<PAGE>
 
================================================================================

                       SECURITIES AND EXCHANGE COMMISSION
                            WASHINGTON, D.C.  20549

                                   FORM 10-Q

                  QUARTERLY REPORT PURSUANT TO SECTION 13 OR
                  15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
                 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1997

                        COMMISSION FILE NUMBER: 0-26528

                       PATRIOT AMERICAN HOSPITALITY, INC.
             (Exact name of registrant as specified in its charter)
 
                VIRGINIA                               75-2599709
      (State or other jurisdiction of               (I.R.S. Employer
      incorporation or organization)               Identification No.)
 
      3030 LBJ FREEWAY, SUITE 1500                        75234
             DALLAS, TEXAS                              (Zip Code)
(Address of principal executive office)
 
                                 (972) 888-8000
              (Registrant's telephone number, including area code)

                                      N/A
             (Former name, former address and former fiscal year, 
                         if changes since last report)


     Indicate by check mark whether the registrant (1) has filed all documents
and 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 of common stock, no par value, of Patriot American
Hospitality, Inc. outstanding on May 12, 1997 was 44,243,496.

     Exhibit Index is located on page 43.

================================================================================
<PAGE>
 
                       PATRIOT AMERICAN HOSPITALITY, INC.

                                     INDEX

                         PART I - FINANCIAL INFORMATION

                                                                            PAGE
                                                                            ----
ITEM 1.  FINANCIAL STATEMENTS:
 
PATRIOT AMERICAN HOSPITALITY, INC.:
  Consolidated Balance Sheets as of March 31, 1997 (unaudited) and 
     December 31, 1996.....................................................  3
  Consolidated Statements of Operations for the three months ended 
     March 31, 1997 and 1996 (unaudited)...................................  4
  Consolidated Statements of Cash Flows for the three months ended 
     March 31, 1997 and 1996 (unaudited)...................................  5
  Notes to Consolidated Financial Statements as of March 31, 1997 
     (unaudited)...........................................................  6
 
CHC LEASE PARTNERS:
  Balance Sheets as of March 31, 1997 (unaudited) and December 31, 1996.... 15
  Statements of Operations for the three months ended March 31, 
    1997 and 1996 (unaudited).............................................. 16
  Statements of Cash Flows for the three months ended March 31, 
    1997 and 1996 (unaudited).............................................. 17
  Notes to Financial Statements as of March 31, 1997 (unaudited)........... 18
 
NORTHCOAST HOTELS, L.L.C.:
  Balance Sheets as of March 31, 1997 (unaudited) and December 31, 1996.... 20
  Statement of Operations for the three months ended March 31, 
    1997 (unaudited)....................................................... 21
  Statement of Cash Flows for the three months ended March 31, 
    1997 (unaudited)....................................................... 22
  Notes to Financial Statements as of March 31, 1997 (unaudited)........... 23
 
PAH RSI, L.L.C.:
  Consolidated Balance Sheet as of March 31, 1997 (unaudited).............. 26
  Consolidated Statement of Operations for the period January 16, 
    1997 (inception of operations) through March 31, 1997 (unaudited)...... 27
  Consolidated Statement of Members' Equity for the period January 16, 
    1997 (inception of operations) through March 31, 1997 (unaudited)...... 28
  Consolidated Statement of Cash Flows for the period January 16, 
    1997 (inception of operations) through March 31, 1997 (unaudited)...... 29
  Notes to Consolidated Financial Statements as of March 31, 
    1997 (unaudited)....................................................... 30
 
ITEM 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND 
         RESULTS OF OPERATIONS............................................. 35
 
                          PART II - OTHER INFORMATION

ITEM 1.  LEGAL PROCEEDINGS................................................. 43
 
ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K:
  Exhibits................................................................. 43
  Reports on Form 8-K...................................................... 43
 
SIGNATURE.................................................................. 44
 
<PAGE>
 
                                     PART I
ITEM 1.  FINANCIAL STATEMENTS

                       PATRIOT AMERICAN HOSPITALITY, INC.

                          CONSOLIDATED BALANCE SHEETS
                       (IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
                                                                              MARCH 31,      DECEMBER 31,
                                                                                1997            1996
                                                                            -----------      ------------
                                                                            (UNAUDITED)
<S>                                                                         <C>              <C> 
                               ASSETS
Investment in hotel properties, net of accumulated depreciation of
  $28,275 in 1997 and $19,815 in 1996....................................     $  947,722      $641,825
Cash and cash equivalents, including capital improvement reserves of                 
  $2,394 in 1997 and $2,458 in 1996......................................          6,271         6,604
Lease revenue receivable.................................................         14,769         5,351
Receivables from selling entities........................................            879           847
Investments in unconsolidated subsidiaries...............................         12,140        11,291
Mortgage notes and other receivables from unconsolidated subsidiaries....         73,622        72,209
Promissory notes and other receivables from Lessees......................         10,189           631
Inventory................................................................          1,821         1,648
Deferred expenses, net of accumulated amortization of $1,144 in 1997                 
  and $750 in 1996.......................................................          4,297         3,063
Prepaid expenses and other assets........................................         10,188        17,462
                                                                              ----------      --------
     Total assets........................................................     $1,081,898      $760,931
                                                                              ==========      ========
                                                                                     
                LIABILITIES AND SHAREHOLDERS' EQUITY                                                 
Borrowings under line of credit and mortgage notes.......................     $  466,712      $214,339
Dividends and distributions payable......................................         13,938        13,129
Accounts payable and accrued expenses....................................         10,843        10,117
Due to unconsolidated subsidiaries.......................................          6,098         6,034
Due to PAH RSI, LLC......................................................          2,655            --
Minority interest in Patriot Partnership.................................        127,262        68,562
Minority interest in other partnerships..................................         13,774        11,711
Commitments and contingencies............................................             --            --
Shareholders' equity:                                                                
  Preferred stock, no par value, 20,000,000 shares authorized,                         
     no shares issued and outstanding....................................             --            --
  Common stock, no par value, 200,000,000 shares authorized,                           
     shares issued and outstanding were 44,093,496 in 1997                         
     and 43,613,496 in 1996 (1)..........................................             --            --
  Paid-in capital........................................................        457,178       442,540
  Unearned stock compensation, net of accumulated amortization                         
     of $1,760 in 1997 and $1,139 in 1996................................        (16,261)       (5,427)
  Retained earnings (distributions in excess of retained earnings).......           (301)          (74)
                                                                              ----------      --------
  Total shareholders' equity.............................................        440,616       437,039
                                                                              ----------      --------
     Total liabilities and shareholders' equity..........................     $1,081,898      $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.

                            See accompanying notes.

                                       3
<PAGE>
 
                       PATRIOT AMERICAN HOSPITALITY, INC.

                     CONSOLIDATED STATEMENTS OF OPERATIONS
                                  (UNAUDITED)
                     (IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
                                                                     THREE MONTHS ENDED
                                                                         MARCH 31,
                                                                    --------------------

                                                                      1997       1996
                                                                    ---------  ---------
<S>                                                                 <C>        <C>
Revenue:
  Participating lease revenue......................................  $35,013    $12,371
  Interest and other income........................................      375         92
                                                                     -------    -------
     Total revenue.................................................   35,388     12,463
                                                                     -------    -------

Expenses:
  Real estate and personal property taxes and casualty insurance...    3,201      1,082
  Ground lease expense.............................................      345         77
  General and administrative.......................................    2,782        941
  Interest expense.................................................    7,805        601
  Depreciation and amortization....................................    8,496      2,838
                                                                     -------    -------
     Total expenses................................................   22,629      5,539
                                                                     -------    -------
Income before equity in earnings of unconsolidated subsidiaries
  and minority interest............................................   12,759      6,924
  Equity in earnings of unconsolidated subsidiaries................    1,021      1,362
                                                                     -------    -------
Income before minority interest....................................   13,780      8,286
  Minority interest in Patriot Partnership.........................   (2,232)    (1,158)
  Minority interest in other partnerships..........................     (200)        --
                                                                     -------    -------
Net income applicable to common shareholders.......................  $11,348    $ 7,128
                                                                     =======    =======

Net income per common share (1)....................................    $0.25      $0.24
                                                                     =======    =======

Weighted average number of common shares and common share
  equivalents outstanding (1)......................................   44,552     29,468
                                                                     =======    =======
</TABLE> 
-------------------------
(1)  Amounts for 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.

                            See accompanying notes.

                                       4
<PAGE>
 
                       PATRIOT AMERICAN HOSPITALITY, INC.

                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                                  (UNAUDITED)
                                 (IN THOUSANDS)
<TABLE>
<CAPTION>
                                                                            THREE MONTHS
                                                                           ENDED MARCH 31,
                                                                        ---------------------
                                                                           1997       1996
                                                                        ----------  ---------
<S>                                                                     <C>         <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
  Net income........................................................... $  11,348   $  7,128
  Adjustments to reconcile net income to net cash
     provided by operating activities:
     Depreciation......................................................     8,467      2,808
     Amortization of unearned stock compensation.......................       621        166
     Amortization of deferred loan costs...............................       330         43
     Amortization of lease inducement costs............................        36         23
     Other amortization................................................        29         30
     Payment of interest on notes receivable from
       unconsolidated subsidiaries.....................................       349      1,064
     Equity in earnings of unconsolidated subsidiaries.................    (1,021)    (1,362)
     Minority interest in income of Patriot Partnership................     2,232      1,158
     Minority interest in income of other partnerships.................       200         --
  Changes in assets and liabilities:
     Lease revenue receivable..........................................    (9,418)       (19)
     Receivables from selling entities.................................       (23)        --
     Receivables from Lessees..........................................       (58)        --
     Prepaid expenses and other assets.................................    (1,751)      (361)
     Accounts payable and other accrued expenses.......................       566     (1,664)
     Due to unconsolidated subsidiaries................................        64        (12)
     Due to PAH RSI, LLC...............................................      (482)        --
                                                                        ---------   --------
          Net cash provided by operating activities....................    11,489      9,002
                                                                        ---------   --------
CASH FLOWS FROM INVESTING ACTIVITIES:
  Acquisition of hotel properties and related working capital assets...  (191,462)   (38,550)
  Improvements and additions to hotel properties.......................   (17,634)    (1,198)
  Collection of receivables from selling entities......................        10        354
  Prepaid acquisition costs............................................    (2,369)      (503)
  Investment in unconsolidated subsidiaries............................    (1,574)        --
  Investment in promissory notes receivable from Lessees...............    (9,500)        --
  Advances from unconsolidated subsidiaries............................        --      2,009
  Principal payment received on other note receivable..................        --         50
                                                                        ---------   --------
          Net cash used in investing activities........................  (222,529)   (37,838)
                                                                        ---------   --------
CASH FLOWS FROM FINANCING ACTIVITIES:
  Borrowings under line of credit and mortgage note....................   237,272     40,750
  Repay borrowings under line of credit................................   (13,388)        --
  Payment of deferred loan costs.......................................    (1,627)       (68)
  Payment of other prepaid expenses....................................        --        (58)
  Payment of offering costs............................................       (84)      (305)
  Contribution received from minority interest in other partnerships...     1,863         --
  Redemption of OP Units...............................................      (201)        --
  Dividends and distributions paid.....................................   (13,128)    (8,154)
                                                                        ---------   --------
          Net cash provided by financing activities....................   210,707     32,165
                                                                        ---------   --------
Net (decrease) increase in cash and cash equivalents...................      (333)     3,329
Cash and cash equivalents at beginning of period.......................     6,604      4,769
                                                                        ---------   --------
Cash and cash equivalents at end of period............................. $   6,271   $  8,098
                                                                        =========   ========
Supplemental disclosure of cash flow information:
  Cash paid during the period for interest............................. $   7,421   $    620
                                                                        =========   ========
</TABLE>
                            See accompanying notes.

                                       5
<PAGE>
 
                      PATRIOT AMERICAN HOSPITALITY, INC.

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

1.  ORGANIZATION AND BASIS OF PRESENTATION:

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

     Patriot, through its wholly-owned subsidiary, PAH GP, Inc., is the sole
general partner and the holder of a 1.0% general partnership interest in Patriot
American Hospitality Partnership, L.P. (the "Patriot Partnership").  In
addition, Patriot, through its wholly-owned subsidiary, PAH LP, Inc., owns an
approximate 82.1% limited partnership interest in the Patriot Partnership as of
March 31, 1997.

     At March 31, 1997, Patriot, through the Patriot Partnership and other
subsidiaries, owned interests in 54 hotels in 21 states with an aggregate of
12,671 guest rooms.

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

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

     On January 30, 1997, the Board of Directors declared a 2-for-1 stock split
on Patriot's common stock effected in the form of a stock dividend distributed
on March 18, 1997 to shareholders of record on March 7, 1997.  All references in
the consolidated financial statements to the number of shares, per share
amounts, and market prices of Patriot's common stock and options to purchase
common stock related to periods prior to the stock split have been restated to
reflect the impact of the stock split.  The number of units of limited
partnership interest in the Patriot Partnership ("OP Units") outstanding did not
change after the 2-for-1 stock split.  However, the OP Unit conversion factor
has changed such that each OP Units subject to redemption will now be redeemed
for cash equal to the value of two shares of Patriot's common stock (or, at
Patriot's election, Patriot may purchase each OP Unit offered for redemption for
two shares of common stock).

                                       6
<PAGE>
 
                      PATRIOT AMERICAN HOSPITALITY, INC.

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

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

2.  ACQUISITION OF HOTEL PROPERTIES:

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

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

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

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

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

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

     On March 6, 1997, Patriot, through the Patriot Partnership, acquired the
112-room Holiday Inn Redmont Hotel in Birmingham, Alabama for approximately
$2,700.  The acquisition was financed primarily with funds drawn on the Line of
Credit.  The hotel is leased to Grand Heritage Lessee for a period of one year
pursuant to a Participating Lease agreement.

     In addition, Patriot, through a consolidated partnership (see Note 6),
acquired the 230-room Luxford Suites Hotel in Minneapolis, Minnesota for
approximately $18,600.  The hotel is leased to PAH RSI Lessee for a one-year
period pursuant to a Participating Lease agreement.  The acquisition of the
hotel was financed through a combination of cash and funds drawn on the Line of
Credit.

     In March 1997, Patriot paid $475 to NorthCoast Lessee which represents
acquisition fees and reimbursement of expenses related to the acquisition of
certain hotel properties.

3.  INVESTMENTS IN AND MORTGAGE NOTES RECEIVABLE FROM UNCONSOLIDATED
SUBSIDIARIES:

     In connection with the Carefree Acquisition, Patriot, through the Patriot
Partnership, contributed certain assets associated with the Carefree Resorts
(including the right to receive certain royalty fees) valued at $1,574 in
exchange 

                                       7
<PAGE>
 
                      PATRIOT AMERICAN HOSPITALITY, INC.

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

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.

4.   PROMISSORY NOTES AND OTHER RECEIVABLES FROM LESSEES:

PAH RSI Lessee

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

NorthCoast Lessee

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

5.   LINE OF CREDIT AND MORTGAGE NOTES:

     Borrowings under the Line of Credit and Mortgage Notes consist of the
following:
<TABLE>
<CAPTION>
                                                     March 31,  December 31,
                                                       1997         1996
                                                     ---------  ------------
<S>                                                  <C>        <C>
Line of credit.....................................   $424,723      $214,339
Mortgage note payable to First National Bank
 of Commerce.......................................     13,500            --
Senior note payable to FINOVA Capital Corporation..     18,758            --
Junior note payable to FINOVA Capital Corporation..      8,830            --
Interest payable to FINOVA Capital Corporation.....        901            --
                                                      --------      --------
                                                      $466,712      $214,339
                                                      ========      ========
</TABLE>
Line of Credit

     In January 1997, the maximum amount available under Patriot's revolving
credit facility (the "Line of Credit") with PaineWebber Real Estate Securities,
Inc. was increased from $250,000 to $475,000, along with certain other
modifications provided, however, the maximum amount that Patriot may draw on the
Line of Credit will be reduced by $22,000 as a result of the single asset loan
related to the Wyndham Greenspoint Hotel.  The Line of Credit bears interest on
the outstanding balance at a rate per annum equal to 30-day LIBOR plus 1.90%.
LIBOR was 5.44% at March 31, 1997 and 5.56% at December 31, 1996.  The weighted
average interest rate incurred by Patriot under this borrowing during the first
quarter of 1997 and 1996 was 7.40% and 7.56%, respectively.

     The Line of Credit requires Patriot to maintain certain financial ratios
with respect to liquidity, loan to value and net worth and imposes certain
limitations on acquisitions.  Patriot is in compliance with such covenants at
March 31, 1997.  The unused commitment under the Line of Credit at March 31,
1997, is approximately $24,300, subject to certain restrictions and provisions
of the Line of Credit Agreement.

                                       8
<PAGE>
 
                      PATRIOT AMERICAN HOSPITALITY, INC.

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

Mortgage Notes

     On January 17, 1997, Patriot, through the Patriot Partnership, obtained
financing from the First National Bank of Commerce, New Orleans, Louisiana in
the amount of $13,500.  The net proceeds from the financing of approximately
$13,388 were used to repay the Line of Credit and release the Bourbon Orleans
Hotel from the borrowing base of the Line of Credit.  The principal amount of
the note along with accrued interest is due January 1, 2004.  Interest at a rate
of LIBOR plus 2% is payable monthly commencing February 1, 1997 through January
1, 1999.  Thereafter, monthly payments of principal and interest are due through
maturity.  The weighted average interest rate incurred by Patriot under this
borrowing during the first quarter of 1997 was 7.49%.  The note is
collateralized by a first mortgage lien on the Bourbon Orleans Hotel.

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

     Patriot also has a construction loan available from FINOVA which was
assumed in connection with the acquisition of The Lodge at Ventana Canyon.
Under the terms of the construction loan agreement, FINOVA is required to loan
to Patriot a maximum of $4,500 (approximately 60% of the budgeted construction
cost) for the planned expansion of The Lodge at Ventana Canyon.  No funds have
been drawn under this agreement by Patriot as of March 31, 1997.

6.  MINORITY INTERESTS:

Minority Interest in Patriot Partnership

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

     In accordance with their redemption rights, in January 1997 certain
partners elected to redeem a total of 4,255 OP Units for a total of $201 in cash
(based upon the market price of Patriot's common stock on the effective dates of
the redemptions).

     The Patriot Partnership has 3,818,818 OP Units and 662,391 Preferred OP
Units outstanding as of March 31, 1997 (excluding OP Units held by Patriot).


Minority Interest in Other Partnerships

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

                                       9
<PAGE>
 
                      PATRIOT AMERICAN HOSPITALITY, INC.

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

     On March 3, 1997, PAH-DT Minneapolis acquired the 230-room Luxford Suites
Hotel in Minneapolis, Minnesota for approximately $18,600.  The acquisition was
financed through cash contributions to the partnership of approximately $16,737
by Patriot Partnership and $1,863 by DTR.  Patriot Partnership's contribution
was financed primarily with funds drawn on the Line of Credit.

7.  SHAREHOLDERS' EQUITY:

Capital Stock

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

     On March 24, 1997, Patriot declared a $0.2625 per common share dividend to
holders of record on March 31, 1997.  Concurrent with the dividend declaration,
the Patriot Partnership authorized distributions in the same amount. The
dividend and distributions were paid on April 30, 1997.  Patriot paid dividends
of $0.24 per common share for the first quarter of 1996.

Stock Grant Awards

     On March 18, 1997, pursuant to Patriot's 1995 Incentive Plan, the Board of
Directors awarded 480,000 shares of common stock to two of its executive
officers.  Patriot has recorded $11,455 (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 period of three to four
years.  For the first quarters of 1997 and 1996, $621 and $166, respectively, of
amortization of stock compensation related to stock grants awarded to Patriot's
directors, officers and certain employees is included in general and
administrative expense in the accompanying consolidated financial statements.

Stock Option Awards

     In connection with the Carefree Acquisition, on January 17, 1997, certain
Carefree owners who are also Carefree employees were granted nonqualified
options to purchase an aggregate of 780,000 shares of Patriot common stock at an
exercise price of $19.125 (based on the market price of Patriot's common stock
on the date the purchase contract with Carefree Resorts was executed after
giving effect to the 2-for-1 stock split) as additional consideration for
entering into the purchase and sale agreement for the Carefree Resorts.  The
estimated fair value of the options issued, in the aggregate amount of $3,266,
was recorded as additional purchase consideration for the acquisition of the
Carefree Resorts. The options to purchase common stock vest annually over a
period of four years.

                                       10
<PAGE>
 
                      PATRIOT AMERICAN HOSPITALITY, INC.

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

8.  NONCASH INVESTING AND FINANCING ACTIVITIES:

     In connection with the acquisition of hotel properties, the following
assets and liabilities were assumed:
<TABLE>
<CAPTION>
                                                                          1997      1996
                                                                        --------  --------
<S>                                                                     <C>       <C>
     Receivables from selling entities................................  $   (19)  $   (78)
     Inventory........................................................     (156)        -
     Prepaid expenses and other assets................................      (23)     (151)
     Mortgage debt....................................................   28,489         -
     Accounts payable and accrued liabilities.........................     (270)      267
     Due to PAH RSI Lessee for working capital liabilities assumed....    3,712         -
 
     Reclassification of prepaid acquisition costs to property costs..  $11,392     $   -
 
     Capital lease obligation acquired................................  $   430     $   -
 
     Issuance of options in connection with the acquisition
       of hotel properties............................................  $ 3,266     $   -
 
     Issuance of OP Units in connection with the acquisition of
       hotel properties...............................................  $59,032     $4,000
</TABLE>
9.  COMMITMENTS AND CONTINGENCIES:

Business Combination

     Patriot has entered into an Agreement and Plan of Merger (the "Merger
Agreement") with California Jockey Club ("Cal Jockey") and Bay Meadows Operating
Company ("Bay Meadows") pursuant to which, subject to stockholder approval and
other conditions, Patriot will merge with and into Cal Jockey (the "Merger"),
with Cal Jockey being the surviving company.  Cal Jockey's shares of common
stock are paired and trade together with the shares of common stock of Bay
Meadows as a single unit pursuant to a stock pairing arrangement (referred to
herein as a "paired share" ownership structure).  Immediately following the
Merger, Cal Jockey's name will be changed to Patriot American Hospitality, Inc.
("New Patriot REIT") and Bay Meadows name will be changed to Patriot American
Hospitality Operating Company ("New Patriot Operating Company").

     Pursuant to the Merger Agreement, Patriot shareholders will be entitled to
receive for each share of common stock, no par value per share, of Patriot held
by them at the effective time of the Merger 0.51895 shares of common stock, par
value $0.01 per share, of New Patriot REIT and 0.51895 shares of common stock,
par value $0.01 per share, of New Patriot Operating Company, which shares will
be paired and transferable only as a single unit.

     Upon completion of the Merger and the related transactions, it is
anticipated that New Patriot REIT and New Patriot Operating Company will
continue the operations of  Patriot, Cal Jockey and Bay Meadows within the
paired share ownership structure.

Development Fees

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

                                       11
<PAGE>
 
                      PATRIOT AMERICAN HOSPITALITY, INC.

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

Contingencies

     Except as described in Note 11, Patriot currently is not subject to any
material legal proceedings or claims nor, to management's knowledge, are any
material legal proceedings or claims currently threatened.

10.  PRO FORMA FINANCIAL INFORMATION:

     The following unaudited pro forma condensed consolidated statements of
operations of Patriot are presented as if (i) the acquisition of the 54 hotels
owned by Patriot as of March 31, 1997, and (ii) the private placement of equity
securities and public offering of Patriot's common stock which occurred during
1996 had occurred on January 1, 1996, and the hotels (except the Crowne Plaza
Ravinia Hotel and the Marriott WindWatch Hotel) had been leased to the Lessees
pursuant to the Participating Leases.  These unaudited pro forma condensed
consolidated statements of operations are not necessarily indicative of what
actual results of operations of Patriot would have been assuming such
transactions had been completed as of January 1, 1996, nor do they purport to
represent the results of operations for future periods.
<TABLE>
<CAPTION>
                                                                          THREE MONTHS ENDED MARCH 31,
                                                                     ---------------------------------------
                                                                            1997                 1996
                                                                     -------------------  ------------------
<S>                                                                  <C>                  <C>
                                                                     (IN THOUSANDS, EXCEPT PER SHARE DATA)
Revenue:
   Participating lease revenue.....................................             $36,551             $35,336
   Interest and other income.......................................                 430                 392
                                                                                -------             -------
       Total revenue...............................................              36,981              35,728
                                                                                -------             -------
Expenses:
   Real estate and personal property taxes and casualty insurance..               3,380               3,365
   Ground lease expense............................................                 345                 335
   General and administrative......................................               3,461               2,158
   Interest expense................................................               8,840               9,011
   Depreciation and amortization...................................               9,064               8,900
                                                                                -------             -------
       Total expenses..............................................              25,090              23,769
                                                                                -------             -------
Income before equity in earnings of unconsolidated subsidiaries
   and minority interest...........................................              11,891              11,959
   Equity in earnings of  unconsolidated subsidiaries..............               1,021               1,185
                                                                                -------             -------
Income before minority interests...................................              12,912              13,144
   Minority interest in Patriot Partnership........................              (2,145)             (2,184)
   Minority interest in other partnerships.........................                (219)               (216)
                                                                                -------             -------
Net income applicable to common shareholders.......................             $10,548             $10,744
                                                                                =======             =======
Net income per common share (1)....................................               $0.23               $0.24
                                                                                =======             =======
Weighted average number of common shares and
   common share equivalents outstanding (1)........................              44,919              44,919
                                                                                =======             =======
</TABLE>
----------------------
(1)  The 1996 amounts 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.

                                       12
<PAGE>
 
                      PATRIOT AMERICAN HOSPITALITY, INC.

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

11.  SUBSEQUENT EVENTS:

Acquisition of Hotel Properties

     On April 14, 1997, a separate partnership in which the Patriot Partnership
holds a 90% general partnership interest and DTR holds a 10% limited partnership
interest acquired the 298-room Sheraton Park Place Hotel in Minneapolis,
Minnesota for a purchase price of approximately $17,000 in cash.  The hotel has
been leased to PAH RSI Lessee for a period of one year pursuant to a
Participating Lease agreement.

Potential Acquisitions

     On April 14, 1997, Patriot entered into a merger agreement and a related
stock purchase agreement (collectively, the "Wyndham Merger Agreement") pursuant
to which Wyndham Hotel Corporation ("Wyndham") will merge with and into New
Patriot REIT with New Patriot REIT being the surviving company (the "Wyndham
Merger"). As a result of the Wyndham Merger, New Patriot REIT will acquire all
of the assets and liabilities of Wyndham, including Wyndham's portfolio of 23
owned and leased hotels, with an aggregate of 4,877 rooms, as well as Wyndham's
79 managed and franchised properties and the Wyndham, Wyndham Garden and Wyndham
Hotels & Resorts proprietary brand names.  Pursuant to the Wyndham Merger
Agreement, upon consummation of the Wyndham Merger, each outstanding share of
common stock of Wyndham ("Wyndham Common Stock") will be converted into the
right to receive 0.712 paired shares of New Patriot REIT common stock and New
Patriot Operating Company common stock (the "Wyndham Exchange Ratio"), subject
to certain adjustments.  In lieu of receiving paired shares, Wyndham
stockholders have the right to elect to receive cash (in an amount per share
based upon the Wyndham Exchange Ratio, as it may be adjusted, and the average
closing price of the paired shares over the five trading days immediately
preceding the closing date of the Wyndham Merger) up to a maximum aggregate
amount of $100,000.  If stockholders holding shares of Wyndham Common Stock with
a value in excess of $100,000 elect to receive cash, such cash will be allocated
on a pro rata basis among such stockholders.  In connection with the execution
of the Wyndham Merger Agreement, Patriot also entered into agreements with
partnerships affiliated with members of the Trammell Crow family providing for
the acquisition by New Patriot REIT of 11 full-service Wyndham-branded hotels
with 3,072 rooms for approximately $331,664 in cash, plus approximately $14,000
in additional consideration if two hotels meet certain operations targets (the
"Crow Acquisition" and, collectively with the Wyndham Merger, the "Proposed
Wyndham Transactions").  The Wyndham Merger and the Crow Acquisition, which will
be consummated concurrently, are subject to various conditions including,
without limitation, the consummation of the Merger and approval of the Proposed
Wyndham Transactions by the stockholders of New Patriot REIT, New Patriot
Operating Company and Wyndham. It is currently anticipated that the stockholder
meetings to approve the Proposed Wyndham Transactions will occur in the fourth
quarter of 1997.

     In addition, Patriot has entered into contracts or letters of intent to
purchase 14 hotels with an aggregate of 3,506 rooms for a combined purchase
price (excluding closing costs and other acquisition-related expenses) of
approximately $268,500.  In addition, Patriot has entered into an agreement to
acquire Grand Heritage Hotels, a hotel management and marketing company, and
other Grand Heritage subsidiaries, including an investment in one hotel
property, for a total acquisition price estimated to be approximately $25,250.
These acquisitions are subject to a number of conditions including completion of
Patriot's due diligence.

Line of Credit

     Patriot is currently in negotiations with certain lenders regarding
expanding and replacing the Line of Credit with a new credit facility with
availability of up to approximately $1,400,000 (the "New Credit Facility").
This credit facility will consist of a $600,000 revolving line of credit and two
term loans (each for $300,000).  It is anticipated that these three portions of
the New Credit Facility will be secured by substantially all of the assets and
properties of Patriot (following the Merger, the assets and properties of New
Patriot REIT and New Patriot Operating Company). Additionally, the New Credit
Facility will include an additional $200,000 term loan which can be drawn upon
in 

                                       13
<PAGE>
 
                      PATRIOT AMERICAN HOSPITALITY, INC.

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

connection with the Proposed Wyndham Transactions and the acquisition of certain
other properties and may either be secured by specific assets, subordinate to
the rest of the New Credit Facility, or unsecured. While negotiations concerning
the New Credit Facility are ongoing, there can be no assurance that such a
credit facility will be obtained, or if obtained, when it will become effective
or available or what the specific terms of such credit facility will be.

Legal Proceedings

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

                                       14
<PAGE>
 
                               CHC LEASE PARTNERS

                                 BALANCE SHEETS
                                 (IN THOUSANDS)

<TABLE>
<CAPTION>
                                                                    MARCH 31, 1997   DECEMBER 31, 1996
                                                                    ---------------  -----------------
                                                                      (UNAUDITED)
                                                ASSETS
<S>                                                                 <C>              <C>
Current assets:
     Cash and cash equivalents....................................         $10,368             $11,096
     Accounts receivable, net of allowance for doubtful accounts
       of $138 and $159 at March 31, 1997 and
       December 31, 1996, respectively............................          11,092               6,895
     Due from affiliates..........................................             537                 341
     Inventories..................................................           2,666               2,588
     Prepaid expenses.............................................           1,801               1,189
                                                                           -------             -------
          Total current assets....................................          26,464              22,109
Investments.......................................................           5,100               5,100
Deposits..........................................................             321                 272
                                                                           -------             -------
       Total assets...............................................         $31,885             $27,481
                                                                           =======             =======
 
                                   LIABILITIES AND PARTNERS' CAPITAL
Current liabilities:
     Accounts payable.............................................         $ 5,207             $ 4,656
     Accrued lease payments due to Patriot American
       Hospitality Partnership, L.P...............................           5,841               3,829
     Due to affiliates............................................             126                  57
     Accrued payroll..............................................           3,305               2,922
     Taxes payable................................................           1,974               1,452
     Guest deposits...............................................           2,218               2,412
     Accrued expenses and other liabilities.......................           3,363               2,611
                                                                           -------             -------
          Total current liabilities...............................          22,034              17,939
Due to Patriot American Hospitality Partnership, L.P..............             799                 809
Lease inducement..................................................           1,509               1,546
                                                                           -------             -------
          Total liabilities.......................................          24,342              20,294
Commitments and contingencies (Note 2)............................              --                  --
Partners' capital.................................................           7,543               7,187
                                                                           -------             -------
          Total liabilities and partners' capital.................         $31,885             $27,481
                                                                           =======             =======
</TABLE>
   The accompanying notes are an integral part of these financial statements.

                                       15
<PAGE>
 
                               CHC LEASE PARTNERS

                            STATEMENTS OF OPERATIONS
                                  (UNAUDITED)
                                 (IN THOUSANDS)

<TABLE>
<CAPTION>
                                                    THREE MONTHS ENDED
                                                        MARCH 31,
                                                   --------------------
                                                     1997       1996
                                                   ---------  ---------
<S>                                                <C>        <C>
Revenue:
  Rooms.............................................   $32,216      $24,260
  Food and beverage.................................    11,665        7,998
  Conference center.................................       748          645
  Telephone and other...............................     3,122        2,295
                                                       -------      -------
    Total revenue...................................    47,751       35,198
                                                       -------      -------
Expenses:
  Departmental costs and expenses...................    17,417       12,765
  Participating lease payments......................    15,514       11,918
  General and administrative........................     4,167        2,883
  Repairs and maintenance...........................     2,160        1,544
  Utilities.........................................     1,997        1,496
  Marketing.........................................     4,544        3,174
  Insurance.........................................       254          220
                                                       -------      -------
    Total expenses..................................    46,053       34,000
                                                       -------      -------
    Income before lessee income (expense)...........     1,698        1,198
                                                       -------      -------
  Limited partnership distributions, interest and
     income miscellaneous...........................       345          210
  Management fees...................................      (520)        (597)
  Lessee general and administrative expenses........      (167)        (178)
                                                       -------      -------
     Total lessee expense...........................      (342)        (565)
                                                       -------      -------
     Net income.....................................   $ 1,356      $   633
                                                       =======      =======
 
</TABLE>
The accompanying notes are an integral part of these financial statements.

                                       16
<PAGE>
 
                              CHC LEASE PARTNERS
 
                           STATEMENTS OF CASH FLOWS
                                  (UNAUDITED)
                                (IN THOUSANDS)
<TABLE>
<CAPTION>
                                                                          THREE MONTHS ENDED
                                                                               MARCH 31,
                                                                          ------------------
                                                                            1997       1996
                                                                          -------    -------
<S>                                                                       <C>        <C>
Cash flows from operating activities:
   Net income...........................................................  $ 1,356    $   633
   Adjustments to reconcile net income to net cash
     provided by operating activities:
       Recognition of lease inducement..................................      (37)       (23)
       Provision for losses on accounts receivable......................       17         46
  Changes in assets and liabilities:
  (Increase) decrease in:
       Accounts receivable..............................................   (4,208)      (897)
       Due from affiliates..............................................     (196)        --
       Inventories......................................................      (15)       255
       Prepaid expenses.................................................     (648)      (500)
       Deposits.........................................................       --        (44)
  Increase (decrease) in:
       Accounts payable.................................................      551         51
       Accrued lease payments due to Patriot American
          Hospitality Partnership, L.P..................................    2,012         19
       Due to affiliates................................................       69        373
       Accrued payroll..................................................      383         52
       Taxes payable....................................................      522        239
       Guest deposits...................................................     (205)       871
       Accrued expenses and other liabilities...........................      664       (674)
                                                                          -------    -------
Net cash provided by operating activities...............................      265        401
                                                                          -------    -------

Cash flows from investing activities:
  Acquired cash from new operating leases...............................        7        736
                                                                          -------    -------
Net cash provided by investing activities...............................        7        736
                                                                          -------    -------

Cash flows from financing activities:
  Partnership distribution..............................................   (1,000)      (340)
                                                                          -------    -------
Net cash used by financing activities...................................   (1,000)      (340)
                                                                          -------    -------

Net (decrease) increase in cash and cash equivalents....................     (728)       797
Cash and cash equivalents at beginning of period........................   11,096      9,385
                                                                          -------    -------
Cash and cash equivalents at end of period..............................  $10,368    $10,182
                                                                          =======    =======

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    $   736
     Accounts receivable................................................        5         --
     Inventories........................................................       63        336
     Prepaid expenses...................................................       13         68
     Due to Patriot American Hospitality Partnership, L.P...............      (63)      (320)
     Guest deposits.....................................................      (11)      (820)
     Accrued expenses and other liabilities.............................      (14)        --
                                                                          -------    -------
     Net assets.........................................................  $  --      $   --
                                                                          =======    =======
</TABLE>
   The accompanying notes are an integral part of these financial statements.

                                       17
<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 Partnership").   CHC Lease Partners, a general partnership, is owned
jointly by CHC REIT Lessee Corp., a wholly owned subsidiary of CHC
International, Inc. ("CHC") and by Gencom Lessee, L.P., an affiliate of a
principal of the Gencom group of companies.

     CHC Lease Partners began operating the twenty initial hotels on October 2,
1995.  During 1996 and 1997, CHC Lease Partners and the Patriot Partnership
entered into additional operating leases for five hotels acquired by the Patriot
Partnership.  The leases are substantially similar to the other lease agreements
between CHC Lease Partners and the Patriot Partnership.  At March 31, 1997, CHC
Lease Partners leases twenty-five hotels.

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

     The hotels leased by CHC Lease Partners consist of nineteen full service
hotels, four limited service hotels, one executive conference center and one
resort.  Twenty-one of the twenty-five hotels are operated under franchise
licenses with nationally recognized hotel companies. The cost of obtaining the
franchise licenses is paid by the Patriot 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 month periods ended March 31, 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.

2.  COMMITMENTS AND RELATED PARTY TRANSACTIONS:

     Under the participating lease agreements for the twenty intial hotels, CHC
Lease Partners is obligated to return the inventory to the Patriot Partnership
at the end of each lease term less a total of $1,000, which is accounted for as
a lease inducement.  Additionally, a lease inducement of $685 was received in
1996 related to leasing one resort property. These lease inducements are
recorded as reductions on a straight-line basis to participating lease payments
over the lives of the participating lease agreements.  Exclusive of the lease
inducements, CHC Lease Partners incurred base rents of $9,515 and $7,321 and
participating rents of $6,036 and $4,620 for the three months ended March 31,
1997 and 1996, respectively.  CHC Lease Partners owed the Patriot Partnership
$5,841 and $3,829 at March 31, 1997 and December 31, 1996, respectively, for
lease payments due under the terms of the participating leases.  Lease
inducements were $1,509 and $1,546 and inventory due to the Patriot Partnership
was $799 and $809 at March 31, 1997 and December 31, 1996, respectively.

     CHC Lease Partners entered into management agreements with  hotel
management  subsidiaries  of  CHC  and GAH-II, L.P. ("GAH"), an affiliate of CHC
and the Gencom group of companies, to perform all management functions necessary
to operate 24 of the 25 hotels leased by CHC Lease Partners.  The terms of these
agreements range from ten to twelve years with management fees due based upon a
percentage of gross revenue of each of the hotels.  The fees under these
management agreements are subordinate to CHC Lease Partners' obligations to the
Patriot Partnership under the participating lease agreements.  If, after payment
of management fees at the contract rate, CHC Lease Partners would incur an
operating loss under any of the participating lease agreements in any year, CHC
and GAH would be required to refund and forego management fees for each of the
hotels which are deficient in participating lease payments up to the amount of
the operating loss.  If after the management fees are refunded and foregone, CHC
Lease Partners would still incur an operating loss under any of the
participating lease agreements, CHC and GAH would be required to pay CHC Lease
Partners up to 50% of the management fees earned by CHC and GAH, respectively.
Management fees incurred under these management agreements were $441 and $516
for the three months ended March 31, 1997 and 1996, respectively.  These
management fees are net of management fees refunded and foregone by CHC and GAH
of $782 and $297 for the three months ended March 31, 1997 and 1996,
respectively.  Included in due to (from) affiliates 

                                       18
<PAGE>

                              CHC LEASE PARTNERS

                  NOTES TO FINANCIAL STATEMENTS - (continued)
                                  (UNAUDITED)
                            (DOLLARS IN THOUSANDS)
 
were amounts for management fees under these management agreements due from CHC
of $305 and $300 and due from GAH of $232 and $41 at March 31, 1997 and December
31, 1996, respectively.

     CHC Lease Partners fully reimburses CHC for office space it occupies within
the corporate offices of CHC and for the payroll and related costs CHC and GAH
incur on behalf of CHC Lease Partners.  These costs amounted to $239 and $149
for the three months ended March 31, 1997 and 1996, respectively.  At March 31,
1997 and December 31, 1996, CHC Lease Partners owed CHC and GAH in the aggregate
$126 and $57, respectively, which is included in due to affiliates.

     During the three months ended March 31, 1997 and 1996, CHC Lease Partners
made distributions to its partners of $1,000 and $340, respectively.

3.  PRO FORMA FINANCIAL INFORMATION:

     The unaudited pro forma statements of operations are presented as if the
leases and the operation of the twenty-five hotels had commenced on January 1,
1996.  The unaudited pro forma statements of operations are not necessarily
indicative of what the actual results of operations of CHC Lease Partners would
have been assuming such operations had commenced as of January 1, 1996, nor do
they purport to represent the results of operations for future periods.  Pro
forma lessee expenses include management fees, estimated lessee overhead
expenses, distribution income on 250,001 units of limited partnership interest
in the Patriot Partnership and interest income associated with working capital
balances.  No pro forma interest income associated with working capital balances
has been included.
<TABLE>
<CAPTION>
                                    THREE MONTHS ENDED MARCH 31,
                                    ----------------------------
                                        1997           1996
                                    -------------  -------------
<S>                                 <C>            <C>
                                           (IN THOUSANDS)
Revenue:
 Rooms............................        $32,318        $31,528
 Food and beverage................         11,704         11,457
 Conference center................            748            645
 Telephone and other..............          3,126          3,658
                                          -------        -------
  Total revenue...................         47,896         47,288
                                          -------        -------
Expenses:
 Departmental costs and expenses..         17,480         17,783
 Participating lease payments.....         15,596         15,409
 General and administrative.......          4,181          4,021
 Repairs and maintenance..........          2,167          2,118
 Utilities........................          2,006          2,025
 Marketing........................          4,557          4,240
 Insurance........................            255            317
                                          -------        -------
  Total expenses..................         46,242         45,913
                                          -------        -------
Income before lessee expenses.....          1,654          1,375
Lessee expenses...................            305            624
                                          -------        -------
 Net income.......................        $ 1,349        $   751
                                          =======        =======
 
</TABLE>

                                       19
<PAGE>
 
                            NORTHCOAST HOTELS, L.L.C.

                                 BALANCE SHEETS
                                 (IN THOUSANDS)
<TABLE>
<CAPTION>
                                                                                        MARCH 31,       DECEMBER 31,
                                                                                          1997             1996
                                                                                       -----------      ------------
                                                                                       (UNAUDITED)
<S>                                                                                    <C>              <C>
                                     ASSETS
Current assets:
   Cash and cash equivalents............................................................. $1,817        $1,756
   Accounts receivable, net of allowance for doubtful accounts of $38 and
       $43 at March 31, 1997 and December 31, 1996, respectively.........................  3,967         4,224
   Receivable from Patriot American Hospitality Partnership, L.P.........................    182           245
   Inventories...........................................................................    309           320
   Prepaid expenses......................................................................    460           387
   Other assets..........................................................................    812           792
                                                                                          ------        ------
          Total current assets...........................................................  7,547         7,724
Deferred assets, net of accumulated amortization of $47 and $33 at
       March 31, 1997 and December 31, 1996, respectively................................    518           500
Investments..............................................................................    825           825
Cash held in trust.......................................................................    172            --
Construction in progress.................................................................    330            --
                                                                                          ------        ------
          Total assets................................................................... $9,392        $9,049
                                                                                          ======        ======

                    LIABILITIES AND MEMBERS' EQUITY
Current liabilities:
   Accounts payable...................................................................... $2,269        $2,064
   Accrued rent due to Patriot American Hospitality Partnership, L.P.....................  1,622           943
   Due to affiliates.....................................................................    199           113
   Accrued payroll and benefits..........................................................  1,683         2,088
   Guest deposits........................................................................    203           155
   Accrued expenses and other liabilities................................................  1,030           986
   FF&E reserve due to Patriot American Hospitality Partnership, L.P.....................     13           415
                                                                                          ------        ------
          Total current liabilities......................................................  7,019         6,764
Note payable to Patriot American Hospitality Partnership, L.P............................    500            --
Due to Patriot American Hospitality Partnership, L.P.....................................    242           242
                                                                                          ------        ------
          Total liabilities..............................................................  7,761         7,006
Commitments and contingencies............................................................     --            --
Members' equity..........................................................................  1,631         2,043
                                                                                          ------        ------
          Total liabilities and members' equity.......................................... $9,392        $9,049
                                                                                          ======        ======
 
</TABLE>
                            See accompanying notes.

                                       20
<PAGE>
 
                           NORTHCOAST HOTELS, L.L.C.

                            STATEMENT OF OPERATIONS
                                  (UNAUDITED)
                                 (IN THOUSANDS)

<TABLE>
<CAPTION>
                                                   THREE
                                                   MONTHS
                                                   ENDED
                                                 MARCH 31,
                                                    1997
                                                 ----------
<S>                                              <C>
Revenue:
   Rooms.......................................... $ 9,912
   Food and beverage..............................   4,792
   Telephone and other............................     944
                                                   -------
       Total revenue..............................  15,648
                                                   -------

Expenses:
   Departmental costs and other expenses..........   6,806
   Participating lease payments...................   4,683
   General and administrative.....................   1,408
   Ground lease expense...........................     320
   Repairs and maintenance........................     911
   Utilities......................................     586
   Marketing......................................   1,248
                                                   -------
       Total expenses.............................  15,962
                                                   -------
       Loss before lessee income (expense)........    (314)
                                                   -------
   Dividend and interest income...................      56
   Service fee income.............................     422
   Management fees................................    (471)
   Depreciation and amortization..................     (14)
   Lessee general and administrative expenses.....     (91)
                                                   -------
       Total lessee income (expense)..............     (98)
                                                   -------
       Net loss................................... $  (412)
                                                   =======
</TABLE>
                            See accompanying notes.

                                       21
<PAGE>
 
                           NORTHCOAST HOTELS, L.L.C.

                            STATEMENT OF CASH FLOWS
                                  (UNAUDITED)
                                 (IN THOUSANDS)
<TABLE>
<CAPTION>
                                                                                      THREE MONTHS
                                                                                          ENDED
                                                                                        MARCH 31,
                                                                                          1997
                                                                                      -------------
<S>                                                                                   <C>
Cash flows from operating activities:
   Net loss................................................................................ $ (412)
   Adjustments to reconcile net loss to net cash provided by operating activities:
       Depreciation and amortization.......................................................     14
   Changes in assets and liabilities:
       Accounts receivable.................................................................    257
       Inventories.........................................................................     11
       Prepaid expenses and other assets...................................................    (74)
       Accounts payable....................................................................    300
       Accrued rent due to Patriot American Hospitality Partnership, L.P...................    679
       Due to affiliates...................................................................     86
       Accrued payroll and benefits........................................................   (405)
       Guest deposits......................................................................     48
       Accrued expenses and other liabilities..............................................    127
       FF&E Reserve due to Patriot American Hospitality Partnership, L.P...................   (402)
                                                                                            ------
Net cash provided by operating activities..................................................    229
                                                                                            ------

Cash flows from investing activities:
   Purchases of equipment and leasehold improvements.......................................   (334)
   Cash held in trust......................................................................   (172)
   Payment for capital improvements on behalf of owner.....................................    (31)
   Payment of organization costs and capitalized lease costs...............................    (32)
   Payment for deferred purchase consideration.............................................    (16)
                                                                                            ------
Net cash used in investing activities......................................................   (585)
                                                                                            ------

Cash flows from financing activities:
   Proceeds from issuance of note..........................................................    500
   Distributions...........................................................................    (83)
                                                                                            ------
Net cash provided by financing activities..................................................    417
                                                                                            ------
Net increase in cash and cash equivalents..................................................     61
Cash and cash equivalents at beginning of period...........................................  1,756
                                                                                            ------
Cash and cash equivalents at end of period................................................. $1,817
                                                                                            ======
</TABLE>
                            See accompanying notes.

                                       22
<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
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 Partnership entered into additional operating
leases for four hotels which were acquired by the Patriot Partnership.  At March
31, 1997, NorthCoast Lessee leased nine hotels.

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

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

2.  MEMBERS' EQUITY:

Initial Capitalization

     Each of the four members is required to contribute $825 to NorthCoast
Lessee.  Contributions can be in the form of cash or other property.  At March
31, 1997, cash contributions of $1,475 and OP Units of $825 have been received.

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

Minimum Net Worth

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

3.  COMMITMENTS AND RELATED PARTY TRANSACTIONS:

     NorthCoast Lessee incurred rents of $4,683 during the three months ended
March 31, 1997, consisting of $3,902 in base rents, $490 in participating rents,
and $291 in additional rent.  At March 31, 1997 and December 31, 1996,
NorthCoast Lessee owed the Patriot Partnership $1,622 and $943, respectively,
for rents under the terms of the participating leases.

                                       23
<PAGE>
 
                           NORTHCOAST HOTELS, L.L.C.

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


  Under the participating lease agreements, NorthCoast Lessee is obligated to
return to the Patriot Partnership the inventory at each of the hotels at the end
of the related lease term.  As of March 31, 1997, the balance of the inventory
due to the Patriot Partnership was $242.  In addition, two of the hotels are
managed by Hyatt Corporation ("Hyatt"). Under the terms of the hotel management
agreements, Hyatt funds a percentage of the hotel gross revenues to a reserve
account for furniture, fixtures and equipment (the "FF&E Reserve"), which is
payable to the Patriot Partnership to make improvements to the hotels.  At March
31, 1997 and December 31, 1996, the FF&E Reserve payable to the Patriot
Partnership was $13 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 $6 for the three months ended March 31,
1997.

  NorthCoast Lessee borrowed $500 from the Patriot 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.

  Construction in progress consists of direct costs and capitalized interest and
are recorded at cost.  As of March 31, 1997, NorthCoast Lessee had capitalized
$330 related to this project and held $172 in cash restricted to expenditures
related to the project.

  Service fee income consists of fees received for acquisition, project
development and renovation services provided to the Patriot Partnership net of
reimbursed expenses of $53.  NorthCoast Lessee received $475 for such services
during the three months ended March 31, 1997.

                                       24
<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 for the three
months ended March 31, 1996 is presented as if the leases and the operation of
the nine hotels leased by NorthCoast Lessee had commenced on January 1, 1996.
The unaudited pro forma statement of operations is not necessarily indicative of
what the actual results of operations of NorthCoast Lessee would have been
assuming such operations had commenced as of January 1, 1996, nor do they
purport to represent the results of operations for future periods.  Pro forma
lessee expenses represent management fees and estimated lessee overhead expenses
and exclude pro forma dividend income on 31,074 units of limited partnership
interest of the Patriot Partnership and pro forma interest income associated
with working capital balances.
<TABLE>
<CAPTION>
                                       THREE MONTHS
                                          ENDED
                                        MARCH 31,
                                           1996
                                      --------------
                                      (IN THOUSANDS)
Revenue:
<S>                                   <C>
   Rooms............................        $ 9,390
   Food and beverage................          4,374
   Telephone and other..............            900
                                            -------
       Total revenue................         14,664
                                            -------
Expenses:
   Departmental costs and expenses..          6,505
   Participating lease payments.....          4,232
   General and administrative.......          1,552
   Ground lease expense.............            289
   Repairs and maintenance..........            898
   Utilities........................            597
   Marketing........................          1,196
   Insurance........................             93
                                            -------
       Total expenses...............         15,362
                                            -------
Loss before lessee expenses.........           (698)
Lessee expenses.....................            417
                                            -------
   Net loss.........................        $(1,115)
                                            =======
</TABLE>

                                       25
<PAGE>
 
                                PAH RSI, L.L.C.

                           CONSOLIDATED BALANCE SHEET
                                  (UNAUDITED)
                                 (IN THOUSANDS)
<TABLE>
<CAPTION>
                                                                             MARCH 31,
                                                                               1997
                                                                             ---------
<S>                                                                          <C>
                                 ASSETS
Current assets:
  Cash and cash equivalents................................................... $16,637
  Accounts receivable, net of allowance for doubtful accounts of $1...........   3,485
  Due from Patriot American Hospitality Partnership, L.P and affiliates.......   2,655
  Due from Resorts Services, Inc..............................................     382
  Inventories.................................................................   3,246
  Prepaid expenses and other assets...........................................   1,770
                                                                               -------
    Total current assets......................................................  28,175
Organizational costs, net of accumulated amortization of $1...................      34
Tradenames, net of accumulated amortization of $62............................   8,937
Deposits......................................................................     332
                                                                               -------
    Total assets.............................................................. $37,478
                                                                               =======

                     LIABILITIES AND MEMBERS' EQUITY
Current Liabilities:
  Accounts payable............................................................ $ 1,213
  Accrued rent due to Patriot American Hospitality Partnership, L.P...........   5,879
  Accrued expenses and other liabilities......................................   6,163
  Accrued interest............................................................     237
  Guest and other deposits....................................................   6,498
                                                                               -------
    Total current liabilities.................................................  19,990
Due to selling entities.......................................................   5,276
Note payable to Patriot American Hospitality Partnership, L.P.................   9,000
                                                                               -------
    Total liabilities.........................................................  34,266
Commitments and contingencies.................................................      --
Members' equity...............................................................   3,212
                                                                               -------
    Total liabilities and members' equity..................................... $37,478
                                                                               =======
</TABLE>
                            See accompanying notes.

                                       26
<PAGE>
 
                                PAH RSI, L.L.C.

                      CONSOLIDATED STATEMENT OF OPERATIONS
                                  (UNAUDITED)
                                 (IN THOUSANDS)

<TABLE>
<CAPTION>
                                                    JANUARY 16,
                                                 1997 (INCEPTION
                                                  OF OPERATIONS)
                                                     THROUGH
                                                     MARCH 31,
                                                       1997
                                                 -----------------
<S>                                              <C>
Revenue:
   Rooms................................................. $11,129
   Food and beverage.....................................   4,981
   Telephone and other revenue...........................   3,175
   Club, club membership and spa revenue.................   8,013
   Shopping center revenue...............................     363
   Royalty revenues......................................     382
                                                          -------
       Total revenue.....................................  28,043
                                                          -------

Expenses:
   Departmental costs and other expenses.................   9,786
   Participating lease payments..........................   8,015
   General and administrative............................   1,611
   Repairs and maintenance...............................   1,812
   Utilities.............................................     706
   Marketing.............................................   1,055
   Interest expense......................................     237
   Insurance.............................................     104
                                                          -------
       Total expenses....................................  23,326
                                                          -------
       Income before lessee expenses.....................   4,717
                                                          -------
   Management fees.......................................  (1,342)
   Amortization..........................................     (63)
   Lessee general and administrative expenses............    (100)
                                                          -------
       Total lessee expenses.............................  (1,505)
                                                          -------
       Net income........................................ $ 3,212
                                                          =======
</TABLE>
                            See accompanying notes.

                                       27
<PAGE>
 
                                PAH RSI, L.L.C.

                   CONSOLIDATED STATEMENT OF MEMBERS' EQUITY
                                  (UNAUDITED)
                                 (IN THOUSANDS)
<TABLE>
<CAPTION>
                                           JANUARY 16, 1997
                                             (INCEPTION OF
                                              OPERATIONS)
                                                THROUGH
                                               MARCH 31,
                                                 1997
                                           ---------------
<S>                                        <C>
 
Initial capitalization at inception..           $ 4,110
Notes receivable from members........            (4,110)
Net income...........................             3,212
                                                -------
Balance, March 31, 1997..............           $ 3,212
                                                =======
 
</TABLE>
                            See accompanying notes.

                                       28
<PAGE>
 
                                PAH RSI, L.L.C.

                      CONSOLIDATED STATEMENT OF CASH FLOWS
                                  (UNAUDITED)
                                 (IN THOUSANDS)
<TABLE>
<CAPTION>
                                                                                           JANUARY 16,
                                                                                        1997 (INCEPTION
                                                                                         OF OPERATIONS)
                                                                                             THROUGH
                                                                                            MARCH 31,
                                                                                              1997
                                                                                        -----------------
 
<S>                                                                                     <C>
Cash flows from operating activities:
   Net income................................................................................... $ 3,212
   Adjustments to reconcile net income to net cash provided by operating activities:
       Provision for losses on accounts receivable..............................................       1
       Amortization.............................................................................      63
   Increase in assets and liabilities:
       Accounts receivable......................................................................  (2,733)
       Due from Patriot American Hospitality Partnership, L.P...................................   1,058
       Due from Resorts Services, Inc...........................................................    (382)
       Inventories..............................................................................  (1,489)
       Prepaid expenses and other assets........................................................      19
       Other Assets.............................................................................    (332)      
       Accounts payable.........................................................................   1,112
       Accrued lease payments due to Patriot American Hospitality Partnership, L.P..............   5,879 
       Accrued expenses and other liabilities...................................................    (573)
       Accrued interest.........................................................................     237
       Guest and other deposits.................................................................     988
       Due to selling entities..................................................................   5,276
                                                                                                 -------
Net cash provided by operating activities                                                         12,336
                                                                                                 -------
Cash flows from investing activities:
   Payment for organizational costs.............................................................     (35)
   Cash acquired at inception...................................................................   4,336
                                                                                                 -------
Net cash used in investing activities...........................................................   4,301  
                                                                                                 -------

Net increase in cash and cash equivalents.......................................................  12,301
                                                                                                 -------
Cash and cash equivalents at end of period...................................................... $16,637
                                                                                                 =======

Supplemental Disclosure of Non-Cash Investing and Financing Activities:
   Contribution of member notes receivable...................................................... $ 4,110
                                                                                                 =======
   Issuance of note payable to Patriot American Hospitality,
   L.P. purchase of tradename................................................................... $ 9,000
                                                                                                 =======
   Operating liabilities assumed in exchange for receivables from Patriot American
       Hospitality Partnership, L.P............................................................. $ 3,712
                                                                                                 =======
</TABLE>

                            See accompanying notes.

                                       29
<PAGE>
 
                                PAH RSI, L.L.C.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  (UNAUDITED)
                             (DOLLARS 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 Partnership"). At
March 31, 1997, Patriot American Hospitality, Inc. ("Patriot"), through its
subsidiaries, owns approximately 83.1% of the Patriot Partnership.  PAH RSI
Lessee, is owned jointly by Messrs. Thomas W. Lattin, Rex E. Stewart and Michael
Murphy, each of whom is an executive officer of Patriot.  PAH RSI Lessee will
continue for a term of 49 years unless terminated earlier pursuant to the terms
of the limited liability company agreement.  In general, members are not
personally liable for any debts or losses of PAH RSI Lessee that exceed their
respective capital contribution, except as discussed in Note 5, and losses are
generally allocated to the members in proportion to their capital contributions.

  PAH RSI Lessee commenced operations and began leasing two resort properties
from the Patriot Partnership on January 16, 1997.  On January 17, 1997, January
29, 1997 and March 14, 1997, PAH RSI Lessee and the Patriot Partnership entered
into four additional operating leases for two additional resort properties and
two hotels which were acquired by the Patriot Partnership.  At March 31, 1997,
PAH RSI Lessee leased six 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:
      Radisson Hotel                 Northbrook, Illinois            313
      Luxford Suites Hotel           Minneapolis, Minnesota          230
 
</TABLE>

  Each hotel is leased by the Patriot 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 March 31, 1997 are not
necessarily indicative of the results that may be expected for the year ended
December 31, 1997.  Significant accounting policies are summarized below.

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation

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

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.

                                       30
<PAGE>

                                PAH RSI, L.L.C.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
                                  (UNAUDITED)
                     (in thousands, except per share data)
 
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 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 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).

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 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 March 31, 1997, PAH RSI Lessee has future lease commitments to the Patriot
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 $12,241.  PAH RSI Lessee incurred base
rents of $2,840 and participating rents of $5,175 for the period January 16,
1997 through March 31, 1997.  At March 31, 1997, PAH RSI Lessee owed the Patriot
Partnership $5,879 for rents under the terms of the participating leases.

                                       31
<PAGE>

                                PAH RSI, L.L.C.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
                                  (UNAUDITED)
                     (in thousands, except per share data)

  The Patriot Partnership has the right to terminate all participating lease
agreements with PAH RSI Lessee.  In the event such termination occurs, Patriot
will be obligated to pay PAH RSI Lessee the fair market value of the leasehold
interests. In addition, in the event of such termination, Patriot intends 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 8% 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 Partnership under the
terms of the participating lease agreements.

  The Luxford Suites Hotel is managed by Doubletree Hotels Corporation which
receives a management fee of 3% of gross revenues, plus incentive fees if
certain operating results based on cash flow and profits (as defined) are
achieved by the hotel.  The Radisson Hotel in Northbrook, Illinois is managed by
a hotel management entity affiliated with CHC International, Inc. and the Gencom
group of companies which receives a management fee of 1.5% 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 conjuction with this agreement were approximately $382 for
the three months ended March 31, 1997.

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.

Expense Reimbursements

  PAH RSI Lessee fully reimburses the Patriot Partnership for office space it
occupies within the corporate offices of Patriot and for payroll and related
costs the Patriot Partnership incurs on behalf of PAH RSI Lessee.  These costs
amounted to $100 for the period ended March 31, 1997.  At March 31, 1997, PAH
RSI Lessee owed the Patriot Partnership $100 for such reimbursements.

Payables to Selling Entities

  At March 31, 1997, PAH RSI Lessee has aggregate payables of $7,950 due to
certain of the former owners of the four resort properties leased from the
Patriot 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.  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

                                       32
<PAGE>

                                PAH RSI, L.L.C.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
                                  (UNAUDITED)
                     (in thousands, except per share data)

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 1
to 4 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...............       $1,087
                          1998...............          666
                          1999...............          448
                          2000...............          165
                                                    ------
                                                    $2,366
                                                    ======
</TABLE>

                                       33
<PAGE>

                                PAH RSI, L.L.C.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
                                  (UNAUDITED)
                     (in thousands, except per share data)
 
7.  PRO FORMA FINANCIAL INFORMATION:

     The following unaudited pro forma statements of operations are presented as
if the leases and the operation of the six 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>
 
                                          THREE MONTHS ENDED MARCH 31,
                                          ----------------------------
                                              1997           1996
                                          -------------  -------------
<S>                                       <C>            <C>
                                                 (IN THOUSANDS)
Revenue:
 Rooms..................................        $13,177        $12,152
 Food and beverage......................          5,891          5,958
 Telephone and other revenue............          3,770          3,067
 Club, club membership and spa revenue..          9,054          8,729
 Shopping center revenue................            474            437
 Royalty revenue........................            458            377
                                                -------        -------
  Total revenue.........................         32,824         30,720
                                                -------        -------
Expenses:
 Departmental costs and expenses........         13,827         12,897
 Participating lease payments...........          9,428          8,863
 General and administrative.............          1,927          1,916
 Repairs and maintenance................          2,247          2,148
 Utilities..............................            949            950
 Marketing..............................          1,405          1,442
 Interest expense.......................            293            293
 Insurance..............................            130            157
                                                -------        -------
  Total expenses........................         30,206         28,666
                                                -------        -------
Income before lessee expenses...........          2,618          2,054
Lessee expenses.........................          1,602          1,450
                                                -------        -------
 Net income.............................        $ 1,016        $   604
                                                =======        =======
</TABLE>
8. SUBSEQUENT EVENTS:

     On April 14, 1997. PAH RSI Lessee and the Patriot Partnership entered into
an operating lease for a hotel acquired by the Patriot Partnership.  The lease
is substantially similar to the other participating lease agreements between PAH
RSI Lessee and the Patriot Partnership.  The base rent for the hotel is
anticipated to be approximately $1,864 for the year ended December 31, 1997.

                                       34
<PAGE>
 
ITEM 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
         OF OPERATIONS

     The accompanying discussion and analysis of financial condition and results
of operations is based on the consolidated financial statements of Patriot, the
financial statements of CHC Lease Partners, the financial statements of
NorthCoast Hotels, L.L.C., and the financial statements of PAH RSI, L.L.C.,
which are included elsewhere in this Quarterly Report.  Certain statements in
this Form 10-Q constitute "forward-looking statements" as that term is defined
under the Private Securities Reform Act of 1995 (the "Act") and the Securities
and Exchange Commission.  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.  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
Patriot to differ materially from anticipated future results, performance or
achievements expressed or implied by such forward-looking statements.  Patriot
undertakes no obligation to publicly update or revise any forward-looking
statement, whether as a result of new information, future events or otherwise.
Certain factors that might cause a difference include, but are not limited to,
Patriot's dependence upon rental payments from the Lessees for substantially all
Patriot's income and the dependence upon the abilities of the Lessees and the
Operators (as such terms are defined herein) to manage the hotels, risks
associated with the hotel industry and real estate markets in general, and risks
associated with debt financing.

BACKGROUND

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

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

     In 1995, Patriot used the balance of the proceeds from the Initial
Offering, together with proceeds from the Line of Credit, to finance
acquisitions of two additional hotel investments, provide for renovations to
existing hotels and for working capital.

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

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

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

     As of March 31, 1997, Patriot, through the Patriot Partnership, PAH
Ravinia, Inc. ("PAH Ravinia"), PAH Windwatch, L.L.C. ("PAH Windwatch") and other
partnerships, owned 54 hotel properties in 21 states with an aggregate 12,671
guest rooms (the "Hotels").  The Hotels are diversified by franchise or brand
affiliation and serve primarily major U.S. business centers, including Atlanta,
Boston, Chicago, Cleveland, Dallas, Denver, Houston, Miami, Minneapolis, New
York and Seattle.  In addition to hotels catering primarily to business
travelers, the Hotels include prominent hotels in major tourist destinations,
including New Orleans, San Antonio, Fort Lauderdale and San Diego. The Hotels
include 44 full service hotels, four limited service hotels, five resorts and an
executive conference center. Fifty of the Hotels are operated under franchise or
brand affiliations with nationally recognized hotel companies.

                                       35
<PAGE>
 
RESULTS OF OPERATIONS OF PATRIOT

Actual (for the three months ended March 31, 1997 and 1996)

     For the three months ended March 31, 1997, Patriot's Participating Lease
revenue from the Lessees increased 183%, to $35,013,000 from $12,371,000 in
1996, due to the acquisition of 29 hotel properties during the past twelve
months.  Interest and other income was $375,000 for the first quarter of 1997,
compared to $92,000 for the first quarter of 1996.  Depreciation and
amortization expense was $8,496,000 for 1997, compared to $2,838,000 for 1996.
Real estate and personal property taxes and insurance was $3,201,000 for 1997,
compared to $1,082,000 for 1996.  General and administrative expenses were
$2,782,000 for the first quarter of 1997 (including amortization of unearned
stock compensation of $621,000 and expenses associated with evaluating
properties for acquisition which ultimately were not purchased of $568,000),
compared to $941,000 (including amortization of unearned stock compensation of
$166,000) for 1996.  Patriot reported $7,805,000 of interest expense for the
first quarter of 1997 (which included $7,277,000 of  interest incurred on the
Line of Credit and mortgage note balances outstanding and $328,000 of
amortization of deferred financing costs).  Interest expense for the first
quarter of 1996 was $601,000 (which consisted of $558,000 of interest incurred
on the Line of Credit balance and $43,000 of amortization of deferred financing
costs). Ground lease expense related to the Holiday Inn Lenox in Atlanta,
Georgia and the Hyatt Regency in Lexington, Kentucky totaled $345,000 in 1997,
compared to $77,000 related to the Holiday Inn Lenox in 1996.  Patriot's share
of income from unconsolidated subsidiaries was $1,021,000 for 1997, compared to
$1,362,000 for 1996.  The minority interest's share of income of Patriot was
$2,432,000 for the first quarter of 1997 (including $200,000 related to the
minority interest in the partnerships with DTR), compared to $1,158,000 for
1996.  The resulting net income applicable to common shareholders was
$11,348,000 for the three months ended March 31, 1997, an increase of 59% from
$7,128,000 for the three months ended March 31, 1996.

Pro Forma (for the three months ended March 31, 1997 and 1996)

     On a pro forma basis, Patriot's lease revenue grew 3.4% from $35,336,000
for the first quarter of 1996 to $36,551,000 for 1997, reflecting improvements
in average room rates due to continuing improvement in market conditions in the
U.S. lodging industry during 1996 and improved results from renovated and
repositioned hotels (see Pro Forma Results of Operations of Lessees below).  Pro
forma interest and other income increased $38,000, from $392,000 for 1996 to
$430,000 for 1997, as a result of increased interest income from cash reserved
for capital improvements and interest income earned on notes receivable.  Total
operating expenses increased approximately 5.6% from $23,769,000 for the first
quarter of 1996 to $25,090,000 for 1997.  Pro forma general and administrative
expenses were $2,158,000 for the first quarter of 1996, compared to $3,461,000
for 1997 (including amortization of unearned stock compensation of $1,300,000
for both periods).  The increase of $1,303,000 is primarily attributable to
$568,000 of expenses recognized  in the first quarter of 1997 related to the
evaluation of properties for acquisition which ultimately were not purchased and
increases in staffing required by the continued growth of Patriot which have
resulted in increased salaries and related benefits costs.  Pro forma interest
expense decreased $171,000, from $9,011,000 for the first quarter of 1996 to
$8,840,000 for 1997, primarily as a result of the decrease in the 30-day LIBOR
rate upon which the Line of Credit interest rate is based.  Pro forma
depreciation and amortization expense increased $164,000, from $8,900,000 for
the first quarter of 1996 to $9,064,000 for 1997, primarily as a result of
depreciation expense related to capital improvements.  As a result, pro forma
net income decreased $196,000, from $10,744,000 for the three months ended March
31, 1996 to $10,548,000 for 1997.

RESULTS OF OPERATIONS OF THE LESSEES

Actual (for the three months ended March 31, 1997 and 1996)

     CHC Lease Partners.  CHC Lease Partners' room revenue increased from
     ------------------                                                  
$24,260,000 for the three months ended March 31, 1996 to $32,216,000 for the
three months ended March 31, 1997.  The increase is primarily attributable to
the increase in the number of hotels leased by CHC Lease Partners from 23 at
March 31, 1996 to 25 at March 31, 1997.  Food and beverage, conference center
and other revenues increased from $10,938,000 for the first quarter of 1996 to
$15,535,000 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 $11,918,000 for the
first quarter of 1996 to $15,514,000 for 1997. Hotel operating expenses were
$22,082,000 for the first quarter of 1996 compared to $30,539,000 for 1997. Net
income for the three months ended March 31, 1996 was $633,000 compared to net
income of $1,356,000 for the three months ended March 31, 1997.

     NorthCoast Lessee.  For the three months ended March 31, 1997, NorthCoast
     -----------------                                                        
Lessee had room revenues of $9,912,000 from the nine hotels it leased during the
quarter.  Food and beverage and other revenues were $5,736,000 for the quarter.
Participating Lease payments and hotel operating expenses were $4,683,000 and
$11,279,000, respectively, and  net loss was $412,000 for the first quarter of
1997.  NorthCoast Lessee commenced operations in April 1996.

     PAH RSI Lessee.  PAH RSI Lessee began leasing four resort properties from
     --------------                                                           
the Patriot Partnership and commenced operations on January 16, 1997.
Subsequently, in January and March 1997, PAH RSI Lessee began leasing two
additional hotels from the Patriot Partnership.  For the period from January 16,
1997 through March 31, 1997, PAH 

                                       36
<PAGE>
 
RSI Lessee had room revenues of $11,129,000 from the six hotels it leased during
the period. Food and beverage and telephone and other revenues were $8,156,000
and revenues from the club, club membership and spa facilities were $8,013,000
for the period. PAH RSI Lessee had shopping center revenue of $363,000 and
royalty revenues of $382,000 for the period. Participating Lease payments and
hotel and resort operating expenses were $8,015,000 and $15,311,000,
respectively, and net loss was $3,212,000 for the period from January 16, 1997
(inception of operations) through March 31, 1997.

     Combined Lessees.  For the three months ended March 31, 1997, the combined
     ----------------                                                          
Lessees (consisting of CHC Lease Partners, NorthCoast Lessee, PAH RSI Lessee,
Doubletree Lessee, Wyndham Lessee, Grand Heritage Lessee, and Metro Lease
Partners) had room revenues of $67,481,000 from the 52 hotels leased to the
Lessees during the period, compared to $25,308,000 from the 24 hotels leased for
the three months ended March 31, 1996.  For the first quarter of 1996, the
combined Lessees consisted of CHC Lease Partners who leased 23 hotels and Metro
Lease Partners who leased one hotel.  Food and beverage, conference center, and
telephone and other revenues were $36,212,000 for the first quarter of 1997,
compared to $11,258,000 for 1996.  In addition, the combined Lessees reported
club, club membership and spa revenue of $8,013,000, shopping center revenue of
$363,000, and royalty revenue of $382,000 for the three months ended March 31,
1996.

     Participating Lease payments were $35,013,000 for the first quarter of
1997, compared to $12,371,000 for 1996.  Hotel operating expenses were
$71,346,000 for the first quarter of 1997, compared to $23,052,000 for 1996. Net
income for the three months ended March 31, 1997 was $3,519,000, compared to net
income of $550,000 for 1996.

Pro Forma (for the three months ended March 31, 1997 and 1996)

     CHC Lease Partners.  Pro forma room revenue increased from $31,528,000 for
     ------------------                                                        
the three months ended March 31, 1996 to $32,318,000 for 1997, an increase of
$790,000 or 2.5%. Average occupancy decreased from 69.7% in 1996 to 66.7% in
1997 and average daily rates increased from $86.94 in 1996 to $94.26 in 1997,
resulting in a 3.7% increase in revenue per available room from $60.62 in 1996
to $62.86 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, completion of renovations at certain of the
Initial Hotels and increased marketing efforts.  Excluding rooms which were
under renovation, average occupancy increased from 69.7% in 1996 to 70.3% in
1997, resulting in revenue per available room of $66.28 in 1997 compared to
$60.62 for 1996.

     Pro forma food and beverage revenue increased from $11,457,000 for the
first quarter of 1996 to $11,704,000 for 1997, a total of $247,000 and a
variance of 2.2%, primarily as a result of increased banquet and catering
business. Conference center revenue increased from $645,000 for the first
quarter of 1996 to $748,000 for 1997, an increase of $103,000, or 16%, primarily
due to increased marketing efforts.  Telephone and other revenue decreased from
$3,658,000 for the first quarter of 1996 to $3,126,000 for 1997, a decrease of
$532,000, or 14.5%, due primarily to the overall decrease in occupancy and the
decrease in cancellation fees during the period.

     Pro forma Participating Lease payments were $15,409,000 for the three
months ended March 31, 1996 compared to $15,596,000 for 1997, an increase of
1.2%.  Pro forma hotel operating expenses decreased $142,000 from $30,504,000
for the first quarter of 1996 to $30,646,000 for 1997.  Departmental costs and
expenses decreased $303,000, or 1.7%, as a result of increased efficiencies in
hotel operations established to increase overall profitability as well as the
leasing of certain restaurant facilities to third parties.  General and
administrative expenses increased $160,000, or 4%, primarily due to additional
salaries and related benefit costs.  Marketing expenses increased $317,000, or
7.5%, as a result of increased marketing efforts at newly renovated hotels.  Pro
forma hotel operating expenses as a percentage of total revenue remained
relatively stable, decreasing from 64.5% in 1996 to 64% in 1997.

     Lessee expenses, which on a pro forma basis consist of management fees and
overhead expenses, net of interest and dividend income, decreased $319,000, or
51.1%, from $624,000 for the first quarter of 1996 to $305,000 for 1997,
primarily as a result of increases in historical interest and dividend income.

     CHC Lease Partners' net income on a pro forma basis was $751,000 for the
three months ended March 31, 1996 compared to $1,349,000 for 1997 as a result of
the variances discussed above.

     NorthCoast Lessee.(The comparisons presented herein are actual results of
     -----------------                                                        
operations of NorthCoast Lessee for the three months ended March 31, 1997 to pro
forma results of operations for the three months ended March 31, 1996).  Pro
forma room revenue increased from $9,390,000 for the three months ended March
31, 1996 to $9,912,000 for 1997, an increase of $522,000 or 5.6%. Average
occupancy decreased from 62.5% in 1996 to 59.8% in 1997 and average daily rates
increased from $80.68 in 1996 to $89.82 in 1997 resulting in a 6.6% increase in
revenue per available room from $50.42 in 1996 to $53.75 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 which were under renovation,
average occupancy decreased from 62.2% in 1996 to 61.4% in 1997, resulting in
revenue per available room of $55.15 in 1997 compared to $50.32 for 1996.

                                       37
<PAGE>
 
     Pro forma food and beverage revenue increased from $4,374,000 for the first
quarter of 1996 to $4,792,000 for 1997, a total of $418,000, or 9.6%.  Telephone
and other revenue increased from $900,000 for the first quarter of 1996 to
$944,000 for 1997, an increase of $44,000, or 4.9%.

     Pro forma Participating Lease payments were $4,232,000 for the first
quarter of 1996 compared to $4,683,000 for 1997, an increase of 10.7% primarily
due to increased revenues upon which the Participating Lease payment calculation
is based.  Pro forma hotel operating expenses increased from $11,130,000 for the
first quarter of 1996 to $11,279,000 for 1997, an increase of $149,000, or 1.3%.
Departmental costs and expenses increased $301,000, or 4.6%, as a result of
increased salaries and benefits at certain of the hotels. General and
administrative expenses decreased $144,000, or 9.3%, while marketing expenses
increased $52,000, or 4.3%.  Pro forma hotel operating expenses as a percentage
of total revenue decreased from 75.9% for the first quarter of 1996 to 72.1% for
1997 primarily due to stabilization of certain operating costs.

     Lessee expenses, which on a pro forma basis consist of management fees and
overhead expenses, decreased $319,000 or 76.7%, from $417,000 for the first
quarter of 1996 to $98,000 for 1997 primarily as a result of service fee income
earned in 1997 related to the acquisition by Patriot of certain hotel properties
owned by affiliates of the NorthCoast Lessee.

     NorthCoast Lessee's net loss on a pro forma basis was $1,115,000 for the
three months ended March 31, 1996 compared to net loss of  $412,000 for the
three months ended March 31, 1997.

     PAH RSI Lessee.  Pro forma room revenue increased from $12,152,000 for the
     --------------                                                            
first quarter of 1996 to $13,177,000 for 1997, an increase of $1,025,000 or
8.4%. Average occupancy increased from 62.7% in 1996 to 67.7% in 1997 and
average daily rates increased from $208.05 in 1996 to $220.39 in 1997 resulting
in a 14.4% increase in revenue per available room from $130.43 in 1996 to
$149.25 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 decreased from $5,958,000 for the first
quarter of 1996 to $5,891,000 for 1997, a total of $67,000 or 1.1%.  Pro forma
telephone and other revenues increased from $3,067,000 for the first quarter of
1996 to $3,770,000 for 1997, an increase of $703,000, or 22.9%, as a result of
the overall increase in occupancy and increased marketing efforts.  Pro forma
club, club membership and spa revenue increased 3.7% from $8,729,000 for the
first quarter of 1996 to $9,054,000 for 1997.  Shopping center revenue increased
from $437,000 for the first quarter of 1996 to $474,000 for 1997, and royalty
revenue increased from $377,000 for the first quarter of 1996 to $458,000 for
1997.

     Pro forma Participating Lease payments were $8,863,000 for the first
quarter of 1996 compared to $9,428,000 for 1997, an increase of 6.4%, primarily
due to increased revenues upon which the Participating Lease payment calculation
is based.  Pro forma hotel operating expenses increased from $19,803,000 for the
first quarter of 1996 to $20,778,000 for 1997, an increase of $975,000, or 4.9%.
This increase is primarily attributable to a $930,000 increase in departmental
costs and expenses as a result of increased salaries and benefits at certain of
the hotels.  Pro forma hotel operating expenses as a percentage of total revenue
decreased from 64.5% in 1996 to 63.3% in 1997.

     Lessee expenses, which on a pro forma basis consist of management fees and
overhead expenses, increased $152,000 or 10.5%, from $1,450,000 for the first
quarter of 1996 to $1,602,000 for 1997 primarily as a result of increased
management fees in accordance with the terms of certain management agreements.

     PAH RSI Lessee's net income on a pro forma basis was $604,000 for the first
three months of 1996 compared to $1,016,000 for 1997.

     Combined Lessees.  On a combined basis, pro forma room revenue from the
     ----------------                                                       
hotels was $69,862,000 for the three months ended March 31, 1997, an increase of
3.3% from $67,614,000 in 1996.  Average occupancy decreased from 68.1% in 1996
to 64.3% in 1997 and average daily rates increased from $94.04 in 1996 to
$103.95 in 1997 resulting in a 4.4% increase in revenue per available room from
$64.01 in 1996 to $66.81 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 which were under renovation, average
occupancy decreased from 68.0% in 1996 to 67.1% in 1997, resulting in revenue
per available room of $69.74 in 1997 compared to $64.00 for 1996.

     Combined pro forma food and beverage, conference center, and telephone and
other hotel revenues increased 2.2%, from $37,016,000 for the first quarter of
1996 to $37,839,000 for 1997.  Pro forma club, club membership and spa revenue
increased 3.7%, from  $8,729,000 for the first quarter of 1996 to $9,054,000 for
1997.  Pro forma shopping center revenue increased from $437,000 for the first
quarter of 1996 to $474,000 for 1997, and pro forma royalty revenue increased
from $377,000 for the first quarter of 1996 to $458,000 for 1997.

     Combined pro forma Participating Lease payments were $36,551,000 for 1997
compared to $35,336,000 for 1996, a 3.4% 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 $718,000, or less than
1%, to $77,212,000 for the 

                                       38
<PAGE>
 
first quarter of 1997 compared to $76,494,000 for 1996. Because pro forma
revenues increased 3.1% from the prior year while hotel operating expenses
remained relatively stable, combined pro forma net income for the three months
ended March 31, 1997 was $1,178,000 compared to a net loss of $919,000 for 1996.

LIQUIDITY AND CAPITAL RESOURCES

     During the first quarter of 1997, Patriot acquired four hotels and four
resort properties for approximately $308,200,000 (including closing costs).
These acquisitions were financed primarily with funds drawn on the Line of
Credit, the issuance of 1,295,077 OP Units  valued at approximately $58,662,000,
and the assumption of mortgage debt in the amount of approximately $28,489,000.

     Borrowings under the Line of Credit generally bear interest at a rate per
annum equal to the 30-day LIBOR rate plus 1.9%.  The Line of Credit is secured
by a mortgage on certain of the hotels.

     In January 1997, the maximum amount available under the Line of Credit was
increased to $475,000,000, along with the modification of certain terms.
Currently however, the maximum amount that Patriot may draw on the Line of
Credit is reduced by $22,000,000 as a result of the single asset loan on the
Wyndham Greenspoint Hotel.

     As of May 9, 1997, Patriot had approximately $453,000,000 available under
the Line of Credit of which approximately $436,699,000 was outstanding.  As of
such date, Patriot also had outstanding approximately  $63,989,000 of other
mortgage debt, resulting in total indebtedness of approximately $500,688,000.
The Line of Credit is currently secured by 37 of the 54 hotels and Patriot has
single asset mortgage loans which encumber three additional hotels.

     On October 31, 1996, Patriot, California Jockey Club ("Cal Jockey") and Bay
Meadows Operating Company ("Bay Meadows") entered into a binding acquisition
agreement (the "October 31, 1996 Agreement") pursuant to which the parties
agreed, subject to stockholder approval and other conditions, to engage in a
business combination transaction. The parties, together with the Patriot
Partnership, subsequently entered into an Agreement and Plan of Merger, dated as
of February 24, 1997 (the "Merger Agreement"), which by its terms supersedes the
October 31, 1996 Agreement and more fully details the transactions to be
consummated by the parties (the "Related Transactions").

     Cal Jockey operates as a REIT and is the owner of approximately 175 acres
of land in San Mateo, California on which the Bay Meadows Racecourse (the
"Racecourse") is situated.  Cal Jockey leases the Racecourse facilities to Bay
Meadows.  Bay Meadows is a gaming and entertainment company engaged primarily 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, Bay
Meadows generates revenues from commissions on simulcast and off-track pari-
mutuel wagering, admissions, parking, program sales and food and beverage
concessions at the Racecourse.  Since 1983, Cal Jockey's shares of common stock
have been paired and trade together with the shares of common stock of Bay
Meadows as a single unit on the American Stock Exchange pursuant to a stock
pairing arrangement (referred to herein as a "paired share" ownership
structure).

     Pursuant to the Merger Agreement, among other things, Patriot will merge
with and into Cal Jockey (the "Merger"), with Cal Jockey being the surviving
company.  In connection with the Merger, Cal Jockey's name will be changed to
Patriot American Hospitality, Inc. ("New Patriot REIT") and Bay Meadows' name
will be changed to Patriot American Hospitality Operating Company ("New Patriot
Operating Company").  Concurrently with these transactions, Bay Meadows will
form an operating partnership (the "New Patriot Operating Partnership") into
which Bay Meadows will contribute its assets in exchange for limited partnership
units of the New Patriot Operating Partnership, and Cal Jockey will contribute
certain of its assets to the Patriot Partnership in exchange for OP Units of the
Patriot Partnership. Upon completion of the Merger and the Related Transactions,
substantially all of the operations of New Patriot REIT and New Patriot
Operating Company will be conducted through their respective operating
partnerships.  Following completion of the Merger and the Related Transactions,
New Patriot REIT and New Patriot Operating Company will continue the operations
of Patriot, Cal Jockey and Bay Meadows within the paired share ownership
structure.

     Pursuant to the Merger Agreement, Patriot shareholders will be entitled to
receive for each share of common stock, no par value per share, of Patriot held
by them at the effective time of the Merger 0.51895 shares of common stock, par
value $0.01 per share, of New Patriot REIT and 0.51895 shares of common stock,
par value $0.01 per share, of New Patriot Operating Company, which shares will
be paired and transferable only as a single unit.

     In connection with the Merger and the Related Transactions with Cal Jockey
and Bay Meadows, Patriot will provide Cal Jockey and Bay Meadows with the funds
necessary to satisfy their payment obligations under the terms of the Merger
Agreement by borrowing the necessary amounts under the Line of Credit or other
financing sources.

     Consummation of the Merger is subject to various conditions (which must be
satisfied or waived), including: (i) approval of a proposal to adopt the Merger
Agreement and the related transactions by the holders of two-thirds of the
outstanding shares of Patriot common stock, by the holders of a majority of the
outstanding shares of Cal Jockey common stock and by the holders of a majority
of the outstanding shares of Bay Meadows common stock; (ii) approval of a
proposal to amend and restate the Certificate of Incorporation of Cal Jockey and
the Bylaws of Cal Jockey by the holders of a majority of the outstanding shares
of Cal Jockey common stock; and (iii) approval of a proposal to amend and
restate the Certificate of Incorporation of Bay Meadows and the Bylaws of Bay
Meadows by the holders of a 

                                       39
<PAGE>
 
majority of the outstanding shares of Bay Meadows common stock. Because each of
the proposals is a condition to closing, if any of the proposals are not
adopted, the parties will not be required to consummate the Merger or any of the
related transactions.

     Patriot anticipates that the respective special meetings of the
stockholders of Patriot, Cal Jockey and Bay Meadows to approve the Merger
Agreement and related proposals will occur in June 1997 and, assuming the
necessary stockholder approvals are obtained and the various other conditions to
the Merger are either satified or waived, the Merger will be consummated by the
end of June 1997.

     On April 14, 1997, a separate partnership in which the Patriot Partnership
holds a 90% general partnership interest and DTR holds a 10% limited partnership
interest acquired the 298-room Sheraton Park Place Hotel in Minneapolis,
Minnesota for a purchase price of approximately $17,000,000 in cash.  The hotel
has been leased to PAH RSI Lessee for a period of one year pursuant to a
Participating Lease agreement.

     Patriot also entered into a merger agreement and a related stock purchase
agreement (collectively, the "Wyndham Merger Agreement") on April 14, 1997,
pursuant to which Wyndham Hotel Corporation ("Wyndham") will merge with and into
New Patriot REIT with New Patriot REIT being the surviving company (the "Wyndham
Merger"). As a result of the Wyndham Merger, New Patriot REIT will acquire all
of the assets and liabilities of Wyndham, including Wyndham's portfolio of 23
owned and leased hotels, with an aggregate of 4,877 rooms, as well as Wyndham's
79 managed and franchised properties and the Wyndham, Wyndham Garden and Wyndham
Hotels & Resorts proprietary brand names.  Pursuant to the Wyndham Merger
Agreement, upon consummation of the Wyndham Merger, each outstanding share of
common stock of Wyndham ("Wyndham Common Stock") will be converted into the
right to receive 0.712 paired shares of New Patriot REIT common stock and New
Patriot Operating Company common stock (the "Wyndham Exchange Ratio"), subject
to certain adjustments.  In lieu of receiving paired shares, Wyndham
stockholders have the right to elect to receive cash (in an amount per share
based upon the Wyndham Exchange Ratio, as it may be adjusted, and the average
closing price of the paired shares over the five trading days immediately
preceding the closing date of the Wyndham Merger) up to a maximum aggregate
amount of $100,000,000.  If stockholders holding shares of Wyndham Common Stock
with a value in excess of $100,000,000 elect to receive cash, such cash will be
allocated on a pro rata basis among such stockholders.  In connection with the
execution of the Wyndham Merger Agreement, Patriot also entered into agreements
with partnerships affiliated with members of the Trammell Crow family providing
for the acquisition by New Patriot REIT of 11 full-service Wyndham-branded
hotels with 3,072 rooms for approximately $331,664,000 in cash, plus
approximately $14,000,000 in additional consideration if two hotels meet certain
operations targets (the "Crow Acquisition" and, collectively with the Wyndham
Merger, the "Proposed Wyndham Transactions").  The Wyndham Merger and the Crow
Acquisition, which will be consummated concurrently, are subject to various
conditions including, without limitation, the consummation of the Merger and
approval of the Proposed Wyndham Transactions by the stockholders of New Patriot
REIT, New Patriot Operating Company and Wyndham.  It is currently anticipated
that the stockholder meetings to approve the Proposed Wyndham Transactions will
occur in the fourth quarter of 1997.

     In addition, Patriot has entered into contracts or letters of intent to
acquire 14 additional hotels with an aggregrate of 3,506 rooms for a combined
purchase price (excluding closing costs and other acquisition-related expenses)
of approximately $268,500,000.  Patriot has also entered into an agreement to
acquire Grand Heritage Hotels, a hotel management and marketing company, and
other Grand Heritage subsidaries, including an investment in one hotel property,
for a total acquisition price estimated to be valued at approximately
$25,250,000.  These acquisitions are subject to a number of conditions including
completion of Patriot's due diligence.  Patriot currently intends to use Line of
Credit borrowings, OP Units and/or additional permanent debt or equity capital
to acquire these assets during the second and third quarters of 1997.  While no
definitive agreements with respect to the acquisition of additional hotels have
been entered into, Patriot expects additional acquisitions will be completed
during the remainder of 1997 which will  be funded through a new credit facility
or through permanent debt or equity financing.

     Patriot is currently in negotiations with certain lenders regarding
expanding and replacing the Line of Credit with a new credit facility with
availability of up to approximately $1.4 billion (the "New Credit Facility"),
which would consist of a $600 million revolving line of credit and two term
loans (each for $300 million).  It is anticipated that these three portions of
the New Credit Facility will be secured by substantially all of the asets and
properties of Patriot (and following the Merger, the assets and properties of
New Patriot REIT and New Patriot Operating Company). Additionally, the New
Credit Facility will include an additional $200 million term loan which can be
drawn upon in connection with the Proposed Wyndham Transactions (the
"Acquisition Line").  The Acquisition Line would be subordinate to the rest of
the New Credit Facility.  While negotiations concerning the New Credit Facility
are ongoing, there can be no assurance that such a credit facility will be
obtained, or if obtained, when it will become effective or available or what the
specific terms of such facility will be.

     In addition, Patriot is evaluating other permanent sources of capital,
including 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 Patriot's overall debt to market capitalization ratio.

     Patriot's principal source of cash to meet its cash requirements, including
distributions to its shareholders,  is its share of the Patriot Partnership's
cash flow.  The Patriot Partnership's principal source of revenue is rent
payments under the Participating Leases.  The Lessees' ability to make rent
payments to the Patriot Partnership and, therefore, 

                                       40
<PAGE>
 
Patriot's liquidity, including the ability to make distributions to its
shareholders, is dependent upon the Lessees' ability to generate sufficient cash
flow from operation of the hotels.

     Cash and cash equivalents as of March 31, 1997 were $6,271,000, including
capital improvement reserves of $2,394,000.  Additionally, the March 31, 1997
lease revenue receivable was $14,769,000, of which $2,895,000 was paid by the
Lessees in April 1997.  Cash flows from operating activities of Patriot was
$11,489,000 for the first quarter of 1997, which primarily represents collection
of rents under the Participating Leases, less Patriot's operating expenses for
the period.  Cash flows used in investing activities in the amount of
$222,529,000 for the first quarter of 1997 resulted from the acquisition of
hotel properties and renovations expenditures at certain hotels.  Cash flows
from financing activities of $210,707,000 for the first quarter of 1997 was
primarily related to borrowings on the Line of Credit, net of payments of
dividends and distributions.

     Cash and cash equivalents as of March 31, 1996 were $8,098,000, including
capital improvement reserves of $1,806,000.  Cash flows from operating
activities of Patriot was $9,002,000 for the three months ended March 31, 1996,
which primarily represents collection of rents under the Participating Leases,
less Patriot's operating expenses for the period.  Cash flows used in investing
activities in the amount of $37,838,000 for the first quarter of 1996 resulted
primarily from the acquisition of hotel properties.  Cash flows from financing
activities of $32,165,000 was primarily related to $40,750,000 in borrowings on
the Line of Credit, net of dividends and distributions paid during the quarter.

RENOVATIONS AND CAPITAL IMPROVEMENTS

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

     Patriot completed over $16,873,000 of capital improvements during 1996 as
well as commenced and completed renovations at certain of the Hotel properties.
During 1996, approximately $11,097,000 of total capital improvement expenditures
was related to significant renovations at certain of the hotel properties which
included upgrading the rooms, public meeting space and lobby areas.  Patriot has
budgeted approximately $20,768,000 of capital improvements, excluding
renovations, to complete recurring capital expenditures in 1997 for the 54
hotels owned as of March 31, 1997.

     During 1997 for the 54 hotels owned as of March 31, 1997, Patriot has
budgeted a total of approximately $39,220,000 related to the renovations or
completion of renovations at a number of the hotels.  Total budgeted renovations
include approximately $11,744,000 related to the completion of major 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.  Additionally, major planned renovations
of approximately $10,549,000 began in late 1996 and are currently in process at
the Holiday Inn - Miami Airport in Miami, Florida and the Holiday Inn in Des
Plaines, Illinois (both of which will be converted to Doubletree brands upon
completion of the renovations); and the Doubletree Hotel in Tallahassee,
Florida.  Renovations which total approximately $15,514,000 are expected to be
started and completed during 1997 on the recently acquired Doubletree Hotel at
Allen Center in Houston, Texas; the Radisson Hotel in Northbrook, Illinois; the
Radisson Hotel in Overland Park, Kansas; the Luxford Suites Hotel in
Minneapolis, Minnesota (also to be branded a Doubletree Hotel) and the Pickwick
Hotel in San Francisco, California.

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

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

FUNDS FROM OPERATIONS

     Funds from Operations (as defined and computed below) was $22,923,000 for
the three months ended March 31, 1997 and $11,634,000 for the three months ended
March 31, 1996. On a pro forma basis, Funds from Operations was $22,472,000 for
the three months ended March 31, 1997 compared to $22,489,000 for the three
months ended March 31, 1996.

                                       41
<PAGE>
 
     Patriot considers Funds from Operations to be a key measure of REIT
performance.  Funds from Operations represents net income (loss) (computed in
accordance with generally accepted accounting principles), excluding gains (or
losses) from debt restructuring or sales of property, plus depreciation of real
property, and after adjustments for unconsolidated partnerships, joint ventures
and corporations.  Adjustments for Patriot's unconsolidated subsidiaries are
calculated to reflect Funds from Operations on the same basis.  Patriot has also
made certain adjustments to Funds from Operations for real estate related
amortization.  Funds from Operations should not be considered as an alternative
to net income or other measurements under generally accepted accounting
principles as an indicator of operating performance or to cash flows from
operating, investing or financing activities as a measure of liquidity.  Funds
from Operations does not reflect working capital changes, cash expenditures for
capital improvements or principal payments on indebtedness.

     The following reconciliation of net income to Funds from Operations
illustrates the difference between the two measures of operating performance:
<TABLE>
<CAPTION>
                                                                    1997         1996
                                                                  -------       -------
<S>                                                               <C>           <C>      
 
     Net income................................................   $11,348       $ 7,128
     Add:                                                                 
       Minority interest in Patriot Partnership................     2,232         1,158
       Depreciation of buildings and improvements and                     
          furniture, fixtures and equipment....................     8,467         2,808
       Amortization of franchise fees..........................        22            22  
       Amortization of capitalized lease costs.................        36            23
     Adjustment for Funds from Operations of                              
       unconsolidated subsidiaries:                                       
       Equity in earnings of unconsolidated                                     
         subsidiaries..........................................    (1,021)       (1,362)
       Funds from operations of unconsolidated                                  
         subsidiaries..........................................     1,839         1,857
                                                                  -------       -------
     Funds from Operations.....................................   $22,923       $11,634
                                                                  =======       =======
                                                                                
     Patriot's share of Funds from Operations..................   $19,158       $10,009
                                                                  =======       =======
                                                                                
     Primary (1):                                                               
       Weighted average shares and OP Units outstanding (2)....    53,043        34,214
                                                                  =======       =======
       Weighted average number of common shares and                             
          common share equivalents outstanding.................    44,552        29,468
                                                                  =======       =======
     Fully-diluted (1):                                                         
       Weighted average shares and OP Units outstanding (2)....    53,077        34,214
                                                                  =======       =======
       Weighted average number of common shares and                             
          common share equivalents outstanding.................    44,586        29,468
                                                                  =======       =======
</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.
(2)  The number of OP Units used in the calculation is based upon the equivalent
     number of shares of Patriot's common stock after giving effect to the
     change in the OP Unit conversion factor which coincides with the 2-for-1
     stock split.

INFLATION

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

SEASONALITY

     The hotel industry is seasonal in nature.  Revenues for certain of
Patriot'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
Patriot's lease revenues.

                                       42
<PAGE>
 
                                    PART II

ITEM 1.  LEGAL PROCEEDINGS

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


ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K

a.   EXHIBITS:

     ITEM NUMBER         DESCRIPTION

     27.1                Financial Data Schedule


b.   REPORTS ON FORM 8-K:

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

     Current Report dated February 24, 1997 (No. 001-13898 filed March 3, 1997)
reporting the execution of the Agreement and Plan of Merger by and among Patriot
American Hospitality, Inc., Patriot American Hospitality Partnership, L.P.,
California Jockey Club and Bay Meadows Operating Company.

                                       43
<PAGE>
 
                                   SIGNATURE

     Pursuant to the requirements of the Securities and Exchange Act of 1934,
the registrant has duly caused the report to be signed on its behalf by the
undersigned thereunto duly authorized.

Dated:    May 12, 1997


                                    PATRIOT AMERICAN HOSPITALITY, INC.



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

                                       44