<PAGE>
 
                                   FORM 10-K/A
                                Amendment No. 2

                       SECURITIES AND EXCHANGE COMMISSION

                             WASHINGTON, D.C. 20549

(Mark One)
[X]  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE 
     ACT OF 1934

For the fiscal year ended December 31, 1997

                                       OR

[_]  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES 
     EXCHANGE ACT OF 1934

For the transition period from ............... to ...............

Commission file number 333-13413

                           READING ENTERTAINMENT, INC.
             (Exact name of registrant as specified in its charter)

         Delaware                                     23-2859312
 (State of incorporation)                (I.R.S. Employer Identification No.)

           30 South Fifteenth Street
                  Suite 1300
          Philadelphia, Pennsylvania                                 19102
   (Address of principal executive offices)                       (Zip Code)

Registrant's telephone number:  215-569-3344

Securities registered pursuant to Section 12(b) of the Act:

       Title of each class             Name of each exchange on which registered
   Common Stock, $.001 Par Value               Philadelphia Stock Exchange

Securities registered pursuant to Section 12(g) of the Act:

             Common Stock, $.001 Par Value
                    Title of class

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

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

     As of March 26, 1998, 7,449,364 shares of Common Stock were outstanding and
the aggregate market value of voting stock held by nonaffiliates of the
Registrant was approximately $27,204,733.38.
<PAGE>
 
Part III, Items 10-13 are amended in their entirety as set forth herein.

PART III

Item 10.   Directors and Executive Officers of the Registrant

     Name                              Age  Position
     ----                              ---  --------

     James J. Cotter (1)               59   Chairman of the Board of Directors

     S. Craig Tompkins                 47   Vice Chairman of the Board of 
                                              Directors and Director

     Robert F. Smerling                63   President and Director

     Gregory R. Brundage (2)(4)        54   Director

     Edward L. Kane (1)(2)(3)          60   Chairman of the Audit and Finance  
                                              Committee of the Board and a 
                                              Director

     John W. Sullivan (1)(3)(4)        63   Chairman of the Compensation 
                                              Committee of the Board and a 
                                              Director

     Albert J. Tahmoush (3)(4)         76   Chairman of the Conflicts Committee
                                              of the Board and a Director

     B. John Rochester                 54   Chief Executive Officer, Australian
                                              Cinema Operations and Reading
                                              Australia Pty Ltd.

     James A. Wunderle                 46   Executive Vice President, Chief 
                                              Financial Officer and Treasurer

     Ellen M. Cotter                   32   Vice President, Business Affairs

     John Foley                        47   Vice President, Marketing

     Charles S. Groshon                44   Vice President, Finance

     Mark A. Novell                    35   Controller

     --------------

(1)  Member of the Executive Committee. The Executive Committee is appointed
     annually by the Board of Directors and exercises the authority of the Board
     of Directors in the management of the business and affairs of the Company
     between meetings of the Board of Directors. The Executive Committee is also
     responsible for recommending to the Board of Directors nominees to be
     elected to the Board of Directors by the shareholders or by the Board of
     Directors in the case of vacancies which occur between meetings of the
     shareholders.

(2)  Member of the Audit and Finance Committee. The Audit and Finance Committee
     is appointed annually by the Board of Directors to recommend the selection
     of independent auditors, review the scope and results of the annual audit,
     review financial results and status, review and assess the adequacy of the
     Company's accounting practices, financial controls and reporting systems
     and assess the financial planning functions of the Company. During 1997 the
     Audit and Finance Committee held one meeting.

                                      -1-
<PAGE>
 
(3)  Member of the Compensation Committee. The Compensation Committee is
     responsible for recommending to the Board of Directors remuneration for
     senior management and officers of the Company, recommending adoption of
     compensation plans and the granting of options under the Company's stock
     option plans. The Compensation Committee held six meetings during 1997.

(4)  Member of the Conflicts Committee. The Conflicts Committee was formed in
     order to evaluate and make recommendations to the Board of Directors
     concerning matters in which the Board of Directors or management may have a
     conflict of interest. The Conflicts Committee held one meeting in 1997.

     Mr. Cotter has been Chairman of the Board of Directors since December 1991,
Chairman of the Company's Executive Committee since March 1993 and a director
since September 1990. Mr. Cotter has been Chairman of the Board of Craig since
1988 and a director since 1985. Mr. Cotter has been a director of Citadel since
1991, became acting Chairman in October of 1991 and was named Chairman in 1992.
From October 1991 to June 1992, Mr. Cotter also served as the acting Chairman of
Citadel's wholly owned subsidiary, Fidelity Federal Bank, FSB ("Fidelity"), and
served as a director of Fidelity until December 1993. Mr. Cotter is the Chairman
and a director of Citadel Agricultural, Inc. ("CAI"), a wholly owned subsidiary
of Citadel; the Chairman and a member of the Management Committee of each of the
agricultural partnerships which constitute the principal assets of CAI (the
"Agricultural Partnerships"); and the Chairman and a member of the Management
Committee of Big 4 Farming LLC ("Farming"), a farm management company, 80% owned
by Citadel. From 1988 through January 1993, Mr. Cotter also served as the
President and a director of Cecelia Packing Corporation ("Cecelia") (a citrus
grower and packer), a company wholly owned by Mr. Cotter, and is the Managing
Director of Visalia LLC ("Visalia"), which holds a 20% interest in each of the
Agricultural Partnerships and a 20% interest in Big 4 Farming LLC. Mr. Cotter
has been a director and Chief Executive Officer of Townhouse Cinemas Corporation
(motion picture exhibition) since 1987, Executive Vice President and a director
of The Decurion Corporation (motion picture exhibition) since 1969 and a
director of Stater Bros. Holdings Inc. and its predecessors from 1987 until
September 1997. Mr. Cotter is also a director and Executive Vice President of
Pacific Theatres, a wholly owned subsidiary of Decurion.

     Mr. Smerling has been President of Reading Entertainment since January
1997. Mr. Smerling has served as President of several subsidiaries of the
Company since November 1994. Mr. Smerling also serves as the President of
CineVista. Mr. Smerling served as president of Loews Theater Management
Corporation, a subsidiary of Sony Corporation, from May 1990 until November
1994. Mr. Smerling also serves as President and Chief Executive Officer of City
Cinemas, a motion picture exhibitor located in New York City, New York. City
Cinemas is an affiliate of James J. Cotter and has entered into an Executive
Sharing Agreement with the Company with respect to the services of Mr. Smerling.

     Mr. Tompkins has been Vice Chairman since January 1997. Mr. Tompkins has
been a Director of the Company since March 1994 and was President of the Company
from March 1994 through December 1996. Mr. Tompkins is also President and
Director of Craig and has served in such positions since March 1, 1994. Prior
thereto, Mr. Tompkins was a partner in the law firm of Gibson, Dunn & Crutcher.
Mr. Tompkins has been a director of Citadel since May 1994 and a director of G&L
Realty Corp., a New York Stock Exchange listed REIT (Real Estate Investment
Trust), since December 1994. Since July 1995, Mr. Tompkins has been the Vice
Chairman of Citadel, and currently serves as that company's Secretary/Treasurer
and Principal Accounting Officer. Mr. Tompkins is also President and a Director
of CAI, a member of the Management Committee of each of the Agricultural
Partnerships and of Big 4 Farming LLC, and serves for administrative convenience
as an Assistant Secretary of Visalia and Big 4 Ranch, Inc. (a partner with CAI
and Visalia in each of the Agricultural Partnerships).

     Mr. Rochester has been Chief Executive Officer of Reading Australia since
November 1995. From 1990 through 1995, Mr. Rochester was the Managing Director
of Television & Media Services Ltd. (formerly Hoyts Entertainment Ltd.). He also
served in several other executive offices for that organization since 1987.

     Mr. Wunderle has been Chief Financial Officer since January 1987 and
Executive Vice President, Treasurer, and Chief Financial Officer since December
1988. He has been Treasurer since March 1986.

     Ms. Cotter has been the Vice President, Business Affairs of the Company
since March 1998. Ms. Cotter has held the same position with Craig since August
1996. Prior thereto, she was an attorney specializing in corporate law with
White & Case, a New York law firm. Ms. Cotter is the daughter of Mr. James J.
Cotter. Ms. Cotter is a member 

                                      -2-
<PAGE>
 
of Visalia and a limited partner in James J. Cotter, Ltd. (Mr. Cotter is a
general partner), which is a general partner of Hecco Ventures I, a privately
held investment partnership.

     Mr. Groshon has been Vice President of the Company since December 1988. He
was an internal auditor with the Company from August 1984 until December 1988,
and a staff accountant prior thereto.

     Mr. Foley has been an officer of the Company since May 1997. Mr. Foley also
has been an officer of City Cinemas since January 1997. Prior to joining City
Cinemas and the Company, Mr. Foley was the President of Distribution for
Miramax, where he, among other things, developed and implemented the
distribution plan for "The English Patient," the winner of nine Academy Awards
and one of the most profitable art films of all time. Prior to joining Miramax
in 1994, Mr. Foley was the President of Distribution for MGM/UA from 1989
through 1993.

     Mr. Novell has been Controller of the Company since March 1998. Mr. Novell
served as Controller for Einstein/Noah Bagels, L.P., a franchisee for the east
coast of the United States, from November 1996 to January 1998. Prior thereto,
Mr. Novell served as Controller for Expert Software, Inc. (a consumer software
publisher/distributor). Mr. Novell is a Certified Public Accountant.

     The Company receives consulting services from the following individual; a
full-time employee of an affiliated company, Citadel:

     Mr. Wesson has been the President and Chief Executive Officer of Citadel
since August 1994. Prior to his employment by Citadel in 1993, Mr. Wesson was
the Chief Executive Officer of Burton Properties Trust Inc., the U.S. real
estate subsidiary of The Burton Group PLC, from 1989. Reading owns 23.5% of the
outstanding Common Stock of Citadel, and receives real estate consulting
services from Citadel pursuant to an agreement with that company.

Section 16(a) Beneficial Ownership Reporting Compliance

     Section 16(a) of the Securities Exchange Act of 1934, as amended, requires
the Company's officers, directors and persons who own more than 10% of the
Company's Common Stock to file reports to ownership and changes in ownership
with the Securities Exchange Commission (the "SEC"). The SEC rules also require
such reporting persons to furnish the Company with a copy of all Section 16(a)
forms they file.

     Based solely on a review of the copies of the forms which the Company
received and written representations from certain reporting persons, the Company
believes that, during the fiscal year ended December 31, 1997, all filing
requirements applicable to its reporting persons were complied with except as
follows: each of the Company's directors (Messrs. Cotter, Smerling, Tompkins,
Brundage, Kane, Sullivan and Tahmoush) and each of the Company's officers
(Messrs. Wunderle, Groshon, Foley and Ms. Mahady) who received options in 1997
did not file timely Form 5's disclosing the resultant change in beneficial
ownership. All of the directors and officers have since filed the required
reports with the Securities and Exchange Commission.

                                      -3-
<PAGE>
 
Item 11.   Executive Compensation

     I.    SUMMARY COMPENSATION TABLE

     The following table shows, for the years ending December 31, 1997, 1996 and
1995, the cash compensation paid by the Company, as well as certain other
compensation paid or accrued for those years, to each of the most highly
compensated executive officers of the Company whose compensation exceeded
$100,000 in all capacities in which they served:
<TABLE> 
<CAPTION> 
                                                                                                       Long Term
                                                                    Annual Compensation                 Awards
                                                        -------------------------------------------- --------------
                                                                                      Other Annual
                                                           Salary        Bonus        Compensation      Options
Name and Principal Position                   Year          ($)           ($)             ($)             (#)
-------------------------------------------- --------   ------------- -------------  --------------- --------------
<S>                                          <C>        <C>           <C>            <C>             <C> 
James J. Cotter/(1)(2)/                       1997                        $475,000         $150,000        460,000
  Chairman of the Board of Directors          1996                                          150,000
                                              1995                                          150,000 
                                                                                                    
                                       
S. Craig Tompkins/(2)(3)/                     1997          $180,000                                        20,000
  Vice Chairman of the Board of Directors     1996           180,000
                                              1995           180,000 
                                                                     
                                       
Robert F. Smerling/(4)/                       1997           175,000                                        35,000
  President and Director                      1996           175,000        60,000
                                              1995           175,000              
                                                                                  
                                       
B. John Rochester/(5)/                        1997           130,000
  President and Chief Executive Officer,      1996           156,620
  Reading Australia Pty Ltd.                  1995            39,155 
                                                                     
                                                                     
                                       
James A. Wunderle                             1997           170,000         5,000                          17,000
  Executive Vice President, Chief             1996           130,000        70,000
  Financial Officer and Treasurer             1995           130,000        52,500 
</TABLE> 


(1)  Mr. Cotter receives a fee for his services as Chairman of the Board of
     Directors of $150,000 per annum.

(2)  Does not include fees of $45,000 paid to Mr. Cotter in both 1997 and 1996
     or fees of $40,000 and $35,000 paid in 1997 and 1996, respectively, to Mr.
     Tompkins by Citadel for services provided to Citadel.

(3)  Mr. Tompkins was appointed Vice Chairman of the Board of Directors
     effective January 17, 1997.

(4)  Mr. Smerling was appointed President of the Company effective January 17,
     1997 and a Director on January 24, 1997.

(5)  Mr. Rochester's compensation is paid in Australian dollars, his base salary
     is A$200,000. The amounts presented in the table fluctuate due to
     fluctuations in the U.S. dollar / Australian dollar exchange rates at
     December 31 of the respective years presented. Mr. Rochester was retained
     effective November 1995. Amount set forth reflects salary for 1995.

                                      -4-
<PAGE>
 
     Directors who are not employees of the Company receive an annual retainer
of $24,000, except for the Chairmen of the Audit and Finance Committee, the
Compensation Committee and the Conflicts Committee, each of whom receives an
annual retainer of $26,000. The Chairman of the Board receives an annual
retainer of $150,000. No separate fees are paid for meetings of the Board or
committee meetings.

     Mr. Tompkins is entitled to a severance payment equal to his annual base
salary and continuation of medical and insurance benefits in the event that his
employment is involuntarily terminated and no change in control of the Company
has occurred. Mr. Tompkins is entitled to a severance payment equal to two years
annual salary in the event that a change in control of the Company occurs.

     Mr. Rochester is employed under the terms of an employment contract with an
initial term of two years beginning January 1, 1996, with automatic renewal
terms of one year each. The agreement provides for an incentive payment to Mr.
Rochester after the fourth anniversary of the agreement, based on a multiple of
cash flow of the Company's Australian theater operations. Under the agreement,
in the event Mr. Rochester's employment is terminated by the Company without
cause, he will be entitled to receive such incentive payment plus 17 payments,
each equal to his monthly remuneration, if such termination is during the
initial term, or 11 such monthly payments if such termination is after the
initial term. Mr. Rochester is entitled to receive a lump sum distribution of
such amounts, as applicable, if the Company and Craig both withdraw from any
material investment or involvement in the Australian operations and he is not
granted employment under comparable terms.

     Messrs. Smerling, Wunderle and Groshon and are entitled to receive payment
equal to twelve, twelve and nine months, respectively, of annual base salary in
the event their individual employment with the Company is involuntarily
terminated.

     II.   OPTION GRANT TABLE

     As of December 31, 1997, the Company had options outstanding under two
Stock Option Plans, the 1992 Non-qualified Stock Option Plan (the "1992 Plan")
and the 1997 Equity Incentive Plan (the "1997 Plan"). Each plan was approved by
shareholders in the year of adoption. The 1997 Plan reserved 200,000 shares for
grant and provides for one-fourth of the options granted to be exercisable on
the first anniversary of the date of grant, and an additional one-fourth on each
subsequent anniversary, unless the Compensation Committee of the Board of
Directors (the "Committee"), in its discretion, decides otherwise.

     The 1992 Plan reserved 500,000 shares for grant and provides for one-third
of options granted to be immediately exercisable, one-third exercisable on the
first anniversary of the date of grant, and the final one-third exercisable upon
the second anniversary date of the date of grant unless the Committee, in its
discretion, decides otherwise.
<TABLE> 
<CAPTION> 
                                                                                     Potential Realizable Value at
                                                                                     Assumed Annual Rates of Stock
                                                                                     Price Appreciation for Option
                                 Individual Grants                                                Term
-----------------------------------------------------------------------------------  -------------------------------
                             No. of       % of Total                                                            
                           Securities       Options                                
                           Underlying     Granted to     Exercise or 
                            Options      Employees in    Base Price     Expiration 
          Name              Granted       Fiscal Year        ($)           Date         5% ($)         10% ($) 
---------------------  --------------  ---------------  -------------  ------------  -------------  ----------------
<S>                       <C>            <C>             <C>           <C>            <C>             <C> 
James J. Cotter             110,000          17.61%         12.80       4/18/2007        652,551       1,873,084
James J. Cotter             260,000          41.63%         12.80       4/18/2007      1,542,395       4,427,290
James J. Cotter              90,000          14.41%         12.80       4/18/2007        533,906       1,532,523
Ellen M. Cotter              10,000           1.60%         12.80       4/18/2007         59,323         170,280
Robert F. Smerling           35,000           5.60%         12.80       4/18/2007        207,630         595,981
S. Craig Tompkins            20,000           3.20%         12.80       4/18/2007        118,646         340,561
James A. Wunderle            17,000           2.72%         12.80       4/18/2007        100,849         289,477
</TABLE> 

                                      -5-
<PAGE>
 
     Options granted under both the 1992 Plan and the 1997 Plan must have
exercise prices equal to or greater than 100% of the fair market value of the
underlying shares on the date of grant and expire ten years from the date of
grant and may contain certain other terms and conditions as determined by the
Committee. All of the options granted to executive officers other than Mr.
Cotter were from the 1997 Plan. Shareholders of the Company approved a grant of
options on September 16, 1997 to James J. Cotter, Chairman of the Board of
Directors of the Company (the "Cotter Options"). The Cotter Options are divided
into three groups: options (the "Basic Options") to purchase up to 110,000
shares of Common Stock, which become exercisable in four equal installments
commencing one year from the date of grant; options (the "Convertible Preferred
Options") to purchase up to 260,000 shares of Common Stock, which become
exercisable over a similar vesting schedule, but only in proportion to the
number of shares of Convertible Preferred Stock which are converted into Common
Stock; and options (the "Asset Put Options") to purchase up to 90,000 shares of
Common Stock which become exercisable over a similar vesting schedule, but only
in proportion to the number of shares of Common Stock which are issued pursuant
to the Asset Put Option (See Item I - Business General - The Reorganization and
Stock Transactions). All shares granted under the Cotter Options have an
exercise price of $12.80 per share.

     III.  OPTION EXERCISES AND YEAR-END TABLE

     The following sets forth information with respect to the options held by
the persons named in the Summary Compensation Table above as of December 31,
1997. No options were exercised by such persons during the fiscal year ended
December 31, 1997 and none of the options held by such persons at December 31,
1997 had exercise prices which were below the market price of the Company's
common stock as of that date. All of such options had an exercise price of
$12.80 per share except for 265,232 held by Mr. Cotter which have an exercise
price of $14.00 per share.

                             Fiscal Year-End Option Values

                                                Number of Unexercised
                                                 Options at 12/31/97
                                                -----------------------
                                                   # Exercisable /
               Name                                 Unexercisable
               -------------------------------  -----------------------
               James J. Cotter (1)                265,232 /    460,000
               Ellen M. Cotter                          0 /     10,000
               S. Craig Tompkins                        0 /     20,000
               Robert F. Smerling                       0 /     35,000
               James A. Wunderle                        0 /     17,000

     (1)   Mr. Cotter's unexercisable options include all of the Convertible
           Preferred Options, Asset Put Options and the Basic Options.

Compensation Committee Interlocks and Insider Participation

     Mr. Sullivan, Chairman of the Compensation Committee, served as the
President and Chief Executive Officer of the Company from 1981 through 1986. Mr.
Kane also a member of the Compensation Committee, served as President of the
Company from December 1991 through January 1993. Messrs. Sullivan, Kane and
James J. Cotter, the Company's Chairman, are members of the Executive Committee
of the Board of Directors, which committee was responsible for compensation
matters prior to the establishment of the Compensation Committee in October
1996.

                                      -6-
<PAGE>
 
Item 12.   Security Ownership of Certain Beneficial Owners and Management

Beneficial Ownership of Common Stock

     The following tables set forth certain information regarding the Common
Stock and total voting stock (including the Series A Preferred Stock and the
Series B Preferred Stock) of the Company owned on April 28, 1998 by (i) each
person or group who is known by the Company to own beneficially more than 5
percent of the Company's Common Stock, (ii) each of the Company's directors and
most highly compensated executive officers and (iii) all directors and officers
of the Company as a group.

5% Beneficial Owners

<TABLE> 
<CAPTION> 
                              --------------------------------------------------------------------------
                                                         Voting Cumulative Convertible Preferred Stock
                                                        ------------------------------------------------
                                    Common Stock               Series A                Series B
--------------------------------------------------------------------------------------------------------------------
                                Amount and               Amount and              Amount and                        
                                 Nature of                Nature of               Nature of             Percent of 
Name and Address of             Beneficial    Percent    Beneficial   Percent    Beneficial   Percent     Voting   
Beneficial Owner                 Ownership    of Class    Ownership   of Class    Ownership   of Class   Stock (1) 
====================================================================================================================
<S>                           <C>             <C>        <C>          <C>        <C>          <C>        <C> 
Craig Corporation              
550 South Hope Street          9,655,312 (3)    80.87         0           0        550,000       100       77.96
Los Angeles, CA 90071 (2)
--------------------------------------------------------------------------------------------------------------------
Citadel Holding Corporation    
550 South Hope Street          2,241,349 (4)    23.13      70,000        100          0           0        5.03
Los Angeles, CA 90071
--------------------------------------------------------------------------------------------------------------------
</TABLE> 

Security Ownership of Management
<TABLE> 
<CAPTION> 
                                                      Amount and
                                                       Nature of
                                                      Beneficial           Percentage of         Percentage of
Name of Beneficial Owner                               Ownership            Common Stock          Voting Stock (1)
------------------------                               ---------            ------------          ----------------
<S>                                                   <C>                  <C>                   <C> 
James J. Cotter......................................   298,732   (2)(5)            3.86                  2.18
Gregory R. Brundage..................................         0                        0                     0
Ellen M. Cotter......................................     2,500   (6)                  *                     *
Edward L. Kane.......................................     9,000   (7)(8)               *                     *
B. John Rochester....................................         0                        0                     0
Robert F. Smerling...................................     7,812   (9)                  *                     *
John W. Sullivan.....................................   165,441   (7)(10)           2.22                  1.23
Albert J. Tahmoush...................................     7,500   (7)                  *                     *
S. Craig Tompkins....................................     6,400   (2)(11)              *                     *
James A. Wunderle....................................     4,250   (12)                 *                     *
All Directors and Officers As a Group (13 Persons)...   507,885   (13)              6.52                  3.69
</TABLE> 

*    Percentages of less than one percent have not been indicated.

(1)  Gives effect to the voting rights of 70,000 shares of Series A Preferred
     Stock and 550,000 shares of Series B Preferred Stock, all of which are
     owned by Citadel and Craig, respectively, both of which are entitled to
     cast 9.64 votes per share, voting together with the holders of the Common
     Stock and the other series of Convertible Preferred Stock, on any matters
     presented to shareholders of the Company.

(2)  Craig filed a Schedule 13D dated June 19, 1989, stating that the shares
     have been purchased for investment purposes. Share information is presented
     as of a report filed on Form 4 with the SEC dated February 4, 1997. James
     J. Cotter is Chairman of the Board of the Company and Craig. S. Craig
     Tompkins is Vice Chairman of the Board of the Company and President of
     Craig. James J. Cotter is also a principal

                                      -7-
<PAGE>
 
     shareholder of Craig. Messrs. Cotter and Tompkins disclaim beneficial
     ownership of the Company's shares held by Craig.

(3)  Includes 4,489,796 shares of Common Stock which may be acquired through the
     conversion of the Series B Preferred Stock.

(4)  Includes 608,696 shares of Common Stock which may be acquired through the
     conversion of the Series A Preferred Stock and 1,632,653 shares of Common
     Stock which may be acquired through the exercise of the Asset Put Option.
     In accordance with the provisions of the Asset Put Option, Citadel may
     require the Company to purchase up to $30 million of Citadel assets and pay
     for such purchase through the issuance of Common Stock, the first $20
     million of which is to be determined by valuing the Common Stock at $12.25
     per share and the balance, if any, through the issuance of Common Stock
     valued at fair market value at the time of the exercise of the Asset Put
     Option. The amount set forth above includes only shares of Common Stock
     which will be issued to Citadel if the Company were required to purchase
     $20 million of Citadel assets pusuant to the exercise of the Asset Put
     Option.

(5)  Includes 265,232 which may be acquired through the exercise of stock
     options and stock options exercisable within 60 days of April 28, 1998.

(6)  Includes 2,500 shares which may be acquired through the exercise of stock
     options and stock options exercisable within 60 days of April 28, 1998.

(7)  Includes 7,500 shares which may be acquired through the exercise of stock
     options and stock options exercisable within 60 days of April 28, 1998.

(8)  Includes 1,500 shares held in a retirement account.

(9)  Includes 7,812 shares which may be acquired through the exercise of stock
     options and stock options exercisable within 60 days of April 28, 1998.

(10) Includes 55,520 shares owned by a family trust for which Mr. Sullivan
     serves as a trustee, 32,785 shares held in a trust for the benefit of Mr.
     Sullivan's daughter for which Mr. Sullivan serves as a trustee and 29,636
     shares held in custodial accounts for Mr. Sullivan's son for which Mr.
     Sullivan serves as custodian. Excludes 107,838 shares held in a charitable
     foundation of which Mr. Sullivan serves as a director, as well as 66,100
     shares held by other trusts (of which Mr. Sullivan is not a trustee) for
     the benefit of Mr. Sullivan's children as to which Mr. Sullivan disclaims
     beneficial ownership.

(11) Includes 5,000 shares which may be acquired through the exercise of stock
     options and stock options exercisable within 60 days of April 28, 1998.
     Excludes 200 shares held in Mr. Tompkins' wife's retirement plan and 500
     shares held in the trust of Mr. Tompkins' minor child as to which Mr.
     Tompkins disclaims beneficial ownership.

(12) Includes 4,250 shares which may be acquired through the exercise of stock
     options and stock options exercisable within 60 days of April 28, 1998.

(13) Includes 341,044 shares which may be acquired through the exercise of stock
     options and stock options exercisable within 60 days of April 28, 1998.

                                      -8-
<PAGE>
 
Item 13.   Certain Relationships and Related Transactions

     In December 1997, Citadel capitalized a wholly owned subsidiary, Big 4
Ranch, Inc. (BRI), with a cash contribution of $1,200,000 and then distributed
100% of the shares of Big 4 Ranch, Inc. to Citadel's common shareholders of
record as of the close of business on December 23, 1997, as a spin-off dividend.
The Company received 1,564,473 shares or 23.4% of Big 4 Ranch, Inc.

     Also, in December 1997, BRI (owning 40%), Citadel (owning 40%) and Visalia
LLC (owning 20%; a limited liability company controlled by Mr. James J. Cotter,
the Chairman of the Board of the Company, Craig, and Citadel, and owned by Mr.
Cotter and certain members of his family) entered into three general
partnerships, which partnerships acquired on December 31, 1997 certain
agricultural properties located in Kern County, California (purchase price
amounting to approximately $7,600,000). The acquisition was financed by a
10-year purchase money mortgage in the amount of $4,050,000, a line of credit
from Citadel and pro rata contributions from the partners. Through the Company's
holdings in Big 4 Ranch, Inc., and Citadel, the Company owned approximately
18.8% of such partnerships at December 31, 1997.

     The Partnerships have each retained Big 4 Farming LLC (owned 80% by Citadel
and 20% by Visalia) to farm their properties. Certain officers and directors of
the Company are officers, directors or management committee members of Citadel,
BRI, Farming and/or the Agricultural Partnerships. Mr. James J. Cotter is the
Chairman and a Director of each of Citadel, Craig and the Company, and is also
Chairman of the management committees of Farming and of each of the Agricultural
Partnerships. Mr. S. Craig Tompkins is the Vice Chairman and a Director of each
of Citadel and the Company, the President and a Director of Craig, the Principal
Accounting Officer of Citadel, and a member of the management committees of
Farming and of each of the Agricultural Partnerships. Mr. Edward L. Kane, a
Director of the Company, is the Chairman and President of BRI, and a member of
the management committee of each of the Agricultural Partnerships. Ms. Margaret
Cotter, a Director of Craig and the daughter of James J. Cotter, is also the
Secretary, Treasurer and Principal Accounting Officer and a Director of BRI, an
owner of Visalia and the Vice President of Ceceila. As an administrative
convenience, Mr. Tompkins also serves as an assistant secretary of BRI and
Visalia, for which he receives no compensation.

     In 1997 the Company's Board of Directors voted to waive the transfer
restrictions imposed by the provisions of the Company's capital stock to the
extent necessary to permit Craig to acquire additional shares of the Company's
capital stock. The transfer provisions prohibit a party from acquiring more than
4.75% of the Company's outstanding capital stock without the permission of the
Company's Board of Directors and are intended to assure the continuing
availability of the Company's federal tax loss carryforwards by precluding a
change in control which could limit the value of the carryforwards. Prior to
granting the waiver of the restrictions, the Board of Directors had determined
that acquisition of the shares by Craig would not affect the continuing
availability of the Company's federal tax loss carryforwards.

     Mr. Smerling serves as President of the Company and City Cinemas, a New
York motion picture theater exhibitor. City Cinemas is an affiliate of Mr.
Cotter, the Company's Chairman. The Company, AFC, CineVista and City Cinemas
entered into an Executive Sharing Agreement pursuant to which Mr. Smerling
provides services to both the Company and City Cinemas entities and the cost of
such services is shared by the parties, if such costs cannot be allocated
directly to such parties. John Foley, Vice President, Marketing of the Company,
also serves as Vice President of City Cinemas.

     The Company acquired the Angelika on August 27, 1996. The theater is owned
jointly by the Company and Sutton Hill, a partnership affiliated with City
Cinemas, a Manhattan-based theater operator and owned in equal parts by James J.
Cotter and Mr. Michael Forman. City Cinemas (also owned indirectly in equal
parts by Messrs. Cotter and Forman) operates the theater pursuant to a
management agreement. Management fees paid to City Cinemas in 1997 and 1996
totaled approximately $370,000 and $43,000, respectively. For more detailed
information concerning the ownership and management of AFC please see Item 1 -
Description of Business - Angelika Film Centers. A company controlled by Mr.
Forman and his family beneficially own 16.4% of Craig's outstanding common stock
and 10.3% of Craig's Class A Common Preference Stock.

     The Company utilizes the services of certain Citadel employees, including
the President and Chief Executive Officer of Citadel for real estate advisory
services. The Company pays Citadel for such services at a rate which is 

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<PAGE>
 
believed to approximate the fair market value of such services. Amounts paid for
such services in 1997 and 1996 totaled approximately $240,000 and $169,000,
respectively.

     In 1996 and January 1997 the Company loaned Robert F. Smerling, President
of the Company, a total of $70,000 pursuant to a promissory note payable upon
demand. The note is interest free.

     Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this amendment to be signed on its behalf by the
undersigned, thereunto duly authorized.



                                             READING ENTERTAINMENT, INC.


                                             By:  /s/ James A. Wunderle
                                                  ---------------------------
                                                  James A. Wunderle
                                                  Executive Vice President


May 11, 1998

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