<PAGE>

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

                    U.S. SECURITIES AND EXCHANGE COMMISSION
                            Washington, D.C. 20549

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

                                   FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
    ACT OF 1934 [FEE REQUIRED]

                  For the fiscal year ended December 31, 2000

                                      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)

<TABLE>
<S>                      <C>
        NEVADA                             23-2859312
(State of incorporation                  (IRS. Employer
   or organization)                  Identification Number)
</TABLE>

<TABLE>
<S>                                       <C>
   550 South Hope Street, Suite 1825
        Los Angeles, California                                90071
(Address of principal executive offices)                    (Zip Code)
</TABLE>

      Registrant's telephone number, including Area Code: (213) 235-2226

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

                                     None

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

<TABLE>
<S>                             <C>
     Title of each class          Name of each exchange on which registered
     -------------------          -----------------------------------------
Common Stock, $0.001 Par Value                      NASDAQ
</TABLE>

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

   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 24, 2001, there were 7,449,364 shares of Common Stock
outstanding. The aggregate market value of voting stock held by nonaffiliates
of the Registrant was approximately $4,567,696.

                     Documents Incorporated By Reference:

                                     None

-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
<PAGE>

                          READING ENTERTAINMENT, INC.

                           ANNUAL REPORT ON FORM 10-K

                          YEAR ENDED DECEMBER 31, 2000

                                     INDEX

<TABLE>
<CAPTION>
                                                                          Page
                                                                          ----
 <C>      <S>                                                             <C>
                                 PART I.

 Item 1.  Business......................................................    1
 Item 2.  Properties....................................................   19
 Item 3.  Legal Proceedings.............................................   20
 Item 4.  Submission of Matters to a Vote of Security Holders...........   21

                                 PART II.

 Item 5.  Market for Registrant's Common Equity and
           Related Stockholder Matters..................................   22
 Item 6.  Selected Financial Data.......................................   23
 Item 7.  Management's Discussion and Analysis of Financial
           Condition and Results of Operations..........................   24
 Item 7A. Quantitative and Qualitative Disclosure about Market Risk.....   33
 Item 8.  Financial Statements and Supplementary Data...................   34
 Item 9.  Changes in and Disagreements with Accountants on
           Accounting and Financial Disclosure..........................   66

                                PART III.

 Item 10. Directors and Executive Officers of the Registrant............   66
 Item 11. Executive Compensation........................................   68
 Item 12. Security Ownership of Certain Beneficial Owners
           and Management...............................................   72
 Item 13. Certain Relationships and Related Transactions................   74

                                 PART IV.

 Item 14. Exhibits, Financial Statement Schedules, and Reports
           on Form 8-K..................................................   78

 Signatures..............................................................  82
</TABLE>
<PAGE>

                                    PART I

ITEM 1. BUSINESS

General

   Reading Entertainment, Inc., a Nevada corporation ("REI" and collectively
with its consolidated subsidiaries and corporate predecessors, the "Company"
or "Reading"), was formed in 1999 in a reorganization of the Company under a
Nevada holding company. Initially organized in 1833, the Company has been
doing business in the United States for over 167 years, most of that time as
the Reading Railroad. Today, the Company is principally in two lines of
business (i) the development and operation of multiplex cinemas in Australia,
New Zealand, and Puerto Rico (operating, directly or through affiliates, 165
screens in 23 cinema complexes) and (ii) the development and operation of
cinema based entertainment centers in Australia and New Zealand. Currently,
the Company and its affiliates own approximately 119,768 square foot of
developed retail space in Australia and New Zealand, and approximately
2,543,396 square foot of developable land located in various urbanized areas
of Australia and New Zealand.

   In 2000, the Company determined to focus its activities on the further
development of its assets and operations in Australia and New Zealand.
Consequently, the Company has now disposed of most of its domestic cinema
assets and is currently considering how best to dispose of its assets and
operations in Puerto Rico, consistent with recovering, to the extent
reasonably possible, its investment in that country. Since the Company's
assets are located principally in Australia and New Zealand, the Company's net
worth and shareholder equity are significantly influenced by currency
fluctuations. The Australian and New Zealand dollars are each currently
trading at or near 25 year lows. This factor will become more pronounced, as
the Company disposes of and reduces its revenue generating assets in the
United States and in Puerto Rico (which uses U.S dollars as it legal
currency).

   Reading is currently operated as a member of a group of related companies
(the "Craig Group of Companies"), ultimately controlled by Mr. James J.
Cotter. Mr. Cotter, directly or through affiliates, controls over 50% of the
voting power of Craig Corporation ("Craig Corp" and collectively with its
wholly owned subsidiaries and corporate predecessors, "Craig"). Craig, in
turn, owns securities representing approximately 78% of the voting power of
REI, and reports with Reading on a consolidated basis for financial reporting
purposes. Craig and Reading collectively own approximately 32.8% of the voting
power of Citadel Holding Corporation ("CHC" and collectively with its
consolidated subsidiaries and corporate predecessors, "Citadel"), and
collectively with Mr. Cotter own approximately 49.3% of the voting power of
that company. In addition, there is substantial management overlap between
REI, Craig Corp and CHC.

   Mr. James J. Cotter is the Chairman of the Board of Directors and the Chief
Executive Officer of each of REI, Craig Corp and CHC. Mr. S. Craig Tompkins is
the President and a Director of Craig Corp, and the Vice Chairman and
Corporate Secretary of each of REI and Citadel. Mr. Andrzej Matyczynski is the
Chief Financial Officer and Treasurer of Craig, Reading and Citadel. Mr.
Robert Smerling is the President and a Director of REI, and the President of
Citadel's cinema exhibition subsidiary, Citadel Cinemas, Inc. Mr. Robert
Loeffler is a Director and a member of the Audit Committees of each of REI,
Craig Corp and Reading.

   In 2000, the administrative offices of the Company were moved to space
adjacent to the office shared by Craig and Citadel and substantially all of
the general and administrative employees of the three companies were moved to
the Craig Corp payroll. The costs of these employees, as well as general and
administrative items such as executive office space rent, are now allocated
among the various members of the Craig Group of Companies based upon the
relative amounts of time spent by these employees on the business of such
companies. These allocations are made in the first instance by management, and
are reviewed periodically by the Conflicts Committees of the Boards of
Directors of REI, Craig Corp and Citadel.

                                       1
<PAGE>

   The management of the Craig Group of Companies believes that economies of
scale and operating efficiencies could be achieved if CHC, Craig Corp. and
Reading were to be consolidated into a single public company. Mr. Cotter has
advised management that he would support such a transaction, so long as a fair
allocation of the ownership of the consolidated company among the current
stockholders of the three companies was achieved. Accordingly, management has
recommended to the Boards of Directors of the three companies that REI, Craig
Corp and CHC be consolidated in a transaction in which all of the stockholders
of REI and Craig Corp become holders of CHC's Class A Nonvoting Common Stock,
and in which REI and Craig Corp would each merge with wholly owned
subsidiaries of CHC. Holders of employee and/or directors stock options would
be given the opportunity to elect to convert their options, on the same terms
and conditions as their currently outstanding options, into options to receive
either Class A Non-Voting Common or Class B Voting Common Stock.

   Management anticipates that, following such a transaction, CHC's Class A
Non-Voting Common Stock would be the principal trading security of the
consolidated entity, as the CHC Class B Common Stock would only have
approximately 1,336,331 shares outstanding for voting and financial statement
purposes, 322,808 of which (or approximately 25%) would be held by Mr. Cotter.
No CHC Class B Voting Common Stock would be issued in the transaction proposed
by management, and Mr. Cotter, and his affiliates, would receive the same CHC
Class A Non-Voting Common Stock for their interests in Craig Corp, as the
public holders of such securities. The CHC Class B Voting Common Stock held by
the Company and Craig would, upon the consolidation, be treated essentially
the same as non-voting treasury shares and would not be considered to be
"outstanding" for voting purposes or on Citadel's consolidated financial
statements. Holders of existing stock options would have the option of
converting their options into option to acquire either CHC Class A or Class B
Common Stock.

   On March 15, 2001, the Boards of Directors of each of REI, Craig Corp. and
CHC considered management's proposal, and determined that it would be in the
best interests of their respective companies and stockholders to consummate
such a consolidation transaction, so long as the allocation of ownership of
the resultant consolidated entity among the equity holders of the constituent
entities was fair. However, in light of the overlapping management and
membership of the Boards of Directors of the three companies, and Mr. Cotter's
status as a controlling stockholder of each of the three companies, it was
determined to be appropriate to delegate management's proposal to the
Conflicts Committees of the three companies. Accordingly, the Boards of
Directors of each of the three companies delegated to their respective
Conflict Committees authority and responsibility to review and take such
action as they determined appropriate with respect to management's
consolidation proposal, and authorized such committees to retain such
professional advisors as they may require to carry out such delegated
authority. These committees are composed entirely of independent outside
directors. It is hoped that these committees will complete their work by the
end of the second quarter of 2001.

   Shares of REI's common stock, par value $.001 per share (the "Common
Stock"), are quoted on the Nasdaq Stock Market under the symbol RDGE.

Background of the Company and Recent Material Transactions

 Historic Railroad Activities

   Prior to 1976, the Company was principally in the transportation business,
owning and operating the Reading Railroad. Following the disposition of
substantially all of its rolling stock and active rail lines in 1976, the
Company pursued a number of endeavors including the development of One Reading
Center, a 600,000 square foot office complex located in Philadelphia, and
initiated the activities which led to the development of the Pennsylvania
Convention Center on land originally utilized by the Company for railroad
purposes. Since 1976, the Company has steadily reduced its railroad real
estate holdings.

                                       2
<PAGE>

 The Move to Cinema Exhibition and Entertainment Center Development

   In 1993, following the sale of its last major railroad real estate asset--
the historic Reading Terminal Headhouse in downtown Philadelphia--the Company
entered the "Beyond the Home" or real estate based segment of the
entertainment industry. Since that date, the Company has:

     (1) acquired and updated a chain of multiplex cinemas in Puerto Rico
  currently comprising 52 screens in seven cinemas and featuring conventional
  film product ("CineVista");

     (2) developed a chain of multiplex cinemas in Australia currently
  comprising 81 screens in eleven cinemas and featuring principally
  conventional film product ("Reading Cinemas"); and

     (3) acquired a 50% interest in a three cinema, thirteen screen cinema
  chain in New Zealand ("Berkeley Cinemas").

   During this time period, the Company also acquired or developed certain
multiplex cinemas in the United States featuring both conventional film
product and art or specialty film product (the "Reading Domestic Cinemas").
Included among these cinemas was the Angelika Film Center and Cafe located in
the Soho District of Manhattan (the "NY Angelika"). However, in light of the
Company's decision to focus its efforts and available assets on its overseas
operations in Australia and New Zealand, the Company has now disposed all of
its domestic cinema interests, other than a passive 33.33% interest in the
Angelika Film Center LLC ("AFC"), the owner of the NY Angelika.

   Currently, the Company and its affiliates operate twenty-one cinemas with
146 screens in Australia, New Zealand, and Puerto Rico. In addition, the
Company has under construction an additional 8-screen cinema in Australia
(Chirnside) which is scheduled to open in the second quarter of 2001, and
anticipates adding a further 14 screens by the end of 2002. The Company also
anticipates an additional 10 screens in New Zealand (Wellington) by the end of
2002.

   In Australia and New Zealand, the Company is also in the business of
developing entertainment centers, typically consisting of a multiplex cinema,
complementary restaurant and retail uses, and convenient parking, all located
on land owned or controlled by the Company. Reading opened the cinema portion
of its first entertainment center in Perth in December 1999, and the cinema
portion of a second and substantially larger entertainment center in Auburn, a
suburb of Sydney, in September, 2000. The leasing of the ancillary space in
these two entertainment centers has taken longer than originally anticipated
by the Company. The Company currently only has signed offers to lease
approximately 17% of the rentable space at Auburn. However, the Company
currently projects that the centers will be substantially leased by July 2001.
In December 2000, the Company broke ground on a third entertainment center
located in Wellington, New Zealand. It is currently anticipated that the
center will open in March 2002. The Company has entered into binding
agreements to lease approximately 15,868 square feet of retail space
representing approximately 45% of the non-cinema space in the Wellington
entertainment center.

   The Company, where feasible, prefers to own the land on which it constructs
its cinemas. In Puerto Rico, a variety of factors have caused the Company to
rely on leasehold sites located principally in established urban areas or
suburban malls. However, an ownership-oriented approach is being pursued in
urban centers in Australia and New Zealand. This means that many of the
Company's projects in Australia and New Zealand are more capital intensive,
have longer lead times, entail greater development risks and have initially
lower cash returns than the more leveraged development of cinemas in leased
facilities in established malls. However, the Company believes that these
risks are reasonably offset by the greater control and flexibility that the
ownership of such sites provides to the Company and by the opportunity given
to the Company to participate in the enhancement to the value of such land
anticipated to result from the consumer traffic generated by a successful
cinema operation. To date, the Company has acquired, or has the contract right
to acquire, six sites in Australia which it believes may be suitable for
development as entertainment centers. These sites (which include the
entertainment centers at Perth and Auburn, currently in the leasing phase and
the entertainment center currently under construction in Wellington) represent
approximately 575,000 square feet of land area. In addition, the Company owns
a 50-acre

                                       3
<PAGE>

parcel in Melbourne, which, while originally purchased as a possible
entertainment center site, is currently being held as a potential site for
residential, office or mixed-use development. The Company is currently
reviewing its land holdings in light of competitive condition in Australia,
and may elect to sell to other developers some or all of the land and other
interest in real property held for development as entertainment centers.
Accordingly, no assurance can be given that the Company will build any
additional entertainment centers.

 The Decision to Focus on Australia and New Zealand

   The Company has elected to focus its future cinema exhibition activities on
Australia and New Zealand. The Company believes that, given its finite capital
resources, the scope and extent of its current activities, investments and
commitments in Australia and New Zealand, and the opportunities available to
it in Australia and New Zealand, that it is in the best interests of the
Company and its stockholders to concentrate on Australia and New Zealand.
Accordingly, the Company has (1) sold to a third party a 50% membership
interest in AFC; (2) sold to Citadel (a) the Company's right and obligation to
acquire the chain of cinemas owned or managed by Manhattan based City Cinemas
and the three Off-Broadway style live theaters owned by Off Broadway
Investments, Inc.; (b) the Company's rights and obligations under a lease to
fit out and operate an Angelika style cinema in Dallas, Texas; (c) the
Company's fee interest in the Royal George Theatre Complex in Chicago
Illinois; and (d) the Company's leasehold interests in the Angelika Film
Center and Cafe in Houston, Texas; the Reading Manville 12 cinema in Manville,
New Jersey; the St. Anthony Main cinema in Minneapolis, Minnesota and the
Tower cinema in Sacramento California; and (3) determined to exit the Puerto
Rican market, when feasible consistent with recouping, to the extent possible,
its investment in Puerto Rico.

   The Sale of the Angelika Interest to NAC: In April 2000, the Company sold a
50% membership interest in AFC to National Auto Credit, Inc ("NAC"). AFC is
the owner of the NY Angelika. The 50% membership interest (the "Angelika
Interest") was conveyed in exchange for 8,999,900 shares of the common stock
of NAC, representing at that time approximately 26% of the outstanding common
stock of that company (calculated after the issuance of such shares), and 100
shares of the Series A Preferred Stock of NAC, representing 100% of such
class. NAC common stock, which is traded in the over-the-counter market,
closed April 5, 2000 at $1.03. The Series A Preferred Stock had a liquidation
preference of $1.50 per share, was convertible into the common stock of NAC on
a share for share basis, was entitled to a dividend preference equal to any
dividends declared on the NAC common stock (determined on a per share basis),
and enjoyed certain special voting rights.

   At the time of the transaction, the Company believed that NAC, which had
significant amounts of cash available for investment but no real business or
business plan, was potentially interested in further investments in the
domestic cinema industry, and that it was a potential buyer for the remainder
of the Company's domestic cinema assets. Incident to the purchase of the
Angelika Interest, NAC paid to the Company a $500,000 option fee for the right
to acquire these cinema assets. However, the option was never exercised, and
NAC ultimately determined to acquire instead a "dot com" company with a
business plan contemplating the generation of revenues through the bringing
together of the buyers and financiers of used cars. In separate transactions
in November and December 2000, NAC repurchased for a total of $14,702,000 the
shares issued to the Company in consideration of the transfer of the Angelika
Interest.

   The November 2000 transaction (at which time the Company sold 5,277,879
shares of its NAC Common Stock and all 100 of its shares of NAC Preferred
Stock for an aggregate consideration of $8,468,770, or $1.67 per share) was
incident to a settlement of certain litigation between NAC and its prior
Chairman, Chief Executive Officer and controlling stockholder, Mr. Sam
Frankino (the "Frankino Litigation"). Pursuant to that settlement, NAC
repurchased all of the NAC Common Stock held by Mr. Frankino and certain of
his affiliates (totaling 15,743,012 shares) for an aggregate purchase price of
$35,340,000, or $2.245 per share. At the request of NAC, REI, Craig Corp,
Citadel and FA, Inc. (a wholly owned subsidiary of REI, "FA" and collectively
with REI, Craig Corp and FA, the "Reading Stockholders") as a part of the
November 2000 stock repurchase transaction, entered into a Standstill
Agreement with NAC. In the Standstill Agreement, the Reading Stockholders
agreed to certain limitations and restriction on their rights as stockholders
of NAC, and received

                                       4
<PAGE>

contractual assurances (a) that the Reading Stockholders would have
representation upon the NAC Board of Directors, (b) that any related party
transactions would be subject to approval by the disinterested members of the
NAC Board of Directors, (c) that certain material transactions would be
subject to the approval of the stockholders generally of NAC, and (d) that no
material transaction would be approved prior to the development, adoption and
publication to the stockholders of NAC by the Board of Directors of NAC of a
five-year business plan. The Standstill Agreement, subject to earlier
termination under certain circumstances, was to have continued through and
including August 31, 2003. Pursuant to their rights under the Standstill
Agreement, the Reading Stockholders designated Messrs. James J. Cotter and
Scott A. Braly as their representative on the NAC Board of Directors.

   The December 2000 transaction grew out of actions taken by NAC at a Board
of Directors meeting which commenced on December 15, 2000 and continued on
into the early morning hours of December 16, 2000. This meeting was held at
the offices of Skadden Arps Slate Meagher & Flom LLP--legal counsel to NAC--in
New York City. Among the items on the agenda for the meeting--faxed to
directors on the evening of December 11, 2000--were the retention of James J.
McNamara as the permanent Chairman and Chief Executive Officer, the adoption
of a business plan (first distributed to Directors on December 12, 2000), and
the consideration of various possible acquisitions (materials on which were
distributed for the first time to directors on December 12 and December 13,
2000).

   After receiving the notice of meeting and agenda, Mr. Cotter circulated a
memo addressed to each of the independent members of the NAC Board of
Directors, advising that he did not believe that Mr. James McNamara, the then
acting Chairman and Chief Executive Officer of NAC, was qualified to serve as
the permanent Chairman and Chief Executive Officer of NAC and that he would
oppose any nomination of Mr. McNamara to fill such positions on such a
permanent basis. That memo stated in some detail the reasons which Mr. Cotter
believed supported his conclusions with respect to the qualifications of Mr.
McNamara.

   At the December 15, 2000 Board Meeting, a number of actions occurred to
which Messrs. Cotter and Braly took exception, including the adoption, on
virtually no notice and with virtually no discussion, of a purported five-year
business plan for NAC and the approval, again on virtually no notice and with
virtually no discussion, of a major investment in what Messrs. Cotter and
Braly believed to be an unproven "dot com" company with a business plan
contemplating the future generation of profits through the bringing together
of the buyers and financiers of used cars. It also became apparent during the
course of the meeting that Mr. McNamara had the support of at least a majority
of the members of the NAC Board of Directors, and that they were prepared to
approve on his behalf a very lucrative (and in the view of Mr. Cotter, grossly
excessive) employment contract. No minutes of prior meetings or financial
statements pertaining to NAC were provided to the directors.

   Following the negative votes by Messrs. Cotter and Braly, and during a
break in the Board Meeting, Messrs. Cotter and Braly were approached by
representatives of NAC with a proposal that NAC repurchase the shares of NAC
Common Stock held by Reading and Citadel, conditioned on, among other things,
the immediate resignation of Messrs. Cotter and Braly from the Board of
Directors. The management of the Company, at the time this proposal was made,
was already considering, in light of what had transpired and what management
believed was about to transpire at the NAC Board Meeting, whether or not to
exercise certain rights that the Company held, under its original agreement
with NAC pertaining to the purchase and sale of the Angelika Interest, to put
its remaining NAC Common Stock to NAC. Following discussions, which continued
until the early morning hours of December 16, 2000, the Reading Stockholders
entered into an agreement providing for the repurchase of all of the NAC
Common Stock owned by the Company and Citadel at a purchase price of $1.67 per
share. Pursuant to the terms of this agreement, Messrs. Cotter and Braly
immediately resigned from the NAC Board of Directors. The agreement also
includes certain standstill agreements on the part of the Reading
Stockholders, certain waivers and releases by the parties, and certain
indemnities by NAC. The sale transaction was closed on December 22, 2000, at
which time the Company sold its remaining 3,721,021 shares of NAC Common Stock
for approximately $6,214,000.

                                       5
<PAGE>

   Subsequently, on January 2, 2001, NAC issued a Report on Form 8K which
included, among other things, a statement to the effect that Messrs. Cotter
and Braly did not resign because of a disagreement with NAC on any matter
relating to NAC's operations, policies or practices. Messrs. Cotter and Braly
have advised NAC that they believe this statement to be materially incomplete
and misleading, and have requested that corrective disclosure be made. To
date, insofar as the Company is aware, no further disclosure with respect to
the matter has been made by NAC.

   The Sale of the Remaining Domestic Cinema Assets to Citadel: With the
exception of the 33.33% membership interest in AFC which has been retained by
the Company, the Company has sold all of its remaining domestic cinema and
live theater assets to Citadel. Prior to the assignment by the Company of such
rights to Citadel in September 2000, the Company had the right under an
agreement with Messrs. James J. Cotter and Michael Forman and certain of their
affiliates (collectively referred to with Messrs. Cotter and Forman as
"Sutton") to (a) lease, with option to purchase, the Cinemas I, II and III,
the Murray Hill, the Sutton, and the Village East Cinemas, and to manage the
NY Angelika, the Gotham, the 56th Street Playhouse, and the 86th Street
Theater, all of which are located in Manhattan, and which are operated
collectively as the City Cinemas Chain, (b) to purchase the 1/6th interest in
the NY Angelika not already owned by the Company and (c) to acquire, through a
stock merger (the "OBI Transaction"), the assets and business of Off Broadway
Investments, Inc. ("OBI"), which assets consisted of the Minetta Lane, Orpheum
and Union Square theaters in Manhattan (the "Off Broadway Theaters"). The
acquisition of the cinema leases, cinema interest and the related management
rights is collectively referred to as the "City Cinemas Transaction". In
September 2000, Citadel closed the OBI Transaction and the City Cinemas
Transaction with Sutton. Citadel reimbursed to the Company the $1,000,000
deposit that the Company had previously paid to Sutton with respect to the
transactions. Shortly following the closing of the OBI Transaction and the
City Cinemas Transaction, the Company conveyed to Citadel, at cost, its
interests in the Dallas Angelika lease, and the Royal George Theatre Complex.
In March 2001, the Company conveyed to Citadel its leasehold interests in the
Houston Angelika Film Center & Cafe, the Reading Manville 12 cinema, the St.
Anthony Main cinema and the Tower cinema in consideration of the delivery of a
two year purchase money note in the amount of $1,706,000 accruing interest at
8% per annum.

   The Decision to Leave Puerto Rico: The Company is currently reviewing its
alternatives with respect to the disposition of its assets and operations in
Puerto Rico. The Company has not been satisfied with the performance of that
market, and took writedowns in the amount of $31,330,000 with respect to such
assets and operations in 1999. In the third quarter of 1999, the Company wrote
off the entire carrying value of the Company's 8 screen cinema at the Plaza
Las Americas Cinema (the "Plaza Cinema") of $14,022,000 upon the determination
by the owners of the Plaza Las Americas in San Juan not to honor what the
Company believes to have been a contractually binding obligation to lease to
the Company a new state-of-the-art cinema complex at the Plaza Las Americas.
The Plaza Las Americas is the largest shopping center in Puerto Rico. The
Company currently leases an older 8-screen cinema at another location at the
Plaza. The determination of the Plaza's owners to instead lease the new
facility in the Plaza to the Company's principal competitor in Puerto Rico has
eliminated the value of the Company's existing cinema in that shopping center,
and will likely materially adversely affect the value of the remainder of the
CineVista circuit. In the fourth quarter of 1999, the Company reduced the
carrying value of CineVista to its estimated net realizable value based upon
the Company's decision to exit the Puerto Rico market recording an additional
impairment loss of $17,308,000. Accordingly, the CineVista circuit is now
carried on the books of the Company at approximately $3,036,000.

   The Company has instituted litigation against the owner of the Plaza for
what the Company believes to have been breach of contract and against the
Company's principal competitor in Puerto Rico, which already controls over 80%
of the box office in Puerto Rico, for what the Company believes to have been
violation of various antitrust and unfair competition laws. Given the
difficulties inherent in this type of litigation, no assurance of success can
be given that a satisfactory result will be achieved. Similarly, while the
Company intends to endeavor to sell its Puerto Rico circuit, in order to free
up further assets for deployment in Australia and New Zealand, no assurances
can be given that these endeavors will be successful.

                                       6
<PAGE>

Certain Ancillary Real Estate Activities

   In addition to its principal cinema and entertainment center development
activities, the Company continues to wind up its historic railroad related
activities, including the sale or other exploitation of its residual real
estate interests. The Company also owns a fifty acre property assemblage
located in the greater Melbourne, Australia area. Originally acquired in 1996
as a potential entertainment center site, the property is currently held for
non-cinema related development. The Company believes this site to be the
largest site available for development in the greater Melbourne metropolitan
area, and to have a value substantially in excess of its book value. The
Company is reviewing various alternatives with respect to this site.

 Certain Capital Raising Activities

   In recognition of the significant amount of capital required to compete in
the cinema exhibition and real estate development businesses, and in
furtherance of its plan to focus on the development of cinemas and cinema
based entertainment centers, the Company reorganized under a Delaware holding
company (the "96 Reorganization") on October 15, 1996, and completed a private
placement of common and preferred stock which increased shareholders' equity,
from approximately $69,000,000 to approximately $156,000,000 (the "Stock
Transactions"). In March 2000, the Company completed and subsequently renewed
an Australian dollar credit facility which provides for initial funding of up
to AUS$25,000,000 to provide funding for the construction of the Auburn
entertainment centers. In December 2000, the bank approved an additional
AUS$5,000,000 for the construction of tenant improvements at the Perth and the
Auburn centers, and the fit-out of a leasehold cinema at the Chirnside
Shopping Center. Also in December 2000, the Company completed a New Zealand
dollar credit facility which provides for funding of up to NZ$30,400,000 for
the construction of the Company's Wellington, New Zealand entertainment center
and the fit out of the cinema component of that center.

   At December 31, 2000, the Company had assets valued for balance sheet
purposes at approximately $116,672,000 and no institutional indebtedness other
than the Australian and New Zealand Credit Facilities discussed in the
preceding paragraph, CineVista's Citibank loan, and the guarantee of a portion
of the indebtedness secured by the Whitehorse Center, discussed below. The
Company has liquidated the assets received in the Stock Transactions and
reinvested the proceeds together with its other cash assets, in the
development of cinemas and entertainment centers and the acquisition of land
held for the development of cinemas and entertainment centers. Accordingly, at
December 31, 2000, the Company held (a) property and equipment and (b)
property held for development with an aggregate net book value of
approximately $76,978,000 (calculated inclusive of approximately $25,158,000
of property held for potential development).

 Investments in Citadel and BRI

   The Company owns approximately 21.25% of Citadel. Citadel is principally in
the business of owning and operating real estate intensive businesses,
including cinemas, Off Broadway style theaters and commercial and agricultural
real estate. Until recently, with consolidation of the general and
administrative functions of the Craig Group of Companies, Citadel also
provided real estate consulting services to Reading. Citadel also owns
70,000 shares, representing all of the outstanding shares, of the REI Series A
Voting Cumulative Convertible Redeemable Preferred Stock (the "Series A
Preferred Stock"). Citadel is a publicly reporting company, whose common stock
is traded on the American Stock Exchange. Citadel's net loss during 2000 was
approximately $3,542,000. The Company's share of such loss was approximately
$918,000 which amount is included in the Consolidated Statement of Operations
for the year ended December 31, 2000 as "Equity in (loss) earnings of
affiliates".

   The Company also owns approximately 32% of Big 4 Ranch, Inc. ("BRI"). In
December 1997, Citadel capitalized BRI, then a wholly owned subsidiary, with a
cash contribution of $1,200,000 and distributed 100% of the shares of BRI to
Citadel's common shareholders, including the Company. BRI, Citadel and
Visalia, LLC (a limited liability company controlled by James J. Cotter, and
owned, directly or indirectly, by Mr. Cotter and certain members of his
family) are general partners in three general partnerships (the "Agricultural

                                       7
<PAGE>

Partnerships") which also in December 1997 acquired an approximately 1,600
acre agricultural property for approximately $7,600,000. The Agricultural
Partnerships are owned 40%, 40%, and 20% by Citadel, BRI and Visalia,
respectively. Through its equity interests in Citadel and BRI, the Company
owns approximately 26% of the Agricultural Partnerships. The partnership
structure was developed to comply with certain federal water laws that limit
the amount of acreage irrigated by federal water that can be owned by any one
entity.

   In 1998, the Agricultural Partnerships' citrus crop was lost due to a
freeze. BRI's net loss (excluding the indirect share of such losses recorded
by Citadel) was $1,090,000. The Company's share of such loss was $346,000. As
a consequence of the freeze, BRI had virtually no revenues in 1999, and
reported an additional net loss of $322,000. As a result of the loss in 1998,
the Company's investment in BRI has been reduced to $0. Therefore, the Company
did not make provision for BRI's 1999 loss in its Consolidated Statement of
Operations. Due to poor market conditions and inferior fruit quality (in part
as a residual consequence of the 1998 freeze), the Agricultural Partnerships
and BRI also reported losses for 2000. Again, since the Company had previously
reduced the carrying value of its investment in BRI to $0, the Company did not
make provision for BRI's 2000 losses in its Consolidated Statement of
Operations. The Company has no obligations to fund BRI's operating losses.

   The Agricultural Partnerships have not performed to expectation, and
management is currently reviewing a possible disposition of either the assets
of the Agricultural Partnerships or the Company's interest in BRI. The Company
believes the value in its interest in BRI to be nominal, at best.

Description of Business

   The Company is primarily engaged in the development in Australia and New
Zealand of cinema based entertainment centers and in the multiplex cinema
exhibition business in Australia, New Zealand and Puerto Rico, focusing on the
market for multiplex complexes featuring principally commercial film.

   While exceptions may be made from time to time with respect to certain
well-situated cinemas with proven or projected draw, it is the Company's
general intention to develop or acquire only state-of-the-art multiplex
venues. With respect to new cinema construction, it is the Company's intention
to concentrate primarily upon a stadium-seating format, and to feature wall-
to-wall screens with state-of-the-art projection and sound. The Company's
entertainment centers will typically be centered around a multiplex cinema,
and feature complementary retail and restaurant facilities and convenient
parking, all on land owned or controlled by the Company. Where possible, the
Company prefers to own rather than lease properties.

   In the future, the Company intends to focus on the cinema and entertainment
center market in Australia and New Zealand and to de-emphasize and ultimately
to phase-out of the Puerto Rican cinema market. In March 2001, the Company
sold substantially all of its domestic cinema assets, retaining only a 33.33%
membership interest in AFC.

Reading Cinemas (Australia and New Zealand)

 General

   The Company currently operates eleven cinemas, consisting of 81 screens, in
Australia and holds a 50% joint venture interest in three cinemas, consisting
of 13 screens in New Zealand. The Company anticipates that it will open one
additional cinema, consisting of 8 screens in Australia, during the remainder
of 2001. In December 2000, the Company commenced construction of an
entertainment center in Wellington, New Zealand, which will feature a 10
screen state-of-the-art multiplex cinema. It is not anticipated that this
cinema will be open for business until March 2002.

   The Company commenced activities in Australia in mid-1995, and conducts
business in Australia through its wholly owned affiliate, Reading
Entertainment Australia Pty. Limited ("REA" and, collectively with its various
subsidiaries, "Reading Australia"). Reading Australia is currently engaged in
the development and

                                       8
<PAGE>

operation of multiplex cinemas featuring conventional film product and the
development of entertainment centers in Australia. Reading Australia's 81
screens are located in seven leased, one managed and three owned locations.

   The Company commenced operations in New Zealand in 1997 and conducts
operations in New Zealand through its wholly owned affiliate, Reading New
Zealand Limited (collectively with its various subsidiaries, "Reading New
Zealand"). At the present time, all of the Company's cinema interests are held
through a 50/50 joint venture with an experienced cinema operator ("Berkeley
Cinemas"). The joint venture currently operates three cinemas representing 13
screens at two owned and one leased facility. The entertainment center
currently being constructed in Wellington is wholly owned by the Company, but
it is anticipated that the 10 screen cinema included in the center will be
managed by Berkeley Cinemas.

 Entertainment Center Development

   Reading Australia and Reading New Zealand are also engaged in the
development of entertainment centers which will typically consist of a
multiplex cinema, complementary restaurant and retail facilities, and
convenient parking, all on land owned or controlled by the Company. In
December 1999, the Company opened the cinema portion of its first
entertainment center in Australia. Located in Perth, the entertainment center
includes a 10 screen cinema and upon completion, approximately 19,000 square
feet of retail space. The Company opened the multiplex cinema component of its
second entertainment center in September 2000. That entertainment center,
located in the Sydney suburb of Auburn, near the site of the Olympic Village,
includes a 10 screen cinema and approximately 59,000 square feet of retail
space. The leasing up of the ancillary space at its Perth and Auburn
entertainment centers has proven more difficult than originally anticipated by
the Company. However, at the present time, the Company has leased
approximately 14% of the non-cinema rentable space at Perth and has signed
offers to lease approximately 17% of the non-cinema rentable space at Auburn.

   The Company has encountered substantial competition from established cinema
exhibition and shopping center interests in Australia. In many cases, the
owners of potentially competing cinemas or shopping centers have opposed
necessary land use approvals, and have been successful in substantially
delaying the Company's projects. On a number of occasions, these competitors
have built new cinemas or enlarged their cinemas located in the same market
area during these periods of delay. Accordingly, the Company is currently
reviewing a number of its entertainment center projects, and may ultimately
determine not to proceed with one or more of such projects. Where a decision
not to proceed is made with respect to land owned by the Company, the Company
may either sell that land or apply it to other purposes. At the present time,
Reading Australia owns or has development rights to own three parcels, which
it currently holds as potential entertainment center locations and none of
which currently produce material cash flow. The Company is currently reviewing
the suitability of each of these three locations for entertainment centers,
and no assurances can be given that any of these sites will ultimately be
developed for such purposes, or at all, by the Company.

   Reading Australia also owns a 50% joint venture interest in an existing
shopping center located on leased land in the Melbourne area of Victoria,
which it acquired in anticipation of redevelopment as an entertainment center
(the "Whitehorse Center"). Unfortunately, the Company's plans for the
redevelopment of the center encountered substantial opposition from competing
cinema interests, resulting in substantial delays for the project. In
addition, the Company's joint venture partner has not proved to be the source
of financial strength that was anticipated by the Company at the time it
entered into the joint venture. During the development delays, significant
additional cinema competition has entered the Whitehorse market. Accordingly,
the Company has advised its joint venture partner that it desires to sell the
shopping center, and commenced marketing the property for sale. However, the
Company's joint venture partner has, to date, resisted the Company's efforts
to effectuate a sale of the property. Based on the initial offers received,
the Company recorded an impairment loss to bring the carrying value of the WPG
interest and the related loan receivable from the joint venture partner to
zero as the Company considered its investment in the Whitehorse Center to be
unrecoverable.

   The Whitehorse Center is subject to a mortgage in the principal amount of
$6,283,000 (the "Whitehorse Debt"), which is currently in default. In March
2001, the Company acquired that Whitehorse Debt from the bank

                                       9
<PAGE>

which held that debt for $6,322,000. This amount includes the original
principal amount of the loan, accrued interest, plus certain collection costs
incurred by the bank through the date the Whitehorse Debt was acquired by the
Company. The Company has commenced collection activities against the
Whitehorse Center, and believes it not unlikely that the proceeds of the sale
of the Whitehorse Center will be insufficient to cover the sum of (a) the
price paid by the Company for the Whitehorse Debt, (b) recoverable costs of
collection and (c) interest accruing on the Whitehorse Debt between the time
it was acquired by the Company and the date the Whitehorse Center is sold. The
Whitehorse Debt is currently accruing interest at the default rate of 13.5%
and the Whitehorse Center is not currently generating sufficient cash flow to
cover its costs.

   Reading New Zealand owns an 114,518 square foot site located in downtown
Wellington, the capital and second largest city in New Zealand. The site
includes a parking facility. In December 2000, the Company commenced
development of a 144,000 square foot entertainment center on this site in
addition to the existing 1,180 car parking facility. The Wellington
Entertainment Center will include the only state-of-the-art stadium design
cinema in Wellington, and will include approximately 36,000 square feet of
leasable retail area. The Company currently has in place binding lease
commitments with respect to approximately half of that non-cinema leasable
area. It is currently anticipated that the Wellington Entertainment Center
will open in March, 2002.

   Summarized below are the properties held by the Company as entertainment
centers (Auburn and Perth), or which are currently under development as
entertainment centers (Wellington), or which are currently under review for
development as entertainment center locations. No assurance can be given that
any of the properties held for development entertainment center locations will
ever be developed:

<TABLE>
<CAPTION>
                                                                    Estimated
                                                                   Development
                                                       Approximate   Size in
                                 Land Size Approximate Cinema Size    Square
                                 in Square  Purchase    in Square   Footage of
   Site                           Footage     Price       Feet     Improvements
   ----                          --------- ----------- ----------- ------------
   <S>                           <C>       <C>         <C>         <C>
   Australia
   Auburn, NSW..................  499,122  $6,800,000    57,000      210,000
   Perth (Belmont)..............  103,204  $  945,000    41,000       69,000
   Frankston, Victoria..........  227,750         N/A       --           --
   Moonee Ponds, Victoria.......  124,754  $4,200,000    54,000      103,000
   Newmarket, Queensland........  176,528  $4,500,000    49,000      161,000

   New Zealand
   Wellington...................  151,803  $3,300,000    77,000      133,000
</TABLE>

   In addition to the above, the Company has accumulated, as the consequence
of three separate acquisitions, a fifty-acre site in Burwood, Victoria. This
site was originally acquired for development of a megaplex cinema. However,
such use is currently prohibited as a consequence of an adverse land use
determination, which negated certain permits for the construction of cinemas
on the site which were in place at the time the properties were acquired by
Reading Australia. Due to the size of the accumulation and its location at the
demographic center of the greater Melbourne metropolitan area, the Company
believes that the accumulation has value substantially over and above its
original purchase price and is currently reviewing its options as to potential
development alternatives for the site.

 Joint Venture Cinemas

   Two of the Company's cinemas, consisting of 11 screens and located in
country towns, are owned by Australia Country Cinemas Pty, Limited ("ACC"), a
company owned 75% by Reading Australia and 25% by a company owned by an
individual familiar with the market for cinemas in country towns. ACC has a
limited right of first refusal to develop any cinema sites identified by
Reading Australia or such individual which are located in country towns.

                                      10
<PAGE>

   One of the Company's cinemas, a 5 screen facility in Melbourne, is owned by
a joint venture in which the Company has a 66.6% interest.

   Reading New Zealand has a 50% joint venture interest in a 5 screen
multiplex cinema located in Whangaparoa, a 4 screen multiplex cinema located
in Mission Bay, and a 4 screen cinema located in Takapuna. Reading New
Zealand's partner in these ventures is an experienced cinema owner and
operator. Two of the joint venture cinemas are fee properties and the third is
leased.

 Certain Real Estate Development Risk Factors

   At the present time, the Company's activities in Australia and New Zealand
are in significant part in the nature of speculative real estate development.
While, in each case, the Company is its own anchor tenant, the success of the
real estate aspects of the Company's business will depend upon a number of
variables and are subject to a number of risks, some of which are outside of
the Company's control. These variables and risks include, without limitation:

  .  construction risks, such as weather, unknown and unknowable site
     conditions, and the availability and cost of materials and labor;

  .  leasing risk with respect to ancillary space being constructed in
     connection with the entertainment centers--in certain cases such
     ancillary, space constitutes a substantial portion of the net leasable
     area of a particular entertainment center;

  .  political risk, such as the possible change in midstream of existing
     zoning or development laws to accommodate competitive interests at
     Burwood; and

  .  financing risks, such as the risk of investing U.S. dollars in Australia
     during times of currency exchange rate instability, and the difficulties
     of acquiring construction financing while the great majority of the
     Company's projects are developmental in nature.

   In light of these risks, no assurances can be given that the Company will
be able to accomplish its business objectives in Australia and/or New Zealand.
Furthermore, even if those objectives are eventually achieved, the realization
of these objectives may require a longer period of time and a greater level of
developmental costs than currently anticipated by the Company.

 Management of Cinemas

   Reading Australia's cinemas are managed by employees of the Company.
Reading New Zealand's cinemas are operated by a Berkeley Cinemas.

 Background Information Regarding Australia

   Australia is a self-governing and fully independent member of the
Commonwealth of Nations. The constitution resembles that of the United States
in that it creates a federal form of government, under which the powers of the
central government are specified and all residual powers are left to the
states. The country is organized into five mainland states (New South Wales,
Queensland, South Australia, Victoria and Western Australia), one island state
(Tasmania) and two territories (Australian Capital Territory and the Northern
Territory).

   The ceremonial supreme executive is the British monarch, represented by the
governor-general and in each of the six states by a governor. These officials
are appointed by the British monarch, but appointments are nearly always
recommended by the Australian governments. True executive power rests with the
prime minister, the leader of the majority party in the House of
Representatives. The legislature is bicameral, with a Senate and a House of
Representatives, and the ministers are appointed by the prime minister from
the membership of the House and the Senate. The organization of the state
government is similar to that of the central government. Each state has an
appointed governor, an elected premier and a legislature.

                                      11
<PAGE>

   Although Australia is the sixth largest country in the world in landmass,
it only has a population of approximately 19.2 million people. This population
is concentrated in a few coastal urban areas, with approximately 4.0 million
in the greater Sydney area, 3.4 million in the greater Melbourne area, 1.7
million in the Brisbane area, 1.1 million in Adelaide and 1.4 million in
Perth. Australia is one of the richest countries in the world in terms of
natural resources per capita and one of the most economically developed
countries in the world, although vast areas of the interior, known as "the
Outback", remain all but uninhabited. The principal language is English, and
the largest pan of the population traces its origin to Britain and Europe,
although an increasing portion of the population has emigrated from the Far
East. Australian taste in film has historically been similar to that of
American audiences.

   Internal trade is dominated by the two most populous states, New South
Wales (mainly Sydney) and Victoria (mainly Melbourne). Together these two
states account for a majority of all wholesale trade and approximately 75% of
all retail sales. At the present time, Australia's principal trading partners
are the United States and Japan.

   Australia does not restrict the flow of currency into the country from the
U.S. or out of Australia to the United States. Also, subject to certain review
procedures, U.S. companies are typically permitted to operate businesses and
to own real estate. On July 1, 2000, Australia implemented a goods and
services tax ("GST") on all goods and services at a consistent rate of 10%.
The Company does not believe that the GST has had a significant impact on the
Company business.

 Background Information Concerning New Zealand

   New Zealand is a self-governing member of the Commonwealth of Nations. It
is comprised of two large islands, and numerous small islands, with a total
land area of approximately 104,500 square miles. The country has a population
of approximately 3.6 million people, most of who are of European descent and
the principal language is English. Wellington, with a population of
approximately 350,000, is the capital and Auckland, with a population of
approximately 1 million, the largest city. Most of the population lives in
urban areas.

   New Zealand is a prosperous country with a high standard of social
services. The national economy is largely dependent upon the export of raw and
processed foods, timber and wool. Principally a trading nation, New Zealand
exports about 30% of its gross national product. In the past (particularly
before the United Kingdom entered the Common Market in 1973), New Zealand's
marketing focused on a small number of countries, principally the United
Kingdom. Currently, only approximately 7% of New Zealand's trade is with the
United Kingdom, with Japan and Australia being its principal trading partners.
While no country currently accounts for more than 20% of its exports, its
economy remains sensitive to fluctuations and demand for its principal
exports.

   Like Australia, New Zealand has a largely ceremonial governor-general,
appointed by the Queen of England. However, the executive branch is run by a
prime minister- typically the leader of the majority party in Parliament--and
appointed ministers (typically chosen from the members of Parliament). The
Parliament is elected by universal adult suffrage using a mixed member
proportional system. Under this system, each voter casts two votes at the
federal level, one for a local representative and one for a party. Fifty
percent of the 120 seats in Parliament are determined by the direct election
of local representatives, and the remaining fifty percent are elected based
upon the number of votes garnered by the parties. The Prime Minister and his
cabinet serve so long as they retain the confidence of the Parliament.

   With the exception of special excise taxes on tobacco, liquor, petroleum
products and motor vehicles the only general sales tax is a GST imposed on all
such services at the consistent rate of 12.5%. In effect, by a series of
refunds, GST is only paid by the end-user of the goods or services in
question. Resident companies pay income tax at a rate of 33%, however,
dividend imputation credits generally prevent double taxation of company
profits. There are no restrictions on repatriation of capital or profits, but
some payments to overseas parties are subject to withholding tax. There is no
capital gains tax, and there are tax treaties with many countries, including
the United States.

                                      12
<PAGE>

   The laws for monitoring and approving significant overseas investment into
New Zealand reflect the country's generally receptive attitude towards such
investment and the generally facilitating nature of the country's foreign
investment policies. One hundred percent overseas ownership can be approved in
nearly all industry sectors, including motion picture exhibition and
distribution. A review process is also applicable to certain land transactions
and the purchase of businesses or assets having a value of NZ$10,000 or more.

 Licensing/Pricing

   Films are licensed under agreements with major film distributors and
several local distributors who distribute specialized films. Film exhibitors
are provided with an opportunity to view films prior to negotiating with the
film distributor the commercial terms applicable to its release. Films are
licensed on a film-by-film, theater-by-theater basis. Reading Australia and
Reading New Zealand license films from all film distributors as appropriate to
each location. Generally, film payment terms are based upon various formulas
which provide for payments based upon a specified percentage of box office
receipts. With the exception of two cinemas in Australia, the Company has not
encountered material problems in getting access to first run film product. The
exceptions have been one cinema located in the Downtown area of Sydney and one
art and specialty cinema. The downtown Sydney market has long been dominated
by the major film exhibitors. The art and specialty cinema located in a
Melbourne competes directly with affiliates of one of the major film
distributors in Australia for such art and specialty film product. The Company
is currently proceeding under the Film Industry Code of Conduct and has sought
the assistance of the Australian Consumer and Competition Commission (the
"ACCC") in an attempt to get full and complete film supply for these cinemas.
Also, the Company filed a lawsuit against Roadshow Film Distributors in 2001,
alleging unconscionable conduct and other trade practice violation by Roadshow
Film Distributors in failing to provide certain first run film to the
Company's cinema in downtown Sydney and to supply the Company's Melbourne art
and specialty cinema. No assurances can be given, however, that these efforts
will be successful.

 Competition

   The film exhibition market in Australia and New Zealand is highly
concentrated and, in certain cases, vertically integrated. The principal
exhibitors in Australia and New Zealand include Village Roadshow Limited
("Village") with approximately 222 screens in Australia and 76 screens in New
Zealand, Greater Union and affiliates with approximately 431 screens in
Australia and Hoyts Cinemas ("Hoyts") with approximately 341 screens in
Australia and 47 screens in New Zealand. Independents, as a group, operate
approximately 703 screens in Australia and 164 screens in New Zealand. These
figures, however, understate in certain respects the degree of concentration
in Australia and New Zealand. Typically, the Major Exhibitors (Village,
Greater Union and Hoyts) own the newer multiplex and megaplex cinemas, while
the independent exhibitors typically have older and smaller cinemas.
Accordingly, the Company believes it likely that the Major Exhibitors may
control upwards of 80% of the total cinema box office in Australia and New
Zealand. Also, the Major Exhibitors have in recent periods built a number of
new multiplexes as joint venture partners or under shared facility
arrangements, and have historically not engaged in head-to-head competition,
except in the downtown areas of Sydney and Melbourne.

   Greater Union is the owner of Birch Carroll & Coyle and a part owner of
Village. Generally speaking, all new multiplex cinema projects announced by
Village are being jointly developed by Greater Union, Village, and Warner
Bros. These companies have substantial capital resources. Village had a
publicly reported consolidated net worth of approximately AUS$1 billion at
June 30, 2000. The Greater Union organization does not separately publish
financial reports, but its parent, Amalgamated Holdings, had a publicly
reported consolidated net worth of approximately AUS$388 million at June 30,
2000. Hoyts Cinemas does not separately publish financial reports as it has
been acquired by a major Australian media and entertainment company,
Consolidated Press Holdings.

                                      13
<PAGE>

   The industry is also somewhat vertically integrated in that Roadshow Film
Distributors--a company owned in equal parts by Village and Greater Union--
serves as a distributor of film in Australia and New Zealand for Warner Bros.
and New Line. Films produced or distributed by the majority of the local
international independent producers are also distributed by Roadshow Film
Distributors.

   In the view of the Company, the principal competitive restraint on the
development of its business in Australia and New Zealand is the limited
availability of good sites. However, unless the Company is successful in its
efforts before the ACCC to open access to film in certain markets, it may be
that access to film will also prove to be a principal competitive restrain on
the further development of its business in Australia. The Company's principal
competitors and certain major commercial real estate interests have typically
used the historical course of land use development in Australia to prevent or
delay the construction of freestanding cinemas in new entertainment oriented
complexes, particularly where those complexes are located outside of an
established central business district or shopping center development.
Competitors or shopping center landlords typically contest the suitability of
the Company's projects, resulting in appeals to applicable land tribunals and
delays in development. In the case of the Company's fifty acre site at
Burwood, the Minister for Planning and Local Government preempted local zoning
authorities to prohibit the Company's intended development of a 25 screen
cinema complex, which would have competed with complexes owned by the
principal theater operators in Australia and located in shopping centers owned
by some of the principal retail landlords in Australia.

   As reported in a television news documentary aired by Australia's Network
Nine, this decision by the minister followed a record-breaking cash
contribution by Village Roadshow to that minister's political party. According
to other published reports, the amount of that contribution was in the range
of AUS$800,000.

   In light of published revelations about the extent to which major shopping
center interests such as Westfields and major film exhibition companies, such
as Village, have been willing to go to block competitive developments, the
Company is hopeful that the use of these types of tactics will be reduced in
Australia. Recently, for example, all opposition to the Company's project at
the Whitehorse Center was dropped. However, it may be that such efforts were
dropped primarily because the goal of such opposition--the delay of the
Whitehorse development while other competitive cinema facilities were brought
on line--had been accomplished. In the view of the Company, it is clear that
the opposition of entrenched interests such as Westfields and Village have
substantially delayed and otherwise adversely affected the Company's endeavors
to become the largest independent cinema exhibitor in Australia.

   The Company generally has not encountered problems in obtaining access to
first run film product in Australia or New Zealand. However, the Company has
encountered some difficulty where it has attempted to take on the established
competitors in the downtown area of Sydney and in one situation where an art
and specialty cinema, owned by a joint venture in which the Company is a
participant, competes with affiliates of Roadshow Film Distributors. The
Company is currently pursuing its remedies under the Film Industry Code of
Conduct, before the ACCC and in private litigation against Roadshow Film
Distributors. Also, the Company is in litigation with Village, alleging
various trade practice violations. Litigation, however, is more difficult for
plaintiffs in Australia than in the United States due to the limits on the
scope and extent of the discovery permitted under Australian law. Depositions,
for example, are not provided for under Australian procedures.

   Currency Risk: Generally speaking, the Company does not engage in currency
hedging. The Company presently intends, to the fullest extent possible, to
operate its Australian and New Zealand operations on a self-funding basis. The
book value, stated in U.S. dollars, of the Company's net assets in Australia
and New Zealand, (assets less liabilities and excludes redeemable preferred
stock), are as follows:

<TABLE>
<CAPTION>
                                                                     Net Assets
                                                                     -----------
       <S>                                                           <C>
       Reading Australia............................................ $29,804,000
       Reading New Zealand..........................................   3,882,000
                                                                     -----------
                                                                     $33,686,000
                                                                     ===========
</TABLE>

                                      14
<PAGE>

   The Company believes that its asset base in Australia should provide a
sufficient capital base to support the borrowings needed to complete the
cinema and entertainment center projects contemplated for 2001. The Company
has put into place an Australian dollar denominated credit facility with an
Australia based institutional lender to provide the funding required to
complete the landlord's tenant improvement work at its entertainment centers
in Perth and Auburn and to complete the cinema fit out of the leasehold cinema
projects being constructed at the Chirnside shopping center.

   With respect to New Zealand, the Company likewise believes that its assets
in New Zealand should provide a sufficient capital base to support the
borrowings needed to complete the currently contemplated entertainment center
in downtown Wellington. In December, 2000 the Company entered into a New
Zealand dollar denominated credit agreement with a New Zealand based
institutional lender, which the Company believes is sufficient to cover all of
the remaining costs of its entertainment center in Wellington, including,
without limitation, the costs of all of the landlord's tenant improvement
work, and the fit out of the 10 screen cinema component of the entertainment
center.

   At the present time, the Australian and New Zealand dollars are trading at
the lower end of their historic 25-year range vis a vis the U.S. dollar. Set
forth below is a chart of the exchange ratios between these three currencies
over the past ten years.


   Seasonality: Major films are generally released to coincide with the school
holiday trading periods, particularly the summer holidays. Accordingly,
Reading Australia and Reading New Zealand record greater revenues and earnings
during the first half of the calendar year.

   Employees: Reading Australia has 23 full time executive and administrative
employees and approximately 370 theater employees. Reading New Zealand
currently has no employees. The Company believes its relations with its
employees to be good.

                                      15
<PAGE>

Puerto Rico ("CineVista")

 General

   Acquired in 1994, CineVista currently operates 56 screens in eight leased
facilities in Puerto Rico. During 1999, the Company opened a 12 screen complex
at the Plaza Carolina, a regional shopping center in the San Juan area. The
Company does not presently anticipate further expansion of this circuit, and
would like to exit this market if a suitable buyer can be found.

   In Puerto Rico, the Company has determined to concentrate on multiplex
cinemas located on leasehold properties, and the exhibition of conventional
film product. All of CineVista's theaters are modern multi-screen facilities.

   CineVista derives approximately 68% of its revenues from box office
receipts. Ticket prices vary by location, and provide for reduced rates for
senior citizens and children. Box office receipts are reported net of a 10%
excise tax imposed by Puerto Rico. Show times and features are placed in
advertisements in local newspapers with the costs of such advertisements paid
by CineVista. Film distributors may supplementally advertise certain feature
films with the costs generally paid by distributors.

   Concession sales account for approximately 25% of total revenues.
Concession products primarily include popcorn, candy and soda. CineVista has
implemented training programs, incentive programs and experiments with product
mix changes with the objective of increasing the amount and frequency of
concession purchases by theater patrons.

   Screen advertising revenues contribute approximately 7% of total revenues.
In Fiscal 2000, 1999 and 1998, CineVista had agreements with a major soft
drink bottler and an independent advertising production company to show
advertisements on theater screens prior to feature film showings. Other
sources of revenue include revenues from theater rentals for meetings,
conferences, special film exhibitions and vending machine receipts or rentals.

 Background Information about Puerto Rico and the Puerto Rican Cinema Market

   Puerto Rico is a self-governing Commonwealth of the United States with a
population of approximately 3.8 million people. Puerto Rico exercises control
over internal affairs similar to states of the United States; however, the
relationship with the United States Federal Government is different than that
of a state. Residents of Puerto Rico are citizens of the United States, but do
not vote in national elections and, with certain exceptions, do not pay
federal income taxes. Income taxes are paid instead under a system established
by the Commonwealth. The United States mainland is Puerto Rico's largest
trading partner.

   During the last five years, Puerto Rico has undergone significant retail
shopping center development. During this period, the number of multiplex
theaters has increased substantially. The Company's principal competitor,
Caribbean Cinemas, a privately-owned company, has opened seven complexes
adding approximately 64 screens since the beginning of 1996, and is expected
to continue to open theaters competitive with those of CineVista. These new
screens have adversely affected the Company's current operations. Since 1994,
this competitor's share of the Puerto Rico box office has increased from 48%
to 80%. The Company believes that the Puerto Rico market is currently over-
built in many areas, and that there will be few, if any, opportunities in the
near to medium term that would be attractive to the Company.

 Licensing/Pricing

   Films are licensed under agreements with major film distributors and
several local distributors specializing in films of special interest to
residents of Puerto Rico. Puerto Rico regulations generally require that film
exhibitors be provided with an opportunity to view films prior to submitting
bids, that film distributors provide advance notice of films which will be
provided to the market, and are generally designed to preclude anticompetitive
practices. Films are licensed on a film-by-film, theater-by-theater basis.
Generally, film payment terms provide for payment to film distributors under
various formulas, which provide for payments based upon a percentage of gross
box office receipts.

                                      16
<PAGE>

   CineVista licenses film from substantially all of the major United States
studios and is not dependent upon any one film distributor for all of its
product. However, in the event the Company was unable to license film from a
major studio, such lack of supply could have a material effect upon
CineVista's business. CineVista believes that the popularity of the Puerto
Rico exhibition market and Puerto Rico rules governing film licensing make
such a situation unlikely. In 2000, films licensed from CineVista's eight
largest film suppliers accounted for approximately 92% of CineVista's box
office revenues.

 Competition

   The Company believes there are approximately thirty-two first-run movie
theaters in daily operation with approximately 234 screens in Puerto Rico.
Based upon number of screens, box office revenues and number of theaters,
CineVista is the second largest exhibitor in Puerto Rico, with the two largest
exhibitors accounting for over 99% of the box office revenues recorded in
2000, measured by theaters in daily operation. Competition among the theater
exhibitors exists not only for theater patrons within certain geographic
areas, but also for the licensing of films and the development of new theater
sites. The number of sites suitable for multiplex cinemas is limited.
CineVista's principal competitor is expected to continue to open theaters
competitive with those of CineVista's.

   In Puerto Rico, the Company's strategy has been to build generally higher
quality cinemas, with larger seats, more leg room and better sound than those
constructed by its principal competitor, and to seek out and build in either
well established retail centers with adequate parking on-site or in connection
with the development of new retail centers being developed by experienced and
well financed developers. The Company's principal competitor appears to have
adopted a strategy of market dominance, building cinemas in areas which are,
in the view of the Company, already over-screened, and offering rents which,
again in the view of the Company, do not provide for an adequate return on
capital for the cinema operator.

   Particularly injurious to the Company's competitive position in Puerto Rico
was the opening in 2000 by Caribbean of a state-of-the-art multiplex cinema in
the Plaza Las Americas. Prior to the opening of this cinema, the Company's
cinema complex at the Plaza Las Americas was the Company's top grossing cinema
in Puerto Rico. The Company believes that the entering into of the lease with
respect to this cinema by the owner of the Plaza Las Americas and this
competitor was in violation of agreements reached between the Company and the
owner of the Plaza, and was an exercise of monopoly power by the Plaza and
this competitor. The Company has commenced litigation against the owner of the
Plaza and this competitor alleging, among other things, breach of contract,
tortuous interference and various trade practice violations.

 Seasonality

   Most major films are released to coincide with the summer months, when
schools are closed or the winter holiday seasons. Accordingly, CineVista has
historically recorded greater revenues and earnings during the second half of
the calendar year, except during 1998 when first half revenues were
unseasonably high due to the strong box office performance of Titanic.

 Employees

   CineVista has approximately 160 employees in Puerto Rico, 12 of whom are
employed under the terms of a collective bargaining agreement. The collective
bargaining agreement expires in May 2001. The Company believes its relations
with its employees in Puerto Rico to be good.

Domestic Cinemas

   During 2000 and the first quarter of 2001, the Company disposed of
substantially all of its domestic cinemas. At the present time, the Company's
only domestic cinema assets is a passive 33.33% interest in AFC.

Financial Information Relating to Industry Segments and Foreign and Domestic
Operations

   See Note 3 to the Consolidated Financial Statements contained elsewhere
herein.

                                      17
<PAGE>

The 96 Reorganization and Stock Transactions

   In October 1996, the Company reorganized under a new Delaware holding
company, Reading Entertainment, Inc., a Delaware corporation ("Reading
Delaware") (the "96 Reorganization"). In the 96 Reorganization, each
outstanding share of Reading common stock was, in effect, converted into a
share of Reading Delaware common stock. Prior to the 96 Reorganization, the
law of Pennsylvania controlled such matters. Following the 96 Reorganization,
the law of Delaware controlled the internal corporate affairs of the Company.
In December 1999, the Company reorganized under a new Nevada holding company,
the current Reading Entertainment, Inc., a Nevada corporation. Accordingly,
the internal corporate affairs of the Company are now controlled by the law of
Nevada.

   Immediately after the 96 Reorganization, Reading Delaware issued common
stock and preferred stock in exchange for cash and other assets valued at
approximately $93,400,000 increasing shareholder's equity from approximately
$69,000,000 to approximately $156,000,000 (the "Stock Transactions"). In the
Stock Transactions, Reading Delaware issued to Citadel 70,000 shares of Series
A Voting Cumulative Preferred Stock (the "Series A Preferred Stock"), and
granted to Citadel the option to sell its assets to the Company on certain
terms (the "Asset Put Option"), in exchange for $7,000,000 in cash. Reading
Delaware issued to Craig Corp 550,000 shares of Series B Voting Cumulative
Preferred Stock (the "Series B Preferred Stock") and 2,476,140 shares of
Common Stock in exchange for 693,650 shares of Stater Bros. Preferred Stock,
the 50% membership interest in Reading International Cinemas LLC ("RIC") not
previously owned by the Company, and 1,329,114 shares of Citadel Preferred
Stock. The Citadel Preferred Stock was redeemed by Citadel in December 1996
for approximately $6,200,000. The Stater Bros. Preferred Stock was repurchased
by Stater Bros. in the third quarter of 1997 for approximately $73,900,000.

   Under the Asset Put Option, Citadel had the right, exercisable at any time
until May 2000, to require the Company to acquire substantially all of
Citadel's assets, and assume related liabilities (such as mortgages), in
exchange for shares of Common Stock. In exchange for up to $20,000,000 in
aggregate appraised value of Citadel assets, REI was obligated to deliver to
Citadel that number of shares of Common Stock determined by dividing the value
of the Citadel assets by $12.25. If the appraised value of the Citadel assets
was in excess of $20,000,000, REI was obligated to pay for the excess over
$20,000,000 by issuing Common Stock at the then fair market value of such
stock. REI was not obligated to acquire more than $30,000,000 of assets. In
light of the trading price of such common stock at the end of the option
period, Citadel elected not to exercise its rights under the Asset Put Option,
and that option has now expired.

   The Series A and Series B Preferred Stock (collectively, the "Convertible
Preferred Stock") have stated values of $7,000,000 and $55,000,000,
respectively. Holders of each series of the Convertible Preferred Stock 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 REl. Each share of Series A Preferred
Stock is convertible into shares of Common Stock at a conversion price of
$11.50, and each share of series B Preferred Stock is convertible into shares
of Common Stock at a conversion price of $12.25, each subject to adjustment
under certain circumstances. The shares of Series A Preferred Stock may also
be converted after a change in control. REI has the right to require
conversion of the Series A Preferred Stock if the average market price of the
Common Stock over a 180-calendar day period exceeds $15.525. REI granted
certain registration rights to Citadel with respect to the shares of Common
Stock, issuable on conversion of the Series A Preferred Stock and the Asset
Put Option.

   Citadel has the right during the ninety day period beginning October 15,
2001, or in the event of a change of control of the Company, to require the
Company to repurchase the Series A Preferred Stock at its stated value plus
accrued and unpaid dividends plus, in the case of a change of control, a
premium. In addition, if REI fails to pay dividends on the Series A Preferred
Stock for four quarters, Citadel may require REI to repurchase the Series A
Preferred Stock. Also, REI has certain rights to redeem the Convertible
Preferred Stock at its option. Due to the redemption provisions, the Series A
Preferred Stock is not included as a component of Shareholders' Equity in the
Consolidated Balance Sheet and is separately categorized as "Preferred Stock".
The Company

                                      18
<PAGE>

anticipates that, in the event that the Consolidation Transaction is not
consummated, Citadel will exercise its right to require the Company to
repurchase the Series A Preferred Stock. As of December 31, 2000, the Company
was two quarters in arrears with respect to payment of dividends on the Series
A Preferred Stock. All dividends in arrears were paid in March 2001.

ITEM 2. PROPERTIES

Executive and Administrative Offices

   The Company leases approximately 19,000 square feet of office space in
Manhattan and Los Angeles in the United States, in Melbourne, Australia and in
San Juan, Puerto Rico.

Entertainment Properties

 Leasehold Interests

   Subsequent to the sale of its domestic theaters to Citadel in March 2001,
the Company has no domestic theater leases. The Company currently leases
approximately 571,273 square feet of completed theater space in Australia and
Puerto Rico as follows:

<TABLE>
<CAPTION>
                                                  Aggregate Approximate Range of
                                                   Square          Terms
                                                   Footage  (including renewals)
                                                  --------- --------------------
   <S>                                            <C>       <C>
   Australia ....................................  368,599      29-40 years
   Puerto Rico ..................................  202,674       3-40 years
</TABLE>

 Fee Interests

   In Australia, the Company currently owns approximately 3,133,000 square
feet of land at five locations. Substantially all of this land is located in
the urban areas of Brisbane, Melbourne, Perth and Sydney, including the fifty-
acre Burwood site in Melbourne.

   In New Zealand, the Company owns a 151,800 square foot site, which includes
an existing 327,000 square feet nine story parking structure in the heart of
Wellington, the capital of New Zealand, and a 698,330 square foot parcel in
Takanini, a suburb of Auckland. The Wellington site is being developed as an
entertainment center which will incorporate the existing parking garage. the
Takanini site is under a contract of sale, anticipated to close in second or
third quarter of 2001. The Company expects to close the sale at a gain of
approximately $22,000, net of disposal costs.

   In the United States, the Company owned no fee interest entertainment
property at December 31, 2000. During 2000, the Company sold the RGT to
Citadel for $3,000,000, its approximate cost basis, less an amount equal to
the sum of (1) the long-term liabilities of RGT and (2) the difference between
the short-term assets and liabilities of RGT. The Company realized net
proceeds of $1,708,000 from the sale of its interest in RGT.

 Joint Venture Interests

   Reading Australia owns (1) a 50% joint venture interest in the Whitehorse
Center shopping center located on leased land in Melbourne; (2) a 66% joint
venture interest in a leased five screen multiplex cinema in Melbourne; and
(3) a 75% interest in a venture which leases two cinemas with eleven screens
in two Australian towns. As discussed previously in Part I--Item 1 "Reading
Cinemas (Australia and New Zealand)", the Company wrote off its investment in
the Whitehorse Center during the second and third quarters of 2000. The
Company is currently endeavoring to sell the property.

   In New Zealand, the Company has 50% joint venture interest in two fee
properties and one leasehold property, totaling approximately 87,100 square
feet. The two fee parcels are improved with cinema/restaurant complexes. The
leasehold is improved with a new multiplex cinema.

                                      19
<PAGE>

Non-Entertainment Properties

 Reading Australia

   In December 1995, Reading Australia acquired a fifty-acre site in Burwood,
a suburban area within the Melbourne metropolitan area. Reading Australia had
intended to build a multiplex theater on this site but the Minister for
Planning and Local Government has intervened to negate certain permits that
were in place at the time the land was acquired. The Company believes that the
site has value as an assemblage for other uses, even if it is unable to
develop the site as a theater, and is currently exploring other options.

 Domestic Non-Entertainment Real Estate

   When the Company's railroad assets were conveyed to Conrail, the Company
retained fee ownership of approximately 700 parcels and rights-of-way located
throughout Pennsylvania, Delaware, and New Jersey. Approximately fifteen
parcels and rights-of-way located outside of Philadelphia are still owned by
the Company. The parcels consist primarily of vacant land and buildings, some
of which are leased. No material value is currently attributed by the Company
to these real estate interests.

ITEM 3. LEGAL PROCEEDINGS

 Certain Shareholder Litigation

   In September 1996, the holder of 50 shares of common stock commenced a
purported class action on behalf of the Company's minority shareholders in the
Philadelphia County Court of Common Pleas relating to the 96 Reorganization
and Stock Transactions. The complaint in the action (the "Complaint") named
the Company, Craig, two former directors of the Company and certain of the
then current directors of the Company as defendants. The Complaint alleged,
among other things, that the Independent Committee (set up to review the
transactions), and the current and former directors of the Company breached
their fiduciary duty to the minority shareholders in the review and
negotiation of the 96 Reorganization and Stock Transactions and that none of
the directors of the Company were independent and that they all were
controlled by James J. Cotter, Craig or those controlled by them. The
Complaint also alleged, in part, that the defendants failed to disclose the
full future earnings potential of the Company and that Craig would benefit
unjustly by having its credit rating upgraded and its balance sheet bolstered
and that the value of the minority shareholders' interest in the Company was
diluted by the transactions.

   In November 1996, plaintiffs filed an Amended Complaint against all of the
Company's directors at that time, its two former directors and Craig. The
Amended Complaint does not name the Company as a defendant. The Amended
Complaint essentially restated all of the allegations contained in the
Complaint and contended that the named defendant directors and Craig breached
their fiduciary duties to the alleged class. The Amended Complaint sought
unspecified damages on behalf of the alleged class and attorneys and experts'
fees. On December 9, 1997, the Court certified the case as a Class Action and
approved the plaintiff as Class Representative.

   On April 24, 1997, plaintiff filed a purported derivative action against
the same defendants. This action included claims substantially similar to
those asserted in the class action and also alleged waste of tax benefits
relating to the Company's historic railroad operating losses. The Company
moved to dismiss this case for failure by the plaintiff to comply with the
mandated procedures for bringing such an action. On January 23, 1998, the
Court dismissed the derivative action. The dismissal of the derivative action
does not affect the class action case, nor does it preclude reassertion to the
claims contained in the derivative action.

   On September 28, 1998, the defendants filed a motion for summary judgment.
In February 2000, the Court granted summary judgment against the Plaintiff and
in favor of all of the defendant directors. Craig was not dismissed, however,
the Court agreed to reconsider Craig's motion in light of its decision to
dismiss the claims against all of the defendant directors. Thereafter, the
Court entered summary judgment in favor of Craig, and the

                                      20
<PAGE>

plaintiff appealed the Court's determinations with respect to all defendants
on February 8, 2001. The Company is advised that all defendants intend to
defend against that appeal.

 Redevelopment Authority of the City of Philadelphia v. Reading

   On December 12, 1997, the Redevelopment Authority filed an action in the
Philadelphia Court of Common Pleas which relates to the 1993 sale of the
Headhouse property by Reading to the Authority. Plaintiff has alleged
discovery of various contaminants--asbestos, PCB's lead paint--and alleged
past and future clean-up costs in excess of $1,000,000. The action was settled
in 2000 for approximately $100,000.

 Whitehorse Center Litigation

   On October 30, 2000, Reading Australia commenced litigation in the Supreme
Court of Victoria at Melbourne, Commercial and Equity Division, against its
joint venture partner and the controlling stockholders of its joint venture
partner in the Whitehorse Center. That action is entitled Reading
Entertainment Australia PTY, LTD vs. Burstone Victoria PTY, LTD and May Way
Khor and David Frederick Burr, and was brought to collect on a loan made by
Reading Australia to Ms. Khor and Mr. Burr, which loan was guaranteed by
Burstone Victoria PTY, LTD ("Burstone"). The defendants have asserted certain
set-offs and counterclaims, alleging, in essence, that Reading Australia
breached certain obligations it allegedly had to build a cinema at the
Whitehorse Center, causing the defendants substantial damages. The Company
believes that it has good and sufficient defenses to the defendants'
assertions and counter claims. The case is currently in the discovery stage.

 Tax Audit

   The Company's 1996 tax return is under review by the Internal Revenue
Service. While the Company believes its reporting position in such period to
be reasonable and the Service has not alleged any deficiencies, no assurances
can be made that the Company's tax reporting position will be upheld.

 Other Claims

   The Company is not a party to any other pending legal proceedings or
environmental action which management believes could have a material adverse
effect on its financial position. While the City of Philadelphia has asserted
that the Company's share of any environmental clean up costs related to its
North Viaduct Property would be in the range of $3,500,000, the Company does
not believe that it has any current obligation to commence such remediation
and believes such estimate to be inaccurate.

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

   At the Company's 2000 Annual Meeting of Shareholders held on September 12,
2000, the shareholders elected the Company's directors and voted on a non-
binding stockholder proposal to liquidate the Company's assets and distribute
them to the shareholders (the "Steiner Proposal"). The results of the votes
were as follows:

<TABLE>
<CAPTION>
     Election of Directors                                      For     Withheld
     ---------------------                                   ---------- --------
     <S>                                                     <C>        <C>
     James J. Cotter........................................ 12,071,487  5,848
     Scott A. Braly......................................... 12,071,387  5,948
     Robert F. Loeffler..................................... 12,071,387  5,948
     Kenneth S. McCormick................................... 12,071,387  5,948
     Robert F. Smerling..................................... 12,071,387  5,948
     S. Craig Tompkins...................................... 12,071,487  5,848
</TABLE>

<TABLE>
<CAPTION>
             Stockholder Proposal            For    Against   Abstain/No-Vote
             --------------------           ------ ---------- ---------------
   <S>                                      <C>    <C>        <C>
   Referred to in the Proxy Statement as
    the "Steiner Proposal"................. 69,648 11,575,897     431,790
</TABLE>

                                      21
<PAGE>

                                    PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

   The following table sets forth the high and low prices of REl common stock
as reported on the NASDAQ.

<TABLE>
<CAPTION>
                                                                    High   Low
                                                                   ------ ------
                                                                   (in dollars)
     <S>                                                           <C>    <C>
     2000:
       Fourth Quarter............................................. 3 1/2  2 1/8
       Third Quarter.............................................. 5 7/8  3 5/8
       Second Quarter............................................. 6      4 1/2
       First Quarter.............................................. 5 3/4  3 5/32

     1999:
       Fourth Quarter............................................. 6 1/8  5
       Third Quarter.............................................. 7 9/16 5 3/4
       Second Quarter............................................. 8 3/8  6 5/8
       First Quarter.............................................. 8 1/8  7
</TABLE>

   On March 24, 2001, the REI common stock closed at $2.00. On March 24, 2001,
there were approximately 560 shareholders of record of REl common stock, which
amount does not include individual participants in security position listings.

   REI has not paid any dividends on the common stock. The Company's Board of
Directors does not intend to authorize payment of dividends on the common
stock in the foreseeable future. Holders of the Convertible Preferred Stock
are entitled to receive quarterly cumulative dividends at the annual rate of
$6.50 per share of Series A Preferred Stock and $6.50 per share of Series B
Preferred Stock, in each case before any dividends (other than dividends
payable in common stock) are paid to the holders of the common stock. All of
the Series A Preferred Stock is owned by Citadel and all of the Series B
Preferred Stock is owned by Craig. As of December 31, 2000, the Company was
two quarters in arrears with respect to the dividends payable on its Series A
Preferred Stock. Those dividends were brought current during the first quarter
of 2001. No dividends were declared nor paid on the Series B Preferred Stock
in 2000 or 1999.

   On October 15, 1996, REI issued the Convertible Preferred Stock to Craig
and Citadel (See Item 1. Business--The 96 Reorganization and Stock
Transactions).

                                      22
<PAGE>

ITEM 6. SELECTED FINANCIAL DATA

   The following table sets forth certain historical consolidated financial
information for the Company. This table is based on, and should be read in
conjunction with, the Consolidated Financial Statements included elsewhere
herein and the related notes thereto (dollars in thousands, except per share
information).

<TABLE>
<CAPTION>
                                        Year ended December 31,
                              ------------------------------------------------
                                2000      1999      1998      1997      1996
                              --------  --------  --------  --------  --------
<S>                           <C>       <C>       <C>       <C>       <C>
Revenues....................  $ 42,237  $ 38,488  $ 33,929  $ 27,164  $ 18,779
Net (loss) income applicable
 to common shareholders.....  $(19,854) $(45,517) $ (6,728) $ (1,354) $  6,092
Earnings per share
 information
Basic (loss) earnings per
 share......................  $  (2.67) $  (6.11) $  (0.90) $  (0.18) $   1.11
Diluted (loss) earnings per
 share......................  $  (2.67) $  (6.11) $  (0.90) $  (0.18) $  (1.02)

<CAPTION>
                                            At December 31,
                              ------------------------------------------------
                                2000      1999      1998      1997      1996
                              --------  --------  --------  --------  --------
<S>                           <C>       <C>       <C>       <C>       <C>
Total assets................  $116,672  $138,496  $172,287  $178,012  $181,754
Redeemable preferred stock..  $  7,000  $  7,000  $  7,000  $  7,000  $  7,000
Shareholders' equity........  $ 73,289  $102,683  $142,372  $150,485  $155,954
</TABLE>

                                       23
<PAGE>

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

 Overview

   Reading Entertainment, Inc. ("REI" and collectively with its consolidated
subsidiaries and corporate predecessors, "Reading" or the "Company") is
principally engaged in the business of developing, owning and operating
multiplex theaters in Australia, New Zealand and Puerto Rico, and in
developing and eventually operating theater based entertainment centers in
Australia and New Zealand. Prior to March 2001, the Company was also
principally engaged in the business of developing, owning and operating
cinemas in the United States. In transactions in April and September 2000 and
March 2001, the Company conveyed to CHC all of its domestic cinema interests
other than a 33.3% passive membership interest in Angelika Film Center LLC
("AFC").

   During the past several years, the Company has been actively engaged in the
construction of state-of-the art multiplexes, principally located in
Australia. Certain of the Company's properties also include a non-cinema
retail component. Though certain Australia-based cinemas commenced operation
prior to 1999, a substantial majority of the Company's current Australia-based
cinemas have been in operation for less than two years. The table below
summarizes the number of cinema screens in operation as of each of the dates
indicated.

<TABLE>
<CAPTION>
                                          Australia/
                                          New Zealand Puerto Rico Domestic Total
                                          ----------- ----------- -------- -----
     <S>                                  <C>         <C>         <C>      <C>
     December 31, 1998...................      30          44        22      96
     December 31, 1999...................      76          56        42     174
     December 31, 2000...................      81          56        28     165
</TABLE>

   In the preceding table, (1) the increase in the number of cinema screens in
Australia and New Zealand is wholly comprised of newly-constructed
multiplexes; (2) the increase in the number of cinema screens in Puerto Rico
is represented by a newly-constructed, 12-screen multiplex that opened in
December 1999; (3) the increase in the number of domestic screens during 1999
resulted from the addition of a newly-constructed, 12-screen multiplex and a
refurbished existing 8-screen cinema; (4) the decrease in the number of
domestic screens during 2000 resulted from closure of the 8-screen cinema, and
the deconsolidation of AFC (6 screens) following the sale of a 50% interest to
NAC.

   In addition to the theater openings and closings, the Company sold the
Royal George Theater ("RGT") to Citadel in September 2000. The RGT was
originally acquired by the Company in February 1999. For these reasons,
comparison of the Company's results between periods may prove difficult.

                                      24
<PAGE>

 Results of Operations

   The tables and narrative which follow set forth and discuss the results of
operations for the three years ended December 31, 2000. In the tables below,
(1) theater revenues consist of admissions, concessions, and advertising; (2)
theater expenses consist of the costs directly attributable to the operation
of each complex (including film rental, employee-related, occupancy and
operating costs, and depreciation); and (3) general and administrative
expenses include all other costs attendant to the operation and management of
the Company's affairs, net of intercompany transactions. The revenues and
expenses generated by the Company's Australian and New Zealand operations have
been translated at the average exchange rates for each period presented
(dollars in thousands).

<TABLE>
<CAPTION>
                                       New    Puerto
2000                      Australia  Zealand   Rico    Domestic  Corporate  Total
----                      ---------  ------- --------  --------  --------- --------
<S>                       <C>        <C>     <C>       <C>       <C>       <C>
Revenues................  $ 16,840    $ 539  $ 15,117  $  9,503   $   238  $ 42,237
Expenses................   (15,720)    (124)  (14,505)   (9,877)      (66)  (40,292)
General & administrative
 expenses...............    (5,279)    (667)   (1,041)     (237)   (5,454)  (12,678)
                          --------    -----  --------  --------   -------  --------
                            (4,159)    (252)     (429)     (611)   (5,282)  (10,733)
Asset impairment
 charge.................    (3,209)     (24)      --    (11,743)      --    (14,976)
                          --------    -----  --------  --------   -------  --------
(Loss) from operations..  $ (7,368)    (276) $   (429) $(12,354)  $(5,282) $(25,709)
                          --------    -----  --------  --------   -------  --------

<CAPTION>
                                       New    Puerto
1999                      Australia  Zealand   Rico    Domestic  Corporate  Total
----                      ---------  ------- --------  --------  --------- --------
<S>                       <C>        <C>     <C>       <C>       <C>       <C>
Revenues................  $  9,333    $ 297  $ 12,974  $ 15,504   $   380  $ 38,488
Expenses................    (8,753)     --    (13,326)  (13,319)      (99)  (35,497)
General & administrative
 expenses...............    (4,074)    (455)     (910)     (618)   (6,399)  (12,456)
                          --------    -----  --------  --------   -------  --------
                            (3,494)    (158)   (1,262)    1,567    (6,118)   (9,465)
Asset impairment
 charge.................       --       --    (31,330)     (136)   (3,717)  (35,183)
                          --------    -----  --------  --------   -------  --------
(Loss) income from
 operations.............  $ (3,494)   $(158) $(32,592) $  1,431   $(9,835) $(44,648)
                          --------    -----  --------  --------   -------  --------

<CAPTION>
                                       New    Puerto
1998                      Australia  Zealand   Rico    Domestic  Corporate  Total
----                      ---------  ------- --------  --------  --------- --------
<S>                       <C>        <C>     <C>       <C>       <C>       <C>
Revenues................  $  6,212    $ --   $ 16,210  $ 11,134   $   373  $ 33,929
Expenses................    (5,286)     --    (14,897)   (9,475)      (38)  (29,696)
General & administrative
 expenses...............    (3,739)    (176)   (1,292)     (597)   (4,453)  (10,257)
                          --------    -----  --------  --------   -------  --------
(Loss) income from
 operations.............  $ (2,813)   $(176) $     21  $  1,062   $(4,118) $ (6,024)
                          --------    -----  --------  --------   -------  --------
</TABLE>

Industry Overview

   While 2000 gross box office revenues were generally comparable with those
achieved in 1999, the cinema exhibition business as a whole has experienced a
noticeable decline in admissions during 2000 as compared with 1999, the first
such decline in many years. The decline in admissions has been generally
attributed by exhibitors and by distributors to the inconsistent quality of
wide-release films and the absence of highly successful independent films.
Since a substantial portion of a cinema's profitability is derived from
concession sales, the impact on the industries bottom line is greater than
might be expected given publicly available box office revenue information. The
adverse effect of this decline in admissions on cinema cash flow has been
exacerbated by the significant increase in the number of motion picture
screens in recent periods. Furthermore, not only have these declining
admissions been spread over a larger number of screens, the greater
availability of screens has resulted in the release of a larger number of
prints, making movies more readily available to customers during their early
weeks of release--a time period when film rentals are customarily at their
highest. These dual influences have resulted in an increase in the percentage
of revenues absorbed by film rentals due distributors (since film rentals are
generally higher, as a percentage of box office revenues, during the initial
period of theatrical release and since the greater availability and lack of
staying power of most films released in 2000 have resulted in a higher
percentage of the industries revenues being realized in the first few weeks of
a films life) and a narrowing of the coverage afforded exhibitors' fixed
costs.

                                      25
<PAGE>

 Operating Revenues

   The growth in theater revenues and expenses generated from the Australia,
New Zealand, and Puerto Rico's operations generally resulted from an increase
in the number of screens in operation during the year ended December 31, 2000
as compared with the same period in 1999 and 1998. This increase was primarily
due to the new Australian cinema developments which completed their first full
year of operations in 2000 and one multiplex in Puerto Rico that opened near
the end of 1999. The increase in Australia's theater revenues was offset by
the decrease in domestic theater revenues from the de-consolidation of AFC
after April 5, 2000 and the closure of one cinema with 8 screens in June 2000.

   Australia revenues increased in 2000 from 1999 and 1998 as a result of the
51 screens that have been added since December 31, 1998. Approximately 46 of
the 51 new screens were placed into operation late 1999 and 2000 was the first
full year of operations for these cinemas.

   New Zealand revenues include rental income on a parking garage which was
acquired in 1999 and proceeds from the Company's interest in a joint venture
which operates three cinemas in New Zealand. Reading New Zealand's 2000
operating revenues were higher than that recorded in 1999 primarily due to the
fact that the Company received revenue generated from the parking area
previously held in 50/50 joint venture. This joint venture interest was
purchased by the Company in late 1999 and used as a parking area prior to the
commencement of site development.

   Puerto Rico revenues increased in 2000 from 1999, reflecting the results of
the first full year of operation for the 12 screens that were added towards
the end of 1999. Puerto Rico's theater revenue decreased in 1999 from 1998
primarily due to deteriorating market conditions as competing cinemas opened
or completed a full year of operations. In addition, 1998 theater revenues
included $459,000 in revenues from a San Juan six-screen cinema which was
destroyed by a hurricane in September 1998 and not re-opened.

   Domestic revenues decreased in 2000 from 1999 mainly due to the closing of
an 8-screen cinema in June 2000 and the deconsolidation of AFC in April 2000
as discussed above. The increase in domestic revenues in 1999 from 1998 was
due to the two cinemas (20 screens) that opened in May and July of 1999 and
$1,161,000 in revenue from the RGT.

Operating Expenses

   Australia operating expenses increased in 2000 from 1999 and 1998 due to
(1) 51 new screens that were added in 1999 and 2000 and (2) start-up expenses
associated with new cinema openings.

   New Zealand expenses also increased in 2000 from 1999 in line with the
increase in revenue.

   Puerto Rico expenses were affected in 2000 by lower start-up costs
associated with the opening of new cinemas which decreased when compared to
1999. With that exception, operating expenses in 2000, 1999 and 1998 were in
line with the revenues.

   Domestic expenses decreased in 2000 from 1999 as a result of the Company's
(1) closing of an 8-screen cinema in June 2000, and (2) deconsolidation of AFC
in April 2000. Expenses increased in 1999 from 1998 due primarily to the
increased number of locations and screens in 1999 and the operations of the
RGT which was acquired in March 1999.

 General and Administrative Expenses

   Australia expenses steadily increased from 1998 due to the level of
infrastructure needed to support the opening and operation of 51 additional
screens partially offset by a decrease in development costs written off.

                                      26
<PAGE>

   New Zealand expenses steadily increased from 1998 as a result of the
Company's expanding real estate development activities. Substantially all such
expenses are comprised of professional fees (legal and accounting) which are
not direct project expenses.

   Puerto Rico expenses increased in 2000 from 1999 as a result of an increase
in legal expenses relating to the Company's litigation against its principal
competitor and other parties. Expenses decreased from 1998 to 1999 due
primarily to the elimination of charges relating to the closing of ten screens
during 1998 offset in part by increased write-offs of capitalized development
costs and professional fees.

   Domestic expenses decreased in 2000 from 1999 primarily as a result of the
Company's (1) closing of an 8-screen cinema in June 2000, and (2)
deconsolidation of AFC in April 2000. Expenses remained comparable between
1999 and 1998. Expenses include $126,000, $488,000 and $488,000, in 2000, 1999
and 1998, respectively, of management fees paid to City Cinemas with respect
to the management of certain of the Company's domestic cinemas. (See Note 3 to
the Consolidated Financial Statements contained elsewhere herein.)

Asset Impairment Charges

 2000

   During the fourth quarter of 2000, the Company determined to sell its
remaining domestic cinema assets and concurrently with this decision, wrote
down the carrying value of its four domestic cinemas (28 screens) to its
estimated market value. The estimated market value of approximately $1,706,000
was calculated using a cash flow multiple of 6 applied on the aggregate cash
flow generated from the four cinemas in 2000. Total write-downs of $11,743,000
were recorded in the year ended December 31, 2000.

   Also in 2000, the Company determined that its equity investment in the
Australian joint venture that owns the Whitehorse Center (the "Whitehorse
JV"), and its related note receivable from the controlling stockholders of its
partners in that joint venture, were not recoverable from the proceeds which
could reasonably be expected from the then intended disposition of the
property by the joint venture. Accordingly, the Company reduced the carrying
value of its aggregate investment by $342,000 and $2,067,000, respectively,
which reduced the Company's investment to zero.

   In addition, the Company determined that it would not proceed with one
development project in Australia. Based upon this decision, management
determined that the Company's investment in this project was not recoverable
and, accordingly, wrote off the Company's investment of $1,142,000.

 1999

   During 1999, the Company recorded an asset impairment charge of $31,330,000
relating to its Puerto Rico cinema circuit. This change was taken in two
quarters. During the third quarter of 1999, the Company recorded an asset
impairment loss of $14,022,000. At that time, the Company wrote-off the entire
carrying value of the Plaza Cinemas, after a determination by the owners of
the Plaza Las Americas Mall (the "Mall") to award a lease for a new cinema in
the Mall to the Company's principal competitor. In the fourth quarter of 1999,
the Company determined that it would commence efforts to exit the Puerto Rico
cinema market and wrote down the value of the circuit to its estimated net
realizable value resulting in an additional asset impairment loss of
$17,308,000.

   Also during 1999, the Company was advised by the partnership which manages
the Company's portfolio of leased equipment that the market for used computer
equipment had deteriorated as the global Year 2000 compliance efforts created
an overabundance of used computer equipment. In addition, a decision by a
large lessee to upgrade its computer equipment, including equipment leased
from the Company's leasing portfolio, was also anticipated to have an effect
upon the future value of the portfolio. Based upon the market valuation
performed by the equipment vendors, the Company determined that the estimated
residual value of the equipment should be reduced to zero and wrote off the
entire carrying value of $2,125,000.

                                      27
<PAGE>

   The Company wrote off the carrying value of two of its domestic cinemas
totaling $136,000 (net of payments due from a landlord of $100,000), in 1999.
In addition, after a review of the estimated market value of certain domestic
real estate held for sale, the Company recorded a $203,000 impairment charge
related to such real estate. In addition, in conjunction with a proposal to
the City of Philadelphia (the "City") for the possible disposition of the
environmentally impaired North Viaduct property in return for a cash payment
from the Company to the City, the Company increased its environmental reserve
by $500,000 from $1,256,000 to $1,756,000.

   During the fourth quarter of 1999, the Company adopted a plan and commenced
steps to relocate the Company's headquarters from Philadelphia to Los Angeles
and recorded a restructuring charge of $889,000 in 1999. The restructuring
charge includes a provision for lease termination charges, duplicate office
and employee expenditures and employee severance obligations.

Non-operating Revenues and Expense

   Gain on sale of assets of approximately $10,488,000 in 2000 was comprised
of the following: (1) sale of National Auto Credit Inc. ("NAC") common stock
in November and December 2000 for an aggregate gain of $4,565,000, (2) sale of
50% membership interest in AFC to NAC for a gain of $4,797,000, and (3) sale
of a real estate property at a gain of $1,126,000 (See Note 4 to the
Consolidated Financial Statements).

   Equity in earnings of affiliates include earnings from the Company's
investment in Citadel Holding, Big 4 Ranch, Inc. ("BRI"), the Whitehorse JV
and two New Zealand joint ventures (the "NZ JVs") in 1999 and 1998. In 2000,
the Company acquired equity investment in NAC as a result of the AFC sale in
April 2000, and recorded an equity interest in AFC when the Company stopped
consolidating AFC subsequent to the April 2000 sale.

   Equity in (loss) earnings of affiliates totaled $(1,832,000) in 2000,
$2,539,000 in 1999, and $1,070,000 in 1998. The adverse change resulted
primarily from (1) losses at Citadel in 2000, which reflected (a) write downs
in connection with Citadel's investment in various agricultural partnerships,
and (b) a negative margin produced by Citadel's theater operations; (2) losses
at NAC, which the Company began accounting for under the equity method in
April 2000; and (3) losses in connection with the Whitehorse JV and with
respect to which the Company wrote down its entire remaining investment in
2000 (See Note 7 to the Consolidated Financial Statements contained elsewhere
herein).

   Interest and dividend revenues were $1,710,000, $1,831,000 and $4,519,000
in each of the three years ended December 31, 2000, 1999, and 1998. Interest
and dividend revenues steadily decreased over the three years ended December
31, 2000 as a result of a decreasing investable "Cash and cash equivalents"
balance from $58,593,000 at December 31, 1998 to $16,416,000 at December 31,
2000. The Company's funds were deployed in its real estate and cinema
development projects.

   Other income (expense) for 2000 included (1) insurance settlement proceeds
of approximately $949,000 received by Puerto Rico in connection with hurricane
damage sustained in 1998, (2) a fee of $500,000 previously paid by NAC to the
Company for a now-expired option, less (3) certain miscellaneous non-operating
expenses. Other income in 1999 was mostly comprised of a $604,000 insurance
settlement received for damages incurred by Puerto Rico from the 1998
hurricane and in 1998, was primarily comprised of losses on foreign currency
derivative contracts. The Company does not have any foreign currency
derivative contracts in effect.

 Interest Expense

   Interest expense totaled $884,000 and $380,000 for the years ended December
31, 2000 and 1999, respectively. Increase in 2000 from 1999 reflects the
interest expense relating to the new Australian and New Zealand lines of
credit, in addition to the interest expense incurred by Puerto Rico. (See Note
10 to the Consolidated Financial Statements contained elsewhere herein).

                                      28
<PAGE>

 Minority Interest

   Decrease in Minority interest from 1999 is due to the deconsolidation of
AFC in April 2000. Minority interest in income of $77,000 in 2000 was
comprised of a 25% interest in two of Reading Australia's theaters and a 33.3%
interest in one other Australian theater. Minority interest of $322,000 and
$343,000 in 1999 and 1998, respectively, included a 16.67% minority interest
in AFC and the interest in three of Reading Australia's cinemas.

 Income Tax Provision

   Income tax expense of $1,078,000, $923,000, and $986,000 in 2000, 1999 and
1998, respectively, primarily reflect accruals for foreign withholding taxes
which will be paid if certain intercompany loans are repaid, in addition to
tax amounts for federal alternative minimum tax ("AMT") and state income and
franchise taxes.

 Net Loss

   As a result of the above, the Company's net loss totaled ($15,824,000),
($41,182,000), and ($2,406,000) in 2000, 1999, and 1998, respectively.

 Net Loss Applicable to Common Shareholders

   Net loss applicable to common stockholders includes the 6.5% per annum
dividend on the $62,000,000 of Convertible Preferred Stock outstanding since
October 15, 1996 and in addition, amortization of the asset put option until
its expiration in May 2000. The asset put option was fully amortized on May
14, 2000, when the asset put option expired unexercised.

Liquidity and Capital Resources

   Since December 31, 1998, the Company's cash and cash equivalents have
decreased from approximately $58,593,000, to approximately $16,446,000 at
December 31, 2000. During this period the Company has utilized its available
liquidity to (1) acquire land in Australia and New Zealand for the purpose of
constructing state-of-the-art cinemas, or entertainment centers, thereon; (2)
fit out newly-constructed cinema space in Australia, with respect to which the
Company is a tenant under long-term leases; and (3) construct two state-of-
the-art cinemas on leased land, one in the United States and one in Puerto
Rico. As a result of these investments, the Company has added 51 theater
screens in Australia and New Zealand (5 locations), 12 theater screens in
Puerto Rico (one location), and 12 theater screens in the United States (one
location) since 1998. Each of the complexes completed and opened since 1998
has been financed solely with the Company's liquidity, except for one project
located in Australia and one in Puerto Rico, with respect to which the costs
of construction were financed with bank borrowings. In addition to its
investments in now-operating cinemas, at December 31, 2000, the Company had a
recorded investment of $25,158,000 (at current exchange rates) in various land
parcels, located in Australia and New Zealand, each of which is intended for
future development. While each of these investments in undeveloped land had
been financed with Company's liquidity, a significant portion of the liquidity
at December 31, 2000 was used to finance the Company's purchase of the
Whitehorse debt in the first quarter of 2001.

   As further described in Note 9, the Company has various commitments which,
in aggregate, exceed the Company's working capital at December 31, 2000.
However, in November and December 2000, the Company received approximately
$14,702,000 in cash from the sale of its investment in NAC common stock to NAC
(see Note 4). In addition to this cash infusion, the Company obtained an
Australian Line of Credit with a major bank which provides for borrowings of
up to AUS$30,000,000 for the construction of an entertainment center and two
cinemas in Sydney. The Australian Line of Credit Agreement is secured by a
pledge of substantially all of Reading Australia's assets and requires Reading
Australia to maintain various financial covenants, restricts dividends and
limits additional borrowings. Also, Reading New Zealand entered into a loan
agreement with a major New Zealand bank for borrowings up to NZ$30,400,000 for
the purpose of the construction of the

                                      29
<PAGE>

Wellington development and for the refinancing of the loan on the Wellington
site. The loan is secured by a mortgage over the Wellington properties and
pledge of the assets of Reading New Zealand and its subsidiaries associated
with the Wellington project. While no assurances can be given, the Company
believes that it will be able to complete its development commitments for the
year 2001 with funds from the Australian and New Zealand credit facilities and
cash flow generated from operations. (These development commitments mostly
consist of the Company's build-out of certain tenant improvements in Auburn
and Perth, Australia and fit out of Chirnside). In addition, the Company is
currently working to sell the Whitehorse property.

   At December 31, 2000, the Company had $900,000 outstanding under a line of
credit with a major bank used to help finance the construction of the Carolina
Mall 12-plex cinema in Puerto Rico. Subsequent to year end, the Company paid
off the Line of Credit in full.

   Citadel has the right, during the fourth quarter of 2001, to require the
Company to repurchase its Series A Voting Preferred Stock for $7,000,000 plus
accrued but unpaid dividends. The Company is presently current with its
quarterly dividend obligation with respect to the Series A Preferred Stock as
discussed above. The Series B Voting Preferred Stock held by Craig Corporation
("Craig Corp" and collectively with its wholly owned subsidiaries and
corporate predecessors, "Craig") is perpetual in nature. As of December 31,
2000, dividends in the amount of $7,150,000 had accrued on that stock and to
date, Craig has not required that such arrearages be brought current. In the
event that the publicly announced consolidation transaction currently being
reviewed by the Conflicts Committees of REI, Craig Corp and CHC is
consummated, these securities and obligations will become intra-company in
nature. The Company is advised that the controlling stockholders of the REI,
Craig Corp. and CHC support such a consolidation transaction.

   In addition to the foregoing, the Company owns several land parcels located
in Australia which have yet to be developed. As part of its annual planning
process, management intends to assess whether these properties can be
economically developed, either independently or through joint ventures, or
whether one or more of these properties should be marketed for sale, though at
present, the Company has no intentions of marketing these properties, except
for the Whitehorse JV property as discussed previously. (See Note 6 to the
Consolidated Financial Statements contained elsewhere herein).

   The following summarizes the major sources and uses of cash funds in each
of the three years ended December 31, 2000, 1999 and 1998:

 2000

   Cash and cash equivalent increased $3,169,000 in 2000 from $13,277,000 in
1999 to $16,446,000 at December 31, 2000. Working capital improved $6,011,000
from $6,011,000 at December 31, 1999 to $7,836,000 at December 31, 2000.

   The Company's principal sources of cash funds in 2000 were as follows:

  .  $19,197,000 from disposal of assets

  .  $16,753,000 from Australian and New Zealand bank borrowings

  .  $1,027,000 in distributions from the AFC and NZ joint ventures

  .  $695,000 in loan repayments received from the NZ joint ventures

   The proceeds from disposal of assets were from (1) the sale of NAC common
stock in November and December 2000 for $14,702,000; (2) the sale of Royal
George LLC to Citadel in September 2000 for $2,908,000; (3) the sale of the
Parkway real estate property in April 2000 for $1,394,000; (4) the sale of
City Cinemas options to Citadel in February 2000 for $1,000,000; (5) the sale
of Angelika Dallas development rights to Citadel in September 2000 for
$356,000; and (6) the sale of obsolete equipment by Reading Australia.

                                      30
<PAGE>

   In addition to the payment of operating expenses, the Company's principal
uses of cash funds were as follows:

  .  $18,708,000 in purchases of property and equipment ($18,351,000 in
     Australia and $357,000 in the U.S)

  .  $6,519,000 in loan repayment

  .  $971,000 in purchase of development property in New Zealand

  .  $228,000 of dividend payments on the Company's Series A Convertible
     Preferred Stock

 1999

   Cash and cash equivalent decreased $45,316,000 in 1999 from $58,593,000 in
1998 to $13,277,000 at December 31, 1999. Working capital decreased
$43,553,000 from $45,378,000 at December 31, 1998 to $1,825,000 at December
31,1999.

   While not necessarily indicative of results of operations determined under
generally accepted accounting principles, Puerto Rico's, the Domestic Cinemas'
and Australia's (net of minority interests of $322,000) operating cash flow
(income before depreciation and amortization, corporate charges and asset
impairment and restructuring charges) totaled $312,000 in 1999. Other sources
of liquid funds in 1999 include $1,831,000 in Interest and dividend income, a
net increase in short term debt of $4,639,000, and real estate revenue of
$677,000.

   In addition to the payment of operating expenses, the principal use of cash
funds included the payment of $455,000 of dividends on the Company's Series A
Convertible Preferred Stock, purchases of property and equipment of
$37,139,000 ($24,063,000 which related to Australia, $5,623,000 which related
to Puerto Rico, and $7,453,000 relating to the Domestic Cinemas), the
investment of $1,739,000 in Property held for development of ($1,642,000
relates to New Zealand and $97,000 relates to Australia), the payment of
$7,938,000 in purchase commitments related to New Zealand real estate
development and increases in current liabilities of $3,350,000.

 1998

   Unrestricted cash and cash equivalent decreased $34,247,000 in 1998 from
$92,840,000 in 1997 to $58,593,000 at December 31, 1998. Working capital
decreased $41,748,000 from $87,126,000 at December 31, 1997 to $45,378,000 at
December 31, 1998.

   While not necessarily indicative of results of operations determined under
generally accepted accounting principles, CineVista's, the Domestic cinemas'
and Reading Australia's (net of minority interest of $343,000) operating cash
flow (income before depreciation and amortization and corporate charges)
totaled $177,000 in 1998. Other sources of liquid funds in 1998 include
$4,519,000 in interest and dividend income, a net increase in purchase
commitments of $4,550,000, and real estate revenue of $373,000.

   In addition to the payment of operating expenses, the principal use of cash
funds included the payment of $4,030,000 of dividends on the Company's
Convertible Preferred Stock, purchases of property and equipment of
$11,078,000 ($1,772,000 which related to Reading Australia, $7,106,000 which
related to CineVista, and $2,200,000 relating to the Domestic Cinemas), the
investment of $12,445,000 in property held for development (of which
($2,645,000) relates to Reading New Zealand and $9,800,000 relates to Reading
Australia), the payment of $1,370,000 relating to the acquisition of the Royal
George Theatre, the payment of $1,272,000 relating to a deposit and other
costs associated with the Cinema Transaction and the OBI Transaction, the
investment of $4,290,000 by Reading New Zealand in two joint ventures
including a loan of $587,000 to a joint venture partner with respect to
property on which Reading New Zealand intends to develop an entertainment
center, and investments in common stock of $2,211,000 (See Notes 2 and 7 to
the Consolidated Financial statements contained elsewhere herein).

                                      31
<PAGE>

 Commitments and Contingencies

   The Company's 1996 tax return is under review by the Internal Revenue
Service ("IRS"). While the Company believes its reporting position in such
period to be reasonable and the IRS has not alleged any deficiencies, no
assurances can be made that the Company's tax reporting position will be
upheld.

   Reading Australia has a contractual obligation to construct an
entertainment center in Frankston by May 27, 2001. Given the state of
development at this site, Reading Australia will not be able to complete its
contractual obligations in a timely manner. Development on the site has been
delayed, while Reading Australia has considered the viability of the project,
and evaluated other sites for cinema development in Frankston and other
potential uses for its current development site. The Company is currently
assessing its alternatives with respect to the project, but does not presently
believe that its failure to construct the entertainment center will result in
material liability to the Company. However, no assurances can be given in this
regard.

 Effects on Inflation

   The Company does not believe that inflation has a material effect upon its
existing operations.

Recent Accounting Pronouncements

   In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities" ("SFAS 133"). SFAS 133 is effective for fiscal years
beginning after June 15, 2000 and requires all derivatives to be recorded on
the balance sheet at fair value as either assets or liabilities depending on
the rights or obligations under the contract. SFAS 133 also establishes new
accounting methodologies for the following three classifications of hedges:
fair value, cash flow and net investment in foreign operations. Management
believes the adoption of SFAS 133 will not have a material impact on the
Company's financial position or results of operations.

   In December 1999, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin No. 101 ("SAB 101"), Revenue Recognition in
Financial Statements. SAB 101 provides guidance on applying generally accepted
accounting principles to revenue recognition issues in financial statements.
The Company is required to adopt SAB 101 in the fourth quarter of 2000.
Management believes that the Company is in compliance with the requirements of
SAB 101, and therefore does not expect that the adoption of SAB 101 will have
a material effect on the Company's results of operations or on its financial
position.

   In March 2000, the FASB issued Financial Interpretation No. 44 ("FIN 44").
"Accounting for Certain Transactions Involving Stock Compensation-an
Interpretation of APB No. 25". FIN 44 clarifies the application of APB 25 for
certain issues including: (1) the definition of employee for purposes of
applying APB 25, (2) the criteria for determining whether a plan qualifies as
a non-compensatory plan, (3) the accounting consequence of various
modifications to the terms of a previously fixed stock option or award, and
(4) the accounting for an exchange of stock compensation awards in a business
combination. FIN 44 was effective July 1, 2000, except for the provisions that
relate to modifications that directly or indirectly reduce the exercise price
of an award and the definition of an employee, which were effective after
December 15, 1998. The adoption of FIN 44 did not have a material impact on
the Company's financial position or results of operations.

Forward-Looking Statements

   From time to time, the Company or its representatives have made or may make
forward-looking statements, orally or in writing, including those contained
herein. Such forward-looking statements may be included in, without
limitation, reports to stockholders, press releases, oral statements made with
the approval of an authorized executive officer of the Company and filings
with the Securities and Exchange Commission. The words or phrases
"anticipates," "expects," "will continue," "estimates," "projects," or similar
expressions are intended to identify "forward-looking statements" within the
meaning of the Private Securities Litigation Reform Act of 1995.

                                      32
<PAGE>

   The results contemplated by the Company's forward-looking statements are
subject to certain risks, trends, and uncertainties that could cause actual
results to vary materially from anticipated results, including without
limitation, delays in obtaining leases and permits for new multiplex
locations, construction risks and delays, the lack of strong film product, the
impact of competition, market and other risks associated with the Company's
investment activities and other factors described herein.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

   The financial performance and results of operations of the Company may be
affected by changes in interest rates and currency exchange rates.

   Historically, the Company maintained most of its cash and cash equivalent
balances in Eurodollar time deposits (U.S dollar denominated deposits in banks
located outside of the United States) and in short-term money market
instruments with original maturities of six months or less. Eurodollar time
deposits are not readily marketable and therefore are not subject to price
risk due to changes in interest rates, although the Company may lose the
ability to realize the benefit of increased interest income if interest rates
were to rise. Other money market investments are subject to price risk and
will decline in value if interest rates increase. Due to the short-term nature
of such investments and the small amount of the Company's cash and cash
equivalents invested in such instruments, a change of 1% in short-term
interest rates would not have a material effect on the Company's financial
condition. The Company expended its remaining cash balances during 2000.
Thereafter, the Company anticipates funding its commitments with borrowed
funds and cash flow. The Company may, from time to time, elect to fix interest
rates on borrowed funds, however, no decision has been made at this time.

   Approximately 65% and 5% of the Company's net assets (assets less
liabilities) were invested in assets denominated in Australian dollars
(Reading Australia) and New Zealand dollars (Reading New Zealand),
respectively, at December 31, 2000 compared to 73% and 5% at December 31,
1999. At December 31, 2000, $2,852,000 of the Company's $16,446,000 in cash
and cash equivalents was invested in Australian and New Zealand dollars
compared to $9,770,000 of the $13,277,000 in Cash and cash equivalents for the
prior year. The Company has secured bank borrowings for developments planned
for 2001. Such borrowings are originated in the local currencies. Unless the
Company elects to hedge its foreign exchange exposure, approximately 42% of
the Company's net assets (based upon the amount at December 31, 2000) will
continue to be invested in assets subject to exchange fluctuations between the
U.S. and Australian and New Zealand dollars. At December 31, 1999
approximately 77% of the Company's net assets were invested in assets subject
to currency fluctuations. The Company has no current plan to hedge such
exposure.

   During 2000, the Company recognized an unrealized foreign currency
translation loss of approximately $11,885,000 (included as a component of
comprehensive loss in the Consolidated Statement of Shareholders' Equity
contained elsewhere herein) compared to an unrealized gain of approximately
$1,948,000 during 1999. The unrealized loss recorded during 2000 related to
the decrease in the value of the Australian and New Zealand dollars relative
to the U.S dollar of approximately 15.0% and 15.2%, respectively, between
December 31, 2000 and 1999. Conversely, the gain recognized in 1999 related to
an increase in the value of the Australian and New Zealand dollars relative to
the U.S. dollar of approximately 6.7% and 1.3%, respectively, between December
31, 1999 and December 31, 1998, and the corresponding effect upon the carrying
value of Reading Australia's and Reading New Zealand's assets. The exchanges
rates of the U.S dollar per Australian dollar were $0.5560 and $0.6543 at
December 31, 2000 and 1999, respectively, and the exchange rates of the U.S
dollar per New Zealand dollar were $0.4423 and $0.5215 at December 31, 2000
and 1999, respectively.

   During 1999 and 1998, the impact on income from operations of fluctuations
in the relative value of the U.S, the Australian and New Zealand dollars was
not material since most of the Company's projects were in their developmental
stages and the foreign dollar income was minimal. In September 2000, however,
Reading Australia opened the cinema portion of its Auburn development and
anticipates opening another development in 2001. As more of the Company's
cinemas exhibition business becomes concentrated in Australia and New Zealand
in 2001, the Company's income from operations may be significantly affected by
foreign currency exchange rate fluctuations.

                                      33
<PAGE>

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

                                     INDEX

<TABLE>
<CAPTION>
                                                                           Page
                                                                           ----
<S>                                                                        <C>
Consolidated Balance Sheets..............................................   35

Consolidated Statements of Operations for the Three Years Ended December
 31, 2000................................................................   36

Consolidated Statements of Cash Flows for the Three Years Ended December
 31, 2000................................................................   37

Consolidated Statements of Shareholders' Equity for the Three Years Ended
 December 31, 2000.......................................................   38

Notes to Consolidated Financial Statements...............................   39

Independent Auditors' Report--Deloitte & Touche LLP......................   80

Report of Independent Auditors--Ernst & Young LLP........................   81
</TABLE>

                                       34
<PAGE>

                  READING ENTERTAINMENT, INC. AND SUBSIDIARIES

                          CONSOLIDATED BALANCE SHEETS
                             (dollars in thousands)

<TABLE>
<CAPTION>
                                                      December 31, December 31,
ASSETS                                                    2000         1999
------                                                ------------ ------------

<S>                                                   <C>          <C>
Cash and cash equivalents (Note 1)..................    $ 16,446     $ 13,277
Amounts receivable, net.............................         970          409
Restricted cash.....................................       1,267          948
Inventories (Note 1)................................         267          316
Prepayments and other current assets................         874          931
Property held for sale (Note 6).....................       4,039        5,740
                                                        --------     --------
Total current assets................................      23,863       21,621
Due from affiliate..................................         --         1,000
Investments in unconsolidated affiliates (Note 7)...      13,268       13,098
Property held for development (Note 1)..............      25,158       31,624
Property and equipment--net (Note 8)................      51,809       57,854
Note receivable from joint venture partners (Note
 7).................................................         421        1,549
Other assets........................................       2,153        1,775
Goodwill, net of accumulated amortization of $2,062
 in 1999 (Notes 1, 5 and 19)........................         --         9,975
                                                        --------     --------
Total assets........................................    $116,672     $138,496
                                                        ========     ========

<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------

<S>                                                   <C>          <C>
Liabilities:
Accounts payable....................................    $  4,159     $  3,131
Accrued taxes.......................................       1,428          631
Accrued property costs and other....................       3,591        4,355
Film rent payable...................................       1,719        1,718
Notes payable and short-term debt (Note 10).........       4,476        8,617
Other liabilities...................................         654        1,344
                                                        --------     --------
Total current liabilities...........................      16,027       19,796
Notes payable (Note 10).............................      14,390        1,035
Other liabilities...................................       5,577        5,918
                                                        --------     --------
Total liabilities...................................      35,994       26,749
Minority interests..................................         389        2,064

Commitments and contingencies (Note 9)

Series A Convertible Redeemable Preferred Stock, par
 value $0.001 per share, stated value $7,000;
 Authorized, issued and outstanding--70,000 shares
 (Note 15)..........................................       7,000        7,000
Shareholders' equity:
Series B Convertible Preferred Stock, par value
 $0.001 per share, stated value $55,000; Authorized,
 issued and outstanding--550,000 shares (Note 15)...           1            1
Preferred stock, par value $0.001 per share:
 Authorized--9,380,000 shares: None issued..........         --           --
Common stock, par value $0.001 per share:
 Authorized--25,000,000 shares: Issued and
 outstanding--7,449,364 shares (Note 15)............           7            7
Additional paid-in capital (Note 7).................     137,407      138,637
Accumulated (deficit)...............................     (48,189)     (31,910)
Accumulated other comprehensive loss................     (15,937)      (4,052)
                                                        --------     --------
Total shareholders' equity..........................      73,289      102,683
                                                        --------     --------
Total liabilities and shareholders' equity..........    $116,672     $138,496
                                                        ========     ========
</TABLE>

          See accompanying notes to consolidated financial statements.

                                       35
<PAGE>

                  READING ENTERTAINMENT, INC. AND SUBSIDIARIES

                     CONSOLIDATED STATEMENTS OF OPERATIONS
                (dollars in thousands, except per share amounts)

<TABLE>
<CAPTION>
                                                   Year Ended December 31,
                                                  ----------------------------
                                                    2000      1999      1998
                                                  --------  --------  --------
<S>                                               <C>       <C>       <C>
Revenues
Theater
  Admissions....................................  $ 29,307  $ 27,604  $ 24,792
  Concessions...................................     9,706     8,450     7,625
  Advertising and other.........................     2,458     1,757     1,139
Real Estate.....................................       766       677       373
                                                  --------  --------  --------
                                                    42,237    38,488    33,929
Expenses
Theater costs...................................   (35,381)  (29,644)  (24,370)
Theater concession costs........................    (2,109)   (1,930)   (1,653)
Depreciation and amortization...................    (2,802)   (3,923)   (3,673)
General and administrative......................   (12,678)  (12,456)  (10,257)
Asset impairment and restructuring charges (Note
 5).............................................   (14,976)  (35,183)      --
                                                  --------  --------  --------
                                                   (67,946)  (83,136)  (39,953)
                                                  --------  --------  --------
Loss from operations............................   (25,709)  (44,648)   (6,024)

Other revenues (expenses)
Gain on sale of assets (Note 4).................    10,488       --        --
Equity (loss) earnings of affiliates (Note 7)...    (1,832)    2,539     1,070
Interest and dividend income....................     1,710     1,831     4,519
Other income (expense), net (Note 4)............     1,558       721      (642)
Interest (expense)..............................      (884)     (380)      --
                                                  --------  --------  --------
Loss before minority interests and income
 taxes..........................................   (14,669)  (39,937)   (1,077)
Minority interests..............................       (77)     (322)     (343)
                                                  --------  --------  --------
Loss before income taxes........................   (14,746)  (40,259)   (1,420)
Income taxes (Note 12)..........................    (1,078)     (923)     (986)
                                                  --------  --------  --------
Net loss........................................   (15,824)  (41,182)   (2,406)
Less: Preferred stock dividends and amortization
 of asset put option............................    (4,030)   (4,335)   (4,322)
                                                  --------  --------  --------
Net loss applicable to common shareholders......  $(19,854) $(45,517) $ (6,728)
                                                  ========  ========  ========
Basic and diluted loss per share (Note 1).......  $  (2.67) $  (6.11) $  (0.90)
                                                  ========  ========  ========
</TABLE>

          See accompanying notes to consolidated financial statements.

                                       36
<PAGE>

                  READING ENTERTAINMENT, INC. AND SUBSIDIARIES

                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                             (dollars in thousands)

<TABLE>
<CAPTION>
                                                    Year Ended December 31,
                                                   ----------------------------
                                                     2000      1999      1998
                                                   --------  --------  --------
<S>                                                <C>       <C>       <C>
Operating Activities
Net loss.........................................  $(15,824) $(41,182) $ (2,406)
Adjustments to reconcile net loss to net (cash
 used in) provided by operating activities:
  Depreciation...................................     2,440     2,544     2,084
  Amortization...................................       362     1,379     1,589
  Deferred rent expense..........................       434       395       217
  Write off of capitalized development costs.....         4       385       542
  (Gain) loss on sale of assets..................   (10,488)      273       634
  Asset impairment and restructuring charges.....    14,976    35,183       --
  Equity in loss (earnings) of affiliates........     1,832    (2,539)   (1,070)
  Minority interests.............................        77       322       343
  Changes in current assets and liabilities:
   (Increase) decrease in amounts receivable.....      (584)      292       636
   Decrease (increase) in inventories............         7       (65)      (45)
   (Increase) decrease in prepayments and other
    current assets...............................    (1,020)     (424)      742
   Increase (decrease) in accounts payable and
    accrued expenses.............................     3,051     1,525      (644)
   Increase (decrease) in film rent payable......       370       357      (284)
   (Decrease) increase in other liabilities......      (601)      (19)     (321)
  Other, net.....................................      (206)      595       --
                                                   --------  --------  --------
     Net cash (used in) provided by operating
      activities.................................    (5,170)     (979)    2,017
                                                   --------  --------  --------
Investing Activities
Purchase of property held for development........      (971)   (1,739)  (12,445)
Purchase of property and equipment, net..........   (18,708)  (37,179)  (11,078)
Decrease in purchase commitments.................       --     (7,938)   (3,397)
(Increase) decrease in restricted cash...........      (610)       44     3,664
Investment in joint ventures.....................      (152)     (164)   (2,601)
Loans from (to) joint venture partners...........       695      (111)     (594)
Investment in Citadel common stock...............       --        --     (2,211)
Investment in Royal George Theatre...............       --       (105)   (1,369)
Investment in New York Live Theaters and City
 Cinemas.........................................       --        --     (1,332)
Distributions from Joint Ventures................     1,027       --        --
Proceeds from sale of option to Citadel..........     1,000       --        --
Decrease in cash due to Angelika
 deconsolidation.................................      (636)      --        --
Proceeds from disposal of assets.................    18,197       --        --
                                                   --------  --------  --------
     Net cash used in investing activities.......      (158)  (47,192)  (31,363)
                                                   --------  --------  --------
Financing Activities
Proceeds from borrowings.........................    16,753     4,639       601
Minority interest distributions..................       (43)     (470)     (417)
Repayment of notes payable.......................    (6,519)     (739)     (766)
Payment of preferred stock dividends.............      (228)     (455)   (4,030)
Proceeds from minority partner of Australian
 joint venture...................................        28       278       --
                                                   --------  --------  --------
     Net cash provided by (used in) financing
      activities.................................     9,991     3,253    (4,612)
                                                   --------  --------  --------
Effect of exchange rate changes on cash and cash
 equivalents.....................................    (1,494)     (398)     (289)
                                                   --------  --------  --------
Increase (decrease) in cash and cash
 equivalents.....................................     3,169   (45,316)  (34,247)
Cash and cash equivalents at beginning of year...    13,277    58,593    92,840
                                                   --------  --------  --------
Cash and cash equivalents at end of period.......  $ 16,446  $ 13,277  $ 58,593
                                                   --------  --------  --------
</TABLE>

          See accompanying notes to consolidated financial statements.

                                       37
<PAGE>

                  READING ENTERTAINMENT, INC. AND SUBSIDIARIES

                CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY

                  Years Ended December 31, 2000, 1999 and 1998
                (dollars in thousands, except per share amounts)

<TABLE>
<CAPTION>
                                                     Series B                 Accumulated
                                  Common Stock   Preferred Stock   Additional  (Deficit)   Accumulated      Total
                                ---------------- -----------------  Paid-in    Retained   Comprehensive Shareholders'
                                 Shares   Amount  Shares   Amount   Capital    Earnings   Income (Loss)    Equity
                                --------- ------ --------- ------- ---------- ----------- ------------- -------------
<S>                             <C>       <C>    <C>       <C>     <C>        <C>         <C>           <C>
Balance at January 1, 1998....  7,449,364  $ 7     550,000  $   1   $138,637   $ 16,163     $ (4,323)     $150,485
Net loss......................                                                   (2,406)                    (2,406)
Comprehensive loss--Foreign
 currency translation.........                                                                (1,677)       (1,677)
                                                                                                          --------
Total comprehensive loss......                                                                              (4,083)
Series A & B preferred
 dividends declared...........                                                   (4,030)                    (4,030)
                                ---------  ---   ---------  -----   --------   --------     --------      --------
Balance at December 31, 1998..  7,449,364    7     550,000      1    138,637      9,727       (6,000)      142,372
Net loss......................                                                  (41,182)                   (41,182)
Comprehensive income--Foreign
 currency translation.........                                                                 1,948         1,948
                                                                                                          --------
Total comprehensive loss......                                                                             (39,234)
Series A & B preferred
 dividends declared...........                                                     (455)                      (455)
                                ---------  ---   ---------  -----   --------   --------     --------      --------
Balance at December 31, 1999..  7,449,364    7     550,000      1    138,637    (31,910)      (4,052)      102,683
Net loss......................                                                  (15,824)                   (15,824)
Comprehensive loss--Foreign
 currency translation.........                                                               (11,885)      (11,885)
                                                                                                          --------
Total comprehensive loss......                                                                             (27,709)
Series A & B preferred
 dividends declared...........                                                     (455)                      (455)
Decrease in equity of Citadel
 (See Note 7).................                                        (1,230)                               (1,230)
                                ---------  ---   ---------  -----   --------   --------     --------      --------
Balance at December 31, 2000..  7,449,364  $ 7     550,000  $   1   $137,407   $(48,189)    $(15,937)     $ 73,289
</TABLE>


          See accompanying notes to consolidated financial statements.

                                       38
<PAGE>

                          READING ENTERTAINMENT, INC.

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                               December 31, 2000

Note 1--Nature of the Business and Summary of Significant Accounting Policies

   In December 1999, Reading Entertainment Inc., a Delaware corporation, was
merged into a newly formed wholly owned subsidiary, Reading Entertainment,
Inc., a Nevada corporation. The purpose of the merger was to change the
domicile of the corporation from Delaware to Nevada. The Nevada corporation
was the surviving corporation and the corporation's operations, assets,
liabilities and capitalization were not changed as a result of the merger. As
used herein, the term "REI" refers to Nevada corporation. REI, together with
its subsidiaries and predecessors, are referred to as "Reading" or the
"Company."

   The Company is in the business of developing and operating multiplex
cinemas and entertainment centers in Australia and New Zealand. The Company
also operates cinemas in Puerto Rico, and until March 2001, in the United
States. After March 2001, the Company's only domestic cinema interest was its
passive 33.3% membership interest in the Angelika Film Center, LLC ("AFC") the
owner of the Angelika Film Center & Cafe located in the Soho district of
Manhattan (the NY Angelika"). This interest in AFC and these historic domestic
cinema operations are referred to herein as the "Domestic Cinemas." Reading's
current cinemas are owned and operated through Reading Cinemas of Puerto Rico,
Inc., a wholly-owned subsidiary, under the CineVista name in Puerto Rico
("CineVista" or the "Puerto Rico Circuit"); through Reading Entertainment
Australia Pty Ltd (collectively with its subsidiaries referred to herein as
"Reading Australia") under the Reading Cinemas name in Australia (the
"Australia Circuit"), and through a 50/50 joint venture in New Zealand under
the Berkeley Cinemas name. The Company's entertainment center development
activities in Australia and New Zealand are conducted through the affiliates
of Reading Australia in Australia and through affiliates of Reading New
Zealand Ltd. (collectively referred to herein as "Reading New Zealand") in New
Zealand. The Company operates in two business segments, cinema operations and
real estate development (see Note 3).

   Basis of Consolidation: The consolidated financial statements of REI and
subsidiaries include the accounts of REI and its majority-owned subsidiaries,
after elimination of all significant intercompany transactions, accounts and
profits. The Company's investments in 20% to 50% owned companies are accounted
for on the equity method. Investments in other companies are carried at cost.

   Accounting Principles: The Company's consolidated financial statements have
been prepared in accordance with accounting principles generally accepted in
the United States of America.

   Use of Estimates: The preparation of financial statements in conformity
with accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts
of revenues and expenses during the reporting period. Actual results could
differ from those estimates.

   Income Taxes: Deferred income taxes reflect the net effects of temporary
differences between the carrying amounts of assets and liabilities for
financial reporting purposes and the amounts used for income tax purposes.

   Cash Equivalents: The Company considers all highly liquid investments with
original maturities of three months or less at the time of acquisition to be
cash equivalents. Cash equivalents are stated at cost plus accrued interest,
which approximates fair market value, and consist principally of time
deposits, interest-bearing bank deposits, federal agency securities and other
short-term money market instruments.

   Inventories: Inventories are comprised of confection goods used in theater
operations and are stated at the lower of cost (first-in, first-out method) or
net realizable value.

                                      39
<PAGE>

                          READING ENTERTAINMENT, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


   Property held for development: Property held for development consists of
land (including land acquisition costs) acquired for the potential development
of multiplex cinemas and/or entertainment centers and held either for such
purposes or for other development purposes. Property held for development is
carried at cost and, at the time that construction of the related multiplex
cinema and/or entertainment center commences, is transferred to property and
equipment and accounted for as construction-in-progress.

   Property and Equipment: Property and equipment are carried at cost.
Depreciation of buildings, leasehold improvements and equipment are recorded
on the straight-line basis over the estimated useful lives of the assets or,
if the assets are leased, the remaining lease term (inclusive of renewal
options, if likely to be exercised), whichever is shorter. The estimated
useful lives are generally as follows:

<TABLE>
       <S>                                                           <C>
       Building and Improvements.................................... 20-40 years
       Equipment....................................................  3-15 years
       Furniture and Fixtures.......................................   3-7 years
       Leasehold Improvements....................................... 10-20 years
</TABLE>

   Construction-in-Progress and Property Development Costs: Construction-in-
progress and property development costs are comprised of direct costs
associated with the development of potential cinemas (whether for purchase or
lease) or entertainment center locations. Startup costs and other costs not
directly related to the acquisition of long term assets are expensed as
incurred. Amounts are carried at cost unless management decides that a
particular location will not be pursued to completion or if the costs are no
longer relevant to the proposed project. If such a judgment is made,
previously capitalized costs which are no longer of value are expensed.
Included in the Statement of Operations as "General and administrative
expenses" are such development expenses for the year ended December 31, 2000,
1999, and 1998 amounting to approximately $1,462,000, $682,000 and $545,000.

   Intangible Assets: Intangible assets are comprised of acquired beneficial
cinema leases used in CineVista's operations, and the cost in excess of net
assets acquired in the acquisition of certain domestic cinema assets.

   The amount of the CineVista purchase price ascribed to the beneficial
leases was determined by an independent appraiser computing the present value
of the excess of market rental rates over the rental rates in effect under
CineVista's leases at the time of the Company's acquisition of CineVista and
allocating such amount as a component of the purchase price of CineVista. The
beneficial leases were amortized on the straight-line basis over a period of
19.5 years. The remaining beneficial leases were written off in 1999 in
conjunction with asset impairment charges recorded in 1999 (see Note 5).

   The amount of the purchase price of the NY Angelika assets in excess of the
appraised fair value of the assets acquired, as determined by an independent
appraiser, was being amortized on the straight-line basis over a period of 20
years. Following the sale of a 50% membership interest of the NY Angelika to
National Auto Credit Inc. ("NAC") in April 2000 (see Notes 2 and 4).

   The purchase price of St. Anthony Main, another domestic cinema in
Minnesota, was being amortized on the straight-line basis over the remaining
life of the lease term which approximates four years. The remaining beneficial
lease of approximately $90,000 was written off in December 2000 in conjunction
with asset impairment charges recorded in 2000 (see Note 5). The Company has
no excess costs at December 31, 2000. The St. Anthony Main was sold in March
2001 (see Note 19).

   Advertising Costs: The Company expenses the costs of advertising as
incurred. Advertising expense was $1,816,000, $1,518,000 and $1,005,000 for
the years ended December 31, 2000, 1999 and 1998, respectively.

                                      40
<PAGE>

                          READING ENTERTAINMENT, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


   Impairment of Long Lived Assets: The Company reviews long-lived assets,
including intangibles, for impairment if events or changes in circumstances
indicate that the carrying amount of the assets may not be fully recoverable.
If the sum of the estimated future cash flows, undiscounted and without
interest charges, is less than the carrying amount of the asset, an impairment
loss is recognized on the amount by which the carrying value of the asset
exceeds its estimated fair value. The fair value of assets is determined as
either the expected selling price less selling costs or the present value of
the estimated future cash flows (see Note 5).

   Translation of Non-U.S. Currency Amounts: The financial statements and
transactions of Reading Australia's and Reading New Zealand's cinema and real
estate operations are maintained in their functional currency (Australian and
New Zealand dollars, respectively) and translated into U.S. dollars in
accordance with Statement of Financial Accounting Standards ("SFAS") No. 52,
"Foreign Currency Translation". Assets and liabilities of such operations are
denominated in their functional currency and translated at exchange rates in
effect at the balance sheet date. Revenues and expenses are translated at the
average exchange rate for the period. Translation adjustments are reported as
"Accumulated other comprehensive income", a component of Shareholders equity.

   The carrying value of Reading Australia's and Reading New Zealand's assets
will fluctuate due to changes in the exchange rate between the U.S. dollar and
the Australian dollar ($0.5560 and $0.6543 were the respective exchange rates
of U.S. dollars per Australian dollar at December 31, 2000 and 1999) and the
U.S. dollar and the New Zealand dollar ($0.4423 and $0.5215 were the
respective exchange rates of U.S. dollar per New Zealand dollar at December
31, 2000 and 1999). In the accompanying financial statements, balance sheet
accounts are translated into U.S. dollars at the exchange rates in effect on
the reporting date, and operating results are translated into U.S. dollars at
the average of the exchange rates in effect during each period reported.

   Loss Per Share: Net loss applicable to common stock shareholders reflects
the reduction for dividends declared or accumulated on the Company's Series A
Voting Cumulative Convertible Redeemable Preferred Stock (the "Series A
Preferred Stock"), and Series B Voting Cumulative Convertible Preferred Stock
(the "Series B Preferred Stock") (collectively, the "Convertible Preferred
Stock") and for amortization of the value of an estimate of an asset put
option (the "Asset Put Option"). The Asset Put Option was fully amortized in
2000 when the Asset Put Option expired unused (see Note 15).

   Basic loss per share on the REI common stock (the "Common Stock") is
calculated using the weighted average number of shares outstanding during the
periods presented. The weighted average number of shares used in the
computation of basic loss per share were 7,449,364 in each of the years ended
December 31, 2000, 1999, and 1998. Diluted loss per share is calculated by
dividing net loss by the weighted average common shares outstanding for the
period plus the dilutive effect of stock options, convertible securities and
the Asset Put Option. During the year ended December 31, 2000, the Company
recorded a net loss and therefore, the effect of these stock options was anti-
dilutive. Stock options to purchase 530,232, 652,232 and 617,232 shares of
common stock were outstanding during 2000, 1999 and 1998 at a weighted average
exercise price of $12.78, $13.37 and $13.37 per share, respectively. In
addition, the Asset Put Option had expired in 2000 and was not included in the
calculation of the diluted loss per share for the year ended December 31,
2000.

   Stock-Based Compensation: The Company accounts for stock-based employee
compensation arrangements in accordance with the provisions of Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees"
("APB 25") and complies with the disclosure provisions of Statement of Finan-
cial Accounting Standards No. 123, "Accounting for Stock-Based Compensation"
("SFAS 123"). Under APB 25, compensation cost is recognized over the vesting
period based on the difference, if any, on the date of grant between the fair
value of the Company's stock and the amount an employee must pay to acquire
the stock (See Note 11).

                                      41
<PAGE>

                          READING ENTERTAINMENT, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


   In March 2000, the FASB issued Financial Interpretation No. 44 ("FIN 44").
"Accounting for Certain Transactions Involving Stock Compensation-an
Interpretation of APB No. 25". FIN 44 clarifies the application of APB 25 for
certain issues including: (1) the definition of employee for purposes of
applying APB 25, (2) the criteria for determining whether a plan qualifies as
a non-compensatory plan, (3) the accounting consequence of various
modifications to the terms of a previously fixed stock option or award, and
(4) the accounting for an exchange of stock compensation awards in a business
combination. FIN 44 was effective July 1, 2000, except for the provisions that
relate to modifications that directly or indirectly reduce the exercise price
of an award and the definition of an employee, which were effective after
December 15, 1998. The adoption of FIN 44 did not have a material impact on
the Company's financial position or results of operations.

   New Accounting Pronouncements: In December 1999, the Securities and
Exchange Commission ("SEC") issued Staff Accounting Bulletin No. 101 ("SAB
101"), Revenue Recognition in Financial Statements. SAB 101 provides guidance
on applying generally accepted accounting principles to revenue recognition
issues in financial statements. The adoption of SAB 101 did not have a
material effect on the Company's results of operations or on its financial
position.

   Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting
for Derivative Instruments and Hedging Activities" is effective for all fiscal
years beginning after June 15, 2000. SFAS 133, as amended, establishes
accounting and reporting standards for derivative instruments, including
certain derivative instruments embedded in other contracts and for hedging
activities. Under SFAS 133, certain contracts that were not formerly
considered derivatives may now meet the definition of a derivative. The
Company will adopt SFAS 133 effective January 1, 2001. Management does not
expect the adoption of SFAS 133 to have a significant impact on the financial
position, results of operations, or cash flows of the Company.

   Reclassification: Certain amounts in previously issued financial statements
have been reclassified to conform with the current presentation.

Note 2--Related Party Transactions

 Management and Ownership Overlap

   There are significant cross ownerships between the Company, Craig
Corporation, Citadel Holding Corporation and Big 4 Ranch, Inc., as follows:

   Craig Corporation ("Craig Corp" and collectively with its corporate
predecessors and wholly-owned subsidiaries "Craig"), a publicly traded company
listed on the New York Stock Exchange, owns Common Stock and Series A and
Series B Convertible Preferred Stock (collectively the "Convertible Preferred
Stocks") comprising approximately 78% of the voting interest in REI.

   Craig and Reading each own stock in Citadel Holding Corporation, a publicly
traded company listed on the American Stock Exchange ("CHC" and collectively
with its corporate predecessors and consolidated subsidiaries "Citadel"). The
Company currently owns approximately 21.3% of the voting interests in CHC.
Craig owns approximately 11.5% of the voting interests of CHC directly, and
approximately 32.8% of such voting interests on a consolidated basis with the
Company. In addition, Citadel owns 70,000 shares of the Series A Convertible
Preferred Stock of REI, a 5% voting interest.

   Big 4 Ranch, Inc. ("BRI") is a publicly held company, but is not listed on
any exchange. Its sole asset is a 40% interest in three agricultural
partnerships (the "Agricultural Partnerships"), formed to hold approximately
1,600 acres of agricultural land in Kern County, California. The remaining 60%
interests are held 40% by Citadel and 20% by Visalia, LLC, a limited liability
company owned, directly or indirectly, by James J. Cotter and certain

                                      42
<PAGE>

                          READING ENTERTAINMENT, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

members of his family. The Company currently owns approximately 33.4% of the
equity interest in BRI. Craig currently owns approximately 16.4% of the equity
interest in BRI and, on a consolidated basis with the Company, approximately
49.8% of such equity interest. In addition, Cecelia Packing (a company owned
by Mr. Cotter, "Cecelia") and a trust for the benefit of one of Mr. Tompkins'
children own additional shares in BRI representing, when aggregated with the
shares held by the Company and Craig, more than a majority of the outstanding
shares of BRI. Big 4 Farming, LLC ("Farming") was formed to provide farming
services to the Agricultural Partnerships and is owned 80% by Citadel and 20%
by Visalia. The Company, as a consequence of its ownership of both CHC common
stock and BRI common stock, owns approximately 26% of the Agricultural
Partnerships.

   There are also substantial management overlaps between these companies.
James J. Cotter, the principal stockholder of Craig Corp, is the Chairman of
the Board of Directors and the Chief Executive Officer of REI, Craig Corp and
CHC. Mr. Cotter also serves as a managing director of each of the Agricultural
Partnerships and of Farming and is the managing member of Visalia. S. Craig
Tompkins, the Vice Chairman of the Board of Directors and Corporate Secretary
of REI and CHC is also a director and the President of Craig Corp.
Mr. Tompkins also serves as the President of Citadel Agriculture Inc., a
wholly owned subsidiary of CHC, and as a managing director of each of the
Agricultural Partnerships and Farming, and serves for administrative
convenience, as the assistant secretary of BRI and Visalia.

   Andrzej Matyczynski, formerly the Chief Administrative Officer of REI, was
also named the Chief Financial Officer effectively June 2, 2000 concurrent
with the resignation of James Wunderle. Mr. Matyczynski is also the Chief
Financial Officer and Treasurer of Craig Corp and CHC.

   Ellen Cotter, Vice President of Business Affairs of REI and Craig Corp, and
of CHC's cinema subsidiary is a member of Visalia and is the daughter of James
J. Cotter.

   Robert Loeffler, a member of the Board of Directors of the Company, and the
Chairman of the Audit Committee of TRI, also serves as a director and as a
member of the Audit Committees of Craig Corp and CHC.

   In 2000, REI, Craig Corp and CHC entered into a management agreement
whereby Craig Corp provides general and administrative service to the Company
and Citadel, from its centralized administrative office in Los Angeles. Craig
Corp is the employer of all general and administrative personnel and the costs
of such personnel are allocated between the three companies on an appropriate
basis, taking into account the amount of time spent by such personnel on the
business and affairs of the three companies. In 1999, prior to such a
management agreement, the Board of Directors of the Company determined it
appropriate to reimburse Craig Corp $580,000 following a review of the time
spent by Messrs. Cotter, Tompkins and certain administrative employees of
Craig for the benefit of the Company. These allocations are reviewed and
approved periodically by the outside directors of the three companies.

   There was no similar reimbursement with respect to 1998. In each of the
three years ended December 31, 2000, Mr. Cotter received directly from the
Company $150,000 per annum for his services as the Chairman of the Board of
Directors. In the two years ended December 31, 1999, Mr. Tompkins received
$180,000 per year directly from the Company as compensation. In addition, the
Company paid Citadel $138,000, $215,000 and $398,000 for the year ended
December 31, 2000, 1999 and 1998, respectively, for real estate consulting
services provided to the Company. With the implementation of the management
agreement structure, the Company will no longer be separately paying Citadel
for real estate consulting services.

                                      43
<PAGE>

                          READING ENTERTAINMENT, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


 BRI and the Agricultural Partnerships

   The Agricultural Partnerships use Farming to farm their properties. Farming
receives, in consideration of its services, reimbursement of its costs plus 5%
of the net revenues of the farming operations after picking, packing and
hauling. Farming, in turn, contracts with Cecelia for certain bookkeeping and
administrative services, for which it pays a fee of $6,000 per month. Cecelia
also packs fruit for the Agricultural Partnerships. The acquisition of the
properties owned by the Agricultural Partnerships was financed by a ten-year
purchase money mortgage in the amount of $4,050,000, a line-of-credit from
Citadel, and pro-rata contributions from the partners. In December 1998, the
Partnerships suffered a freeze which destroyed the 1998-1999 crop. The
Agricultural Partnerships had no funds to repay the line-of-credit from
Citadel, to fund the costs associated with production of a 1999-2000 crop, or
to complete the anticipated capital improvements other than to call upon the
partners for funding. BRI had no funds or resources with which to provide such
funding other than to call upon its separate line-of-credit from Citadel. That
line-of-credit has now expired. For the period from January 1999 to December
2000, Citadel and Visalia have provided the funding required by the
Agricultural Partnerships on an 80/20 basis. The management of Citadel and
Visalia currently intend to scale back farming operations until such
operations can be supported from the cash flow generated by the Big 4
Properties, while looking for a way to exit the citrus farming business. As of
December 31, 2000, Citadel and Visalia had advanced $3,909,000 and $634,000,
respectively, to the Agricultural Partnerships. The Board of Directors and
executive officers of BRI are comprised of three Craig directors, including
Margaret Cotter, James Cotter's daughter and a member of Visalia.

 City Cinema and OBI Transactions

   The Angelika Film Center LLC ("AFC") is owned jointly by National Auto
Credit, Inc. ("NAC"), Citadel and the Company. NAC owns 50% of AFC as a result
of a transaction on April 5, 2000 in which the Company exchanged 50% ownership
of AFC for 8,999,900 shares of NAC common stock and 100 shares of NAC
preferred stock (see Note 4). Citadel owns 16.7% of AFC and the Company owns
the remaining 33.3% interest. City Cinemas, an affiliate of Mr. James J.
Cotter and Michael Forman, managed the NY Angelika and two other domestic
cinemas owned by the Company pursuant to management agreements up until the
transfer of those management rights to Citadel in September 2000. The two
Domestic Cinemas referenced above were themselves subsequently transferred to
Citadel in March 2001. Robert F. Smerling, President of the Company also
serves in the same positions at Citadel Cinemas, Inc., a wholly-owned
subsidiary of Citadel.

   In December 1998, the Company entered into an agreement in principal
("Reading Agreement in Principal") with James J. Cotter and Michael R. Forman
providing for a series of transactions which contemplated the Company's
leasing or acquiring various cinemas and live theater properties held either
directly or by entities owned by Messrs. Cotter and Forman. In connection with
the execution and delivery of the Reading Agreement in Principal, the Company
made a $1,000,000 deposit.

   In May 2000, the Company, Citadel, and Messrs. Cotter and Forman entered
into an agreement ("Citadel Agreement"), in which the Company assigned its
rights and Citadel assumed the Company's obligations under the Reading
Agreement in Principal, subject to certain modifications agreed to by Messrs.
Cotter and Forman. Under that assignment, Citadel reimbursed the Company for
the $1,000,000 deposit. The transactions contemplated by the Reading Agreement
in Principal, as modified pursuant to negotiations between Citadel and Messrs.
Cotter and Forman, was closed in September 2000, and Reading has no further
obligations or liabilities under the Reading Agreement in Principal.

                                      44
<PAGE>

                          READING ENTERTAINMENT, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


 The Royal George Theatre Complex Transaction

   In March 1999, the Company acquired the Royal George Theater Complex,
located in Chicago, for approximately $3,000,000. In June 2000, Citadel lent
to the Company the funds needed to retire the purchase money note. On
September 22, 2000, the Company transferred to Citadel its interest in Royal
George Theatre LLC ("RGT"), the limited liability company formed by the
Company to acquire and operate the Royal George Theatre complex, for
$3,000,000, its approximate book basis, less an amount equal to the sum of (1)
the note from the Company to Citadel and (2) the difference between the short-
term assets and liabilities of RGT. The Company realized net proceeds of
$1,708,000 from the sale of its interest in RGT.

 The Angelika Film Center & Cafe Dallas Transaction

   In 1999, the Company entered into a lease of a to-be-constructed theater in
Dallas, known as the Angelika Film Center and Cafe Dallas ("Angelika-Dallas").
On September 22, 2000, the Company assigned that lease to Citadel. In
consideration of the assignment of the lease, Citadel paid to Reading
approximately $356,000 in reimbursement of its costs incurred through the
closing date in acquiring the leasehold and fitting out the theater, and
assumed the Company's obligations under the lease and under various agreements
relating to the fitting out of the theater. The Company has agreed that, in
the event the theater's EBITDA (earnings before interest, taxes, depreciation
and amortization) during the last twelve of the first twenty-four months
following the opening of the theater is less than that amount producing a 20%
theater level return on Citadel's investment in the theater, then the Company
will reimburse to Citadel that amount of Citadel's investment necessary to
produce such a 20% return for the twelve-months period; provided that, subject
to certain exceptions, Citadel's investment in the theater does not exceed
$2,300,000.

 Theater Management Agreements

   Prior to their transfer to Citadel in March 2001, two of the Company's
domestic cinemas were managed initially by City Cinemas and later by Citadel,
which acquired the management rights to these and all cinemas in September
2000. The management agreements applicable to these two domestic cinemas
provided for management fee equal to 2.5% of revenues. The NY Angelika was
likewise managed initially by City Cinemas, and, following its acquisition of
such management rights, by Citadel. The management agreement provides for the
payment of a minimum fee of $125,000 plus an incentive fee equal to 50% of
annual cash flow (as defined) over prescribed levels provided, however, that
the maximum annual aggregate fee cannot exceed 5% of the NY Angelika's
revenues. The Company paid $126,000, $449,000, and $488,000 pursuant to these
management agreements in 2000, 1999 and 1998, respectively.

 Love Janis LLC

   During the third quarter of 1999, the Company invested $109,000 to acquire
a 25% interest in a live theater production of the play Love, Janis which
played in the RGT. The play ran from August through November 1999 and was
closed. The Company wrote-off the investment of $109,000 in Love Janis LLC and
included such loss in Equity in earnings of affiliates for the year ended
December 31, 1999. James J. Cotter and Michael Forman (see Note 2) were also
investors in Love Janis LLC.

 Loans to Officers

   The Company loaned Robert Smerling, President, $105,000. The non-interest
bearing loan is payable upon demand.

                                      45
<PAGE>

                          READING ENTERTAINMENT, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


Note 3--Business Segments and Geographic Area Information

   The Company operates multiplex cinemas in Australia, New Zealand and Puerto
Rico, and is developing cinemas and cinema based entertainment centers in
Australia and New Zealand. Until March 2001, when it transferred all of its
domestic cinemas (other than its 33.3% membership interest in AFC) to Citadel,
the Company also owned and operated cinemas in the United States.

   The Company operates in two business segments, cinema development and
operations, and real estate development and operations (entertainment center
development and operating activities). The Company evaluates performance and
allocates resources based on several factors of which the primary financial
measure is operating income (loss) from operations. Accounting policies of the
business segments are the same as those described in the summary of
significant accounting polices in Note 1. Business segment assets are the
owned or allocated assets used in each geographic or functional area.

   The corporate component of income (loss) from operations includes corporate
general and administrative expenses and other income. Corporate assets consist
of corporate cash, property and equipment, certain intangibles and the
Company's investment in Citadel and AFC. However, the operating results of AFC
was consolidated into the Company's financial statements and reported as part
of cinema operations until the 50% sale of membership interest to NAC in April
2000. The following sets forth certain information concerning the Company's
two segments, real estate development and cinema operations for the three
years ended December 31, 2000 (dollars in thousands):

<TABLE>
<CAPTION>
                                                      Corporate
                              Real Estate   Cinema       and
                              Development Operations Eliminations Consolidated
                              ----------- ---------- ------------ ------------
   <S>                        <C>         <C>        <C>          <C>
   2000
   Revenues..................   $   539    $ 41,455    $   243      $ 42,237
   Operating (loss) income...    (6,074)    (13,360)    (6,275)      (25,709)
   Identifiable assets.......    66,652      23,385     26,635       116,672
   Depreciation and
    Amortization.............       559       2,176         67         2,802
   Capital expenditures......    16,907       2,439        333        19,679

   1999
   Revenues..................   $   297    $ 37,811    $   380      $ 38,488
   Operating (loss) income...    (3,389)    (31,503)    (9,756)      (44,648)
   Identifiable assets.......    61,962      50,969     25,565       138,496
   Depreciation and
    Amortization.............       128       3,773         22         3,923
   Capital expenditures......     9,569      29,547         15        39,131

   1998
   Revenues..................   $     0    $ 33,556    $   373      $ 33,929
   Operating (loss) income...    (3,197)      1,307     (4,134)       (6,024)
   Identifiable assets.......    42,125      57,247     72,915       172,287
   Depreciation and
    Amortization.............         0       3,598         75         3,673
   Capital expenditures......    12,445      11,011         67        23,523
</TABLE>

   Real estate capital expenditures are net of purchase commitments of
$8,066,000 for the year ended December 31, 1998, and the identifiable assets
for the real estate development includes investments in unconsolidated
affiliates of $2,847,000 and $3,608,000 at December 31, 1999 and 1998,
respectively.

                                      46
<PAGE>

                          READING ENTERTAINMENT, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


   Capital expenditures include purchases of property held for development of
$31,623,000 and $12,445,000 for the years ended December 31, 1999 and 1998,
respectively. The capital expenditures for the year ended December 31, 1999
have not been reduced by approximately $213,000 of proceeds from disposals.

   Identifiable assets include investments in unconsolidated affiliates.
Investment in unconsolidated affiliates amounted to (1) approximately
$1,099,000 and $2,141,000 at December 31, 2000 and 1999, respectively, for the
cinema operations; and (2) approximately $12,169,000 and $10,957,000 at
December 31, 2000 and 1999, respectively, for Corporate.

   The following table indicates the relative amounts of revenues from
operations and property, plant and equipment of the Company by geographic area
during the three years ended December 31, 2000 (dollars in thousands). The
Company has no export revenues.

<TABLE>
<CAPTION>
                                                         2000    1999    1998
                                                        ------- ------- -------
   <S>                                                  <C>     <C>     <C>
   Revenues:
     Australia......................................... $16,840 $ 9,332 $ 6,212
     New Zealand.......................................     539     297     --
     Puerto Rico.......................................  15,117  12,974  16,210
     United States.....................................   9,741  15,885  11,507
                                                        ------- ------- -------
       Total........................................... $42,237 $38,488 $33,929
                                                        ======= ======= =======

<CAPTION>
                                                         2000    1999    1998
                                                        ------- ------- -------
   <S>                                                  <C>     <C>     <C>
   Property, plant and equipment:
     Australia......................................... $62,896 $59,678 $29,420
     New Zealand....................................... $13,191 $14,853 $ 9,549
     Puerto Rico....................................... $ 3,036 $ 3,006 $18,389
     United States..................................... $ 1,883 $17,681 $ 8,125
                                                        ------- ------- -------
       Total........................................... $81,006 $95,218 $65,483
                                                        ======= ======= =======
</TABLE>

   Property, plant and equipment balances presented above include property
held for sale and property held for development. The property held for sale
amounted to (1) $1,581,000 and $2,893,000 at December 31, 2000 and 1999,
respectively, for the United States; (2) $2,847,000 at December 31, 1999 for
Australia, and (3) $2,458,000 at December 31, 2000 for New Zealand. The
property held for development amounted to (1) $20,186,000 and $23,702,000 at
December 31, 2000 and 1999, respectively, for Australia and (2) $4,972,000 and
$7,922,000 at December 31, 2000 and 1999, respectively, for New Zealand.

Note 4--Acquisition, Disposition & Development Activities

 Royal George Theater

   On March 18, 1999, the Company acquired a four-auditorium live theater
complex in Chicago which operates under the name "The Royal George Theatre"
for approximately $3,000,000 of which $1,180,000 was paid through the delivery
of a purchase money note secured by the theater and maturing in May 2000. The
theater was acquired in a wholly owned limited liability company, Royal George
Theater LLC ("RGT"). In June 2000, Citadel lent the Company $1,200,000 to
satisfy this indebtedness . On September 22, 2000, the Company sold RGT to
Citadel, for $3,000,000, the Company's approximate cost basis in the property,
less an amount equal to the sum of (1) the Citadel loan and (2) the difference
between the short-term assets and liabilities of RGT. The Company realized net
proceeds of $1,708,000 from the sale of its interest in RGT.

                                      47
<PAGE>

                          READING ENTERTAINMENT, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


 The Angelika Dallas Transaction

   In 1999, the Company entered into a lease of a to-be-constructed theater in
Dallas, known as the Angelika Film Center & Cafe Dallas ("Angelika-Dallas").
On September 22, 2000, the Company assigned that lease to Citadel. In
consideration of the assignment of the lease, Citadel paid to Reading
approximately $356,000 in reimbursement of its costs incurred to date in
acquiring the leasehold and fitting out the theater, and assumed the Company's
obligations under the lease and under various agreements relating to the
fitting out of the theater. The Company has agreed that, in the event the
theater's EBITDA (earnings before interest, taxes, depreciation and
amortization) during the last twelve of the first twenty-four months following
the opening of the theater is less than that amount producing a 20% theater
level return on Citadel's investment in the theater, then the Company will
reimburse to Citadel that amount of Citadel's investment necessary to produce
such a 20% return for the twelve-months period; provided that, subject to
certain exceptions, Citadel's investment in the theater does not exceed
$2,300,000.

 OBI and City Cinemas Transactions

   In December 1998, the Company entered into an agreement in principal
("Reading Agreement in Principal") with James J. Cotter and Michael R. Forman
providing for a series of transactions which contemplated the Company's
leasing or acquiring various cinemas and live theater properties held either
directly or by entities owned by Messrs. Cotter and Forman. In connection with
the execution and delivery of the Reading Agreement in Principal, the Company
made a $1,000,000 deposit.

   In May 2000, the Company, Citadel, and Messrs. Cotter and Forman entered
into an agreement ("Citadel Agreement"), in which the Company assigned its
rights and Citadel assumed the Company's obligations under the Reading
Agreement in Principal, subject to certain modifications agreed to by Messrs.
Cotter and Forman. Under that assignment, Citadel reimbursed the Company for
the $1,000,000 deposit. The transactions contemplated by the Reading Agreement
in Principal, as modified pursuant to negotiations between Citadel and Messrs.
Cotter and Forman, was closed in September 2000, and Reading has no further
obligations or liabilities under the Reading Agreement in Principal.

 Sale of Angelika Interest

   On April 5, 2000, the Company sold a 50% interest in AFC to NAC, which
resulted in the reduction of its ownership interest in AFC to 33.3%. AFC is
the owner of the Angelika Film Center & Cafe, located in the Soho district of
Manhattan. The 50% membership interest ("Angelika Interest") in AFC was
conveyed in exchange for 8,999,900 shares of the common stock of NAC,
representing approximately 25.9% of the outstanding common stock of NAC
(calculated after the issuance of such shares), and 100 shares of the Series A
Preferred Stock of NAC, representing 100% of such class ("Angelika
Transaction"). The Series A Preferred Stock had a liquidation preference of
$1.50 per share, was convertible into the common stock of NAC on a share for
share basis, was entitled to a dividend preference equal to any dividends
declared on the NAC common stock (determined on a per share basis), and
enjoyed certain special voting rights.

   The Company had a financial statement basis of approximately $4,923,000 in
the Angelika Interest. The sales price was determined to be approximately
$9,720,000 for financial reporting purposes, which was calculated using $1.08
per common stock share, the average per share price of NAC common stock for
the ten trading days prior to April 5, 2000, and $1.50 per share of the
preferred stock, the value of such shares. In the contract setting forth the
terms and conditions of the Angelika Transaction, however, the parties valued
the Angelika Interest and the shares issued in the transaction at $13.5
million (or $1.50 per share), and this valuation has been adopted by the
parties for tax purposes. The sale of the Angelika Interest to NAC resulted in
an accounting gain of approximately $4,797,000, including the $1,242,000 of
deferred gain (see Note 7).

                                      48
<PAGE>

                          READING ENTERTAINMENT, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


   As a result of its sale of the Angelika Interest, the Company's ownership
of AFC was reduced to 33.3%, which required that the Company's remaining
investment in AFC be accounted for by the equity method of accounting from the
date of disposition. Prior to the disposition date, the Company consolidated
AFC. The deconsolidation of AFC in April 2000 resulted in a decrease to the
Consolidated Balance Sheet captions as follows (dollars in thousands):

<TABLE>
     <S>                                                               <C>
     Cash............................................................. $  (636)
     Other assets.....................................................    (192)
     Property, plant and equipment....................................    (695)
     Cost in excess of net assets acquired............................  (9,840)
     Liabilities......................................................  (1,240)
     Minority liability...............................................  (1,670)
</TABLE>

   Also in April 2000, the Company received $500,000 from NAC for an option
that expired unexercised in May 2000. Accordingly, the Company recorded the
$500,000 as other income. On November 3, 2000, the Company sold to NAC
5,277,879 shares of the NAC common stock and all 100 shares of the NAC
preferred stock issued to it in the Angelika Transaction for $8,469,000. Then
in December 2000, the Company sold its remaining 3,722,021 shares for
$6,233,000, or approximately $1.67 per share. As a result of the repurchases,
the Company holds no NAC common stock as of December 31, 2000.

 Reading Australia

   In 1995, the Company commenced cinema development activities in Australia.
In 2000, Reading Australia opened two cinemas with 18 screens, one 8-screen
cinema on April 1, 2000 and one 10-screen cinema on September 7, 2000. In
Australia, at December 31, 2000, there are seven cinemas in leased facilities,
three in owned facilities and one at a managed facility, with a total of 81
screens.

 Puerto Rico

   The Company acquired CineVista in 1994. Since that time the Company has
opened four new cinemas with 34 screens. There were no cinemas that opened or
closed in 2000.

 New Zealand

   During 1998, Reading New Zealand Limited entered into two 50/50 joint
ventures, one of which currently operates thirteen screens in three locations.
The second joint venture owned a parcel of land in Wellington on which the
Company has now begun construction of an entertainment center featuring a 12
screen multiplex cinema. In July 1999, Reading New Zealand acquired 100%
ownership of the Wellington property. In 1998, Reading New Zealand acquired
ownership of (1) a property adjacent to the Wellington development site; (2) a
multi-story parking garage, also located adjacent to the Wellington
development site, and (3) a fifteen-acre site in a suburb of Auckland on which
it intended to develop a cinema and an entertainment center ("Takanini").
Development plans for the Takanini site have not matured, and the property is
under contract to be sold. The contract provides for a closing date of April
30,2001. The Company expects to close the sale at a gain of approximately
$22,000, net of disposal costs.

                                      49
<PAGE>

                          READING ENTERTAINMENT, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


Note 5--Asset Impairment and Restructuring Charges

 Domestic Theaters

   During the fourth quarter of 2000, the Company determined to sell its
remaining domestic cinema assets (excluding its 33.3% ownership interest in
AFC) and concurrently with this decision, wrote down the carrying value of its
four domestic cinemas (28 screens) to their estimated market value. The
estimated market value of approximately $1,706,000 was calculated using a cash
flow multiple of 6 applied on the aggregate cash flow generated from the four
cinemas in 2000. Included in the Consolidated Statement of Operations for the
year ended December 31, 2000 is approximately $11,743,000 of such write-down
(inclusive of approximately $90,000 and $125,000 of goodwill written off and
estimated disposal costs, respectively). Included in the Consolidated Balance
Sheet at December 31, 2000 is $1,706,000 of cinema assets (market value less
estimated disposal costs) as "Assets held for sale". In March 2001, those
assets were sold to Citadel for $1,706,000.

   In 1999, the Company wrote-off the entire carrying value of two of its
domestic cinemas totaling $136,000 (net of $86,000 to be paid to the Company
by the City of Buffalo, New York). In addition, after a review of the
estimated market value of certain domestic real estate held for sale, the
Company recorded a $203,000 impairment charge related to such real estate.

   During the fourth quarter of 1999, the Company adopted a plan and commenced
steps to relocate the Company's headquarters from Philadelphia to Los Angeles
and recorded a restructuring charge of $889,000 in 1999. The Restructuring
charge includes a provision for lease termination charges, duplicate office
and employee expenditures and employee severance obligations.

 Puerto Rico

   During the third quarter of 1999, the Company recorded an asset impairment
charge of $14,022,000 after CineVista wrote-off the entire carrying value of
the 8-screen cinema it operates at the Plaza Las Americas Mall (the "Plaza
Cinema"). Prior thereto, CineVista believed it had reached an agreement with
the landlord as to the terms of the lease with respect to the opening of a new
10-screen cinema at a second location in the Plaza. However, CineVista was
advised by the landlord that the new cinema lease was awarded to a third
party, CineVista's primary competitor in the Puerto Rican market. In light of
the adverse change in the Plaza Cinemas' business prospects upon the opening
of a competing state-of-the-art cinema in the same shopping mall, the Company
evaluated the recoverability of its investment in the Plaza Cinema and
determined that the entire carrying value of the Plaza Cinemas, $13,884,000
($11,838,000 in beneficial lease, $1,438,000 in leasehold improvements and
$1,009,000 in equipment, net of certain related lease liabilities of $401,000)
was impaired and was written-off. Also in the third quarter of 1999, CineVista
decided to close a 4-screen leased cinema and recorded an asset impairment
charge of $138,000, the difference of the carrying value of the cinema and the
appraised value of the leasehold interest. That cinema was closed in January
2001.

   During the fourth quarter of 1999, the Company decided it should exit the
Puerto Rico market and therefore wrote-down the carrying value of CineVista to
its estimated net realizable value, resulting in an additional asset
impairment charge of $17,308,000. The estimated net realizable value of
CineVista was determined by computing the net present value of CineVista's
estimated future cash flows. The discount rate utilized was determined based
upon an analysis of comparable sale transactions. In conjunction with the
asset impairment charge, the Company wrote-off the remaining beneficial lease,
$273,000, and created a $17,034,000 asset impairment reserve which is a
component of Property and equipment (see Note 8).

                                      50
<PAGE>

                          READING ENTERTAINMENT, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


 Reading Australia and Reading New Zealand

   During third and fourth quarters of 2000, the Company recorded an asset
impairment charge of approximately $3,233,000 relating to the Company's
investments in Australia and New Zealand. Of this amount, approximately
$2,068,000 related to the Whitehorse Property Group and the unit trust of
which the Whitehorse Property Group is the sole trustee (collectively "WPG")
(see Note 6), $1,141,000 related to Frankston, and $24,000 related to
Takanini.

   In early 2000, WPG determined to sell its shopping center and commenced
marketing the property for sale during the second quarter of 2000. Based upon
then estimates of the potential proceeds which could be expected from a sale
of the shopping center, and WPG's investment in the property, the Company
wrote down its investment in WPG by approximately $1,725,000. In the third
quarter of 2000, the Company determined that the Company's remaining
investment in WPG would not be recoverable, taking into account the
obligations of WPG, and the contracted sales price for the shopping center.
Accordingly, the Company reduced its investment in WPG to zero as of September
30, 2000.

 Leased Equipment

   In the fourth quarter of 1999, the Company was advised by the partnership
which manages the Company's portfolio of leased equipment that the market for
used computer equipment had deteriorated as the global Year 2000 compliance
efforts created an overabundance of used computer equipment. In addition, a
decision by a large lessee of the Company's computer equipment to upgrade
certain computer equipment, including equipment leased from the Company, is
also anticipated to have an effect upon the estimated residual value of the
portfolio. Based on discussions with computer equipment vendors, the Company
wrote-off the entire carrying value, $2,125,000, in the fourth quarter of
1999.

Note 6--Property Held for Sale

 Domestic Theaters

   During the fourth quarter of 2000, the Company determined to sell its
remaining domestic cinema assets (excluding its 33.3% membership interest in
AFC) and concurrently with this decision, wrote down the carrying value of its
four domestic cinemas (28 screens) to their estimated market value (see Note
5). The Company concluded the sale of the four domestic assets in question on
March 8, 2001. The sale was to Citadel at a sale price equal to the written
down value on the Company's books at December 31, 2000 of $1,706,000 and was
in the form of a two year note carrying interest at 8.0%.

 Whitehorse Property Group

   Reading Australia owns a 50% interest in WPG. The ownership is structured
as a joint venture with Burstone Victoria Pty Limited ("Burstone") which owns
the remaining 50% interest in WPG. WPG owns a shopping center located near
Melbourne, Australia (the "Whitehorse Center").

   Reading Australia paid $1,400,000 for its interest in WPG. In addition,
Reading Australia guaranteed a 50% interest in an existing bank loan in the
principal amount of $6,120,000, incurred by WPG in connection with its
purchase of the shopping center and secured by a first mortgage on the
shopping center ("WPG Loan"), and loaned to the principals of Burstone
approximately $1,600,000 to enable these individuals to buy out certain
minority interests in Burstone ("Burstone Loan"). The Burstone Loan was due
and payable on November 21, 1999 and is guaranteed by Burstone and is secured
by the borrower's interest in Burstone and by Burstone's interest in WPG. The
Company has taken legal actions against the Burstone's principals to collect
this loan which is currently in default.

                                      51
<PAGE>

                          READING ENTERTAINMENT, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


   In early 2000, WPG determined to sell its shopping center and commenced
marketing the property for sale during the second quarter of 2000. Based upon
then estimates of the potential proceeds which could be expected from a sale
of the shopping center, and WPG's investment in the property, the Company
wrote down its investment in WPG by approximately $1,725,000 during the three
months ended June 30, 2000.

   WPG has not yet been successful in selling the shopping center due to the
refusal of Burstone to agree to sell the shopping center at the price
currently being offered by a prospective qualified purchaser. On September 28,
2000, WPG was unable to repay the WPG Loan when the same became due. In light
of the position taken by Burstone, the Company has (1) commenced an action to
recover the Burstone Loan; (2) purchased in March 2001 the WPG Loan, and (3)
entered into an agreement to sell the shopping center to a potential purchaser
(subject to the satisfactory completion of due diligence by that potential
purchaser, and the procurement by Reading Australia of the right to sell the
shopping center over any ongoing objections by Burstone). Based upon the
contracted sales price for the shopping center, and taking into account the
obligations of WPG under the WPG Loan, management determined that the
Company's remaining investment in WPG would not be recoverable. The Company
wrote off its investment in WPG amounting to $343,000 in the third quarter of
2000.

   WPG's (net loss) earnings for the years ended December 31, 2000, 1999 and
1998 totaled approximately ($478,000), ($194,000) and $50,000, respectively.
Reading recognized 100% of such losses in 2000 and 1999 because it effectively
holds 100% of WPG due to its security interest in the WPG interest owned by
Burstone and in the shares of Burstone owned by the borrowers under the
Burstone Loan. These losses have been included in the Consolidated Statements
of Operations for the year ended December 31, 2000 as "Equity in (losses)
earnings of affiliates."

 Royal George Theatre

   In 1999, the Company determined that it would sell RGT. Accordingly,
$2,893,000, the Company's net carrying value of RGT was classified as Property
held for sale in the Consolidated Balance Sheet at December 31, 1999.

   On September 22, 2000, the Company transferred to Citadel its interest in
RGT, the limited liability company formed by the Company to acquire and
operate the Royal George Theatre complex, for $3,000,000, the Company's
approximate cost basis in the property, less an amount equal to the sum of (1)
the long-term liabilities of RGT and (2) the difference between the short-term
assets and liabilities of RGT. The Company realized net proceeds of $1,708,000
from the sale of its interest in RGT.

                                      52
<PAGE>

                          READING ENTERTAINMENT, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


Note 7--Investments in Unconsolidated Affiliates

   The tables below set forth the carrying values of the Company's equity
investments in unconsolidated affiliates, and the Company's share of their
earnings or losses, for the periods presented (dollars in thousands).

   The Company accounts for its investment in unconsolidated affiliates by the
equity method. The Company records its share of such earnings (loss) in the
Consolidated Statement of Operations as "Equity in earnings of affiliate" and
the carrying value of the Company's investment in unconsolidated affiliates
are recorded in the Consolidated Statement of Operations as "Equity in
earnings of affiliate" (dollars in thousands).

<TABLE>
<CAPTION>
                                                       December 31, December 31,
                                                           2000         1999
                                                       ------------ ------------
     <S>                                               <C>          <C>
     CHC..............................................   $ 8,811      $10,957
     NAC..............................................       --           --
     AFC..............................................     3,358          --
     NZ JV............................................     1,099        2,141
     BRI..............................................       --           --
                                                         -------      -------
                                                         $13,268      $13,098
                                                         -------      -------
</TABLE>

<TABLE>
<CAPTION>
                                                             Year Ended
                                                            December 31,
                                                        -----------------------
                                                         2000     1999    1998
                                                        -------  ------  ------
     <S>                                                <C>      <C>     <C>
     CHC............................................... $  (918) $2,799  $1,390
     NAC...............................................    (785)    --      --
     AFC...............................................     265     --      --
     NZ JV.............................................      84      20     --
     WPG (Note 5)......................................    (478)   (171)     26
     Love Janis........................................     --     (109)    --
     BRI...............................................     --      --     (346)
                                                        -------  ------  ------
                                                        $(1,832) $2,539  $1,070
                                                        -------  ------  ------
</TABLE>

 Citadel Holding Corporation

   At December 31, 2000, the Company owned 2,113,673 shares of common stock of
CHC representing an ownership interest of approximately 31.7%. In January
2000, Citadel reorganized under a new Nevada holding company. In that
transaction, the outstanding shares of CHC's Common Stock were converted into
0.8 shares of Class A Nonvoting Common Stock and 0.2 shares of Class B Voting
Common Stock. As a result, the common stock shares owned by the Company were
converted into 1,690,938 shares of Class A Nonvoting and 422,734 shares of the
Class B Voting common stock.

   On September 20, 2000, the CHC issued 2,622,466 shares of Class A Nonvoting
Common Stock and 655,616 shares of Class B Voting Common Stock to acquire OBI
which further reduced the Company's ownership to approximately 21.25%. In
accordance with the Securities and Exchange Commission's Staff Accounting
Bulletin No. 51, the Company decreased its additional paid-in capital by
approximately $1,230,000 to reflect the dilution in the Company's ownership of
CHC's common stock.

   The carrying value of the Company's investment at December 31, 2000 and
1999 approximate the Company's underlying equity in the net assets of Citadel
plus a $1,998,000 loan receivable from Craig held by Citadel (which amount is
deducted from Citadel's Shareholders equity for financial reporting purposes
as disclosed in Citadel's December 31, 2000 Annual Report on Form 10-K). The
closing price of CHC's Class A

                                      53
<PAGE>

                          READING ENTERTAINMENT, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Nonvoting and Class B Voting common stock at December 31, 2000 was $2.375 and
$2.5625 per share, respectively. Citadel's assets and liabilities totaled
$63,922,000 and $24,794,000, respectively, as of December 31, 2000.

 National Auto Credit, Inc. ("NAC") & Angelika Film Center LLC ("AFC")

   On April 5, 2000, the Company sold a 50% interest in AFC to NAC in exchange
for 8,999,900 shares of NAC common stock and 100 shares of NAC preferred stock
(see Note 10). Completion of this transaction (1) gave the Company a 25.9%
ownership interest in NAC, (2) resulted in a gain of $4,797,000 attributable
to the 50% of AFC sold to NAC, approximately $1,242,000 of which was deferred,
representing the gain attributable to the Company's ownership percentage of
NAC common stock, and (3) required that the accounts of AFC be de-consolidated
from those of the Company, with the Company's remaining 33.3% interest in AFC
accounted for by the equity method from the date of the sale.

   On November 3, 2000, the Company sold 5,277,879 shares of NAC common stock
and its 100 shares of NAC preferred stock to NAC, in exchange for a cash
payment of $8,469,000. On December 16, 2000, the Company sold its remaining
3,722,021 shares for approximately $6,223,000 and recognized the deferred gain
on the sale of the AFC. Following completion of these transactions, the
Company owned no NAC common stock at December 31, 2000.

 New Zealand Joint Ventures

   During the second quarter of 1998, Reading New Zealand entered into a 50/50
joint venture, with a cinema operator in New Zealand (the "NZ JV"). In
connection with the joint venture, the Company has made loans to the joint
venture of $1,200,000 in order to finance a portion of the acquisition price
of two multiplex cinemas and the underlying property acquisition and
construction costs of a cinema which the joint venture developed.

 Love Janis LLC

   During the third quarter of 1999, the Company invested $109,000 to acquire
a 25% interest in a live theater production of the play Love, Janis which
played in the RGT. The play ran from August through November 1999 and was
closed. The Company wrote-off the investment of $109,000 in Love Janis LLC and
included such loss in Equity in earnings of affiliates for the year ended
December 31, 1999. James J. Cotter and Michael Forman (see Note 2) were also
investors in Love Janis LLC.

 Big 4 Ranch, Inc.

   In December 1997, Citadel capitalized a wholly-owned subsidiary, BRI, with
a cash contribution of $1,200,000 and distributed 100% of the shares of BRI to
Citadel's common shareholders. The Company received 1,564,473 shares or 23.4%
of BRI. In September 1998, the Company acquired 661,700 additional
shares increasing its interest to 2,226,173 shares of common stock of BRI, an
ownership interest of approximately 33.4%. The carrying value of the Company's
interest in BRI was reduced to $0 in 1998. Accordingly, the Company did not
recognize any share of BRI's net loss in 2000 or 1999. BRI had negative equity
at December 31, 2000. The Company has no obligation to fund BRI's operating
losses.

                                      54
<PAGE>

                          READING ENTERTAINMENT, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


Note 8--Property and Equipment

   Property and equipment consisted of the following (dollars in thousands):

<TABLE>
<CAPTION>
                                                               December 31,
                                                             ------------------
                                                               2000      1999
                                                             --------  --------
   <S>                                                       <C>       <C>
   Land..................................................... $  2,598  $  3,015
   Buildings................................................   14,800    13,258
   Leasehold improvements...................................   28,779    29,539
   Equipment................................................   25,397    24,200
   Construction-in-progress development costs...............   16,193    11,137
                                                             --------  --------
                                                               87,767    81,149
   Accumulated depreciation.................................   (7,145)   (6,261)
   Provision for asset impairment (Note 5)..................  (28,813)  (17,034)
                                                             --------  --------
                                                             $ 51,809  $ 57,854
                                                             --------  --------
</TABLE>

Note 9--Commitments and Contingencies

 Minimum Lease Payments

   The Company determines annual base rent expense by amortizing total minimum
lease obligations on a straight-line basis over the lease terms. Base rent
expense under operating leases totaled $5,994,000, $5,274,000, and $4,670,000
in 2000, 1999 and 1998, respectively. In 2000, 1999, and 1998, contingent
rental expense under operating leases totaled $332,000, $336,000 and $134,000,
respectively.

   The Company conducts some of its cinema operations in leased premises.
Seven of Reading Australia's eleven operating multiplexes are in leased
facilities. At December 31, 2000, all of the Company's domestic and Puerto
Rico cinemas were operated in leased premises. The Company's cinema leases
have remaining terms inclusive of options of 10 to 50 years. Certain of the
Company's cinema leases provide for contingent rentals based upon a specified
percentage of theater revenues with a guaranteed minimum. Substantially all of
the leases require the payment of property taxes, insurance and other costs
applicable to the property. The Company also leases office space and equipment
under non-cancelable operating leases. All leases are accounted for as
operating leases.

   Future minimum lease payments by year and in the aggregate, under non-
cancelable operating leases consist of the following at December 31, 2000. The
Company has no leases which require capitalization (dollars in thousands).

<TABLE>
<CAPTION>
                                                                       Operating
                                                                        Leases
                                                                       ---------
     <S>                                                               <C>
     2001............................................................. $  4,914
     2002.............................................................    4,849
     2003.............................................................    4,759
     2004.............................................................    4,846
     2005.............................................................    4,863
     Thereafter.......................................................   76,499
                                                                       --------
       Total net minimum lease payments............................... $100,730
                                                                       --------
</TABLE>

   Included in the table above are the minimum lease payments relating to the
four domestic cinemas that were sold in March 2001.

                                      55
<PAGE>

                          READING ENTERTAINMENT, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


 Domestic

   The Company's affiliate, Citadel, as the holder of the $7,000,000 of Series
A Preferred Stock, has the right to require redemption of such stock during a
ninety day period commencing October 15, 2001 (see Note 15). In addition, the
Company is two quarters in arrears with respect to dividends owed on the
Series A Preferred Stock amounting to $228,000 (payable to Citadel) and the
Company had dividends in arrears amounting to $7,150,000 on its Series B
Preferred Stock (payable to Craig) at December 31, 2000. Dividends on the
Series A Preferred Stock were paid in March 2001.

   In 1999, the Company entered into a lease of a to-be-constructed theater in
Dallas, known as the Angelika Film Center and Cafe Dallas ("Angelika-Dallas").
On September 22, 2000, the Company assigned that lease to Citadel and has
agreed to reimburse Citadel portion of its investment in the cinemas, to the
extent needed to produce a 20% return on the investment during the second
operating year of that cinema (see Note 4).

   The City of Philadelphia (the "City") has asserted that the Company's North
Viaduct property requires environmental decontamination and that the Company's
share of any such remediation cost will aggregate approximately $3,500,000.
The Company presently is in discussions with the City involving a possible
conveyance of the property and believes that reserves related to the North
Viaduct are adequate (see Note 13).

   The Company's 1996 tax return is under review by the Internal Revenue
Service ("IRS"). While the Company believes its reporting position in such
period to be reasonable and the IRS has not alleged any deficiencies, no
assurances can be made that the Company's tax reporting position will be
upheld.

 Australia

   The Company has committed to development expenditures relating to cinema
and entertainment development projects (Chirnside and fit-out of Auburn and
Belmont) that have been approved for completion of approximately $5,226,000
all of which is expected to be funded in 2001. The Company has secured what it
believes to be adequate funding from the bank to complete its one pending
development project. Under the current terms, this loan is due and payable in
full in December 31, 2000. The Company has also entered into a contract to
build one entertainment center which is currently under review by the Company.
The extent of the Company's exposure to the other contracting party if it
fails to construct that entertainment center is uncertain. However, while no
assurances can be given, the Company believes that its exposure for damage
would not be material, were it to elect not to proceed with such construction.
There are no other development commitments in Australia.

 New Zealand

   The Company has succeeded in acquiring additional financing to fund its
development obligations at Wellington which commenced in December 2000. In New
Zealand, the Company has a $2,800,000 property purchase mortgage on its
Takanini property due in 2001, which will be repaid from the proceeds of its
sale.

Note 10--Bank Credit Facilities

   CineVista had a $5,000,000 line of credit (the "Line of Credit") which
expired on December 31, 2000. At December 31, 2000, $900,000 was outstanding
under the Line of Credit and the Line of Credit was paid in full subsequent to
yearend.

   In March 2000, Reading Australia entered into the Australian Line of Credit
with a major bank which provides for borrowings of up to A$25,000,000 for the
construction of an entertainment center and cinema in Sydney. The Australian
Line of Credit Agreement is secured by a pledge of substantially all of
Reading

                                      56
<PAGE>

                          READING ENTERTAINMENT, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Australia's assets and those of its 100% owned subsidiaries and requires
Reading Australia to maintain various financial covenants, restricts dividends
and limits additional borrowings. In December 2000, the bank approved an
extension on the credit facility to December 31, 2001 and an increase of the
Australian Line of Credit of A$5,000,000 for additional cinema development.
The Company is negotiating with the bank to extend the loan to December 2002.

   In December 2000, Reading New Zealand entered into a loan agreement with a
major New Zealand bank for borrowings of NZ$30,400,000 for the purpose of the
construction of the Wellington development and for the refinancing of the loan
on the Wellington site. The loan is secured by a mortgage over the Wellington
properties and pledge of the assets of Reading New Zealand and its
subsidiaries associated with the Wellington project.

   The Company's aggregate future principal loan payments are as follows
(dollars in thousands):

<TABLE>
       <S>                                                               <C>
       Year Ending December 31,
         2001........................................................... $ 4,476
         2002...........................................................  14,207
         2003...........................................................     183
                                                                         -------
                                                                         $18,886
                                                                         -------
</TABLE>

Note 11--Stock Option Plans

   As of December 31, 2000, the Company had options outstanding under two
stock option plans: the 1992 Non-qualified Stock Option Plan (the "1992 Plan,"
as amended in 1997) and the 1997 Equity Incentive Plan (the "1997 Plan"). Each
plan was approved by shareholders in its year of adoption.

   The 1992 Plan reserves 500,000 shares for grant and the 1997 Plan reserves
200,000 shares for grant. The exercise price, term and other conditions
applicable to each grant of options under the Company's two plans are
generally determined at the time of grant by the Compensation Committee of the
Board of Directors and may vary with each option grant. Generally, options
granted under both plans vest on the anniversary of the date of grant in four
equal, annual installments, 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.

   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 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 (the "Basic Options"); 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 (the "Convertible Preferred Options");
and 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 (the "Asset Put Options") which expired on May 14, 2000. Accordingly,
these options are no longer considered exercisable. All shares granted under
the Cotter Options have an exercise price of $12.80 per share.

                                      57
<PAGE>

                          READING ENTERTAINMENT, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


   Changes in the number of option shares available under the Plans are
summarized as follows:

<TABLE>
<CAPTION>
                                  2000                     1999                    1998
                         ------------------------ ----------------------- -----------------------
                                    Weighted Avg            Weighted Avg            Weighted Avg
                         Options   Exercise Price Options  Exercise Price Options  Exercise Price
                         --------  -------------- -------  -------------- -------  --------------
<S>                      <C>       <C>            <C>      <C>            <C>      <C>
1992 Plan:
  Outstanding at
   1/1/00...............  415,232      $13.76     360,232      $13.76     360,232      $13.76
  Canceled..............  (80,000)     $11.58     (15,000)     $12.80         --          --
  Granted...............      --          --       70,000      $ 6.34         --          --
                         --------      ------     -------      ------     -------      ------
    Outstanding at
     12/31/00...........  335,232      $12.78     415,232      $13.76     360,232      $13.76
                         --------      ------     -------      ------     -------      ------
1997 Plan:
  Outstanding at
   1/1/00...............  127,000      $12.81     147,000      $12.82     152,000      $12.80
  Canceled.............. (142,000)     $ 6.51     (20,000)     $12.88      (5,000)     $12.80
  Granted...............  100,000      $ 3.88         --          --          --          --
                         --------      ------     -------      ------     -------      ------
    Outstanding at
     12/31/00...........   85,000      $12.82     127,000      $12.81     147,000      $12.80
                         --------      ------     -------      ------     -------      ------
Cotter Options:
  Outstanding at Year
   End..................  110,000      $12.80     110,000      $12.80     110,000      $12.80
                         --------      ------     -------      ------     -------      ------
Total
  Outstanding at Year
   End..................  530,232      $12.78     652,232      $13.37     617,232      $13.37
                         --------      ------     -------      ------     -------      ------
  Exercisable at Year
   End..................  444,732      $12.79     453,357      $13.70     386,732      $13.70
                         --------      ------     -------      ------     -------      ------
</TABLE>

   The weighted average remaining contractual life of all options outstanding
at December 31, 2000 was approximately 4.0 years.

   The Company applies Accounting Principles Board Opinion No. 25, the
intrinsic value method, in accounting for the compensation expense of its
stock option plans. Under the intrinsic value method, no compensation expense
is recognized for stock option awards granted at or above fair market value.
Effective January 1, 1996, SFAS No. 123, "Accounting for Stock-Based
Compensation," encouraged adoption of a fair value based method for valuing
the cost of stock option grants. SFAS No. 123 allows companies to continue to
employ APB No. 25, but requires disclosure of pro forma net income and
earnings per share information reflecting the fair value approach to valuing
stock options and the corresponding increase in compensation expense in each
of the years that the company grants stock options. The Company granted
options in 1999 and no options were granted in 2000 or 1998. In computing the
pro forma effect of the grants of stock options granted in 1999, the Asset Put
Options and the Convertible Preferred Stock Options have been excluded since
the conditions precedent to the granting of such options have not occurred.
The fair value of these options was estimated at the respective dates of grant
using a Black-Scholes option pricing model employing the weighted average
assumptions in the following table:

<TABLE>
<CAPTION>
                                                             2000  1999    1998
                                                             ---- -------  ----
     <S>                                                     <C>  <C>      <C>
     Stock Option Exercise Price............................ $ -- $  6.34  $ --
     Risk Free Interest Rate................................   --    5.61%   --
     Expected Dividend Yield................................   --    0.00%   --
     Expected Option Life...................................   -- 5 years    --
     Expected Volatility....................................   --   25.01%   --
     Fair Value of Options..................................   -- $  2.11    --
</TABLE>

                                      58
<PAGE>

                          READING ENTERTAINMENT, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


   The pro forma effect of the issuance of these options would have been to
increase the "Net loss applicable to common shareholders" by approximately
$32,000 ($0.004 per share), $164,000 ($.02 per share), and $258,000 ($.03 per
share) in 2000, 1999, and 1998, respectively. The pro forma adjustments may not
be representative of future disclosures because the estimated fair value of
stock options is amortized to expense over the vesting period, and additional
options may be granted in future years. Further, SFAS 123 requires assumptions
by management regarding the likelihood of events on which the vesting of
contingent options is predicated.

Note 12--Income Taxes

   Loss before income taxes consists of the following components (dollars in
thousands):

<TABLE>
<CAPTION>
                                                     Year Ended December 31,
                                                    ---------------------------
                                                      2000      1999     1998
                                                    --------  --------  -------
     <S>                                            <C>       <C>       <C>
     United States................................. $ (2,553) $   (215) $ 4,917
     Foreign.......................................  (13,271)  (40,044)  (6,337)
                                                    --------  --------  -------
       Total....................................... $(15,824) $(40,259) $(1,420)
                                                    --------  --------  -------
</TABLE>

   Significant components of the provisions for income taxes attributable to
operations are as follows (dollars in thousands):

<TABLE>
<CAPTION>
                                                                 Year Ended
                                                                December 31,
                                                              -----------------
                                                               2000  1999  1998
                                                              ------ ----- ----
     <S>                                                      <C>    <C>   <C>
     Income taxes (benefit):
     Current
       United States......................................... $   62 $ --  $122
       Foreign...............................................    846   817  786
       State and local.......................................    170   106   78
                                                              ------ ----- ----
         Total income taxes (benefit)........................ $1,078 $ 923 $986
                                                              ------ ----- ----
</TABLE>

   Reconciliation of income taxes at United States statutory rates to income
taxes as reported are as follows:

<TABLE>
<CAPTION>
                                                          Year Ended
                                                         December 31,
                                                    ------------------------
                                                     2000      1999    1998
                                                    -------  --------  -----
   <S>                                              <C>      <C>       <C>
   Tax provision (benefit) at U.S. statutory
    rates.......................................... $(5,380) $(13,688) $(483)
   Foreign and U.S. losses not currently
    benefited......................................   4,383    13,688    605
   Foreign withholding taxes.......................     846       817    786
   State income taxes..............................     170       106     78
   Use of net operating loss carryforwards.........   1,059       --     --
                                                    -------  --------  -----
       Total income taxes (benefit)................ $ 1,078  $    923  $ 986
                                                    =======  ========  =====
</TABLE>

                                       59
<PAGE>

                          READING ENTERTAINMENT, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


   Carryforwards and temporary differences which give rise to the deferred tax
asset at December 31 are:

<TABLE>
<CAPTION>
                                                               2000      1999
                                                             --------  --------
   <S>                                                       <C>       <C>
   Net operating loss carryforwards......................... $ 19,367  $ 20,715
   Alternative minimum taxes................................    3,189     3,189
   Wrap Lease rental sale...................................    4,754     6,981
   Reserves and other, net..................................   21,288    16,314
                                                             --------  --------
     Gross deferred asset...................................   48,598    47,119
   Valuation allowance......................................  (48,298)  (47,199)
                                                             --------  --------
     Net deferred asset..................................... $    --   $    --
                                                             ========  ========
</TABLE>

   Based on an analysis of the likelihood of realizing the Company's gross
deferred tax asset (taking into consideration applicable statutory
carryforward periods), the Company concluded that under SFAS No. 109, a
valuation allowance for the entire amount was necessary at December 31, 2000
and 1999. The Company's federal tax net operating loss carryforwards expire as
follows:

<TABLE>
<CAPTION>
       Year                                                              Amount
       ----                                                              -------
       <S>                                                               <C>
       2002............................................................. $ 7,382
       2003.............................................................     589
       2007.............................................................   1,443
       2008.............................................................   1,155
       2009.............................................................      32
       2018.............................................................     311
       2019.............................................................   2,239
                                                                         -------
                                                                         $13,151
                                                                         =======
</TABLE>

   In addition to the federal net operating loss carryforwards, the Company
has Federal Alternative Minimum Tax ("AMT") credits of $3,189,000, which can
be carried forward indefinitely. Also, the Company has foreign net operating
loss carryforwards of $38,470,000 of which $17,862,000 are in Puerto Rico and
expire between 2002 and 2007 unless utilized prior thereto.

   The Company paid $83,000, $88,000 and $192,000 in income taxes in 2000,
1999, and 1998, respectively. The Company is subject to regular federal income
tax; however, due to its net operating loss carryforwards, the Company is only
required to pay AMT. AMT is calculated separately from the regular federal
income tax and is based on a flat rate applied to a broader tax base. Amounts
payable thereunder cannot be totally eliminated through the application of net
operating loss carryforwards.

   The Company's 1996 tax return is under review by the Internal Revenue
Service. While the Company believes its reporting position in such period to
be reasonable and the Service has not alleged any deficiencies, no assurances
can be made that the Company's tax reporting position will be upheld.

                                      60
<PAGE>

                          READING ENTERTAINMENT, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


Note 13--Legal Proceedings

 Certain Shareholder Litigation

   In September 1996, the holder of 50 shares of common stock commenced a
purported class action on behalf of the Company's minority shareholders in the
Philadelphia County Court of Common Pleas relating to the 96 Reorganization
and Stock Transactions. The complaint in the action (the "Complaint") named
REI, Craig Corp, two former directors of REI and certain of the then current
directors of REI as defendants. The Complaint alleged, among other things,
that the Independent Committee (set up to review the transactions), and the
current and former directors of REI breached their fiduciary duty to the
minority shareholders in the review and negotiation of the 96 Reorganization
and Stock Transactions and that none of the directors of REI were independent
and that they all were controlled by James J. Cotter, Craig Corp or those
controlled by them. The Complaint also alleged, in part, that the defendants
failed to disclose the full future earnings potential of the Company and that
Craig Corp would benefit unjustly by having its credit rating upgraded and its
balance sheet bolstered and that the value of the minority shareholders'
interest in the Company was diluted by the transactions.

   In November 1996, plaintiffs filed an Amended Complaint against all of the
REI's directors at that time, its two former directors and Craig Corp. The
Amended Complaint does not name REI as a defendant. The Amended Complaint
essentially restated all of the allegations contained in the Complaint and
contended that the named defendant directors and Craig Corp breached their
fiduciary duties to the alleged class. The Amended Complaint sought
unspecified damages on behalf of the alleged class and attorneys and experts'
fees. On December 9, 1997, the Court certified the case as a Class Action and
approved the plaintiff as Class Representative.

   On April 24, 1997, plaintiff filed a purported derivative action against
the same defendants. This action included claims substantially similar to
those asserted in the class action and also alleged waste of tax benefits
relating to the Company's historic railroad operating losses. The Company
moved to dismiss this case for failure by the plaintiff to comply with the
mandated procedures for bringing such an action. On January 23, 1998, the
Court dismissed the derivative action. The dismissal of the derivative action
does not affect the class action case, nor does it preclude reassertion to the
claims contained in the derivative action.

   On September 28, 1998, the defendants filed a motion for summary judgment.
In February 2000, the Court granted summary judgment against the Plaintiff and
in favor of all of the defendant directors. Craig Corp was not dismissed,
however, the Court agreed to reconsider Craig Corp's motion in light of its
decision to dismiss the claims against all of the defendant directors.
Subsequently, the Court entered summary judgment in favor of Craig Corp, and
the plaintiff appealed the Court's determinations with respect to all
defendants. The Company is advised that all defendants intend to defend
against the plaintiff's appeal of the Court's ruling.

 Redevelopment Authority of the City of Philadelphia v. Reading

   On December 12, 1997, the Redevelopment Authority filed an action in the
Philadelphia Court of Common Pleas which relates to the 1993 sale of the
Headhouse property by Reading to the Authority. Plaintiff has alleged
discovery of various contaminants--asbestos, PCB's lead paint--and alleged
past and future clean-up costs in excess of $1,000,000. The action was settled
in 2000.

 Whitehorse Center Litigation

   On October 30, 2000, Reading Australia commenced litigation in the Supreme
Court of Victoria at Melbourne, Commercial and Equity Division, against its
joint venture partner and the controlling stockholders of its joint venture
partner in the Whitehorse Center. That action is entitled Reading
Entertainment Australia PTY, LTD vs. Burstone Victoria PTY, LTD and May Way
Khor and David Frederick Burr, and was brought to collect

                                      61
<PAGE>

                          READING ENTERTAINMENT, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

on a loan made by Reading Australia to Ms. Khor and Mr. Burr, which loan was
guaranteed by Burstone Victoria PTY, LTD ("Burstone"). The defendants have
asserted certain set-offs and counterclaims, alleging, in essence, that
Reading Australia breached certain obligations it had to build a cinema at the
Whitehorse Center, causing the defendants substantial damages. The Company
believes that it has good and sufficient defenses to the defendants assertions
and counter claims. The case is currently in the discovery stage.

 Other Claims

   The Company is not a party to any other pending legal proceedings or
environmental action which management believes could have a material adverse
effect on its financial position. While the City of Philadelphia has asserted
that the Company's share of any environmental clean up costs related to its
North Viaduct Property would be in the range of $3,500,000, the Company does
not believe that it has any current obligation to commence such remediation
and believes such estimate to be inaccurate.

Note 14--Quarterly Financial Information (Unaudited)

   Quarterly financial information for 2000 and 1999 is summarized below:

<TABLE>
<CAPTION>
                                          First   Second    Third     Fourth
                                         Quarter  Quarter  Quarter   Quarter
                                         -------  -------  --------  --------
   <S>                                   <C>      <C>      <C>       <C>
   2000:
     Revenues........................... $11,387  $10,961  $ 10,848  $  9,041
     Net loss applicable to common
      shareholders......................  (3,292)  (1,728)   (4,241)  (10,593)
     Basic and diluted loss per share... $ (0.44) $ (0.23) $  (0.57) $  (1.43)

   1999:
     Revenues........................... $ 8,256  $ 9,974  $ 11,403  $  8,855
     Net loss applicable to common
      shareholders......................  (2,540)    (815)  (16,411)  (25,751)
     Basic and diluted loss per share... $ (0.34) $ (0.11) $  (2.20) $  (3.46)
</TABLE>

 Fiscal 2000

   The growth in revenues during first and second quarters of 2000 as compared
with the same periods during 1999 is generally due to increased number of
screens in operation in Puerto Rico and Australia during the 2000 periods,
partially offset by the decline in revenues as a result of the deconsolidation
of AFC after April 5, 2000 and the closure of one location with 8 screens in
June 2000. In addition, first and second quarter results include the following
non-recurring transactions: (1) an exchange transaction with NAC which
resulted in the sale of a 50% interest in the AFC and the acquisition of 25.9%
common stock interest in NAC. This exchange transaction resulted in a gain of
approximately $4,776,000 (including the deferred gain of approximately
$1,242,000); (2) a $1,725,000 and a $ 24,000 impairment loss to reflect the
uncertainty regarding the ultimate recovery of WPG and Takanini investments;
and (3) an increase in equity losses from the Company's ownership of NAC, WPG
and Citadel (see Note 7).

   Third quarter results include the following: (1) a write off of development
costs amounting to approximately $1,142,000 upon the Company's determination
that it would not proceed with development of one project in Australia; (2) an
additional $342,000 impairment write down relating to WPG assets to reduce the
carrying cost to zero; (3) insurance settlement proceeds of approximately
$949,000 received by CineVista; and (4) $500,000 of fee received from NAC
taken to income (previously recorded as deferred income).

   Fourth quarter results include (1) approximately $14,150,000 of proceeds
received from the sale of NAC common stock in November and December 2000 and
(2) approximately $11,743,000 in impairment write down of the Company's
domestic cinema circuit to its estimated market value (see Note 5).

                                      62
<PAGE>

                          READING ENTERTAINMENT, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


 Fiscal 1999

   First quarter revenues decreased from those recorded in the prior year's
first quarter due to the significant contribution the Company received from
the movie Titanic in 1998's first quarter. Third quarter results include a
$14,022,000 asset impairment charge and a full quarter of operating results of
two new cinemas opened in May. Fourth quarter results include an asset
impairment charge of $20,272,000, a restructuring charge of $889,000 and an
additional allocation of expenses charged to the Company by Craig of
approximately $580,000, plus a full quarter of results of a new cinema which
opened in September.

Note l5--Capitalization

 Common Stock

   Common Stock, par value $0.001, is traded on the Nasdaq National Market
system under the symbol RDGE The Articles of Incorporation include
restrictions on the transfer of Common Stock which are intended to reduce the
risk that an "ownership change" within the meaning of Section 382(g) of the
Internal Revenue Code of 1986, as amended, will occur, which change could
reduce the amount of federal tax net loss carryforwards available to offset
taxable income. The restrictions provide that any attempted sale, transfer,
assignment or other disposition of any shares of Common Stock to any person or
group who, prior to the transfer owns (within the meaning of the Code and such
regulations) shares of Common Stock or any other securities of REI which are
considered "stock" for purposes of Section 382, having a fair market value
equal to or greater than 4.75% of the value of all outstanding shares of REI
"stock" shall be void ab initio, unless the Board of Directors of the Company
shall have given its prior written approval. The transfer restrictions will
continue until January 1, 2003 unless earlier terminated by the Company's
Board of Directors.

 Reading Entertainment Series A and Series B Cumulative Convertible Preferred
 Stock

   Holders of the Convertible Preferred Stock are entitled to receive
quarterly cumulative dividends at the annual rate of $6.50 per share. In the
event of a liquidation of the Company, the holders of the Convertible
Preferred Stock will be entitled to receive the stated value of $100 per share
plus accrued and unpaid dividends before any payment is made to the holders of
the Common Stock. The Series B Preferred Stock ranks junior to the Series A
Preferred Stock in rights to dividend distributions and distributions in
liquidation. All of the Series A Preferred Stock is held by Citadel and all of
the Series B Preferred Stock is held by Craig.

   No dividends were declared or paid on the Series B Preferred Stock, all of
which is owned by Craig, during 2000 and 1999. With respect to dividends due
on the Series A Preferred Stock, all of which is held by Citadel, the Company
was two quarters in arrears at December 31, 2000. Accumulated dividends
related to the Series A and Series B Preferred Stock totaled $227,000 and
$7,150,000 at December 31, 2000. All dividends owed on Series A Preferred
Stock were paid in March 2001.

   Holders of the Convertible Preferred Stock are entitled to cast 9.64 votes
per share. In the event that dividends are not paid on either series of the
Convertible Preferred Stock for six consecutive quarters, the holders of such
series of the Convertible Preferred Stock will be entitled to elect one
director.

   Each share of Series A Preferred Stock is convertible into shares of Common
Stock at a conversion price of $11.50 per share and each share of Series B
Preferred Stock is convertible into shares of Common Stock at a price of
$12.25 per share, at any time after April 15, 1998. The shares of Series A
Preferred Stock are convertible prior to April 15, 1998 in the event that a
change in control of the Company occurs. The Company also has the right to
require conversion of the Series A Preferred Stock in the event that the
average market price of the Common Stock over a 180-day period exceeds 135% of
the conversion price of the Series A Preferred Stock.

                                      63
<PAGE>

                          READING ENTERTAINMENT, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

The Series B Preferred Stock has no mandatory conversion provisions. Citadel
has certain registration rights with respect to the shares of the Common Stock
to be received upon the conversion of the Series A Preferred Stock.

   The Company may, at its option, redeem the Series A Preferred Stock at any
time after October 15, 2001, in whole or in part, at a redemption price equal
to a percentage of the stated value (initially 108%, declining 2% per annum
until the percentage equals 100%) plus accrued and unpaid dividends to the
date of redemption. The holders of a majority of the Series A Preferred Stock
have the right to require REI to repurchase the Series A Preferred Stock at
the stated value plus accrued and unpaid dividends for a 90-day period
beginning October 15, 2001. In addition, the holders of the Series A Preferred
Stock may require the Company to repurchase the shares at the stated value
plus accrued and unpaid dividends in the event that the Company falls to pay
dividends on the Series A Preferred Stock in any four quarterly periods. In
the event of a change in control of the Company, the holders of a majority of
the Series A Preferred Stock may require redemption at a premium. The Series A
Preferred Stock has not been included as Shareholders' Equity in the Company's
Consolidated Balance Sheet due to the mandatory redemption provisions.

Note 16--Financial Instruments

   During the fourth quarter of 1997, the Company entered into several foreign
currency swaps and currency forward position with a major bank. The agreements
provided for the Company to receive $12,363,800 U.S. dollars ("USD") in return
for the delivery of $18,659,300 Australian dollars ("AUD") in January 1998.
The value of the contracts at December 31, 1997 was established by computing
the difference between the contractual exchange rates of the swap and forward
positions (AUD/USD) and the exchange rates in effect at December 31, 1997 and
an unrealized gain of $220,000 was recorded in 1997 from these transactions
which gain has been included in "Other income." During the first quarter of
1998, the currency positions and extensions thereof matured and the Company
incurred a loss of approximately $670,000 which has been included in the
Consolidated Statement of Operations as a component of "Other Expense." The
Company does not presently have any foreign currency positions.

Note 17--Supplemental Disclosure of Cash Flow Information

   During fiscal years 2000, 1999 and 1998, interest paid amounted to
approximately $767,000, $371,000 and $70,000, respectively. Income taxes paid
during fiscal years 2000, 1999 and 1998 amounted to $83,000, $96,000 and
$192,000, respectively.

   Non-cash investing activities during 2000 consisted of (1) the exchange of
50% interest in Angelika for equity investment in National Auto Credit, Inc.
(Note 4), (2) debt extinguished as a part of the Royal George Theatre sale
(Note 4), (3) $4,500,000 note payable to Sutton Hill Associate (Note 4), and
(4) SAB 51 loss (Note 7).

Note 18--Subsequent Event

 Cinema Closure

   On January 11, 2001, CineVista closed a 6-screen theater in Cayey.

 Sale of Cinema

   On March 8, 2001, the Company sold to Citadel the Company's leasehold
interests in four domestic cinemas for approximately $1,706,000, its
approximate book basis.

                                      64
<PAGE>

                          READING ENTERTAINMENT, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


 Proposed Consolidation of the Companies

   On March 15, 2001, the Boards of Directors of each of REI, Craig Corp. and
CHC considered management's proposal to consolidate REI, Craig Corp. and CHC
into a single public company and determined that it would be in the best
interests of their respective companies and stockholders to consummate such a
consolidation transaction, so long as the allocation of ownership of the
resultant consolidated entity among the equity holders of the constituent
entities was fair. However, in light of the overlapping management and
membership of the Boards of Directors of each company, and Mr. Cotter's status
as a controlling stockholder of each of the three companies, it was determined
to be appropriate to delegate management's proposal to the Conflicts
Committees of the three companies. Accordingly, the Boards of Directors of
each of the three companies delegated to their respective Conflict Committees
authority and responsibility to review and take such action as they determined
appropriate with respect to management's consolidation proposal, and
authorized such committees to retain such professional advisors as they may
require to carry out such delegated authority. These committees are composed
entirely of independent outside directors. It is hoped that these committees
will complete their work by the end of the second quarter 2001.

 Cinema Purchase

   On April 10, 2001, Reading Australia entered into an agreement to purchase
the land, property and operating rights to the Maitland Cinema Complex in New
South Wales, Australia, for approximately $1,700,000.

                                      65
<PAGE>

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
        FINANCIAL DISCLOSURE

   None

                                   PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

   The names of the directors, executive officers, and significant employees
of the Company, are as follows:

<TABLE>
<CAPTION>
               Name             Age                  Position
               ----             ---                  --------
   <C>                          <C> <S>
   James J. Cotter(1)*.........  63 Chairman of the Board, Chief Executive
                                    Officer

   S. Craig Tompkins(1)........  50 Vice Chairman of the Board and a Director

   Robert M. Loeffler(2).......  78 Director

   Kenneth McCormick(2)(3)(4)..  49 Director

   John Hunter(1)(2)(3)(4).....  42 Director

   Robert F. Smerling..........  65 President and a Director

   Andrzej Matyczynski.........  48 Chief Financial Officer and Treasurer

   Brett Marsh.................  54 Vice President--Real Estate

   Ellen Cotter*...............  35 Vice President--Business Affairs

   Neil Pentecost..............  43 Chief Operating Officer, Australia and New
                                    Zealand

   David Lawson................  43 Director of Real Estate Development,
                                     Australia and New Zealand
</TABLE>

 *  Ms. Ellen Cotter is the daughter of Mr. James J. Cotter.

(1) Member of the Executive Committee.

(2) Member of the Audit Committee.

(3) Member of the Compensation Committee.

(4) Member of the Conflicts Committee.

   Mr. Cotter has been Chairman of the Board of Directors since December 1991
and a director since September 1990. Mr. Cotter has been Chairman of the Board
of Craig Corp. since 1988 and a director since 1985. Mr. Cotter has been
Chairman of the Board and a director of CHC since 1991 and the Chief Executive
Officer of Citadel since August 1999. Mr. Cotter is Chairman of the Board and
a director of Citadel Agricultural, Inc. ("CAI"), a wholly-owned subsidiary of
CHC and a member of the Management Committee of each of the three agricultural
partnerships which constitute the principal assets of CAI (the "Agricultural
Partnerships"), and Chairman of the Board and a member of the Management
Committee of Big 4 Farming LLC ("Farming"), a farm management company, 80%
owned by Citadel and formed to manage the properties owned by the Agricultural
Partnerships. Also, Mr. Cotter has served since December 1997 as the Managing
Director of Visalia LLC (a company owned, directly or indirectly, by Mr.
Cotter and by certain members of his family, "Visalia"), which holds a 20%
interest in each of the Agricultural Partnerships and a 20% interest in
Farming. Mr. Cotter has been a director and Chief Executive Officer of
Townhouse Cinemas Corporation (motion picture exhibition) since 1987 and has
been the a director of the Decurion Corporation (real estate and motion
picture exhibition) and of Pacific Theaters, Inc. (motion picture exhibition),
a wholly owned subsidiary of Decurion, since 1969. Mr. Cotter is the general
partner of a limited partnership which is, in turn, the general partner of
Hecco Ventures, a California general partnership engaged in the business of
investing in securities, and the holdings of which include shares representing
approximately 17.5% of the voting power of Craig Corp. Mr. Cotter was a
director of Stater Bros. Holdings Inc. and its predecessors from 1987 until
September 1997.

                                      66
<PAGE>

   Mr. Tompkins has been the Vice Chairman since January 1997 and Corporate
Secretary since December 1999. Mr. Tompkins has been a director of the Company
since March 1994 and was President of the Company from March 1993 through
December 1996. Mr. Tompkins is also President and Director of Craig Corp and
has served in such positions since March 1, 1993. Mr. Tompkins has been a
director CHC since May 1993, the Vice Chairman since July 1994 and Corporate
Secretary of CHC since September 1994. Mr. Tompkins is also President and a
director of Citadel Agricultural Inc. and a member of the Management Committee
of each of the Agricultural Partnerships and of Big 4 Farming LLC. Mr.
Tompkins also serves as an Assistant Secretary of Visalia and Big 4 Ranch Inc.
for administrative convenience. Mr. Tompkins was elected to the Board of
Directors of G&L Realty Corporation, a New York Stock Exchange-listed real
estate investment trust in December 1993, and currently serves as the Chairman
of the Audit Committee of that REIT. Prior to joining the Company,
Mr. Tompkins as a partner in the law firm of Gibson, Dunn & Crutcher. Mr.
Tompkins has been a director of Fidelity Federal Bank, FSB, since April 2000,
where he serves on the Audit and Compensation Committees.

   Mr. Loeffler has been a director of the Company since July 1999, is
Chairman of the Audit Committee. Mr. Loeffler became a director of Craig Corp
in February 2000 and is a member of its Audit Committee. Mr. Loeffler also has
served as a director of CHC since March 2000. Mr. Loeffler served as a
director of PaineWebber Group, Inc. from 1978 to 2000. Mr. Loeffler is a
retired attorney and serves as a counsel to the California law firm of Wyman
Bautzer Kuchel & Silbert from 1987 to March 1991. He was Chairman of the
Board, President and Chief Executive Officer of Northview Corporation from
January to December 1986.

   Mr. McCormick has been a director of the Company since July 1999 and is a
member of the Conflicts Committee and the Compensation Committee. During 1999,
Mr. McCormick served as the Senior Executive Vice President of Metro-Goldwyn-
Meyer, Inc., responsible for strategic development. Prior to joining
Metro-Goldwyn-Meyer, Mr. McCormick was a managing director of J. P. Morgan &
Company for more than the prior five years. Mr. McCormick is currently self-
employed as a financial consultant.

   Mr. Hunter was elected a director of the Company on January 19, 2001 and
serves as a member of the Executive, Audit, Compensation, and Conflicts
Committees. John Hunter joined The Decurion Corporation, parent company of
Pacific Theatres Entertainment Corp., as Chief Financial Officer and Treasurer
in early 1994. Mr. Hunter came to Decurion Coporation after fifteen years of
experience in various financial and operations positions within the
publishing, direct mail and video industries. In addition to his duties as
Chief Financial Officer and Treasurer, he has served as head of Theater
Construction, Information Systems and Human Resources. Hunter received a
Bachelor of Arts degree from the University of California at Berkeley. He
serves as a member of the Board of Directors for the Mental Health Association
of Los Angeles County, where he is Chairman of its finance committee, and is
also a member of the Board of Directors of The Variety Club of Southern
California.

   Mr. Smerling has been a director since September 1997 and President of the
Company since January 1997. Mr. Smerling has served as President of the
Company's various domestic and Puerto Rican exhibition subsidiaries since
1994. Mr. Smerling served as President of Loews Theater Management Corporation
form May 1990 until November 1993. Mr. Smerling also served as President and
Chief Executive Officer of City Cinemas Corporation ("City Cinemas"), a motion
picture exhibitor located in New York City from November 1993 to September
2000. Since September 2000, Mr. Smerling has served as the President of
Citadel Cinemas, Inc., a wholly owned subsidiary of CHC.

   See biographical information for Messrs. Matyczynski, Smerling, Marsh,
Lawson and Pentecost and Ms. Ellen Cotter in Item 11. Executive Compensation
Table.

Director Compensation

   Directors who are not employees of the Company receive an annual retainer
of $24,000, except for the Chairmen of the Audit Committee, the Conflicts
Committee, and the Compensation Committee, each of who receives an annual
retainer of $26,000. The Chairman of the Board receives an annual retainer of
$150,000. No separate fees were paid in 1999 for meetings of the Board or
committee meetings. With respect to the period from August 1, 1999 through
July 31, 2000, the directors' fees for Messrs. Braly, Loeffler and McCormick
were increased to $52,000 to reflect the extra time required for these new
directors to become acquainted with the Company and in connection with the
performance of their responsibilities as members of the Conflicts Committee.

                                      67
<PAGE>

ITEM 11. EXECUTIVE COMPENSATION

Summary Compensation Table

   Effective January 1, 2000, Craig Corp became the management company for the
Company and CHC. Pursuant to this arrangement, substantially all executive
officers and administrative employees (excluding consultants and directors)
became employees of Craig Corp. At the same time, Craig Corp entered into
management agreements with the Company and CHC pursuant to which all of the
general and administrative costs paid by Craig Corp are allocated to each
company. Accordingly, subsequent to December 31, 1999, the majority of the
Company's executives and general and administrative employees are not paid
directly by the Company. The names of the executive officers of the Company
are as listed below in the summary compensation table that sets forth the
compensation paid by the Company for the years ended December 31, 2000, 1999,
and 1998 for the service of each of the most highly compensated executive
officers of the Company.

<TABLE>
<CAPTION>
                                                                         Long Term
                                            Annual Compensation         Compensation
                                     ---------------------------------- ------------
                                                                         Securities
                                                                         Underlying
                                                                           Stock
                                                           Other Annual   Options       All Other
    Name and Principal Position      Year  Salary   Bonus  Compensation   Granted    Compensation(11)
    ---------------------------      ---- -------- ------- ------------ ------------ ----------------
<S>                                  <C>  <C>      <C>     <C>          <C>          <C>
James J. Cotter(2).................. 2000 $196,000     --    $150,000       --               --
 Chairman of the Board and           1999      --      --    $150,000       --               --
 Chief Executive Officer             1998      --      --    $150,000       --               --

Scott A. Braly(3)................... 2000 $ 26,264     --         (1)       --               --
 Chief Executive Officer

S. Craig Tompkins(4)................ 2000 $246,904     --                   --               --
 Corporate Secretary and Vice        1999 $180,000     --         (1)       --           $ 2,940
 Chairman of the Board               1998 $180,000     --         (1)       --               --

Andrzej Matyczynski(5).............. 2000 $100,800 $ 6,720        (1)       --           $ 2,453
 Chief Financial Officer and         1999      --      --         (1)       --               --
 Treasurer

Robert F. Smerling(6)............... 2000 $175,000     --    $ 20,415       --               --
 President of Reading/City Cinemas   1999 $175,000     --    $ 20,415       --               --
 and Citadel Cinemas, Inc.           1998 $175,000     --    $ 20,415       --               --

Ellen M. Cotter(7).................. 2000 $163,800     --         (1)       --               --
 Vice President, Business Affairs    1999 $150,000     --         (1)       --           $ 4,800
                                     1998 $ 80,770 $25,000        (1)       --           $ 2,423

Brett Marsh(8)...................... 2000 $ 95,200 $ 9,520        (1)       --           $ 4,149
 Vice President of Real Estate       1999 $162,500     --         (1)       --               --
                                     1998 $162,500 $30,000        (1)       --               --

David Lawson(9)..................... 2000 $186,000     --         (1)       --           $14,000
 Director of Real Estate Development 1999 $177,600     --         (1)       --           $12,400
 Australia and New Zealand           1998      --      --         --        --               --

Neil Pentecost(10).................. 2000 $ 91,600     --         (1)       --           $10,200
 Chief Operating Officer             1999 $ 32,000     --         (1)       --           $ 3,500
 Australia and New Zealand           1998      --      --         --        --               --
</TABLE>

 (1) Excludes perquisites if the aggregate amount thereof is less than
     $50,000, or 10% of salary plus bonus, whichever is less.

 (2) Mr. Cotter is paid a retainer of $150,000 from the Company for his
     services as the Chairman of the Board. Mr. Cotter, however, does not
     receive separate compensation for serving as the Chief Executive Officer
     of the Company. Amounts shown do not include amounts paid by CHC for
     director's fees of $45,000 annually nor a bonus of $200,000 in 1998 paid
     for services provided to CHC. In addition, the Company reimbursed Craig
     Corp for approximately 56% or $196,000 of the $350,000 retainer that it
     paid to Mr. Cotter.

                                      68
<PAGE>

 (3) Mr. Braly was named the Chief Executive Officer of the Company, Craig,
     and Citadel, effective October 16, 2000 and resigned from all three
     companies effectively December 27, 2000. The salary shown above for the
     year ended December 31, 2000 reflects approximately 56% of Mr. Braly's
     compensation which was allocated to the Company. Mr. Braly's total
     compensation earned in aggregate with respect to his employment contract
     with Craig Corp totaled approximately $46,900.

 (4) Mr. Tompkins was elected as the President of REI and was appointed to the
     Board of Directors of REI on February 26, 1993. On the same date, Mr.
     Tompkins was elected as the Vice Chairman and a member of the Board of
     Directors of Craig Corp. Mr. Tompkins was elected to the Board of
     Directors of CHC in 1993 and was named Vice Chairman of the Board in July
     1994. Mr. Tompkins has served as the Corporate Secretary of CHC since
     August 1994 and as the Principal Accounting Officer of that Company from
     August 1994 to November 1999. Mr. Tompkins became the Vice Chairman of
     the Board of Directors of REI and the Corporate Secretary of REI in
     January 1997. While no formal written agreement exists as to the terms of
     Mr. Tompkins' employment by REI and Craig Corp, Mr. Tompkins is entitled
     to receive his annual base salary for a period of one year in the event
     that his employment is involuntarily terminated and no change of control
     has occurred. Mr. Tompkins is entitled to a severance payment equal to
     two years his base salary in the event of a change of control of Craig
     Corp, and to a two-year severance payment in the case of a change of
     control of REI. The salary shown above for the years ended December 31,
     2000 reflects approximately 56% of Mr. Tompkin's compensation which was
     allocated to the Company (excludes amounts paid by Citadel for director's
     fees and a bonus of $40,000 paid in 1998 for services provided to
     Citadel). Mr. Tompkins' total compensation earned in aggregate totaled
     approximately $410,900 for the year ended December 31, 2000.

 (5) Mr. Matyczynski was named the Chief Administrative Officer of the Company
     effective November 19, 1999. On that date, Mr. Matyczynski also became
     the Chief Financial Officer of CHC and Craig Corp. Mr. Matyczynski was
     named the Chief Financial Officer of the Company effective June 2, 2000,
     concurrently with the resignation of James Wunderle who had held that
     position. Prior to joining the Company, Mr. Matyczynski was associated
     with Beckman Coulter and its predecessors for more than the past twenty
     years and also served as a director for certain Beckman Coulter
     subsidiaries. Pursuant to the employment agreement with Craig Corp, Mr.
     Matyczynski is entitled to a severance payment equal to six months'
     salary in the event his individual employment is involuntarily
     terminated. In addition, Mr. Matyczynski was granted a loan for $33,000,
     which will be forgiven ratable over three years, and is entitled to an
     annual mandatory bonus of $12,000 and is eligible for a discretionary
     bonus of up to 25% of his base salary. The salary shown above for the
     year ended December 31, 2000 reflects approximately 56% of Mr.
     Matyczynski compensation which was allocated to the Company. Mr.
     Matyczynski's total compensation earned in aggregate totaled
     approximately $180,000 plus $12,000 in bonus. Mr. Matyczynski's aggregate
     compensation did not exceed $100,000 for the year ended December 31,
     1999.

 (6) In September 2000, Citadel acquired certain cinema assets previously
     owned by City Cinemas. At the time of that acquisition, an executive-
     sharing arrangement was in place between the Company and City Cinemas,
     pursuant to which the Company and City Cinemas agreed to share Mr.
     Smerling's executive services. Mr. Smerling serves as a director and the
     President of REI. Since the acquisition of the City Cinemas assets, Mr.
     Smerling has served as the President of Citadel Cinemas, Inc. (the
     cinemas operations subsidiary of CHC). The executive sharing agreement
     has been superceded by the general and administrative cost sharing
     arrangement currently in place between REI, Craig Corp and CHC.
     Mr. Smerling is entitled to receive a payment equal to a year's base
     salary in the event his individual employment with Reading is
     involuntarily terminated. Mr. Smerling's salary shown above for the years
     ended December 31, 2000, 1999, and 1998 reflect compensation earned from
     Citadel Cinemas Inc. and Reading. Mr. Smerling's "Other Annual
     Compensation" includes life insurance premium paid by the Company. Mr.
     Smerling is permitted to designate the beneficiary of this life insurance
     policy.

 (7) Ms. Cotter has been Vice President, Business Affairs of the Company since
     March 1998 and President of Reading Australia since September 1999. Ms.
     Cotter has been Vice President of Business Affairs of Craig Corp. since
     August 1996, Vice President of Angelika Cinemas, Inc. since May 1998 and

                                      69
<PAGE>

     Secretary/Treasurer of Citadel Agriculture, Inc. since December 1997. Ms.
     Cotter's salary shown above for the years ended December 31, 2000, 1999,
     and 1998 reflect compensation earned directly from the Company.

 (8) Mr. Marsh serves as the Vice President of Real Estate of the Company,
     Craig and Citadel. Prior to joining the Company, Mr. Marsh was the Senior
     Vice President of Burton Property Trust, Inc., the U.S. real estate
     subsidiary of The Burton Group PLC. The salary shown above for the year
     ended December 31, 2000 reflects approximately 56% of Mr. Marsh's
     compensation which was allocated to the Company. Mr. Marsh's total
     compensation earned in aggregate totaled approximately $182,600 plus
     $28,000 in bonus.

 (9) Mr. Lawson has been the Director of REI's principal Australian operating
     company, Reading Entertainment Australia Pty Limited since May 1999.
     Prior to joining REI, Mr. Lawson served as the Asset General Manager
     responsible for New South Wales for Westfield from 1996 to 1998, and as
     the General Manager (Retail Property Development) for Coles Myer from
     1994 to 1995. Mr. Lawson's compensation was paid in Australian dollars
     and for presentation purposes, translated into U.S dollars using an
     average exchange rate for Fiscal 2000 of 0.5813.

(10) Mr. Pentecost has been the Chief Operating Officer for Australia and New
     Zealand since August 1999 and a director of Reading Entertainment
     Australia since September 1999. Prior to joining the Company,
     Mr. Pentecost was with Hoyts, where he served in a number of positions,
     most recently serving as Operations and Services Manager (National). Mr.
     Pentecost joined Hoyts in 1995. Prior thereto, Mr. Pentecost served as
     the Director of Retail Services (Operations) for KFC in Australia. Mr.
     Pentecost's compensation was paid in Australian dollars and for
     presentation purposes, translated into U.S dollars using an average
     exchange rate for Fiscal 2000 of 0.5813.

(11) All other compensation is primarily comprised of approximately 56% of the
     employer's match of Craig's 401(k) plan.

Option/SAR Grants In Last Fiscal Year

   As of December 31, 2000, the Company had options outstanding under two
stock option plans: the 1992 Non-qualified Stock Option Plan (the "1992 Plan",
as amended in 1997) and the 1997 Equity Incentive Plan (the "1997 Plan"). Each
plan was approved by shareholders in its year of adoption.

   The 1992 Plan and the 1997 Plan reserve 500,000 and 200,000 shares for
grant, respectively. The exercise price, term and other conditions applicable
to each grant of options under the Company's two plans are generally
determined at the time of grant by the Compensation Committee of the Board of
Directors and may vary with each option grant. Generally, option granted under
both plans vest on the anniversary of the date of the grant in four equal,
annual installments, 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 the grant.

   On October 16, 2000, the board of directors of the Company granted options
to Mr. Braly to purchase 100,000 shares of Reading Common under the 1997 Plan
at an exercise price of $3.875 per share. In accordance with the provision of
the 1997 Plan, all of Mr. Braly's options were cancelled on December 27, 2000,
the effective date of his resignation from the Company.

                                      70
<PAGE>

Aggregated Option/SAR In Last Fiscal Year and Fiscal Year-End Option/SAR
Values

   The following sets forth information with respect to the executives named
in the Summary Compensation Table, concerning the exercise of options during
the year ended December 31, 2000 and unexercised options as of December 31,
2000.

<TABLE>
<CAPTION>
                                                  Number of Unexercised     Value of Unexercisabled
                                       Shares      Option at 12-31-00      In- the-Money at 12-31-00
          Name             Security   Exercised Exercisable/Unexercisable Exercisable/Unexercisable(1)
          ----           ------------ --------- ------------------------- ----------------------------
<S>                      <C>          <C>       <C>                       <C>
James J. Cotter(2)...... Common Stock      0          347,742/0                      $0/$0
Scott A. Braly(3)(4).... Common Stock      0                0/0                      $0/$0
S. Craig Tompkins(4).... Common Stock      0           15,000/5,000                  $0/$0
Robert F. Smerling(4)... Common Stock      0           26,250/8,750                  $0/$0
Ellen M. Cotter(4)...... Common Stock      0            7,500/2,500                  $0/$0
Brett Marsh(4).......... Common Stock      0            7,500/2,500                  $0/$0
</TABLE>

(1) Represents the amount by which the aggregate market price on December 31,
    2000 of the shares subject to such options exceeded the exercise price of
    such options. Based on the $2.25 per share closing price of Reading Common
    Stock on December 31, 2000, there were no options that were deemed "in-
    the-money" at December 31, 2000.

(2) Shareholders of the Company approved a grant of options on September 16,
    1997 to Mr. Cotter, Chairman of the Board of Directors of the Company (the
    "Cotter Options"). The Cotter Options are divided into two groups: options
    to purchase up to 110,000 shares of the Common Stock (the "Basic Options")
    which become exercisable in four equal installments commencing one year
    from the date of the grant and options to purchase up to 260,000 shares of
    Common Stock (the "Convertible Preferred Options") 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. At December 31, 1999, Mr. Cotter also held options to
    purchase up to 90,000 shares of Common Stock, the exercisability of which
    were subject to certain conditions that were never satisfied. All of the
    Cotter Options, except for the Basic Options and the convertible preferred
    options, expired unexercised in April 2000. All of the Cotter Options have
    an exercise price of $12.80 per share.

(3) Mr. Braly's stock options were cancelled as of December 27, 2000, the date
    of his resignation from the Company.

(4) All of the options granted to executive officers were from the 1997 Plan.

Compensation Committee Interlocks and Insider Participation

   Messrs. Cotter and Tompkins are directors and executive officers of Craig
Corp and CHC which collectively own securities representing approximately 83%
of the voting power of the Company. Mr. Cotter, as a result of his direct and
indirect ownership and proxies, votes Craig Corp securities representing
approximately 51% of the voting power of that Company. Mr. Loeffler is on the
Board of Directors of each of REI, Craig Corp and CHC.

Section 16(a) Beneficial Ownership Reporting Compliance

   Section 16(a) of the Exchange Act 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 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, 2000, all
filing requirements applicable to its reporting persons were complied with.

                                      71
<PAGE>

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

   The following tables set forth certain information regarding the common
stock and total voting stock (including the Series A and the Series B Stock)
of the Company owned as of March 1, 2001 by (i) each of the Company's
directors and its most highly compensated executives, (ii) each person or
group who is known by the Company to own beneficially more than 5% of any
class of the Company's voting securities, and (iii) all directors and officers
of the Company as a group.

                             5% Beneficial Owners

<TABLE>
<CAPTION>
                                                                       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         Beneficial    Percent of  Beneficial  Percent of  Beneficial  Percent of   Voting
    of Beneficial Owner       Ownership(2)    Class(2)  Ownership(2)  Class(2)  Ownership(2)  Class(2)   Stock(2)
    -------------------       ------------   ---------- ------------ ---------- ------------ ---------- ----------
<S>                           <C>            <C>        <C>          <C>        <C>          <C>        <C>
James J. Cotter(1)(4)(5)....      353,732       4.54%         --        --            --        --           *

S. Craig Tompkins(1)(4)(6)..       21,400         *           --        --            --        --           *

Robert M. Loeffler(1)(7)....        6,000         *           --        --            --        --           *

Kenneth McCormick(1)(7).....        6,000         *           --        --            --        --           *

John Hunter(1)..............          --          *           --        --            --        --           *

Robert Smerling(1)(8).......       35,000         *           --        --            --        --           *

Scott Braly(1)(9)...........          --          *           --        --            --        --           *

Andrzej Matyczynski(1)(10)..          --          *           --        --            --        --           *

Brett Marsh(1)(11)..........        6,000         *           --        --            --        --           *

Craig Corp.(3)(4)...........   10,467,510(5)   82.09%           0         0%      550,000       100%      77.96%
 550 So. Hope St.
 Suite 1825
 Los Angeles, CA 90071

Citadel Holding Corp.(4)....    2,241,349(6)   23.10%      70,000       100%          --        --          --
 550 So. Hope St.
 Suite 1825
 Los Angeles, CA 90071

Lawndale Capital
 Management(12).............      494,775       6.60%         --        --            --        --          --
 One Sansome St.
 Suite 3900
 San Francisco, CA 94104

All directors and officers
 as a group (9 persons).....      430,732       5.72%         --        --            --        --          --
</TABLE>

 (1) 550 South Hope Street, Suite 1825, Los Angeles, Califorania 90071.

 (2)  Applicable percentage of ownership is based on 7,449,364 shares of
      Common Stock, 70,000 shares of Convertible Preferred Stock-Series A
      ("Series A Stock"), and 550,000 shares of Convertible Preferred Stock-
      Series B ("Series B Stock") outstanding as March 1, 2001 plus the
      applicable options for such shareholder. Beneficial ownership is
      determined in accordance with the rules of the securities exchange
      Commission and includes voting and investment power with respect to such
      shares. Shares subject to options currently exercisable within 60 days
      of March 1, 2001 are deemed outstanding for computing the percentage
      ownership of the person holding such options, but not deemed outstanding
      for computing the percentage ownership of any other person. The
      calculation of the Percent of Voting Stock gives effect to the voting
      rights of the Series A Stock, all of which is owned by Citadel, and of
      the Series B Stock, all of which is owned by Craig Corp. The holders of
      the Series A Stock and Series B Stock are entitled to cast

                                      72
<PAGE>

     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 stockholders of the Company, except as required by law.

 (3) Includes amounts held by Craig Management, Inc., a wholly-owned
     subsidiary of Craig Corp.

 (4) James J. Cotter is Chairman of the Board and Chief Executive Officer of
     REI, Craig Corp. and CHC. S. Craig Tompkins is Vice Chairman of the Board
     and Corporate Secretary of REI, a director and President of Craig Corp.,
     and the Vice Chairman and Corporate Secretary of CHC. James J. Cotter is
     also the principal stockholder of Craig Corp., having the power directly
     or through proxies to vote securities representing approximately 51% of
     the voting power of Craig Corp. Craig and the Company collectively own
     approximately 32% of CHC's outstanding Class A Nonvoting common stock and
     approximately 33% of CHC's outstanding Class B Voting common stock. Mr.
     Cotter and Mr. Tompkins disclaim beneficial ownership of all of the CHC
     securities held by the Company or Craig Corp. and all of the REI's
     securities held by Craig and Citadel.

 (5) Includes 6,000 shares held in a profit sharing plan, and 347,732 shares
     issuable within 60 days of March 1, 2001 upon the exercise of outstanding
     stock options. Mr. Cotter is also the beneficial owner of
     2,385,142 shares of the Common Stock and 2,021,702 shares of Class A
     Common Preference Stock of Craig Corp, including 594,940 shares of Craig
     Corp Common Stock issuable within 60 days of March 1, 2001 upon exercise
     of outstanding stock options previously issued to Mr. Cotter, and 617,438
     shares of Craig Corp. Common Stock and 720,838 shares of Craig Corp Class
     A Common Preference Stock owned by Hecco Ventures, a California general
     partnership ("HV"). Mr. Cotter is the general partner of a limited
     partnership which is, in turn, a general partner of HV and, accordingly,
     has shared voting and investment power with respect to such securities.
     Mr. Cotter is also a principal stockholder of Craig Corp., having the
     power directly or through proxies to vote securities representing
     approximately 51% of the voting power of Craig Corp. In addition, Mr.
     Cotter also owns 1,311,233 shares of CHC's Class A Nonvoting and 327,808
     shares of CHC's Class B Voting Common Stock which were acquired as a
     result of the OBI Merger.

 (6) Includes 20,000 shares issuable within 60 days of March 1, 2001 upon the
     exercise of outstanding stock options. Excludes 200 shares held in Mr.
     Tompkins' wife's retirement plan and 500 shares held in a trust for Mr.
     Tompkins' minor child as to which Mr. Tompkins disclaims beneficial
     ownership. Mr. Tompkins is also the beneficial owner of 37,000 shares of
     the Class A Common Preference Stock of Craig Corp including 35,000 shares
     of Class A Common Preference stock and 16,000 shares of CHC Class A
     Nonvoting Common Stock issuable within 60 days of March 1, 2001 upon the
     exercise of outstanding stock options.

 (7) Includes 6,000 shares each issuable within 60 days of March 1, 2001 upon
     the exercise of outstanding stock options granted to such directors in
     November 1999. Mr. Loeffler also has 20,000 shares of CHC Class A
     Nonvoting Common Stock issuable within 60 days of March 1, 2001.

 (8) Includes 35,000 shares issuable within 60 days of March 1, 2001 upon the
     exercise of outstanding stock options.

 (9) Scott Braly was named the Chief Executive Officer of the Company, Craig
     and Citadel effective October 16, 2000 and resigned effective December
     27, 2000. Mr. Braly's options have since expired.

(10) Includes 15,000 shares issuable within 60 days of March 1, 2001 upon the
     exercise of outstanding stock options. Mr. Matyczynski is also the
     beneficial owner of 15,000 shares of Craig Corp common stock and 15,000
     shares of Class A Voting Common Stock of CHC, each issuable within 60
     days of March 1, 2001 upon the exercise of outstanding stock options.

(11) Includes 6,000 shares issuable within 60 days of March 1, 2001 upon the
     exercise of outstanding stock options. Mr. Marsh is also the beneficial
     owner of 6,000 shares of Class A Voting Common Stock of CHC issuable
     within60 days of March 1, 2001 upon the exercise of outstanding stock
     options.

(12) Based on 13-G filed on November 3, 2000.

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

                                      73
<PAGE>

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

General

   Craig, Citadel and Reading are operated as part of a group of commonly
controlled companies referred to elsewhere in the Report on Form 10K as the
"Craig Group of Companies." Reading is currently principally engaged in two
lines of business (1) the development, ownership and operation of multiplex
cinemas in Australia, New Zealand and Puerto Rico, and (2) the development,
ownership and operation of cinema based entertainment centers and other real
estate development activities in Australia and New Zealand. Citadel is
likewise currently principally engaged in two lines of business (1) the
development, ownership and operation of multiplex cinemas (focusing primarily
on the art and upper-end film market) and "Off Broadway" style live theaters
in the United States and (2) the ownership and operation of rental real
estate. Craig is principally in the business of owning interests in and
providing management services to Reading and Citadel.

   Mr. James J. Cotter, the Chairman of the Board and Chief Executive Officer
of each of Craig Corp, CHC and REI, owns or otherwise has voting control over
each of the companies in the group. Specifically, Mr. Cotter owns or otherwise
controls securities representing more than 50% of the voting power of Craig
Corp, which in turn owns securities representing more than 50% of the voting
power of REI. Mr. Cotter, together with Craig Corp and REI, owns securities
representing 49.3% of the voting power of CHC.

   In part due to this overlapping ownership and control, there have been in
the past a significant number of related party transactions between the
members of the Craig Group of Companies, and their various affiliates.

   In part to address these related party transactions, management, with the
support of Mr. Cotter, has proposed that Craig Corp, CHC and REI be
consolidated in a transaction where the holders of all of the outstanding
securities of Craig Corp and REI, including Mr. Cotter, would receive shares
of CHC Class A Non-Voting Common Stock. That stock is currently listed for
trading on the American Stock Exchange under the symbol CDL.A. One result of
such a consolidation transaction would be a reduction in Mr. Cotter's voting
control of CHC from slightly under 50% to slightly under 25%. This would be
due to the fact that all of the CHC Class B Voting Common Stock held by Craig
and Reading after such a consolidation transaction would become, in essence,
non-voting treasury shares. The consolidation transaction has been delegated
by the Boards of Directors of Craig Corp. CHC and REI, to their respective
Conflicts Committees for further consideration.

 Overlapping Management

   Prior to 2000, the members of the Craig Group of Companies allocated
certain overhead expenses and provided various management services to one
another pursuant to various cost sharing and consulting arrangements. During
2000, Reading moved its executive offices from Philadelphia to Los Angeles,
and the members of the Craig Group of Companies reorganized and consolidated
their general and administrative staffs under Craig Corp. Consequently,
substantially all of the general and administrative employees of the Craig
Group of Companies are now employed directly by Craig Corp, and receive all of
their health, medical, retirement and other benefits from Craig Corp. The
general and administrative expense of the Craig Group of Companies is then
periodically allocated, subject to the review and approval of the Conflicts
Committees of Craig Corp, CHC and REI, in accordance with the amount of time
spent by these employees providing services for the respective member of the
group.

   At the present time, Mr. James J. Cotter is the Chairman of the Board and
Chief Executive Officer of Craig Corp., CHC and REI. Mr. S. Craig Tompkins is
the President and a Director of Craig Corp. and the Vice Chairman of the Board
and Corporate Secretary of CHC and REI. Mr. Robert Smerling is the President
and a Director of REI and the President of Citadel Cinemas, Inc. Mr. Andrzej
Matyczynski is the Chief Financial Officer and Treasurer of Craig Corp., CHC
and REI and Chief Administrative Officer of REI. Mr. Robert Loeffler is a
director and a member of the Audit Committees of Craig Corp., CHC and REI.

                                      74
<PAGE>

Certain Transactions Between the Members of the Craig Group of Companies, and
their Affiliates

 Certain Entertainment Property Transactions

   In 1999, Reading determined that, in view of its limited capital resources
and the size and scope of its investments and commitments in Australia and New
Zealand, it should focus on its overseas activities and dispose of its
domestic entertainment assets. During this same period, Citadel was searching
for hard asset investment opportunities in which to invest its cash
($21,440,000 at June 30, 1999).

   In the summer of that year, management began conversations with NAC, about
a potential transaction in which NAC would acquire, in partnership with
Citadel, all of the domestic cinema assets of Reading, including Reading's
rights to acquire the Manhattan based City Cinemas chain. In April 2000,
Reading conveyed a 50% membership interest in AFC to NAC in consideration of
the issuance to it of certain securities and granted to NAC, in consideration
of the payment by NAC to Reading of an option fee of $500,000, an option to
acquire the remainder of Readings domestic cinema assets. That option was
subject to the right of Citadel to participate as a 50/50 partner with NAC in
those assets, if Citadel were to so elect. Ultimately, NAC determined not to
exercise that option, and determined instead to invest in a developmental
"dot.com" company. Reading has resold to NAC the securities it received in
consideration of the transfer of the 50% membership interest in AFC for gross
proceeds of approximately $14,702,000.

   During this same period, Citadel determined to proceed with the acquisition
from Reading of the remainder of Reading's domestic entertainment assets.
During 2000 and the first quarter of 2001, Reading conveyed to Citadel the
following domestic entertainment assets:

   1. The City Cinemas and OBI Transactions In December, 1998 Reading entered
into an agreement (the "Sutton Agreement") with Messrs. James J. Cotter and
Michael Forman and certain of their affiliates (collectively referred to here
in as "Sutton") to acquire the City Cinemas chain (the "City Cinemas
Transaction") and OBI (now Liberty Theaters)(the "OBI Merger"). In 2000,
Reading assigned that agreement to Citadel, and Citadel reimbursed to Reading
the $1,000,000 deposit Reading had made to Sutton under the Sutton Agreement.
In September 2000, Citadel closed the City Cinemas Transaction and the OBI
Merger. That transaction is described in detail elsewhere in this Report.
Basically, Citadel leased from Sutton, under a ten-year operating lease, four
cinemas, obtained certain management rights with respect to an additional six
cinemas, and purchased City Cinemas' 16.7% membership interest in AFC. Citadel
also obtained an option, exercisable in ten years, to purchase the assets
subject to the lease, including two fee interests, for $48,000,000, and
committed to lending Sutton up to $28,000,000 in 2007. Citadel also merged
with OBI, issuing CHC common stock for all of the outstanding shares of OBI.
The OBI stock was valued at $10,000,000 in the transaction. As a result of the
City Cinemas Transaction, the management of NY Angelika, and two other
domestic cinemas owned by Reading, was transferred from City Cinemas to
Citadel.

   2. The Domestic Cinema Transactions In September, 2000, Citadel also
acquired from Reading the rights to the Angelika Film Center & Cafe project in
Dallas, Texas--an eight screen Angelika style cinema currently under
construction and slated for opening in Summer, 2001 (the "Angelika Dallas").
That transaction is described in detail elsewhere in this Report. Basically,
Citadel reimbursed to Reading its costs in the development, and assumed
Reading's obligations under the lease. Reading, in turn, assigned to Citadel
its interest in the lease and committed to reimburse to Citadel a portion of
its investment in the Angelika Dallas if Citadel did not achieve at least a
20% return on equity during the second year of operation of the cinema. In
March 2001, Reading sold the remainder of its domestic cinema assets (other
than its residual 33.3% membership interest in AFC) to Citadel in
consideration of the issuance by Citadel of a two year purchase money
promissory note in the amount of $1,706,000.

   3. The Royal George Theatre Complex Transaction In March 1999, Reading
acquired the Royal George Theatre Complex for approximately $3,000,000. The
Royal George was acquired in a newly formed limited liability company ("RGT").
In June 2000, Citadel lent to RGT, at an interest rate of 10.0% per annum, the
funds needed to retire the purchase money note issued by RGT to purchase the
theater. In September 2000, Citadel

                                      75
<PAGE>

acquired RGT from Reading at approximately the same price as was paid by
Reading for the Royal George Theater complex in March 1999.

   4. Management of Live Theater Assets Prior to the OBI Merger, the live
theater assets of OBI and the Royal George Theatre Complex were booked and
managed by Union Square Management, Inc., a third party theater management
company. Ms. Margaret Cotter, the daughter of James J. Cotter, was at that
time the Senior Vice President of that company. In 1998, Craig Corp guaranteed
a $100,000 bank loan to Mr. Alan Schuster, the principal stockholder and
President of Union Square Management. Following the closing of the OBI Merger,
OBI was renamed Liberty Theaters, Inc. Citadel's live theaters are now booked
and managed, on an at-will basis, by Off Broadway Investments LLC ("OBI
Management"), a company wholly owned by Margaret Cotter. Ms. Cotter is the
President of that company, and of Liberty Theaters but receives no
compensation for her service as the President of Liberty Theaters other than
the compensation paid to OBI Management. OBI Management is a separate company
and is not related to the OBI acquired by Citadel in the OBI Merger and
renamed Liberty Theaters. OBI has been retained on an at-will basis, on
substantially the same terms as Union Square Management pending negotiation of
a definitive agreement and approval of that agreement by the CHC Conflicts
Committee.

   5. Investment in Plays From time to time the members of the Craig Group of
Companies, and Mr. Cotter and the other members of management, are afforded
the opportunity to invest in the plays that play or may play in the live
theaters owned by Citadel. These investments are monitored by Mr. Cotter, and
periodically reported to the Conflicts Committee of CHC.

Certain Agricultural Transactions

   The Craig Group of Companies collectively own approximately 60% of the
equity interest in three partnerships (the "Agricultural Partnerships") formed
in 1997 to purchase approximately 1,600 acres of agricultural land in Southern
California commonly know as the "Big 4 Ranch." The property is principally
improved with mature citrus groves. The transaction was originated and
negotiated by Citadel. However, in order to satisfy certain federal laws
relating to access to federal water supplies, ownership of the Big 4 Ranch was
taken in the Agricultural Partnerships which are owned 40% by Citadel, 40% by
Big 4 Ranch, Inc. ("BRI") and 20% by Visalia LLC ("Visalia").

   Visalia is owned, directly or indirectly, by James J. Cotter and certain
members of his family. The outside Directors of CHC felt that it was important
that Mr. Cotter acquire an equity interest in the Agricultural Partnerships,
since Citadel was relying principally upon his expertise and experience in
making and providing executive supervision of the investment.

   BRI was initially a wholly owned subsidiary of CHC, and was spun off to the
stockholders of CHC immediately prior to the acquisition by the Agricultural
Partnerships of Big 4 Ranch. Accordingly, Craig and Reading received their
interests in BRI initially as a result of that spin-off. Thereafter, Craig
increased its holdings in BRI through the purchase of additional BRI shares in
privately negotiated transactions. Craig and Reading own their interests in
the Agricultural Partnerships indirectly through their ownership of CHC and
BRI shares. Craig and Reading currently control BRI, owning 49% of the voting
power of that company. In addition, Cecelia Packing ("Cecelia"), a company
wholly-owned by Mr. Cotter, and a trust for the benefit of one of
Mr. Tompkins's children own an additional 3.2% of BRI. Historically, the
officers and directors of Craig Corp. have served as the officers and
directors of BRI.

   The Big 4 Ranch is farmed by Big 4 Ranch Farming, LLC ("Farming"), which is
owned 80% by Citadel and 20% by Visalia. Farming is reimbursed for all of its
out-of-pocket costs by the Agricultural Partnerships, plus a fee equal to 5%
of the gross revenues of the Agricultural Partnerships, after deducting the
expenses of picking, packing and hauling. Farming, in turn, contracts with
Cecelia for certain bookkeeping and administrative services, for which it pays
a fee of $6,000 per month. Farming is reimbursed for this expense from the
Agricultural Partnerships. Cecelia also packs fruit for the Agricultural
Partnerships, and received $72,000 per

                                      76
<PAGE>

annum for its services to the Agricultural Partnerships in each of the three
years ended December 31, 2000. The Craig Group of Companies provide various
administrative services for the Agricultural Partnerships and BRI, for which
they receive no compensation.

   Due to a variety of factors, principally bad weather and market conditions,
the Agricultural Partnerships have lost in excess of 100% of their equity, and
since the 1998 freeze destroyed the Big 4 Ranch crops funded by loans from
Citadel and Visalia. Such loans have been made on an 80/20 basis. At the
present time, it is the intent of the Craig Group of Companies that the
Agricultural Partnerships limit their activities to those that can be covered
by the cash flow from their operations. To date, Citadel and Visalia have lent
$4,840,000 and $820,000 respectively to the Agricultural Partnerships, and, in
addition, have guaranteed (on an 80/20 basis) certain equipment leases entered
into by the Agricultural Partnerships. BRI, which had no assets other than its
original interest in the Agricultural Partnerships and a limited amount of
cash, has not had the capital resources to contribute to the ongoing funding
of the Agricultural Partnerships.

 Certain Family Relationships

   Mr. Cotter, the controlling stockholder of the Craig Group of Companies,
has advised that he considers his holdings in Craig Corp. and CHC to be long-
term investments to be passed to his heirs. The Directors of Craig Corp., CHC
and REI believe that it is in the best interests of these companies, and their
respective stockholders, for Mr. Cotter's heirs to become experienced in the
operations and affairs of the members of the Craig Group of Companies.
Accordingly, Ms. Margaret Cotter is a member of the Board of Directors of
Craig. Corp. and BRI and the President of Liberty Theaters. Ms. M Cotter has
also served as an officer of Cecelia and Union Square Management, Inc., and is
the owner and President of OBI Management. Ms. Ellen Cotter is the Vice
President--Business Affairs of Craig Corp., REI and of Citadel's cinema
subsidiary. Ms. Ellen Cotter and Ms. Margaret Cotter have direct or indirect
ownership interest in Visalia and Hecco Ventures. Mr. James J. Cotter, Jr. is
a director of Gish Biomedical Inc., a company that is owned approximately
16.3% by Citadel. Ms. M. Cotter and Ms. E. Cotter are each graduates of the
Georgetown Law Center and were in public and private practice, respectively,
prior to becoming involved with the Craig Group of Companies. Mr. J. Cotter
Jr. is a graduate of the Brown University, and obtained his law and tax
degrees from the New York University. Mr. Cotter is currently in the private
practice of law with the firm of Winston & Strawn, in Manhattan.

Certain Miscellaneous Transactions

   Reading has loaned to Mr. Smerling $105,000 pursuant to a non-interest
bearing demand loan.

                                      77
<PAGE>

                                    PART IV

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

   (a)(1) Financial Statements

<TABLE>
<CAPTION>
                                                                          Page
                                                                          ----
   <S>                                                                    <C>
   Consolidated Balance Sheets as of December 31, 2000 and 1999..........  35

   Consolidated Statements of Operations for the three years ended
    December 31, 2000....................................................  36

   Consolidated Statements of Cash Flows for the three years ended
    December 31, 2000....................................................  37

   Consolidated Statements of Shareholders' Equity for the three years
    ended December 31, 2000..............................................  38

   Notes to Consolidated Financial Statements............................  39

   Independent Auditors' Report--Deloitte & Touche LLP...................  80

   Report of Independent Auditors--Ernst & Young LLP.....................  81
</TABLE>

   All schedules for which provision is made in the applicable accounting
regulations of the Commission are not required under the related instructions
or are not applicable and therefore have been omitted.

   (a)(2) Exhibits

<TABLE>
 <C>    <S>
  2.1   Agreement and Plan of Merger Among Reading Company, Reading
         Entertainment, Inc., and Reading Merger Co. (Incorporated by reference
         to Exhibit A to the Proxy Statement/Prospectus included in Reading
         Entertainment, Inc.'s Registration Statement on Form S-4, File No.
         333-13413.)

  2.2   Agreement and Plan of Merger between Reading Entertainment, Inc. (a
         Delaware corporation) and Reading Entertainment, Inc. (a Nevada
         corporation) dated November 19, 1999. (Incorporated by reference to
         Exhibit C to the Definitive Proxy Statement on Schedule 14A of Reading
         Entertainment, Inc. dated November 22, 1999.)

  3(i)  Articles of Incorporation of Reading Entertainment, Inc. (Incorporated
         by reference to Exhibit 3(i) to Reading Entertainment, Inc.'s Annual
         Report on Form 10-K for the year ended December 31, 1999.)

  3(ii) By-laws of Reading Entertainment, Inc. (Incorporated by reference to
         Exhibit 3(ii) to Reading Entertainment, Inc.'s Annual Report on Form
         10-K for the year ended December 31, 1999.)

  4.1   Certificate of Designation of Reading Entertainment, Inc. setting forth
         the voting powers, designations, preferences, limitations,
         restrictions and relative rights of Series A Voting Cumulative
         Convertible Preferred Stock and Series B Voting Cumulative Preferred
         Stock. (Incorporated by reference to Exhibit A-2 to the Definitive
         Proxy Statement on Schedule 14A of Reading Entertainment, Inc. dated
         November 22, 1999.)

 10.1*  Reading Company 1992 Nonqualified Stock Option Plan, as amended.
         (Incorporated by reference to Exhibit 10.1 to Reading Entertainment,
         Inc.'s Quarterly Report on Form 10-Q for the quarter ended June 30,
         1998.)

 10.2*  Non-Qualified Stock Option Agreement dated April 18, 1997 by and
         between Reading Entertainment, Inc. and James J. Cotter. (Incorporated
         by reference to Exhibit 10.1 to Reading Entertainment, Inc.'s
         Quarterly Report on Form 10-Q for the quarter ended June 30, 1997.)

 10.3*  Reading Entertainment, Inc. 1997 Equity Incentive Plan. (Incorporated
         by reference to Exhibit A to Reading Entertainment, Inc.'s Definitive
         Proxy Statement on Schedule 14A as filed with the Securities and
         Exchange Commission on August 21, 1999.)

 10.4*  Master Management Agreement between Angelika Holding, Inc. and City
         Cinemas Corporation dated November 26, 1997. (Incorporated by
         reference to Exhibit 10.29 to Reading Entertainment, Inc.'s Annual
         Report on Form 10-K for the year ended December 31, 1997.)
</TABLE>

                                      78
<PAGE>

<TABLE>
 <C>   <S>
 10.5  Agreement by and among Public Transport Corporation, Reading Properties
        Pry Ltd, and Mackie Group Pt), Ltd for development at the Frankston
        Railway Station dated May 28, 1998. (Incorporated by reference to
        Exhibit 10.1 to Reading Entertainment, Inc.'s Quarterly Report on Form
        10-Q for the quarter ended June 30, 1998.)

 10.6  Agreement in Principle between Reading Entertainment, Inc. and City
        Cinemas dated December 2, 1998. (Incorporated by reference to Exhibit
        10.23 to Reading Entertainment, Inc.'s Annual Report on Form 10-K for
        the year ended December 31, 1998.)

 10.7* Employment Agreement by and between Craig Corporation and Andrzej
        Matyczynski. (Incorporated by reference to Exhibit 10.7 to Reading
        Entertainment, Inc.'s Annual Report on Form 10-K for the year ended
        December 31, 1999.)

 10.8  Letter agreement dated April 5, 2000, by and between National Auto
        Credit, Inc. and Reading Entertainment, Inc. and FA, Inc. to acquire
        additional one-third membership interest in Angelika Film Centers,
        LLC. (Incorporated by reference to Exhibit 10.8 to Reading
        Entertainment, Inc.'s Annual Report on Form 10-K for the year ended
        December 31, 1999.)

 10.9  Letter agreement dated April 5, 2000, by and between National Auto
        Credit, Inc. and Reading Entertainment, Inc. to acquire the remaining
        domestic cinema assets of Reading Entertainment, (Incorporated by
        reference to Exhibit 10.9 to Reading Entertainment, Inc.'s Annual
        Report on Form 10-K for the year ended December 31, 1999.)

 10.10 Purchase agreement dated as of April 5, 2000, among National Auto
        Credit, Inc., National Cinemas, Inc., FA, Inc., and Reading
        Entertainment, Inc. (Incorporated by reference to Exhibit 10.10 to
        Reading Entertainment, Inc.'s Annual Report on Form 10-K for the year
        ended December 31, 1999.)

 21(i) List of Subsidiaries of Reading Entertainment, Inc.

 23.1  Consent of Independent Auditors--Deloitte & Touche LLP.

 23.2  Consent of Independent Auditors--Ernst & Young LLP.
</TABLE>

* These exhibits constitute the executive compensation plans and arrangements
  of the Company.

   (b) Reports on Form 8-K.

   No reports on Form 8-K were filed during the reporting period.

   (c) See item 14(a)(3) above.

   (d)(1) Not applicable.

   (d)(2) Not applicable.

   (d)(3) Not applicable.

                                       79
<PAGE>

                         INDEPENDENT AUDITORS' REPORT

To the Board of Directors and Shareholders of
Reading Entertainment, Inc.

   We have audited the accompanying consolidated balance sheets of Reading
Entertainment, Inc. and subsidiaries as of December 31, 2000 and 1999, and the
related consolidated statements of operations, shareholders' equity, and cash
flows for the years then ended. These financial statements are the
responsibility of the Corporation's management. Our responsibility is to
express an opinion on the financial statements based on our audits.

   We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.

   In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of Reading Entertainment, Inc.
and subsidiaries at December 31, 2000 and 1999, and the results of their
operations and their cash flows for the years then ended in conformity with
accounting principles generally accepted in the United States of America.

                                          /s/  Deloitte & Touche LLP
April 6, 2001

                                      80
<PAGE>

                        REPORT OF INDEPENDENT AUDITORS

The Board of Directors and Shareholders
Reading Entertainment, Inc.

   We have audited the accompanying consolidated statements of operations,
shareholders' equity, and cash flows of Reading Entertainment, Inc. and
Subsidiaries for the year ended December 31, 1998. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audit.

   We conducted our audit in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.

   In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated results of operations and cash
flows of Reading Entertainment, Inc. for the year ended December 31, 1998, in
conformity with accounting principles generally accepted in the United States.

                                          /s/ Ernst & Young LLP

Philadelphia, Pennsylvania
March 18, 1999

                                      81
<PAGE>

                                  SIGNATURES

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

                                          READING ENTERTAINMENT, INC.

                                                /s/ Andrzej Matyczynski
                                          By: _________________________________
Date: April 12, 2001
                                                    Andrzej Matyczynski
                                                Chief Financial Officer and
                                                         Treasurer

   Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the date indicated.
<TABLE>
<CAPTION>
             Signature                           Title                  Date
             ---------                           -----                  ----

<S>                                  <C>                           <C>
      /s/ James J. Cotter            Chairman, Director and        April 12, 2001
____________________________________  Chief Executive Officer
          James J. Cotter

     /s/ S. Craig Tompkins           Vice Chairman and Director    April 12, 2001
____________________________________
         S. Craig Tompkins


     /s/ Robert F. Smerling          President and Director        April 12, 2001
____________________________________
         Robert F. Smerling

     /s/ Robert M. Loeffler          Director                      April 12, 2001
____________________________________
         Robert M. Loeffler

    /s/ Kenneth S. McCormick         Director                      April 12, 2001
____________________________________
        Kenneth S. McCormick

        /s/ John Hunter              Director                      April 12, 2001
____________________________________
            John Hunter
</TABLE>


                                      82