<PAGE>

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

                      SECURITIES AND EXCHANGE COMMISSION
                            Washington, D.C. 20549

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

                                   FORM 10-Q

(Mark One)

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
    ACT OF 1934

              For the quarterly period ended: September 30, 2001

                                      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)

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

               550 South Hope Street,
                     Suite 1825
               Los Angeles, California            90071
                (Address of principal          (Zip Code)
                 executive offices)

                 Registrant's telephone number: (213) 235-2226

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

   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 the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date. As of November 5, 2001, there
were 7,449,364 shares of Common Stock outstanding.

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

<PAGE>

                 READING ENTERTAINMENT, INC. AND SUBSIDIARIES

                                     INDEX

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

PART I.  Financial Information

Item 1.  Financial Statements

         Condensed Consolidated Balance Sheets--
         September 30, 2001 (Unaudited) and December 31, 2000......................   1

         Condensed Consolidated Statements of Operations--
         Three Months and Nine Months Ended September 30, 2001 and 2000 (Unaudited)   3

         Condensed Consolidated Statements of Cash Flows--
         Nine Months Ended September 30, 2001 and 2000 (Unaudited).................   4

         Notes to Condensed Consolidated Financial Statements (Unaudited)..........   5

Item 2.  Management's Discussion and Analysis of Financial Condition and Results of
         Operations................................................................  15

Item 3.  Quantitative and Qualitative Disclosure About Market Risk.................  23

PART II. Other Information

Item 1.  Legal Proceedings.........................................................  24

Item 2.  Changes in Securities.....................................................  24

Item 3.  Defaults Upon Senior Securities...........................................  24

Item 4.  Submission of Matters to a Vote of Security Holders.......................  24

Item 5.  Other Information.........................................................  24

Item 6.  Exhibits and Reports on Form 8-K..........................................  24

         Signatures................................................................  25
</TABLE>


<PAGE>

                        PART I - Financial Information

Item 1. Financial Statements

                 READING ENTERTAINMENT, INC. AND SUBSIDIARIES
                     CONDENSED CONSOLIDATED BALANCE SHEETS
                            (dollars in thousands)

<TABLE>
<CAPTION>
                                                       September 30, December 31,
                                                           2001          2000
                                                       ------------- ------------
                                                        (Unaudited)
<S>                                                    <C>           <C>
ASSETS

Current Assets
Cash and cash equivalents.............................   $  3,185      $ 16,446
Amounts receivable....................................      1,994           970
Restricted cash.......................................        402         1,267
Inventories...........................................        222           267
Prepayments and other current assets..................      1,223           874
Property held for sale (Note 5 and 8).................         --         4,039
                                                         --------      --------
   Total current assets...............................      7,026        23,863

Investments in unconsolidated affiliates (Note 2).....     12,047        13,268
Property held for development.........................     20,360        25,158
Property and equipment--net (Note 3)..................     54,894        51,809
Investment in WPG (Note 5)............................      5,623            --
Note receivable from Citadel (Note 8).................      1,706            --
Notes receivable from joint venture partners..........        117           421
Other assets..........................................      2,036         2,153
                                                         --------      --------
   Total assets.......................................   $103,809      $116,672
                                                         ========      ========
</TABLE>


    See accompanying notes to condensed consolidated financial statements.

                                      1

<PAGE>

                 READING ENTERTAINMENT, INC. AND SUBSIDIARIES
                     CONDENSED CONSOLIDATED BALANCE SHEETS
                            (dollars in thousands)

<TABLE>
<CAPTION>
                                                                                 September 30, December 31,
                                                                                     2001          2000
                                                                                 ------------- ------------
                                                                                  (Unaudited)
<S>                                                                              <C>           <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Accounts payable................................................................   $  2,368      $  4,159
Accrued taxes...................................................................      1,468         1,428
Accrued property costs and other................................................      3,240         3,591
Film rent payable...............................................................      1,259         1,719
Notes payable and short-term debt (Note 6)......................................      5,952         4,476
Convertible Redeemable Series A Preferred Stock, held by Affiliate, par value
  $0.001 per share, stated value $7,000,000 Authorized, issued and outstanding--
  70,000 shares (Note 6)........................................................      7,000         7,000
Other liabilities...............................................................      1,873           654
                                                                                   --------      --------
   Total current liabilities....................................................     23,160        23,027
Note payable....................................................................     13,872        14,390
Other liabilities...............................................................      5,564         5,577
                                                                                   --------      --------
   Total liabilities............................................................     42,596        42,994

Minority interest...............................................................        429           389

Commitments and contingencies (Note 6)

Shareholders' Equity
Series B Preferred Stock, par value $0.001 per share, stated value $55,000;
  Authorized, issued and outstanding--550,000 shares............................          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......................................          7             7
Other capital...................................................................    137,407       137,407
Accumulated (deficit) earnings..................................................    (53,767)      (48,189)
Accumulated other comprehensive income (Note 7).................................    (22,864)      (15,937)
                                                                                   --------      --------
   Total shareholders' equity...................................................     60,784        73,289
                                                                                   --------      --------
   Total liabilities and shareholders' equity...................................   $103,809      $116,672
                                                                                   ========      ========
</TABLE>

         See accompanying notes to consolidated financial statements.

                                      2

<PAGE>

                 READING ENTERTAINMENT, INC. AND SUBSIDIARIES
          CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
               (dollars in thousands, except per share amounts)

<TABLE>
<CAPTION>
                                                          Three Months Ended       Nine Months Ended
                                                             September 30,           September 30,
                                                        ----------------------  ----------------------
                                                           2001        2000        2001        2000
                                                        ----------  ----------  ----------  ----------
<S>                                                     <C>         <C>         <C>         <C>
Revenues
   Theater
       Admissions...................................... $    7,970  $    7,494  $   21,548  $   23,038
       Concessions.....................................      2,625       2,557       7,089       7,579
       Advertising and other...........................        480         638       1,347       1,866
   Real estate.........................................        238         159         672         547
                                                        ----------  ----------  ----------  ----------
                                                            11,313      10,848      30,656      33,030
                                                        ----------  ----------  ----------  ----------
Operating costs and expenses
   Theater operating...................................      7,842       8,644      23,791      26,783
   Theater concession..................................        542         529       1,543       1,596
   Depreciation and amortization.......................      1,209         655       2,183       2,089
   General and administrative..........................      3,047       3,110       6,888       8,334
   Asset impairment....................................         --       1,508          --       3,233
                                                        ----------  ----------  ----------  ----------
                                                            12,640      14,446      34,405      42,035
                                                        ----------  ----------  ----------  ----------
Operating loss                                              (1,327)     (3,598)     (3,749)     (9,005)
Non-operating expense (income)
   Gain on sale of assets..............................         (5)     (1,221)        (80)     (4,776)
   Equity losses of affiliates (Note 2)................        272         884         429       1,861
   Interest and dividend income........................        (91)        (57)       (455)       (340)
   Interest expense....................................        232         171         783         537
   Other income, net...................................          8        (542)         21      (1,117)
                                                        ----------  ----------  ----------  ----------
Loss before minority interest and income tax...........     (1,743)     (2,833)     (4,447)     (5,170)
Income tax (Note 4)....................................        195         396         701         867
                                                        ----------  ----------  ----------  ----------
Loss before minority interest..........................     (1,938)     (3,229)     (5,148)     (6,037)
Minority interest......................................         13           5          89          97
                                                        ----------  ----------  ----------  ----------
Net loss...............................................     (1,951)     (3,234)     (5,237)     (6,134)
Preferred stock dividends and amortization of asset put
  option...............................................      1,008       1,007       3,023       3,127
                                                        ----------  ----------  ----------  ----------
Net loss applicable to common shareholders............. $   (2,959) $   (4,241) $   (8,260) $   (9,261)
                                                        ----------  ----------  ----------  ----------
Basic loss per share (Note 1)..........................     $(0.40)     $(0.57)     $(1.11)     $(1.24)
Weighted average number of shares outstanding..........  7,449,364   7,449,364   7,449,364   7,449,364
Diluted loss per share (Note 1)........................     $(0.40)     $(0.57)     $(1.11)     $(1.24)
Diluted weighted average number of shares
  outstanding..........................................  7,449,364   7,449,364   7,449,364   7,449,364
</TABLE>

    See accompanying notes to condensed consolidated financial statements.

                                      3

<PAGE>

                 READING ENTERTAINMENT, INC. AND SUBSIDIARIES
          CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
                            (dollars in thousands)

<TABLE>
<CAPTION>
                                                                                              Nine Months Ended
                                                                                                September 30,
                                                                                             ------------------
                                                                                               2001      2000
                                                                                             --------  --------
<S>                                                                                          <C>       <C>
Operating Activities
Net loss.................................................................................... $ (5,237) $ (6,134)
    Adjustments to reconcile net loss to net cash used in operating activities:
       Depreciation and amortization........................................................    2,183     2,089
       Equity losses of affiliates..........................................................      429     1,861
       Minority interest....................................................................       89        97
       Gain on disposal of assets...........................................................      (80)   (4,776)
       Asset impairment charges.............................................................       --     3,233
       Other, net...........................................................................     (133)      189
       Changes in operating assets and liabilities:
          Increase (decrease) in current assets.............................................      268    (1,816)
          (Increase) decrease in accounts payable and accruals..............................   (1,572)      622
          (Decrease) increase in film rent payable..........................................     (428)      236
          Increase (decrease) in other liabilities..........................................      586      (951)
                                                                                             --------  --------
Net cash used in operating activities.......................................................   (3,895)   (5,350)
                                                                                             --------  --------
Investing Activities
    Proceeds from sale of assets............................................................    2,678     5,658
    Purchase of property held for development...............................................   (4,805)     (158)
    Purchase of property and equipment, net.................................................   (4,090)  (17,336)
    Decrease due to accounting for exchange of AFC interest.................................       --      (636)
    Decrease (increase) in restricted cash..................................................      753      (679)
    Proceeds from note receivable...........................................................      283       464
    Investments in joint ventures...........................................................      (37)       --
    Distributions from joint ventures.......................................................      704       484
                                                                                             --------  --------
Net cash used in investing activities.......................................................   (4,514)  (12,203)
                                                                                             --------  --------
Financing Activities
    Payment of preferred stock dividends....................................................     (341)     (228)
    Purchase of/payment on notes payable....................................................   (8,618)   (5,245)
    Proceeds from debt......................................................................    6,810    14,603
    Issuance of note receivable.............................................................   (1,706)     (486)
    Minority interest distributions.........................................................       --       (43)
    Capital contributions from minority interest............................................       --        28
                                                                                             --------  --------
Net cash (used in) provided by financing activities.........................................   (3,855)    8,629
                                                                                             --------  --------
    Effect of exchange rate changes on cash and cash equivalents............................     (997)     (825)
                                                                                             --------  --------
Decrease in cash and cash equivalents.......................................................  (13,261)   (9,749)
Cash and cash equivalents at beginning of year..............................................   16,446    13,277
                                                                                             --------  --------
Cash and cash equivalents at end of period.................................................. $  3,185  $  3,528
                                                                                             --------  --------
Non-Cash Transaction: Exchange of 50% interest in Angelika for equity investment in National
 Auto Credit, Inc. in April 2000............................................................
Supplemental Disclosures....................................................................
    Interest paid........................................................................... $    812  $    345
    Income taxes paid....................................................................... $    205  $    125
</TABLE>

    See accompanying notes to condensed consolidated financial statements.

                                      4

<PAGE>

                 READING ENTERTAINMENT, INC. AND SUBSIDIARIES
       NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Note 1 -- Summary of Significant Accounting Policies

  Basis of Presentation

   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 Nevada corporation was the surviving
corporation and the corporation's operations, assets, liabilities and
capitalization were not changed as a result of the merger. 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 principally 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 is
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 the 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 "NZ JV"). 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 (Note 9).

  Foreign Currency Exchange

   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
Australian dollar ($0.4946 and $0.5560, were the respective exchange rates of
U.S. dollars per Australian dollar at September 30, 2001 and December 31, 2000)
and the U.S. dollar and New Zealand dollar ($0.4067 and $0.4423, were the
respective exchange rates of U.S. dollars per New Zealand dollar at September
30, 2001 and December 31, 2000).

  Loss per Share

   Net loss available to common shareholders includes provision for dividends
accrued and declared on the Company's Series A Voting Cumulative Convertible
Redeemed Preferred Stock (the "Series A Preferred Stock"), and the Series B
Voting Cumulative Convertible Preferred Stock (the "Series B Preferred Stock")
(collectively, the "Convertible Preferred Stock") and for amortization for the
value of an asset put option which expired in the second quarter of 2000.

   The weighted average number of shares used in the computation of basic loss
per share was 7,449,364 in both 2001 and 2000. Diluted loss per shares 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 (for periods prior to May 13,
2000). During the three and nine months ended September 30, 2001 and 2000, the
Company recorded a net loss available to shareholders of $(2,959,000) and
$(8,260,000) and $(4,241,000) and $(9,261,000), respectively. As a result, the
stock options would have been anti-dilutive.

  Recent Accounting Pronouncements

   On June 29, 2001, the Financial Accounting Standards Board ("FASB") approved
for issuance Statement of Accounting Financial Standards ("SFAS") No. 141
"Business Combinations" and No. 142 "Goodwill and Other

                                      5

<PAGE>

Intangible Assets". Among other provisions, all future business combinations
will be accounted for using the purchase method of accounting and the use of
the pooling-of-interest method is prohibited. In addition, goodwill will no
longer be amortized but will be subject to impairment tests at least annually.
We expect to adopt SFAS No. 141 and SFAS No. 142 effective January 1, 2002,
although certain provisions will be applied to any acquisitions we may close
subsequent to June 30, 2001. The Company is currently assessing, but in view of
the pending consolidation transaction (Note 10), has not yet determined the
impact of SFAS 141 and 142 on its financial position and results of operations.

   On October 3, 2001, the FASB issued Statement of Accounting Standards No.
144 "Accounting for the Impairment or Disposal of Long-Lived Assets" ("SFAS
144"). SFAS 144 supercedes SFAS 121 "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" and applies to
all long-lived assets, including discontinued operations. SFAS 144 develops one
accounting model for long-lived assets that are to be disposed of by sale and
requires that such long-lived assets be measured at the lower of book value or
fair value less cost to sell. Additionally, SFAS 144 expands the scope of
discontinued operations to include all components of an entity with operations
that (1) can be distinguished from the rest of the entity and (2) will be
eliminated from the ongoing operations of the entity in a disposal transaction.
SFAS 144 is effective for the Company for all financial statements issued in
fiscal 2002. The Company has not yet determined the impact, if any, the
adoption of SFAS No. 144 will have on its results of operations and financial
condition.

   The financial statements have been prepared in accordance with generally
accepted accounting principles in the United States of America for interim
information and the rules of the Securities and Exchange Commission and
therefore do not include all information and footnotes required by generally
accepted accounting principles for complete financial statements. In the
opinion of management, all adjustments of a recurring nature considered
necessary for a fair presentation of the results for the interim periods
presented have been included. Operating results for the three and nine months
ended September 30, 2001 are not necessarily indicative of the results that may
be expected for the year ending December 31, 2001. For further information,
refer to the consolidated financial statements and footnotes thereto included
in the Company's Annual Report on Form 10-K for the year ended December 31,
2000. Certain amounts in previously issued financial statements have been
reclassified to conform with the current period presentation.

Note 2 -- 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).

<TABLE>
<CAPTION>
                                               September 30, December 31,
                                                   2001          2000
                                               ------------- ------------
       <S>                                     <C>           <C>
       Citadel................................    $ 8,069      $ 8,811
       AFC....................................      3,168        3,358
       NZ JV..................................        810        1,099
                                                  -------      -------
                                                  $12,047      $13,268
                                                  =======      =======
</TABLE>

<TABLE>
<CAPTION>
                                        Three Months Ended Nine Months Ended
                                          September 30,      September 30,
                                        -----------------  ----------------
                                          2001      2000    2001      2000
                                         -----      -----  -----    -------
       <S>                              <C>        <C>     <C>      <C>
       Citadel......................... $(393)     $(600)  $(742)   $  (805)
       NAC.............................    --       (214)     --       (883)
       AFC.............................    55         37     177        127
       NZ JV...........................    66         24     136        105
       WPG (Note 5)....................    --       (131)     --       (405)
                                         -----      -----  -----    -------
                                        $(272)     $(884)  $(429)   $(1,861)
                                         =====      =====  =====    =======
</TABLE>

                                      6

<PAGE>

  Citadel Holding Corporation ("Citadel")

   At September 30, 2001, the Company owned 1,690,938 shares of Citadel Class A
Nonvoting and 422,734 shares of Citadel Class B Voting common stock,
approximately 21.25% of Citadel's outstanding common stock. The closing prices
of Citadel's Class A Nonvoting and Class B Voting common stock at September 30,
2001 were $1.81 and $1.85 per share, respectively.

   Summarized financial information of Citadel as of September 30, 2001 and
December 31, 2000 and for the nine months ended September 30, 2001 and 2000 was
as follows (dollars in thousands):

<TABLE>
<CAPTION>
                                             September 30, December 31,
                                                 2001          2000
                                             ------------- ------------
<S>                                          <C>           <C>
Condensed Balance Sheets:
Cash and cash equivalents...................    $ 4,502      $16,010
Receivables.................................      2,602        1,430
Marketable securities.......................        455          493
Investment in unconsolidated affiliates.....     10,141       10,237
Rental property and fixed assets, net.......     29,408       19,820
Other assets, net...........................     14,710       15,932
                                                -------      -------
   Total assets.............................    $61,818      $63,922
                                                -------      -------
Accounts payable and accrued liabilities....    $ 6,169      $ 8,033
Other liabilities...........................     19,119       16,707
Minority interests..........................         68           54
Shareholders' equity........................     38,460       41,126
Note receivable from stockholder............     (1,998)      (1,998)
                                                -------      -------
Total liabilities and equity................    $61,818      $63,922
                                                =======      =======
</TABLE>

<TABLE>
<CAPTION>
                                          Three Months Ended Nine Months Ended
                                            September 30,      September 30,
                                          -----------------  -----------------
                                            2001     2000      2001     2000
                                          -------   -------  --------  -------
  <S>                                     <C>       <C>      <C>       <C>
  Condensed Statement of Operations:
  Revenue................................ $ 6,251   $ 1,955   $17,003  $ 3,162
  Operating costs and expenses...........   7,581     2,367    19,550    3,309
                                          -------   -------  --------  -------
  Operating loss.........................  (1,330)     (412)   (2,547)    (147)
  Non-operating (income) expense.........     500    (2,258)      379    2,899
                                          -------   -------  --------  -------
  Loss before tax and minority interest..  (1,830)   (2,670)   (2,926)  (3,046)
  Income tax expense (benefit)...........      14       (76)      209       --
  Minority interest......................       4        --        14        3
                                          -------   -------  --------  -------
     Net loss............................ $(1,848)  $(2,594)  $(3,149) $(3,049)
                                          -------   -------  --------  -------
     Basic and diluted loss per share.... $ (0.19)  $ (0.38)  $ (0.32) $ (0.45)
                                          =======   =======  ========  =======
</TABLE>


                                      7

<PAGE>

Note 3 -- Property and Equipment

   The table below sets forth the Company's investment in property and
equipment as of the dates indicated (dollars in thousands):

<TABLE>
<CAPTION>
                                                    September 30, December 31,
                                                        2001          2000
                                                    ------------- ------------
  <S>                                               <C>           <C>
  Land.............................................   $ 10,283      $  2,598
  Buildings........................................     13,363        14,800
  Leasehold improvements...........................     17,198        28,779
  Equipment........................................     21,927        25,397
  Construction-in-progress and property development     16,716        16,193
                                                      --------      --------
                                                        79,487        87,767
  Accumulated depreciation.........................     (7,559)       (7,145)
  Provision for Asset Impairment...................    (17,034)      (28,813)
                                                      --------      --------
                                                      $ 54,894      $ 51,809
                                                      ========      ========
</TABLE>

   The increase in the amount of land is due to $6,540,000 of land in Auburn,
Australia, which has been reclassified from property held for development upon
completion of the Auburn construction project.

   The carrying amount of land includes land associated with operating theater
properties, and excludes land which has yet to be developed, which amounts are
included in "Property held for development" in the Condensed Consolidated
Balance Sheets. The Company's property and equipment and asset impairment
reserve decreased as a result of the sale of four domestic cinemas to Citadel
in March 2001 (Note 8).

Note 4 -- Income Tax

   Income tax expense for the nine months ended September 30, 2001 and 2000
includes $72,000 and $252,000, respectively, in current provision for federal
and state income taxes, and an accrual of $629,000 and $615,000, respectively,
in foreign withholding taxes which are expected to be paid when and if certain
intercompany loans are repaid.

Note 5 -- Property Held for Sale

  Whitehorse Property Group ("WPG")

   WPG, in which Reading has a 50% interest, is the owner of a shopping center
in Melbourne, Australia. Reading believes that it would be in the best interest
of WPG and its owners to sell that shopping center but Burstone, the owner of
the remaining 50% interest in WPG, has refused to approve such a transaction.
On September 28, 2000, WPG was unable to repay the WPG Loan (used to finance
the purchase of the shopping center) 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 (made by the Company to the principals of Burstone and
guaranteed by Burstone), and (2) purchased, for US$5,799,000, in March 2001 the
WPG Loan. The Company has entered into an agreement in principle with a third
party to foreclose upon the WPG loan and to sell the Whitehorse Center to that
third party. While definitive documentation between the parties is
substantially complete, no assurance can be given that such documentation will
be entered into or that the transactions contemplated will be closed.

   For the nine months ended September 30, 2001, the Company and Burstone
funded WPG's negative cash flow on a 50/50 basis and the Company reserved for
these advances at 100% in the period the money was advanced. No assurances can
be given that Burstone will continue such funding. For the nine months ended
September 30, 2001, the Company had advanced approximately $35,000 (AUS$71,475)
to WPG.

                                      8

<PAGE>

Note 6 -- Commitments and Contingencies

  Domestic

  Dividend in Arrears

   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. As part of the proposed
consolidation transaction, both companies have agreed to postpone the exercise
of such redemption right, pending resolution of the consolidation. In addition,
at September 30, 2001, the Company is two quarters in arrears with respect to
dividends owed on REI Series A Preferred Stock dividend amounting to $227,500
payable to Citadel and is also eleven quarters in arrears with respect to
dividends owed on the Series B Preferred Stock amounting to $9,831,250 payable
to Craig.

  Angelika Dallas Guarantee

   In 1999, the Company entered into a lease of a to-be-constructed theatre 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 that portion of its investment in the cinemas
needed to produce a 20% return on the investment during the second operating
year of that cinema provided that, subject to certain exceptions, Citadel's
investment in the theater does not exceed $2,300,000. At September 30, 2001,
Citadel's investment in the theater was approximately $1,300,000 and is not
expected to exceed the budgeted $2,300,000.

  Environmental

   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. Certain of the subsidiaries of the Company were
historically involved in railroad operations, coal mining and manufacturing.
Also, certain of these subsidiaries appear in the chain of title of properties
which may suffer from pollution. Accordingly, certain of these subsidiaries
have, from time to time, been named in and may in the future be named in
various actions brought under applicable environmental laws. The Company does
not currently believe that its exposure under applicable environmental laws is
material in amount.

  Tax Audit

   The Internal Revenue Service (the "IRS") has completed its audits of the
Reading tax return for its tax year ended December 31, 1996, and of the Craig
tax return for its tax year ended June 30, 1997. With respect to both Reading
and Craig, the principal focus of these audits had been the treatment of the
contribution by Reading Entertainment, Inc. to Reading Australia and subsequent
repurchase by Stater Bros. Inc. from Reading Australia of certain preferred
stock in Stater Bros. Inc. (the "Stater Stock") received by Reading
Entertainment, Inc. from Craig as a part of a private placement of securities
by Reading Entertainment, Inc. that closed in October 1996.

   By letters dated November 9, 2001, the IRS issued reports of examination
proposing changes to the tax returns of Reading and Craig for the years in
question (the "Examination Reports"). The Examination Report for each of
Reading and Craig proposes that the gain on the disposition by Reading
Entertainment Inc. of Stater Stock, reported as taxable on the Reading return,
should be reallocated to Craig. This proposed change would result in an
additional tax liability for Craig of approximately $21,000,000 plus interest.
As reported on Reading's return, the gain on the disposition of the Stater
Stock was fully offset for regular income tax purposes by net operating losses,
but gave rise to an alternative minimum tax liability of approximately
$2,000,000. Under the Examination Report issued to Reading, a consequence of
the reallocation to Craig of the gain on the disposition of the Stater Stock is
the elimination of Reading's alternative minimum tax liability, which would
result in a refund to Reading of approximately $2,000,000, plus interest.

                                      9

<PAGE>

   The examination Reports do not constitute a final determination of Reading's
or Craig's tax liability. Reading and Craig have thirty days from the date of
the Examination Reports to agree with the proposed changes in such reports or
to seek review of these proposed changes with the IRS Office of the Regional
Director of Appeals.

   The Company has been advised by Craig that it intends to appeal and to
vigorously contest the IRS' proposed changes in its Examination Report.
However, no assurances can be given that Craig will quickly or ultimately
prevail in its positions. While Reading does not intend to challenge the
proposed finding in the Examination Report that it is entitled to a refund, in
the event that Craig prevails in its appeal, the IRS would be free (absent a
settlement with Reading) to revisit its position with respect to the refund to
Reading and with respect to the availability of the Reading losses to offset
any gain in the disposition of the Stater Stock by Reading.

   The potential that the IRS might take the position currently stated in its
Examination Report was taken into consideration by the management of Reading,
Craig, and Citadel, and by the respective special committees and boards of
directors of Reading, Craig, and Citadel in adopting the exchange ratios
contemplated by the Merger Agreement (as defined in Note 10).

   Reading and Craig have entered into agreements with the IRS tolling the
applicable statutes of limitation with respect to the returns in question.

  Australia

   The Company has entered into a contract to build an entertainment center in
Frankston. However, in light of its determination to develop a cinema as a part
of the existing regional shopping center at Frankston, the Company has
determined not to proceed with this development. The extent of the Company's
exposure to the other contracting party if it fails to construct that
entertainment center is uncertain. However, the Company believes that its
exposure for damage is not material. While the Company continues to own
developable property at a number of locations in Australia, there are no other
development commitments in Australia at this time.

   In March 2000, Reading Australia entered into the Australian Line of Credit
("Australian LOC") with a major bank which provided for borrowings of up to
AUS$25,000,000 for the construction of an entertainment center and cinema in
Sydney. In December 2000, the lender increased the Australian LOC to
AUS$30,000,000 and extended the credit facility to December 31, 2001. The
Australian LOC is secured by a pledge of substantially all of Reading
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. The Company is currently negotiating with the
bank to increase the Australian LOC to AUS$42,000,000 (Note 11).

  New Zealand

   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 its Wellington entertainment center development and for the
refinancing of the loan used to acquire the Wellington site. The loan is
secured by a mortgage over the Wellington properties and a pledge of the assets
of Reading New Zealand and its subsidiaries associated with the Wellington
project. The loan is due and payable in March 2005. On July 18, 2001, Reading
New Zealand entered into an agreement pertaining to the borrowing of an
additional NZ$4,135,000 to be used to fit-out the cinema being constructed as a
part of the Wellington entertainment center.

                                      10

<PAGE>

Note 7 -- Comprehensive Income

   The following sets forth the Company's Comprehensive income or loss for the
periods shown (dollars in thousands):

<TABLE>
<CAPTION>
                                        Three Months Ended  Nine Months Ended
                                          September 30,       September 30,
                                        -----------------  ------------------
                                          2001     2000      2001      2000
                                        -------   -------  --------  --------
<S>                                     <C>       <C>      <C>       <C>
Net loss............................... $(1,951)  $(3,234) $ (5,237) $ (6,134)
Other comprehensive loss from foreign
  currency translation.................  (1,523)   (6,587)   (6,927)  (13,716)
Other comprehensive loss from equity
  investment in Citadel................      84       (34)      103      (145)
                                        -------   -------  --------  --------
Comprehensive loss..................... $(3,390)  $(9,855) $(12,061) $(19,995)
                                        =======   =======  ========  ========
</TABLE>

   As a result of the Company's equity investment in Citadel, the Company
recorded 21.35% and 31.70% of other comprehensive loss recorded by Citadel for
the nine months ended September 30, 2001 and 2000, respectively. Citadel's
other comprehensive loss is comprised of unrealized loss on available-for-sale
securities.

Note 8 -- Purchase and Sale of Assets

  Australia

   On May 17, 2001, Reading Australia purchased the real property and operating
rights to the Maitland Cinema complex located in New South Wales, Australia,
for approximately US$1,700,000.

  Domestic

   On March 8, 2001, the Company sold to Citadel the Company's leasehold
interests in four domestic cinemas for a note receivable from Citadel in the
amount of $1,706,000, its approximate book basis (net of its asset impairment
reserve relating to these cinemas totaling approximately $11,779,000). In
addition, Citadel has assumed the liabilities of these cinemas and the Company,
in exchange, has agreed to reimburse Citadel approximately $1,115,000
representing the difference between the liabilities assumed and the amount of
inventory, prepaid expenses and other current assets on the balance sheet as of
the closing date. At September 30, 2001, this amount is included in the
Condensed Consolidated Balance Sheet as current liability.

  New Zealand:

   On May 1, 2001, Reading New Zealand sold a fifteen-acre site in a suburb of
Auckland ("Takanini") for approximately $2,397,000 (NZ$5,669,000), net of
disposal costs.

                                      11

<PAGE>

Note 9 -- Segment Information

   The following sets forth certain information concerning the Company's two
segments, real estate development and cinema operations, for the three and nine
months ended September 30 (dollars in thousands):

<TABLE>
<CAPTION>
                                                    Corporate
                            Real Estate   Cinema       and
                            Development Operations Eliminations Consolidated
                            ----------- ---------- ------------ ------------
<S>                         <C>         <C>        <C>          <C>
Three months:
2001
----
Revenues...................   $   162    $11,075     $    76      $11,313
Operating (loss) income....    (1,806)       861        (382)      (1,327)

2000
----
Revenues...................   $   129    $10,691     $    28      $10,848
Operating loss.............      (112)    (2,397)     (1,089)      (3,598)
Nine months:
2001:
-----
Revenues...................   $   445    $29,991     $   220      $30,656
Operating (loss) income....    (3,106)       964      (1,607)      (3,749)

2000:
-----
Revenues...................   $   406    $32,483     $   141      $33,030
Operating loss.............      (181)    (5,558)     (3,266)      (9,005)
</TABLE>

Note 10 -- Proposed Consolidation of the Companies

   On August 16, 2001, the Boards of Directors of each of REI, Craig Corp and
CHC approved an Agreement and Plan of Merger (the "Merger Agreement") providing
for the consolidation of Reading, Craig and Citadel into a single public
company. Under the terms of the Merger Agreement, upon the closing of the
merger, each holder of Reading common stock will receive 1.25 shares of CHC
Class A Nonvoting common stock for each share of REI common stock and each
holder of Craig Corp common stock and Craig Corp common preference will receive
1.17 shares of CHC Class A Nonvoting common stock for each share of the Craig
Corp common or common preference stock. Holders of CHC Class A Nonvoting common
stock and CHC Class B Voting common stock will hold the same shares immediately
after the consolidation as they did immediately prior to the consolidation
since CHC will be the survivor in the transaction. Consummation of the
consolidation is subject to the satisfaction of certain conditions, including
the receipt of the requisite stockholder approvals. However, in the Merger
Agreement, the holders of 49% of the outstanding voting power of CHC and of a
majority of the outstanding voting power of REI and Craig Corp have agreed to
vote in favor of the transaction.

   The operations of Craig and Reading will be included in the Company's
accounts from the effective merger date. The pro forma information presented
below are not necessarily indicative of what the actual financial results would
have been, had the consolidation take place on January 1, 2001. Unaudited pro
forma operating results for the consolidated company, assuming that the
consolidation had occurred on January 1, 2001, are set forth below (dollars in
thousands, except for per share amounts).

<TABLE>
<CAPTION>
                                    For Nine Months
                                         Ended
                                   September 30, 2001
                                   ------------------
<S>                                <C>
Revenues..........................      $52,703
Net loss..........................       (8,556)
Basic earnings per share..........      $ (0.39)
</TABLE>

                                      12

<PAGE>

   Had the consolidation of the three companies taken place as of January 1,
2001, the consolidation would have resulted in the following Consolidated
Balance Sheet (dollars in thousands):

<TABLE>
<CAPTION>
                                                  September 30,
                                                      2001
                                                  -------------
<S>                                               <C>
Cash.............................................   $  9,060
Receivables......................................      6,265
Property, plant and equipment....................     82,399
Rental properties, net...........................      8,719
Property held for development, net...............     20,215
Intangible assets................................     21,698
Other assets.....................................     17,689
                                                    --------
   Total assets..................................   $166,045
                                                    --------
Current liabilities..............................     22,125
Notes payable....................................     35,665
Non-current liabilities..........................     16,392
Minority interest................................      5,008
Stockholders' equity.............................     86,855
                                                    --------
   Total liabilities & equity....................   $166,045
                                                    --------
</TABLE>

   On August 3, 2001, approximately two weeks after the joint announcement by
Craig, Reading, and Citadel3 that they had entered into an agreement in
principle with respect to the consolidation, Harbor Finance Partners filed a
purposed class action complaint in the Nevada State District Court, Clary
County, Nevada, styled Harbor Finance Partners, Plaintiff v. James J. Cotter,
Robert F. Smerling, S. Craig Tompkins, Scott A. Braley, Robert M. Loeffler,
Kenneth S. McCormick, Craig Corporation, and Reading Entertainment, Inc., Case
no. A438155. The Harbor complaint alleges that the Reading directors and Craig,
as the controlling stockholders of Reading, have breached their respective
duties to the stockholders of Reading in various respects, and seeks various
remedies, including preliminary and permanent injunctions against the closing
of the consolidation and monetary damages.

   Essentially, the Harbor Finance Partners complaint alleges that the
defendants are attempting to deceive the plaintiff and the class and deprive
them unfairly of their investment in Reading, and that the defendants have
further breached their respective duties by:

    .  Entering into an agreement that would result in a less than 10% premium
       for the exchange of their Reading shares for Citadel nonvoting common
       stock and at an exchange ration that is alleged to be "grossly unfair,
       inadequate, and substantially below the fair or inherent value of
       Reading" and that allegedly fails to take into account plaintiff's
       assertion that "the intrinsic value of the equity of Reading is
       materially greater than the consideration being considered, taking into
       account Reading's asset value, liquidation value, its expected growth
       and the strength of its business:"

    .  Failing to negotiate any collar on the stock price movements of Citadel
       to guarantee that Reading shareholders would receive a premium for their
       shares;

    .  Failing to disclose, "inter alia, the full extent of the future earnings
       potential of Reading and the expected increase in profitability;" and

    .  Entering into a merger transaction which is allegedly an "unlawful plan
       and scheme to obtain the entire ownership of Reading at the lowest
       possible price" and which allegedly "deny class members their right to
       share proportionately in the true value of Reading's valuable assets,
       profitable business, future growth in profits and earnings, while
       usurping the same for the benefit of the defendants at an unfair and
       inadequate price."

                                      13

<PAGE>

   Although filed on August 3, 2001, the Harbor Finance Partners' complaint was
not served until after the directors of the three companies had approved the
execution and delivery of the consolidation agreement. Neither the directors
nor management were aware of the existence of the complaint until it was served
on August 28/th/.

   On September 5, 2001, Harbor Finance Partners was invited to meet with
Reading to discuss their concerns with respect to the consolidation. In
preparation for that meeting, Reading entered into a Confidentiality Agreement
with Harbor Finance Partners dated September 13, 2001, and on September 17,
2001 forwarded to Harbor Finance Partners the presentations made by Marshall &
Stevens to the conflicts committees on May 3, 2001, June 21, 2001 and July 17
and 18, 2001.

   On September 25, 2001, Reading met with legal counsel and a financial
advisor to Harbor Finance Partners. During the meeting, Harbor Finance
Partners' legal counsel and advisor raised the following concerns on behalf of
Harbor Finance Partners:

    .  The presence of a "buy-out premium" of less that 10% in light of
       precedents cited by the financial advisor to Harbor Finance Partners as
       to the payment of higher premiums in other "buy-out situations;"

    .  The use by Marshall & Stevens of six-months trading histories as one
       element in their determination of the fair exchange ratio recommended to
       the Reading conflicts committee and the Reading board of directors;

    .  The use by Marshall & Stevens of what Harbor Finance Partners took to be
       "book value" numbers in connection with their "market valuation" of
       Reading and the lack of assignment of any specific value to the Reading
       net operating loss carryovers in that "market valuation;" and

    .  The scope and extent of the disclosure in the joint proxy
       statement/prospectus. Specifically, Mr. Houston and Ms. Preston
       expressed the view that the disclosure was unclear as to the extent to
       which appraisals were relied upon in valuing Reading, and that they
       would appreciate greater disclosure regarding the basis for the
       determination to use a single financial advisor to assist with the
       setting of the conversion ratios.

   Harbor Finance Partners' legal counsel and financial advisor also stated
that in their view, the Reading conversion ratio should have been 1.7 to 1
based on an average of their adjustments for each of the above referenced items.

   During the course of this meeting, Reading expressed its management's view
that plaintiff's allegations in the complaint were without merit, and that
Reading intends to vigorously defend against plaintiff's lawsuit. Following the
meeting, the issues raised by Harbor Finance Partners' legal counsel and
financial advisor were brought to the attention of the Reading conflicts
committee and the Reading board of directors. After considering the issues
raised by Harbor Finance Partners, the Reading conflicts committee and the
board of directors have determined to continue moving forward with the
consolidation. On November 7, 2001, this determination was communicated to
Harbor Finance Partners.

   Although no assurances can be given, management expects that the transaction
will close promptly following the special meeting of stockholders currently
scheduled for December 26, 2001. Upon the effectiveness of the merger, the
Company's common stock will then be delisted from the NASDAQ exchange.

Note 11 -- Subsequent Event

   On November 8, 2001, the Company received an extension on its Australian LOC
to March 31, 2003, reduction of the interest margin from 1.6% to 1.2%, and an
increase in the line-of-credit to AUS$42,000,000 (subject to the participating
bank's approval on this syndicated loan facility).

                                      14

<PAGE>

Item 2.  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 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 Citadel Holdings Corporation ("Citadel") 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>
September 30, 1999     35         44         46     125
September 30, 2000     84         56         28     168
September 30, 2001    106         52         --     158
</TABLE>

   In the preceding table, (1) the increase in the number of cinema screens in
Australia and New Zealand is comprised of newly-constructed or acquired
multiplexes cinemas; (2) the increase in the number of cinema screens in Puerto
Rico from 1999 is represented by a newly-constructed, 12-screen multiplex that
opened in December 1999 offset by the closure of a 4-screen cinema, in January
2001 and (3) the decrease in the number of domestic screens from 1999 to 2000
was a result of the deconsolidation of AFC in April 2000 following the sale of
a 50% interest to National Auto Credit, Inc. ("NAC") and closure of an 8-screen
cinema in June 2000. The decrease in the number of domestic screens from 2000
to 2001 was due to the sale of four cinemas with 28-screens to Citadel in March
2001.

                                      15

<PAGE>

Results of Operations

   The following tables and narrative set forth and discuss the results of
operations for the three months and nine months ended September 30, 2001 ("2001
Quarter" and "2001 Nine Months", respectively) as compared to the three and
nine months ended September 30, 2000 ("2000 Quarter" and "2000 Nine Months",
respectively). In the tables below, (1) revenues consist of admissions,
concessions, advertising and real estate rental income; (2) operating costs
consist of costs directly attributable to the theater or real estate operations
including concession costs, (3) operating expenses consist of depreciation,
amortization and general and administrative expenses; and (4) non-operating
expenses include all other expenses and revenues including the asset impairment
charge. 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 and all intercompany transactions have been eliminated
(dollars in thousands).

<TABLE>
<CAPTION>
Three Months Ended September 30
                                                       Puerto
                                              AUS/NZ    Rico   Domestic
2001 Quarter                                 Theaters Theaters Theaters Corporate  Total
------------                                 -------- -------- -------- --------- -------
<S>                                          <C>      <C>      <C>      <C>       <C>
Revenues.................................... $ 6,377  $ 4,861   $   --   $    75  $11,313
Operating costs.............................   4,165    4,219       --        --    8,384
Operating expenses..........................   3,133      222       --       901    4,256
Non-operating expenses......................     146       (1)      --       271      416
                                             -------  -------   ------   -------  -------
(Loss) earnings before minority interest and
  income tax................................ $(1,067) $   421   $   --   $(1,097) $(1,743)
                                             -------  -------   ------   -------  -------
<CAPTION>

                                                       Puerto
                                              AUS/NZ    Rico   Domestic
2000 Quarter                                 Theaters Theaters Theaters Corporate  Total
------------                                 -------- -------- -------- --------- -------
<S>                                          <C>      <C>      <C>      <C>       <C>
Revenues.................................... $ 3,702  $ 4,520   $2,199   $   427  $10,848
Operating costs.............................   3,125    3,933    2,115        --    9,173
Operating expenses..........................   1,904      375      226     1,260    3,765
Non-operating expenses......................   2,175     (917)       2      (517)     743
                                             -------  -------   ------   -------  -------
(Loss) earnings before minority interest and
  income tax................................ $(3,502) $ 1,129   $ (144)  $  (316) $(2,833)
                                             -------  -------   ------   -------  -------
<CAPTION>

Nine Months Ended September 30
                                                       Puerto
                                              AUS/NZ    Rico   Domestic
2001 Nine Months                             Theaters Theaters Theaters Corporate  Total
----------------                             -------- -------- -------- --------- -------
<S>                                          <C>      <C>      <C>      <C>       <C>
Revenues.................................... $17,700  $11,086   $1,651   $   219  $30,656
Operating costs.............................  12,884   10,723    1,527       200   25,334
Operating expenses..........................   5,640      748       50     2,633    9,071
Non-operating expenses......................     541        2       (6)      161      698
                                             -------  -------   ------   -------  -------
(Loss) earnings before minority interest and
  income tax................................ $(1,365) $  (387)  $   80   $(2,775) $(4,447)
                                             -------  -------   ------   -------  -------
<CAPTION>

                                                       Puerto
                                              AUS/NZ    Rico   Domestic
2000 Nine Months                             Theaters Theaters Theaters Corporate  Total
----------------                             -------- -------- -------- --------- -------
<S>                                          <C>      <C>      <C>      <C>       <C>
Revenues.................................... $13,145  $11,640   $7,698   $   547  $33,030
Operating costs.............................  10,581   10,650    7,148        --   28,379
Operating expenses..........................   4,892      817      890     3,824   10,423
Non-operating expenses......................   3,671     (781)      15    (3,507)    (602)
                                             -------  -------   ------   -------  -------
(Loss) earnings before minority interest and
  income tax................................ $(5,999) $   954   $ (355)  $   230  $(5,170)
                                             -------  -------   ------   -------  -------
</TABLE>

                                      16

<PAGE>

  Revenues

   The fluctuations noted in theater revenues generally resulted from a
corresponding increase or decrease in the number of screens in operation during
the 2001 Quarter and 2001 Nine months as compared with the 2000 Quarter and
2000 Nine Months. The revenues fluctuated due to the following:

    .  $2,675,000 and $4,555,000 increase in Australian/New Zealand theater
       revenues for the 2001 Quarter and the 2001 Nine Months, respectively, is
       mostly attributed to the 21 new screens that have opened or been
       acquired since September 30, 2000.

    .  $341,000 increase in Puerto Rico's theater revenues for the 2001 Quarter
       as compared to the 2000 Quarter is due to well-received summer movies
       such as the Kiss of the Dragon, Rush Hour 2, and Jurassic Park III.
       Conversely, a $(554,000) decrease in Puerto Rico's theater revenues for
       the 2001 Nine Months as compared to the 2000 Nine Months is due to (1)
       the closure of a 4-screen cinema in January 2001 and (2) increased
       competition, especially in the Plaza Las Americas in San Juan.

    .  The Company sold its four domestic cinemas to Citadel in March 2001. As
       a result of the sale, the Company had no domestic cinema operation in
       the 2001 Quarter. A $6,047,000 decrease in domestic theater revenues for
       the 2001 Nine Months is due to (1) the decrease from the deconsolidation
       of AFC following the sale of 50% membership interest to NAC on April 5,
       2000, (2) the decrease in domestic theater revenues due to the closure
       of a 8-screen cinema in June 2000, and (3) the sale to Citadel as
       mentioned before.

  Operating costs

   Operating costs include costs associated with the day-to-day management of
the theater operations. Significant components of the operating costs such as
film rent payable, concession costs, and employee costs fluctuate in line with
the revenues and accordingly, decreased in the 2001 Quarter and 2001 Nine
Months due to the following:

    .  Australia/New Zealand operating costs increased approximately $1,040,000
       and $2,303,000 in the 2001 Quarter and 2001 Nine Months, respectively.
       This increase is due to 22 additional screens that opened or were
       acquired since September 30, 2000.

    .  Puerto Rico's operating costs increased $286,000 in the 2001 Quarter
       compared to the same period in 2000. The increase is in line with the
       increase in theater revenue. Overall, Puerto Rico's operating costs for
       the 2001 Nine Months compared to the same period in 2000 remained
       comparable even though theater revenue for the 2001 Nine months period
       decreased. The decrease in theater rent as a result of the closure of a
       4-screen cinema in January 2001 and other direct theater expenses was
       offset by a slight increase in film rent expense, advertising and
       insurance expenses.

    .  As discussed above, the Company had no domestic cinema operation in the
       2001 Quarter. The decrease of $5,621,000 in domestic operating costs for
       the 2001 Nine Months is attributable to (1) deconsolidation of AFC, (2)
       the closure of an 8-screen theater in 2000, and (3) to the sale of the
       four theaters in March 2001.

  Operating expenses

   Operating expenses include depreciation, amortization and general and
administrative expenses. The items below represent the more significant
contributors to changes in the operating expenses in the 2001 Quarter and 2001
Nine Months:

    .  Australia/New Zealand operating expenses increased $1,229,000 and
       $748,000 in the 2001 Quarter and the 2001 Nine Months, respectively,
       primarily due to (1) $590,000 in depreciation expense recorded on its
       Auburn property in the 2001 Quarter, and (2) the increased depreciation
       expense stemming from the newly opened/acquired properties. Despite its
       growing operations, Australia/New Zealand's general and administrative
       expense (excluding depreciation and amortization expense) for the 2001
       periods remained comparable to that of 2000 periods.

                                      17

<PAGE>

    .  Corporate operating expenses decreased $359,000 and $1,191,000 in the
       2001 Quarter and the 2001 Nine Months, respectively, as a result of the
       Company's consolidation of its corporate functions with Craig
       Corporation and Citadel under a management sharing arrangement, which is
       discussed in greater detail in the Company's report on Form 10-K for the
       year ended December 31, 2000. The decrease in general and administrative
       expenses from the 2000 Quarter and 2000 Nine Months is due to decreased
       allocation of costs from Craig reflecting the Company's lessened need
       for general and administrative support following the sale of its cinemas
       and theater operations.

  Non-operating expenses

   The Company's non-operating expenses are comprised of interest and dividend
income, equity in earnings/loss of unconsolidated entities, interest expense,
miscellaneous other income or expense, and other non-recurring income/expense.
Corporate interest, dividend income and other income are presented net of
intercompany transactions with the Puerto Rico and Australia/New Zealand
subsidiaries. Non-operating expenses, in total, decreased $327,000 for the 2001
Quarter but increased $1,300,000 for the 2001 Nine Months for the following
reasons:

    .  The 2000 Quarter non-operating expense of $743,000 was mainly comprised
       of (1) $(1,508,000) in asset impairment taken on its Australian and New
       Zealand properties, (2) $(884,000) in equity losses of unconsolidated
       subsidiaries, partially offset by (3) $1,221,000 of deferred gain on
       National Auto Credit, Inc. ("NAC"), and (4) $500,000 in NAC option fees.

    .  Likewise, the 2000 Nine Months non-operating income of $602,000 was
       comprised of numerous non-recurring income/expense such as (1) the
       $(3,233,000) of asset impairment taken on its Australian and New Zealand
       properties, (2) $4,776,000 of non-recurring gain realized on the
       exchange of the AFC interest, (3) $949,000 in insurance settlement
       income from Puerto Rico and (4) $500,000 in option fee income received
       from the National Auto Credit.

Liquidity and Capital Resources

   Since December 31, 1998, the Company's cash and cash equivalents have
decreased from approximately $58,593,000, to approximately $3,185,000 at
September 30, 2001. 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)
construct state-of-the-art cinemas and entertainment centers in Australia and
New Zealand, (3) fit out newly-constructed cinema space in Australia, with
respect to which the Company is a tenant under long-term leases; (4) acquire
the real estate, equipment and operations constituting two existing cinemas in
Australia; (5) acquire a 50% interest in a cinema joint venture in New Zealand
and (6) construct state-of-the-art cinemas on leased land in the United States
(one location) and in Puerto Rico (one location). Each of the cinemas and
entertainment centers constructed or acquired since 1998 have been financed
predominantly with the Company's liquidity, except for the fitout of two leased
cinemas and a portion of the construction costs of two entertainment centers in
Australia and the construction of the Company's Wellington entertainment center
project in New Zealand. During this period, in the land portion of addition to
its investments in now-operating cinemas, at September 30, 2001, the Company
had a recorded investment of $20,360,000 (at current exchange rates) in various
land parcels, located in Australia and New Zealand, each of which is intended
for future development. Each of these investments in undeveloped land has also
been financed with the Company's liquidity.

   During Fiscal 2000, based on the Company's limited resources, the Company
determined that it would concentrate its available resources on developing and
operating its Australian and New Zealand cinema circuits. Concurrently, the
Company decided that it would exit the domestic cinema market. Through a
serious of transactions in April and September 2000 and March 2001, the Company
has divested all of its domestic cinema assets except for a passive 33%
membership interest in the Angelika Film Center ("AFC") at September 30, 2001.
In addition, the Company is looking to exit out of Puerto Rico if a suitable
buyer can be found for its cinemas. No assurances can be given that any such
buyer will be found.

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<PAGE>

   The Company has various commitments which, in the aggregate, exceed its
current liquidity. As discussed in greater detail in the Company report on Form
10-K for the year ended December 31, 2000, the Company received approximately
$14,702,000 in cash from its sale of its investment in NAC common stock to NAC
in November and December 2000. A significant portion of the cash proceeds from
the sale of the NAC stock have been used to (1) acquire the bank loan on the
Whitehorse property as described in Note 5 to the quarterly financial
statements, (2) acquire the Maitland cinema property in Australia as described
in Note 8 to the quarterly financial statements and (3) fund the Companies
continuing negative cash flow from operations of approximately $3,895,000 over
the first three quarters of 2001. The Company currently expects to fully
recover the loan amount upon sale of the Whitehorse property. The Company is
currently endeavoring to finance a portion of the purchase price of the
Maitland cinemas complex. No assurances can be given that management will be
successful in obtaining the financing for the Maitland property on commercially
reasonable or acceptable terms, or that the Company will be able to sell the
Whitehorse property.

   In addition to the cash infusion from the NAC transaction, the Company has
obtained a line-of-credit with a major bank which provides for borrowings of up
to AUS$30,000,000 ("Australian Line of Credit"). The Australian Line of Credit
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. At September 30, 2001, Reading
Australia had approximately AUS$2,175,000 (approximately $1,076,000 at
September 30, 2001 exchange rate) available under its line of credit. On
November 8, 2001, the Company received an extension on its Australian Line of
Credit to March 31, 2003, reduction of the interest margin fro 1.6% to 1.2%,
and an increase in the line-of-credit to AUS$42,000,000 (subject to the
participating bank's approval on this syndicated loan facility). At September
30, 2001, the Company was in compliance with all bank covenants.

   Also, Reading New Zealand entered into a loan agreement with a major New
Zealand bank for borrowings up to NZ$30,400,000. On July 18, 2001, the Company
entered into an agreement with this New Zealand bank to increase the loan
facility by the lesser of the NZ$4,135,000 or 75% of the fit-out costs with
respect to its cinema currently under construction in Wellington. The loan is
secured by a mortgage over the Wellington properties and a 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 improvement at its entertainments centers in
Australia and the fitout of a cinema lease in Australia.

   With respect to its obligations of the Company under its Series A and Series
B Preferred Stock, the Company currently anticipates that its liabilities with
respect to these securities will be resolved by the contemplated consolidation
of the Company with Citadel and Craig. However, in the event the consolidation
was for any reason not to be consummated, it is currently expected that Citadel
would exercise its rights to require the Company to repurchase its Series A
Preferred Stock for approximately $7,341,250 (calculated inclusive of
accumulated dividends through December 31, 2001). Also, accumulated dividends
under the Company's Series B Preferred Stock anticipated to aggregate to
$10,725,000 by December 31, 2001. The Company does not currently have the
liquidity to repurchase its Series A Preferred Stock or to pay dividends. If
the consolidation is for any reason not consummated, it is anticipated that the
Company will need to raise capital by selling assets (or interest in assets) or
equity. No assurances can be given that equity securities could be sold so that
would not be dilutive to the Company's stockholders.

   The Company's management expects the Company's general and administrative
expense to decrease following the pending consummation of the consolidation of
the three companies. Taking into account all of the duplicated costs associated
with maintaining three separate public companies--having three sets of board of
directors, filing three sets of quarterly and annual reports, incurring costs
for three annual shareholders' meetings, etc.--the Company's management expects
to decrease the total general and administrative expense by approximately
$1,000,000 annually across the three companies once the consolidation is
complete. Although no

                                      19

<PAGE>

assurances can be given, the management expects that the transaction will close
in the fourth quarter of 2001 and the Company's common stock will then be
delisted from the NASDAQ. Information about the third quarter results of Craig
and Citadel, and recent events affecting those companies are set out in the
reports on Form 10-Q for such period, which reports are being filed
simultaneously herewith.

   On August 16, 2001, the Boards of Directors of each of REI, Craig Corp and
CHC approved an Agreement and Plan of Merger (the "Merger Agreement") providing
for the consolidation of Reading, Craig and Citadel into a single public
company. Under the terms of the Merger Agreement, upon the closing of the
merger, each holder of Reading common stock will receive 1.25 shares of CHC
Class A Nonvoting common stock for each share of REI common stock and each
holder of Craig Corp common stock and Craig Corp common preference will receive
1.17 shares of CHC Class A Nonvoting common stock for each share of the Craig
Corp common or common preference stock. Holders of CHC Class A Nonvoting common
stock and CHC Class B Voting common stock will hold the same shares immediately
after the consolidation as they did immediately prior to the consolidation
since CHC will be the survivor in the transaction. Consummation of the
consolidation is subject to the satisfaction of certain conditions, including
the receipt of the requisite stockholder approvals. However, in the Merger
Agreement, the holders of 49% of the outstanding voting power of CHC and of a
majority of the outstanding voting power of REI and Craig Corp have agreed to
vote in favor of the transaction.

   On August 3, 2001, approximately two weeks after the joint announcement by
Craig, Reading, and Citadel that they had entered into an agreement in
principle with respect to the consolidation, Harbor Finance Partners filed a
purposed class action complaint in the Nevada State District Court, Clary
County, Nevada, styled Harbor Finance Partners, Plaintiff v. James J. Cotter,
Robert F. Smerling, S. Craig Tompkins, Scott A. Braley, Robert M. Loeffler,
Kenneth S. McCormick, Craig Corporation, and Reading Entertainment, Inc., Case
no. A438155. The Harbor complaint alleges that the Reading directors and Craig,
as the controlling stockholders of Reading, have breached their respective
duties to the stockholders of Reading in various respects, and seeks various
remedies, including preliminary and permanent injunctions against the closing
of the consolidation and monetary damages.

   Essentially, the Harbor Finance Partners complaint alleges that the
defendants are attempting to deceive the plaintiff and the class and deprive
them unfairly of their investment in Reading, and that the defendants have
further breached their respective duties by:

    .  Entering into an agreement that would result in a less than 10% premium
       for the exchange of their Reading shares for Citadel nonvoting common
       stock and at an exchange ration that is alleged to be "grossly unfair,
       inadequate, and substantially below the fair or inherent value of
       Reading" and that allegedly fails to take into account plaintiff's
       assertion that "the intrinsic value of the equity of Reading is
       materially greater than the consideration being considered, taking into
       account Reading's asset value, liquidation value, its expected growth
       and the strength of its business:"

    .  Failing to negotiate any collar on the stock price movements of Citadel
       to guarantee that Reading shareholders would receive a premium for their
       shares;

    .  Failing to disclose, "inter alia, the full extent of the future earnings
       potential of Reading and the expected increase in profitability;" and

    .  Entering into a merger transaction which is allegedly an "unlawful plan
       and scheme to obtain the entire ownership of Reading at the lowest
       possible price' and which allegedly "deny class members their right to
       share proportionately in the true value of Reading's valuable assets,
       profitable business, future growth in profits and earnings, while
       usurping the same for the benefit of the defendants at an unfair and
       inadequate price."

   Although filed on August 3, 2001, the Harbor Finance Partners' complaint was
not served until after the directors of the three companies had approved the
execution and delivery of the consolidation agreement. Neither the directors
nor management were aware of the existence of the complaint until it was served
on August 28/th/.

                                      20

<PAGE>

   On September 5, 2001, Harbor Finance Partners was invited to meet with
Reading to discuss their concerns with respect to the consolidation. In
preparation for that meeting, Reading entered into a Confidentiality Agreement
with Harbor Finance Partners dated September 13, 2001, and on September 17,
2001 forwarded to Harbor Finance Partners the presentations made by Marshall &
Stevens to the conflicts committees on May 3, 2001, June 21, 2001 and July 17
and 18, 2001.

   On September 25, 2001, Reading met with legal counsel and a financial
advisor to Harbor Finance Partners. During the meeting, Harbor Finance
Partners' legal counsel and advisor raised the following concerns on behalf of
Harbor Finance Partners:

    .  The presence of a "buy-out premium" of less that 10% in light of
       precedents cited by the financial advisor to Harbor Finance Partners as
       to the payment of higher premiums in other "buy-out situations;"

    .  The use by Marshall & Stevens of six-months trading histories as one
       element in their determination of the fair exchange ratio recommended to
       the Reading conflicts committee and the Reading board of directors;

    .  The use by Marshall & Stevens of what Harbor Finance Partners took to be
       "book value" numbers in connection with their "market valuation" of
       Reading and the lack of assignment of any specific value to the Reading
       net operating loss carryovers in that "market valuation;" and

    .  The scope and extent of the disclosure in the joint proxy
       statement/prospectus. Specifically, Mr. Houston and Ms. Preston
       expressed the view that the disclosure was unclear as to the extent to
       which appraisals were relied upon in valuing Reading, and that they
       would appreciate greater disclosure regarding the basis for the
       determination to use a single financial advisor to assist with the
       setting of the conversion ratios.

   Harbor Finance Partners' legal counsel and financial advisor also stated
that in their view, the Reading conversion ratio should have been 1.7 to 1
based on an average of their adjustments for each of the above referenced items.

   During the course of this meeting, Reading expressed its management's view
that plaintiff's allegations in the complaint were without merit, and that
Reading intends to vigorously defend against plaintiff's lawsuit. Following the
meeting, the issues raised by Harbor Finance Partners' legal counsel and
financial advisor were brought to the attention of the Reading conflicts
committee and the Reading board of directors. After considering the issues
raised by Harbor Finance Partners, the Reading conflicts committee and the
board of directors have determined to continue moving forward with the
consolidation. On November 7, 2001, this determination was communicated to
Harbor Finance Partners.

   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. Certain of the subsidiaries of the Company were
historically involved in railroad operations, coal mining and manufacturing.
Also, certain of these subsidiaries appear in the chain of title of properties
which may suffer from pollution. Accordingly, certain of these subsidiaries
have, from time to time, been named in and may in the future be named in
various actions brought under applicable environmental laws. The Company does
not currently believe that its exposure under applicable environmental laws is
material in amount.

   The Internal Revenue Service (the "IRS") has competed its audits of the
Reading tax return for its tax year ended December 31, 1996, and of the Craig
tax return for its tax year ended June 30, 1997. With respect to both Reading
and Craig, the principal focus of these audits had been the treatment of the
contribution by Reading Entertainment, Inc. to Reading Australia and subsequent
repurchase by Stater Bros. Inc. from Reading Australia of certain preferred
stock in Stater Bros. Inc. (the "Stater Stock") received by Reading
Entertainment, Inc. from Craig as a part of a private placement of securities
by Reading Entertainment, Inc. that closed in October 1996.

                                      21

<PAGE>

   By letters dated November 9, 2001, the IRS issued reports of examination
proposing changes to the tax returns of Reading and Craig for the years in
question (the "Examination Reports"). The Examination Report for each of
Reading and Craig proposes that the gain on the disposition by Reading
Entertainment Inc. of Stater Stock, reported as taxable on the Reading return,
should be reallocated to Craig. This proposed change would result in an
additional tax liability for Craig of approximately $21,000,000 plus interest.
As reported on Reading's return, the gain on the disposition of the Stater
Stock was fully offset for regular income tax purposes by net operating losses,
but gave rise to an alternative minimum tax liability of approximately
$2,000,000. Under the Examination Report issued to Reading, a consequence of
the reallocation to Craig of the gain on the disposition of the Stater Stock is
the elimination of Reading's alternative minimum tax liability, which would
result in a refund to Reading of approximately $2,000,000, plus interest.

   The examination Reports do not constitute a final determination of Reading's
or Craig's tax liability. Reading and Craig have thirty days from the date of
the Examination Reports to agree with the proposed changes in such reports or
to seek review of these proposed changes with the IRS Office of the Regional
Director of Appeals.

   The Company has been advised by Craig that it intends to appeal and to
vigorously contest the IRS' proposed changes in its Examination Report.
However, no assurances can be given that Craig will quickly or ultimately
prevail in its positions. While Reading does not intend to challenge the
proposed finding in the Examination Report that it is entitled to a refund, in
the event that Craig prevails in its appeal, the IRS would be free (absent a
settlement with Reading) to revisit its position with respect to the refund to
Reading and with respect to the availability of the Reading losses to offset
any gain in the disposition of the Stater Stock by Reading.

   The potential that the IRS might take the position currently stated in its
Examination Report was taken into consideration by the management of Reading,
Craig, and Citadel, and by the respective special committees and boards of
directors of Reading, Craig, and Citadel in adopting the exchange ratios
contemplated by the Merger Agreement.

   Reading and Craig have entered into agreements with the IRS tolling the
applicable statutes of limitation with respect to the returns in questions.

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.

   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, continuing effects of the September 11/th/ tragedy, inability to
obtain extension of current loans, delays in obtaining leases and permits for
new multiplex locations, construction risks and delays, the lack of strong film
product, the impact of competition, ability to resolve IRS audits favorably,
market and other risks associated with the Company's investment activities,
consummation of the proposed consolidation plan with Craig Corporation and
Citadel, and other factors described herein.

                                      22

<PAGE>

Item 3. 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.

   Approximately 42% and 14% of the Company's assets were invested in assets
denominated in Australian dollars (Reading Australia) and New Zealand dollars
(Reading New Zealand), respectively, at September 30, 2001 compared to 41% and
7% at December 31, 2000. At September 30, 2001, $1,949,000 and $605,000 of the
Company's $3,185,000 in cash and cash equivalents was invested in Australian
and New Zealand dollars compared to $2,852,000 and $101,000 of the $16,446,000
in cash and cash equivalents at December 31, 2000. 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 56% of the Company's assets (based upon the amount at
September 30, 2001) will continue to be invested in assets subject to exchange
fluctuations between the U.S. and Australian and New Zealand dollars. At
December 31, 2000 approximately 48% of the Company's assets were invested in
assets subject to currency fluctuations. The Company has no current plan to
hedge such exposure.

   During the nine months ended September 30, 2001, the Company recognized an
unrealized foreign currency translation loss of approximately ($6,927,000)
(included as a component of comprehensive loss in the Consolidated Statement of
Shareholders' Equity contained elsewhere herein) compared to an unrealized loss
of approximately ($13,716,000) during the same period in 2000. The unrealized
loss recorded during the nine months ended September 30, 2001 and 2000 related
to the decrease in the value of the Australian and New Zealand dollars relative
to the U.S dollars. The exchanges rates of the U.S dollar per Australian dollar
were $0.4946 and $0.5560 at September 30, 2001 and December 31, 2000,
respectively, and the exchange rates of the U.S dollar per New Zealand dollar
were $0.4067 and $0.4423 at September 30, 2001 and December 31, 2000,
respectively.

   In September 2000, Reading Australia opened the cinema portion of its Auburn
development and opened its Belmont development in 2001. As more of the
Company's cinemas exhibition business becomes concentrated in Australia and New
Zealand in 2001 and as a result of the Company's sale of its domestic cinema
operations in March 2001, the Company's income from operations may be
significantly affected by foreign currency exchange rate fluctuations.

                                      23

<PAGE>

                         PART II -- Other Information

Item 1. Legal Proceedings

  Harbor Finance Partners

   On August 3, 2001, Harbor Finance Partners filed a purposed class action
complaint in the Nevada State District Court, Clary County, Nevada, styled
Harbor Finance Partners, Plaintiff v. James J. Cotter, Robert F. Smerling, S.
Craig Tompkins, Scott A. Braley, Robert M. Loeffler, Kenneth S. McCormick,
Craig Corporation, and Reading Entertainment, Inc., Case no. A438155. The
Harbor complaint alleges that the Reading directors and Craig, as the
controlling stockholders of Reading, have breached their respective duties to
the stockholders of Reading in various respects, and seeks various remedies,
including preliminary and permanent injunctions against the closing of the
consolidation and monetary damages.

   Essentially, the Harbor Finance Partners complaint alleges that the
defendants are attempting to deceive the plaintiff and the class and deprive
them unfairly of their investment in Reading, and that the defendants have
further breached their respective duties by (1) entering into an agreement that
would result in a less than 10% premium for the exchange of their Reading
shares for Citadel nonvoting common stock and at an exchange ration that is
alleged to be "grossly unfair, inadequate, and substantially below the fair or
inherent value of Reading" and that allegedly fails to take into account
plaintiff's assertion that "the intrinsic value of the equity of Reading is
materially greater than the consideration being considered, taking into account
Reading's asset value, liquidation value, its expected growth and the strength
of its business:" (2) failing to negotiate any collar on the stock price
movements of Citadel to guarantee that Reading shareholders would receive a
premium for their shares; (3) failing to disclose, "inter alia, the full extent
of the future earnings potential of Reading and the expected increase in
profitability;" and (4) entering into a merger transaction which is allegedly
an "unlawful plan and scheme to obtain the entire ownership of Reading at the
lowest possible price' and which allegedly "deny class members their right to
share proportionately in the true value of Reading's valuable assets,
profitable business, future growth in profits and earnings, while usurping the
same for the benefit of the defendants at an unfair and inadequate price."

  Alphin Litigation

   On October 26, 2001, the Pennsylvania Court of Appeals affirmed the grant by
the trial court of Summary Judgment in our favor of the Company and all other
defendants in Alphin v. James J. Cotter et al.

   In addition, please refer to Item 3 entitled "Legal Proceedings" contained
in the Company's Form 10-K for the fiscal year ended December 31, 2000.

Item 2. Changes in Securities

Not applicable.

Item 3. Defaults Upon Senior Securities

   Not applicable.

Item 4. Submission of Matters to a Vote of Security Holders

Not applicable.

Item 5. Other Information

Not applicable.

Item 6. Exhibits and Reports on Form 8-K

      (a) Exhibits--None

      (b) Reports on Form 8-K.

          Form 8-K dated July 19, 2001 reporting that Citadel Holding
          Corporation, Craig Corporation and Reading Entertainment, Inc.
          entered into an Agreement in Principle to consolidate the three
          companies was filed with the SEC and incorporated herein by reference.

                                      24

<PAGE>

                                  SIGNATURES

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

                                         READING ENTERTAINMENT, INC. REGISTRANT

Date: November 15, 2001   By: /S/ JAMES J. COTTER
                          ---------------------------
                             James J. Cotter
                             Chief Executive Officer
Date: November 15, 2001   By: /S/ ROBERT F. SMERLING
                          ---------------------------
                             Robert F. Smerling
                             President
Date: November 15, 2001   By: /S/ ANDRZEJ MATYCZYNSKI
                          ---------------------------
                             Andrzej Matyczynski
                             Chief Financial Officer


                                      25