<PAGE>
 
                      SECURITIES AND EXCHANGE COMMISSION
                            Washington, D.C.  20549
                   -----------------------------------------
                                        
                                   FORM 10-K
(Mark One)
[X]   ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
      ACT OF 1934
                  For the fiscal year ended December 31, 1998

                                      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 1-6123

                               CRAIG CORPORATION
            (Exact name of Registrant as specified in its charter)

            DELAWARE                                   95-1620188
  (State or other jurisdiction of           (IRS Employer Identification No.)
  incorporation or organization)
 
     550 SOUTH HOPE STREET, SUITE 1825                     90071
            LOS ANGELES  CA
  (Address of principal executive offices)               (Zip Code)


      Registrant's telephone number, including area code: (213) 239-0555
 
Securities Registered pursuant to Section 12(b) of the Act:

     TITLE OF EACH CLASS       NAMES OF EXCHANGES ON WHICH EACH CLASS REGISTERED
     -------------------       -------------------------------------------------
 Common stock, $0.25 par value,             New York Stock Exchange
Class A Common preference stock,          And Pacific Stock Exchange
         $.01 par value

Securities registered pursuant to Section 12(g) of the Act:  None

   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 twelve months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X]  No [_]

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

   The aggregate market value of voting stock held by non-affiliates of the
Registrant was $49,903,000 as of April 12, 1999.

   Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date. As of April 12, 1999, there
were 3,581,112 shares of Common Stock, $0.25 par value per share, and 7,058,412
shares of Class A Common Preference Stock, $0.01 par value per share,
outstanding.

                      DOCUMENTS INCORPORATED BY REFERENCE
                                     None.
<PAGE>
 
                               CRAIG CORPORATION

                          ANNUAL REPORT ON FORM 10-K
                         YEAR ENDED DECEMBER 31, 1998
                                     INDEX

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

<TABLE>
<CAPTION>
                                                                                         PAGE
<S>                                                                                      <C>
PART I.

Item 1.   Business                                                                         1
Item 2.   Properties                                                                      18
Item 3.   Legal Proceedings                                                               21
Item 4.   Submission of Matters to a Vote of Security Holders                             22


PART II.

Item 5.   Market for the Registrant's Common Stock and Related Stockholder Matters        23
Item 6.   Selected Financial Data                                                         24
Item 7.   Management's Discussion and Analysis of Financial Condition and
          Results of Operations ("MD&A")                                                  26
Item 7A   Quantitative and Qualitative Disclosure About Market Risk                       45
Item 8.   Financial Statements and Supplementary Data                                     46
Item 9.   Change in and Disagreements with Accountants on
          Accounting and Financial Disclosure                                             46


PART III.

Item 10.  Directors and Executive Officers of the Registrant                              47
Item 11.  Executive Compensation                                                          50
Item 12.  Security Ownership of Certain Beneficial Owners and Management                  55
Item 13.  Certain Relationships and Related Transactions                                  58


PART IV.

Item 14.  Exhibits, Financial Statement Schedule, and Reports on Form 8-K                 60
          Signatures                                                                      64
</TABLE>


                                      -i-
<PAGE>
 
                                    PART I
                                    ------

ITEM 1.  BUSINESS

GENERAL
-------

     Introduction:  Craig Corporation (Craig, collectively with its wholly owned
     ------------                                                               
subsidiaries, the "Company", and collectively with its consolidated subsidiaries
the "Consolidated Company") is in the business of identifying, acquiring, owning
and strategically managing controlling interests in other operating companies.
The Company is not in the business of investing, reinvesting or trading in
securities.

     The Company's principal holdings at December 31, 1998 consisted of (i)
common and preferred stock representing approximately 78% of the voting power of
Reading Entertainment, Inc. ("REI" and collectively with its consolidated
subsidiaries, "Reading"), (ii) common shares representing approximately 16.4% of
the outstanding common shares of Citadel Holding Corporation ("CHC" and
collectively with its consolidated subsidiaries "Citadel") and, (iii) 16.4% of
the outstanding common stock of Big 4 Ranch, Inc., a company owning a 40%
interest in certain agricultural properties located in Kern County, California,
and (iv) cash and cash equivalents.  The Consolidated Company holds a 48%
interest in Citadel and 49% interest in Big 4 Ranch, Inc. ("BRI").

     The Company currently reports for financial purposes on a consolidated
basis with Reading.  However, the Company does not consolidate with Reading for
tax purposes, does not have common financing with Reading, does not guarantee
the obligations of Reading and has separate offices and, with three exceptions,
separate officers and directors from Reading. These common officers and
directors are separately compensated by the Company and Reading.

     Reading:  The Company has been accumulating stock in REI, a publicly traded
     -------                                                                    
company whose shares are quoted on the NASDAQ National Market and traded on the
Philadelphia Stock Exchange, and in its predecessor, Reading Company, since
1989. By the end of the second quarter of 1996, this interest had grown to
approximately 52.5% of the outstanding voting securities of that company. In
November 1995, the Company and Reading formed Reading International Cinemas LLC
("Reading International"), owned in equal portions by the Company and Reading,
to pursue the development of cinemas in Australia. During the first quarter of
1996, the Company conveyed to Reading its common stock interest in CHC and
during the fourth quarter of 1996, the Company, Reading and Citadel consummated
the Stock Transactions in which the Company contributed its Stater Preferred
Stock, CHC Preferred Stock and its 50% membership interest in Reading
International to Reading in exchange for common stock and preferred stock of
REI. Citadel contributed cash in the amount of $7 million in exchange for a
separate class of REI preferred stock and certain contractual rights including
the Asset Put Option described below. As a consequence of the Stock Transactions
and certain other open market acquisitions by the Company made after the Stock
Transactions, the Company now holds 5,165,516 shares of REI Common Stock and
550,000 shares of REI Series B Preferred Stock, which in the aggregate represent
approximately 78% of the outstanding voting power of REI. Citadel currently
owns, as a result of the Stock Transactions, 70,000 shares of REI Series A
Preferred Stock representing approximately 5% of the outstanding voting power of
REI, and the Asset Put Option.

                                    Page 1
<PAGE>
 
     Reading is principally engaged in the cinema exhibition business in the
United States, Puerto Rico, Australia and New Zealand and in the development of
cinema based entertainment centers in Australia and New Zealand. In addition,
Reading has recently expanded into the live theater business in the United
States and currently owns or has agreements to acquire or license five live
theaters comprising eight auditoriums in Manhattan, Chicago and San Francisco.

     The Company's Chairman and President are, respectively, the Chairman and
Vice Chairman of the Board of Directors of Reading, and comprise two of the six
directors of that company.  These common directors are separately compensated by
Reading for their services to that company.

     Citadel:  In 1986, the Company acquired options to purchase 4.5% of the
     -------                                                                
outstanding common stock of CHC, a publicly traded company whose shares are
listed for trading on the American Stock Exchange.  The Company exercised those
options in 1987, and by the close of that year owned approximately 9% of the
outstanding common stock of CHC.  Prior to August 1994, CHC was the holding
company for Fidelity Federal Bank, FSB ("Fidelity").  In August 1994, as a
result of the weakened financial position of Fidelity caused, in part, by
declines in the Southern California real estate market and the Northridge
earthquake, Fidelity consummated a recapitalization transaction in which CHC
received certain real estate assets and litigation claims from Fidelity and
CHC's interest in Fidelity was diluted, as a consequence of the issuance by
Fidelity of new equity securities, from 100% to approximately 16%. Following
that recapitalization, the Consolidated Company increased its voting interest to
approximately 48% at December 31, 1998. At December 31, 1998, the Consolidated
Company's carrying value of its equity investment in Citadel totaled
approximately $12,962,000.

     At December 31, 1998, Citadel's assets had a book value for purposes of
Citadel's consolidated financial statements on CHC's consolidated balance sheet
of $35,000,000, consisting principally of two office buildings (located in
Glendale, California and Phoenix, Arizona), 70,000 shares of REI Series A
Convertible Preferred Stock, a 40% interest in certain agricultural
partnerships, an 80% interest in Big 4 Farming LLC (a farming management
company) and cash and cash equivalents.  At that same date, Citadel had long
term liabilities (consisting of mortgage debt on its two office properties) of
$92 million.  Citadel has entered into a contract to sell one of its office
buildings for approximately $20 million, in a transaction currently anticipated
to close in the second quarter of 1999.  This building was acquired in 1994
for approximately $6.4 million.  Citadel also holds a put option to put to
Reading, through approximately April 2000, subject to certain limitations, all
of its assets other than the Series A Convertible Preferred Stock, in exchange
for REI common stock (the "Asset Put Option").  The Asset Put Option provides
for an exercise price of $12.25 per share.  The closing price of REI stock at
December 31, 1998 was $7.875 per share.

     The Company's Chairman is the Chairman of CHC, and the Company's President
is the Vice Chairman, Secretary, Treasurer and Principal Accounting Officer of
CHC.  The Company's Chairman and President constitute two of CHC's four
directors.  Citadel shares office space with the Company and receives certain
administrative support services under a cost sharing arrangement between the two
companies.  Certain employees of Citadel provide consulting services to Reading
Entertainment under a consulting agreement between CHC and REI.  The two
overlapping officers are separately compensated by Citadel for their services as
directors of that company.

     Big 4 Ranch, Inc.:  On December 29, 1997, Citadel capitalized a wholly
     -----------------                                                     
owned subsidiary, Big 4 Ranch, Inc., with a cash contribution of $1,200,000 and
then distributed 100% of the shares of Big 4 Ranch, Inc. to Citadel's common
shareholders of record as of the close of business on December 23, 1997, as a
spin-off dividend.  The Consolidated Company received 2,230,473 shares or 33.4%
of Big 4 

                                    Page 2
<PAGE>
 
Ranch, Inc. The Company recorded such distribution of Big 4 Ranch, Inc. as a
reduction of its investment in Citadel in the amount of approximately $401,000
and a corresponding increase as investment in Big 4 Ranch, Inc. During 1998, the
Company purchased an additional 430,106 shares of BRI and Reading purchased
661,700 shares of BRI for an aggregate purchase price of approximately $136,000,
increasing the Consolidated Company's holdings in BRI to approximately 49.8%.
Also during 1998, a company owned by the Chairman and a trust for the benefit of
a child of the Vice Chairman purchased approximately 3.2% of BRI. The Board of
Directors and executive officers of Big 4 Ranch, Inc. are comprised of certain
directors of the Company, Gerard Laheney, William D. Gould and Margaret Cotter.

     Prior to the Spin-off, Big 4 Ranch, Inc. (owning 40%), Citadel (owning 40%)
and Visalia LLC (owning 20%; a limited liability company controlled by Mr. James
J. Cotter, the Chairman of the Board of Craig, REI and Citadel, and owned by Mr.
Cotter and certain members of his family) entered into three general
partnerships.  On December 31, 1997 theses Partnerships acquired approximately
1,580 acres of agricultural property in Kern County, California for
approximately $7.6  million. The acquisition was financed by a 10-year purchase
money mortgage in the amount of $4.05 million, drawdowns on a line of credit
from Citadel in the amount of $831,000 and pro rata capital contributions from
the partners in the amount of $2,700,000.  Through the Consolidated Company's
holding in Big 4 Ranch, Inc., and Citadel, the consolidated Company owns
approximately 39% of such Partnerships at December 31, 1998.  The Company's
Chairman and President serve as two of the three members of the management
committees of these three partnerships.  The Agriculture Partnerships have each
retained Big 4 Farming LLC (owned 80% by Citadel and 20% by Visalia) to farm
their properties.

     In December 1998, the Kern County area suffered a devastating freeze.
Substantially all of the Agricultural Partnerships' crop was destroyed.  As the
crop was not insured against freeze damage, the Agricultural Partnerships have
booked a loss of $2,651,000 for 1998 (inclusive of $1,577,000 related to the
inventory loss resulting from the freeze), Big 4 Ranch Inc.'s share of which is
$1,061,000.  After recording such operating losses, Big 4 Ranch, Inc.
stockholders' equity was generally eliminated at December 31, 1998, and,
accordingly, the Consolidated Company has reported an equity loss of
approximately $520,000 with respect to its investment in Big 4 Ranch, Inc. at
December 31, 1998.  It is to be anticipated that the Agricultural Partnerships
will also report a significant loss for 1999, as it will not receive any crop
revenues until the second quarter of 2000.

     Citadel is the principal source of funding for the operations of the
Agricultural Partnerships.  The costs of the destroyed crop were funded through
a line of credit from Citadel to the Agricultural Partnerships.  At March 26,
1999, $1,705,000 had been drawn down under a $1,850,000 line of credit with
Citadel.  In addition, at March 26, 1999, the Agricultural Partnerships had
incurred liabilities of approximately $187,000 which they expect to borrow
pursuant to an amended line of credit with Citadel.  Since the Agricultural
Partnership's do not anticipate having revenue until the sale of the 1999-2000
crop, the Agricultural Partnerships do not currently have any source of funds
with which to repay that line of credit when it comes due in August 1999, or any
funds (other than the remaining undrawn upon balance of the line of credit) with
which to cover its 1999 cultural, administrative and interest costs and capital
improvement budget currently projected at $2.64 million.  When acquired by the
Partnership the property included approximately 600 acres of open land.
Approximately 60 acres of this land was planted with citrus in 1998, and an
additional 200 acres are scheduled for planting in 1999. The liquidity and 
funding needs of the Agricultural Partnerships are currently being reviewed by 
the Board of Directors of CHC and BRI.

     Hope Street Hospitality, LLC:  In January 1996, the Company formed a joint
     -----------------------------                                             
venture in the form of a limited liability company (1) to acquire the rights for
the Western United States to produce a woodfired Montreal style bagel, (2) to
build a store to test the concept in the United States, and (3) if that concept
proved successful, potentially to develop a chain of such stores.  The founders
of this joint 

                                    Page 3
<PAGE>
 
venture and the holders of the remaining 50% membership interest in HSH are two
individuals whose principal business is their employment as managing directors
of an international investment banking firm. The venture has not, in the view of
the Company, been successful and the Company has notified its joint venture
partners of its intent to work towards the disposition, liquidation or
alternative financing of this business. The Company remains as a guarantor
pursuant to the terms of the store lease.

THE STOCK TRANSACTIONS
----------------------

     In October 1996, shareholders of REI, approved a reorganization of Reading
Company under REI a Delaware corporation, (the "Reorganization") and the
placement of Common and Preferred Stock by REI to the Company and Citadel (the
"Stock Transactions").  Both transactions were completed on October 15, 1996.

     In the Stock Transactions, REI issued (i) 70,000 shares of Series A Voting
Cumulative Convertible Preferred Stock (the "Series A Preferred Stock") to
Citadel, and granted certain contractual rights to Citadel including the Asset
Put Option described herein in return for $7 million in cash and (ii) 550,000
shares of Series B Voting Cumulative Convertible Preferred Stock (the "Series B
Preferred Stock") and 2,476,190 shares of Common Stock to Craig in exchange for
certain assets owned by Craig.  The assets acquired by REI from Craig consisted
of the 693,650 shares of Stater Preferred Stock, Craig's 50% membership interest
in Reading International, of which an indirect wholly owned subsidiary of REI
was the sole other member, and 1,329,114 shares of Citadel's Preferred Stock,
which were subsequently redeemed by Citadel.

     The Asset Put Option is exercisable at any time up until 30 days after REI
files its Annual Report on Form 10-K for the year ending December 31, 1999,
gives to Citadel the option to sell assets subject to certain related
liabilities (such as mortgages) to REI, for shares of REI Common Stock.  With
respect to the first $20 million in aggregate appraised value of assets, REI is
obligated to deliver to Citadel that number of shares of REI Common Stock
determined by dividing the value of the Citadel net assets by $12.25 per share.
If the appraised value of the Citadel net assets is in excess of $20 million,
Citadel is entitled to receive Common Stock at the then fair market value of
such securities for such excess, provided that Citadel is not entitled to sell
more than $30 million of assets to REI under the Asset Put Option.

     The Series A and Series B Preferred Stock of REI (collectively, the
"Convertible Preferred Stock") have stated values of $7 million and $55 million,
respectively.  Holders of each series of the Convertible Preferred Stock are
entitled to cast 9.64 votes per share, voting together with the holders of the
Common Stock and the other series of Convertible Preferred Stock, on any matters
presented to shareholders of REI.  Each share of Series A Preferred Stock is
convertible into shares of Common Stock at a conversion price of $11.50, and
each share of Series B Preferred Stock is convertible into shares of Common
Stock at a conversion price of $12.25, each subject to adjustment on certain
events.  The shares of Series A Preferred Stock may also be converted after a
change in control.  REI has the right to require conversion of the Series A
Preferred Stock if the average market price of the Common Stock over a 180-
calendar day period exceeds $15.525.  REI granted certain registration rights to
Citadel with respect to the shares of Common Stock issuable on conversion of the
Series A Preferred Stock and the Asset Put Option.

     Citadel has the right during the 90 day period beginning October 15, 2001,
or in the event of a change of control of REI, to require REI to repurchase the
Series A Preferred Stock at its stated value plus accrued and unpaid dividends
plus, in the case of a change of control, a premium.  In addition, if REI fails
to pay dividends on the Series A Preferred Stock for four quarters, Citadel may
require REI to repurchase the Series A Preferred Stock.  Also, REI has certain
rights to redeem the Convertible Preferred Stock at its option.  Due to the
redemption provisions, the Series A Preferred Stock has not been included as a

                                    Page 4
<PAGE>
 
component of Shareholders' Equity in the Consolidated Balance Sheet and is
separately categorized as "Redeemable Preferred Stock of Reading."

DESCRIPTION OF BUSINESS
-----------------------

     General:  The Company's business is the identification, acquisition,
     -------                                                             
ownership and strategic management of controlling interests in other operating
companies.  The Company's business objective is to serve as a holding company
and management resource to a diversified group of such operating companies. The
Company is not in the business of investing, reinvesting or trading in
securities.  Over the past ten years, while the Company has reviewed a number of
opportunities, the Company's efforts have focused primarily on three such
companies:  Reading (cinema exhibition and real estate development), Citadel
(currently principally a real estate company) and Stater (retail grocery).  In
1997, the Consolidated Company's interest in Stater was repurchased by that
Company.  At December 31, 1998, the material portion of the Company's book value
and source of cash flows is comprised from its investment in Reading.

     Employees:  The Company's executives consist of Mr. S. Craig Tompkins
     ---------                                                            
(formerly a partner with Gibson, Dunn & Crutcher, and currently a director and
the President of the Company, the Vice Chairman of REI, the Vice Chairman,
Secretary, Treasurer and Principal Accounting Officer of CHC, the President of
Citadel Agriculture, Inc., and a member of the management committees of various
agricultural partnerships in which Citadel and Big 4 Ranch, Inc. hold ownership
interests), Ms. Robin Skophammer (formerly a partner with KPMG Peat Marwick, and
a director of Stater Bros. Holdings Inc. and currently the Chief Financial
Officer of the Company) and Ms. Ellen Cotter (formerly with White & Case and
currently the Vice President -Business Affairs of the Company and of Reading).
Ms. Cotter devotes substantially all of her time to Reading matters and,
accordingly, has not been paid for services to Craig since February 1998. Mr.
James J. Cotter, the Company's Chairman, is the Chairman of REI, the Chairman of
CHC, and provides services to the Company pursuant to a consulting arrangement.
Mr. Cotter owns, assuming exercise of his outstanding options, 27% of the
Company's currently issued equity securities and, together with other securities
which Mr. Cotter has beneficial voting ownership, approximately 55% of the
voting securities of the Company. In addition, the Company has two
administrative employees. The Company considers its relations with its employees
to be good.

     Reading Entertainment, Inc.: Set forth below is a more detailed discussion
     ---------------------------                                               
of the businesses conducted by Craig's majority owned subsidiary, Reading.

     At December 31, 1998, the Company held 5,165,516 shares of REI Common Stock
and 550,000 shares of REI Series B Preferred Stock, which together represent
approximately 78% of the voting power of REI.  The Series B Preferred Stock is
junior to the 70,000 shares of REI Series A Preferred Stock (aggregate stated
value $7 million) held by Citadel, has a stated value and liquidation preference
of $100 per share, has a cumulative dividend of 6.5% and is entitled to cast
9.64 votes per share, voting together with the holder of the REI Common Stock
and the Series A Preferred Stock on any matter presented to the shareholders of
REI, as well as customary class voting rights.  Each share of the Company's
Series B Preferred Stock is convertible into shares of REI Common Stock at a
conversion price of $12.25 each, subject to adjustment on certain events.  For
financial statement purposes, REI assets and liabilities are consolidated as a
majority owned subsidiary of the Company and, accordingly, the Company's stock
investments in REI is eliminated in the December 31, 1998 and 1997 consolidated
financial statements.



                                    Page 5
<PAGE>
 
READING BUSINESS
 
READING GENERAL

GENERAL

     Reading Entertainment, Inc., a Delaware corporation ("REI" and collectively
with its various subsidiaries and predecessors,  "Reading"), was formed in 1996
in a reorganization of the company under a Delaware holding company.  Initially
organized in 1833, Reading has been doing business in the United States for
approximately 165 years.

     Prior to 1976, Reading was principally in the transportation business,
owning and operating the Reading Railroad.  Following the disposition of
substantially all of its rolling stock and active rail lines in 1976, Reading
pursued a number of endeavors including the development of One Reading Center (a
600,000 square foot office complex located in Philadelphia) and initiated the
activities which led to the development of the Pennsylvania Convention Center on
land originally utilized by Reading for railroad operating purposes.  Since
1976, Reading has reduced its railroad real estate holdings from approximately
700 parcels and rights-of-way to approximately 25.

     In 1993, following the sale of its last major railroad real estate asset --
the Reading Terminal Headhouse -- Reading determined to enter into the "Beyond-
the-Home" or real estate based segment of the entertainment industry.  Since
that date, Reading has acquired and expanded a chain of multiplex cinemas in
Puerto Rico ("CineVista") featuring conventional film product; begun the
development of a cinema chain in the United States featuring principally art,
specialty and sophisticated or upper-end conventional film product ("Angelika
Cinemas"); begun the development of a chain of cinemas in Australia and New
Zealand featuring conventional film product ("Reading Cinemas"); and acquired or
entered into agreements to acquire certain live theaters featuring "Off
Broadway" type productions ("Reading Live Theater").  In Australia and New
Zealand, Reading is also in the business of developing entertainment centers,
typically consisting of a multiplex cinema, complementary restaurant and retail
uses, and convenient parking, all located on land owned or controlled by
Reading.

     Reading, where feasible, prefers to own the land on which it constructs its
cinemas.  In the United States and Puerto Rico, a variety of factors (including
land acquisition costs, the proliferation of suburban multiplex cinemas and
competition from existing developers and shopping center owners) have caused
Reading to rely on leasehold sites in established urban areas or suburban malls.
However, an ownership oriented approach is being pursued in urban centers in
Australia and New Zealand.  This means that many of Reading's projects in
Australia and New Zealand are more capital intensive, have longer lead times and
entail greater development risks than the development of cinemas in leased
facilities in established malls.  However, Reading believes that these risks are
more than offset by the greater control and flexibility that the ownership of
such sites provides to Reading and by the opportunity given to Reading to
participate in the enhancement to the value of such land likely to result from
the consumer traffic generated by a successful cinema operation.  To date,
Reading has acquired (directly or through joint venture or tenant-in-common
investments), or has the contract right to acquire, eight sites in Australia and
New Zealand which it believes may be suitable for development or redevelopment
as entertainment centers. These sites represent nearly two million square feet
of potential land area and nearly one million square feet of improvements. Due
principally to the scope and extent of its development activities in Australia
and New Zealand, Reading views itself as being involved in essentially two lines
of business, (1) the development and operation of cinemas in Puerto Rico,
Australia and New Zealand and of cinemas and live theaters in the United States
and (2) the development and future operation of cinema based entertainment
centers in Australia and New Zealand. Most of these entertainment center
projects are in the early stage of development.  One of the centers is expected
to be completed in 1999.

                                    Page 6
<PAGE>
 
     At December 31, 1998, Reading owned or otherwise operated 17 cinemas
comprising 98 screens (inclusive of two cinemas with a total of nine screens
held by a joint venture) and had under development or agreement to lease,
acquire or manage, complexes representing approximately 200 additional screens.
Reading currently anticipates adding approximately 100 of these screens in 1999.

     During 1998, Reading determined to commence activities in the live theater
industry and in December of that year signed an Agreement in Principle to
acquire three live theaters in Manhattan: the Minetta Lane, Orpheum and Union
Square theaters. In March 1999, Reading acquired the Royal George Theater, a
four auditorium live theater complex in Chicago and licensed the Marine Theater
in San Francisco through May 2001. Reading is actively investigating other live
theater acquisitions in major theater markets.

     In addition to its principal activities, Reading continues to wind up its
historic railroad related activities, including the sale or other exploitation
of its residual real estate interests, and to lease equipment to third parties.
Reading also owns a 50 acre property assemblage located in the greater
Melbourne, Australia area. Originally acquired in 1996 as a potential
entertainment site, the property is currently held for non-cinema development.
Reading is reviewing its alternatives with respect to this site.

     Shares of REI's common stock, par value $.001 per share (the "Common
Stock"), are quoted on the Nasdaq National Market ("NNM") and trade on the
Philadelphia Stock Exchange under the symbols RDGE and RDG, respectively.

DESCRIPTION OF BUSINESS
-----------------------

     Reading is primarily engaged in the development in Australia and New
Zealand of cinema based entertainment centers and in the multiplex cinema
exhibition business (focusing on the market for multiplex complexes featuring
principally commercial film in Puerto Rico, Australia and New Zealand, and
featuring principally art, specialty and more sophisticated upper-end film
product in the United States).  In addition, the Company has recently expanded
into the live theater business and currently owns or has agreements to acquire
four live theaters, consisting of seven auditoriums, located in Manhattan and
Chicago, and to license a fifth live theater located in San Francisco.  These
live theaters are designed for the presentation of "Off Broadway" type
productions and typically have auditoriums with less than 600 seats.
 
     While exceptions may be made from time to time with respect to certain
well-situated cinemas with proven or projected draw as art and specialty houses,
it is Reading's general intention to develop or acquire state-of-the-art
multiplex venues.  With respect to new cinema construction, it is Reading's
intention to concentrate primarily upon a stadium seating format, and to feature
wall-to-wall screens with state-of-the-art projection and sound.  Reading's
entertainment centers will typically be centered around a multiplex cinema, and
feature complimentary retail and restaurant facilities and convenient on-site
parking.

PUERTO RICO (CINEVISTA)
-----------------------

     Acquired in 1994, CineVista currently operates 44 screens in seven leased
facilities in Puerto Rico.  Reading has commenced construction of a leased
twelve screen cinema in a regional shopping center located in the San Juan area
(currently anticipated to open in November 1999) and is negotiating the
expansion (from eight to eighteen screens) of a complex located in the largest
shopping center in 

                                    Page 7
<PAGE>
 
Puerto Rico, the Plaza Las Americas. No assurances can be given that such
negotiations will result in operating facilities. On the date of its acquisition
by Reading, CineVista operated 36 screens in eight leased locations.

     In Puerto Rico, Reading has determined to concentrate on multiplex cinemas
located on leasehold properties, and the exhibition of conventional film
product.  Generally speaking, Reading's current and future developments are
being constructed in existing malls with proven foot traffic and self contained
parking.  All of CineVista's theaters are modern multi-screen facilities.

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

     During the last five years, Puerto Rico has undergone significant retail
shopping center development.  During this period, the number of multiplex
theaters has increased substantially.  CineVista's principal competitor,
Caribbean Cinemas, a privately-owned company, has opened six complexes adding
approximately 53 screens since the beginning of 1996, and currently has two
cinemas under construction.  These new screens have adversely affected
CineVista's current operations, reducing CineVista's market share from
approximately 34% in 1995 to approximately 26% percent in 1998.  Reading
believes that, while CineVista has an opportunity to expand its operations
through the development of new multiplex theaters and improvement of its
existing operations, the Puerto Rico market will be substantially built out in
the near term.

     CineVista derives approximately 70% of its revenues from box office
receipts.  Ticket prices vary by location, and provide for reduced rates for
senior citizens and children.  Box office receipts are reported net of a 10%
excise tax imposed by Puerto Rico.  Show times and features are placed in
advertisements in local newspapers with the costs of such advertisements paid by
CineVista.  Film distributors may supplementally advertise certain feature films
with the costs generally paid by distributors.

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

     Screen advertising revenues contribute approximately 4% of total revenues.
CineVista has agreements with a major soft-drink bottler and an independent
advertising production company to show advertisements on theater screens prior
to feature film showings.  Other sources of revenue include revenues from
theater rentals for meetings, conferences, special film exhibitions and vending
machine receipts or rentals.

     Licensing/Pricing:  Films are licensed under agreements with major film
     -----------------                                                      
distributors and several local distributors specializing in films of special
interest to residents of Puerto Rico.  Puerto Rico regulations generally require
that film exhibitors be provided with an opportunity to view films prior to
submitting bids, that film distributors provide advance notice of films which
will be provided to the market, and are generally designed to preclude anti-
competitive practices.  Films are licensed on a film-

                                    Page 8
<PAGE>
 
by-film, theater-by-theater basis. Generally, film payment terms provide for
payment to film distributors under various formulas which provide for payments
based upon a percentage of gross box office receipts.

     CineVista licenses film from substantially all of the major United States
studios and is not dependent upon any one film distributor for all of its
product.  However, in the event Reading was unable to license film from a major
studio, such lack of supply could have a material effect upon CineVista's
business.  CineVista believes that the popularity of the Puerto Rico exhibition
market and Puerto Rico rules governing film licensing make such a situation
unlikely.  In 1998, films licensed from CineVista's seven largest film suppliers
accounted for approximately 91% of CineVista's box office revenues.

     Competition:  Reading believes there are approximately 30 first-run movie
     -----------                                                              
theaters in daily operation with approximately 200 screens in Puerto Rico.
Based upon number of screens, box office revenues and number of theaters,
CineVista is the second largest exhibitor in Puerto Rico, with the two largest
exhibitors accounting for over 99% of the box office revenues recorded in 1998,
measured by theaters in daily operation.  Competition among the theater
exhibitors exists not only for theater patrons within certain geographic areas,
but also for the licensing of films and the development of new theater sites.
The number of sites suitable for multiplex cinemas is limited. CineVista's
principal competitor is expected to continue to open theaters competitive with
those of CineVista's.  Since the beginning of 1996, CineVista's principal
competitor has opened six complexes in the San Juan metropolitan area, adding 53
screens, all of which are competitive with CineVista's theaters, and which have
attracted business that would otherwise have gone to theaters owned by
CineVista.  This competitor has at least two additional competitive theaters and
an expansion of an existing theater under development, which are expected to add
26 screens to the San Juan market.

     In Puerto Rico, CineVista's strategy has been to build generally higher
quality cinemas, with larger seats, more leg room and better sound than those
constructed by its principal competitor, and to seek out and build in either
well established retail centers with adequate parking on-site or in connection
with the development of new retail centers being developed by experienced and
well financed developers.  All of the screens currently under construction are
stadium design and CineVista currently intends to make this stadium design
structure a consistent element of its cinemas.

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

     Employees: CineVista has approximately 200 employees in Puerto Rico,
     ---------                                                           
approximately 15 of whom are employed under the terms of a collective bargaining
agreement.  The collective bargaining agreement expires in May 2000.  Reading
believes its relations with its employees in Puerto Rico to be good.

DOMESTIC CINEMAS
----------------

     Reading has focused its domestic cinema activities on (i) the Manhattan
cinema market, (ii) the art and specialty film exhibition market, and (iii) the
selective acquisition and/or development of conventional commercial cinemas.  At
December 31, 1998, Reading operated four domestic cinemas with 22 screens.
During 1998, Reading entered into agreements to lease or manage an additional
eight domestic locations with a total of 34 screens.  These cinemas, seven of
which are either existing or 

                                    Page 9
<PAGE>
 
refurbished facilities, are expected to open under Reading's markee in 1999. In
addition, in March 1999, Reading leased an eight screen facility in Buffalo, New
York for use as an art cinema.

     Reading's first domestic art theater was acquired in August 1996 for
approximately $12,570,000.  This cinema, known as The Angelika Film Center (the
"NY Angelika"), is a six screen multiplex theater located in the Soho district
of New York City, and was acquired by Reading and Sutton Hill Associates
("Sutton Hill") through a newly formed limited liability company, Angelika Film
Centers LLC ("AFC").  Reading contributed 83.3% of the capital of AFC and Sutton
Hill contributed the remaining 16.7%.  The theater is held under a long term
lease, with a remaining term of approximately 27 years.
 
     Reading is currently working to develop additional Angelika Film Centers in
major urban areas located throughout the United States.  In December 1997
Reading opened an eight screen, 31,700 square foot art and specialty cinema and
cafe facility at the Bayou Place entertainment center in Houston, Texas.  The
leased complex sits over a 3,500-car parking garage in Houston's theater
district.  In December 1997, Reading acquired an existing five screen, 18,100
square foot facility located in Minneapolis, at which Reading exhibits a
combination of conventional commercial and art and specialty film under the
Reading Cinemas name.  In November 1998, Reading commenced operation of a three
screen, 18,000 square foot facility in Sacramento, California.  In 1998, Reading
signed a ground lease and is currently constructing a 46,000 square foot twelve
screen Reading Cinemas complex in Manville, New Jersey which cinema is
anticipated to open in May 1999.

     In December 1998, Reading entered into an Agreement in Principle to lease
four cinemas, consisting of 16 screens, to manage three additional cinemas,
consisting of six screens, all located in Manhattan, and to acquire the 1/6th
interest in AFC not currently owned by Reading.  These cinemas, are currently
operated in Manhattan under the City Cinemas markee.  In March 1999, Reading
leased an eight screen complex in Buffalo, New York for use as an art cinema.
Reading is in discussions with owners and developers with respect to a number of
additional potential locations.  No assurances can be given, however, that any
of these negotiations will result in operational theaters.

     City Cinemas Corporation ("City Cinemas"), an affiliate of Sutton Hill, has
managed AFC and two other domestic cinemas for Reading since such cinemas were
opened by Reading.  A third domestic cinema which commenced operations in
November 1998 is managed directly by Reading.  In conjunction with the December
1998 agreement to lease and manage certain theaters in Manhattan (described
above), Reading will commence management of all domestic cinemas with an
affiliate of City Cinemas providing certain accounting and  administrative
services without cost to Reading.

     Licensing/Pricing:  Art and specialty films are available from many sources
     -----------------                                                          
ranging from the divisions of the larger film distributors specializing in the
distribution of specialty films to individuals that have acquired domestic
rights to one film.  Generally, film payment terms are based upon an agreed upon
percentage of box office receipts.

     Competition:  In most markets, art and specialty film is currently
     -----------                                                       
exhibited at older independently owned one and two screen theater complexes.
Few such independent exhibitors operate cinemas in more than one metropolitan
area.  Reading believes that the exhibition of first run art and specialty films
is a niche business, in some ways distinct from the business of exhibiting
bigger budget wide release films.  At the present time there exists one national
chain specializing in art and specialty film which circuit operates
approximately 150 specialty screens in approximately over 50 locations,
principally in California and Washington.  Many larger cities have smaller
chains which operate one to five locations.  One major commercial cinema circuit
has formed a joint venture which is developing cinemas specializing in the
exhibition of independent film.

                                    Page 10
<PAGE>
 
     The cinema industry is currently in a state of significant change, as
illustrated by the significant number of multiplex and megaplex theaters which
have been constructed or announced in recent periods, and no assurances can be
given that Reading's plans can be successfully implemented. Due to the
relatively small scale of Reading's current US operations and the geographical
dispersion of its Domestic cinemas, Reading may have difficulty securing certain
film product due to competitive pressures of larger domestic cinema chains or
more regionally concentrated exhibitors, and faces competition for sites from
much larger and better known competitors. Reading has attempted to strengthen
its competitive position in art and upper end film by materially increasing its
presence in Manhattan through the anticipated addition in 1999 of four leased
and three managed cinemas.

     Seasonality:  The exhibition of art and specialty film, while still
     -----------                                                        
somewhat seasonal in nature, is less so than the film exhibition business
generally.  Art and specialty films tend to be released more evenly over the
course of the year and, if successful, to enjoy a longer run than wide release
films.  The popularity of art and specialty film has increased significantly in
recent years, grossing domestically approximately $112,000,000, $244,000,000,
$372,000,000, $355,000,000, $500,000,000, $525,000,000 and $545,000,000 in 1992
through 1998, respectively (based upon management estimates).

     Employees: At December 31, 1998 approximately 50 cinema employees were
     ---------                                                             
employed by City Cinemas to operate Reading's domestic cinemas including 3
employees employed under the terms of a collective bargaining agreement which
expired in October 1998.  Reading has approximately 14 direct cinema employees
and 17 executive and administrative staff which, while located in the Unites
States, provide service with respect to all of Reading's operations.  Reading
believes its relationship with its employees to be good.

READING CINEMAS (AUSTRALIA AND NEW ZEALAND)
-------------------------------------------

     Reading currently operates four cinemas, consisting of 21 screens, in
Australia and holds a 50% joint venture interest in two cinemas, consisting of
nine screens in New Zealand.  Reading currently anticipates that it will open an
additional seven cinemas, consisting of 54 screens in Australia and New Zealand
during 1999.

     Reading commenced activities in Australia in mid-1995, and currently
conducts business in Australia through its wholly-owned affiliate, Reading
Entertainment Australia Pty Limited ("REA" and, collectively with its various
subsidiaries, "Reading Australia"). Reading Australia is currently engaged in
the development and operation of multiplex cinemas featuring conventional film
product and the development of entertainment centers. Reading Australia
currently operates 21 screens at two leased, one owned and one managed location,
and has approximately 120 screens currently under development. It is anticipated
that six cinemas consisting of 50 screens will be opened during 1999 for a total
of ten cinemas with 71 screens in Australia by the end of that year.

     Reading commenced operations in New Zealand in 1997 and currently conducts
operations in New Zealand through its wholly owned affiliate, Reading New
Zealand Limited (collectively with its various subsidiaries, "Reading New
Zealand"). At the present time, all of Reading's cinema interests are held
through a joint venture with an experienced cinema operation. The joint venture
currently operates two cinemas representing nine screens at one owned and one
leased facility. The joint venture is currently constructing an additional four
screen cinema on land owned by the joint venture, which it is anticipated will 
be opened during 1999. 

                                    Page 11
<PAGE>
 
          Reading Australia and Reading New Zealand are also currently engaged
  in the development of entertainment centers which will typically consist of a
multiplex cinema, complementary restaurant and retail facilities, and convenient
parking, all on land owned or controlled by Reading.

     Summarized below are the entertainment center projects currently under
development by Reading Australia and Reading New Zealand:

                                    Page 12
<PAGE>
 
<TABLE>
<CAPTION>
                                                                                                          ESTIMATED  
                                                                                 APPROXIMATE             DEVELOPMENT  
                                      LAND SIZE             APPROXIMATE             CINEMA             SIZE IN SQUARE 
                                      IN SQUARE              PURCHASE          SIZE IN SQUARE            FOOTAGE OF  
      SITE                             FOOTAGE                 PRICE                 FEET               IMPROVEMENTS  
      ----                            --------                 ----                  ----               ------------
<S>                                   <C>                   <C>                <C>                     <C> 
AUSTRALIA
 Auburn, NSW                            522,720             6,800,000               60,000                 210,000
 Belmont                                103,129             1,000,000               68,000                  89,000
 Frankston, Victoria                    227,750                 N/A/1/              64,000                  94,000
 Moonee Ponds, Victoria                 129,949             4,200,000               54,000                 103,000
 Newmarket, Queensland                  172,160             4,500,000               49,000                 161,000
 Whitehorse, Victoria/2/                171,365              1,600000               60,000                 230,000
                                                                                                                  
NEW ZEALAND                                                                                                       
 Wellington/3/                           76,855             3,300,000               77,000                 133,000
 Takanini/4/                            678,132             3,200,000               41,000                  56,000 
</TABLE>

     In addition to the above, Reading Australia has accumulated, as the
consequence of three separate acquisitions, a 50 acre site in Burwood, Victoria.
This site was originally acquired for development of a megaplex cinema. However,
such use is currently prohibited as a consequence of an adverse land use
determination, which negated certain permits for the construction of cinemas on
the site which were in place at the time the properties were acquired by Reading
Australia. Due to the size of the accumulation and its location at the
demographic center of the greater Melbourne metropolitan area, the Company
believes that the accumulation has value over and above its original purchase
price and is currently reviewing its options as to potential development
alternatives for the site.

     Reading New Zealand owns an undivided 50% interest in a 77,000 square foot
site located in downtown Wellington, the capital and second largest city in New
Zealand. Reading New Zealand has

________________________
     /1/ Under the applicable development agreement, Reading Australia is
     required to make certain infrastructure improvements which are estimated to
     cost approximately $4,000,000 in consideration of a grant to the underlying
     land.

     /2/ Reading holds a 50% interest in this shopping center. Purchase price
     does not include $1,400,000 loan to Reading's joint venture partner in this
     development, or the $3,700,000 purchase price of the underlying land, which
     the joint venture may acquire subject to the satisfaction of certain
     conditions. The center currently consists of approximately 150,000 square
     feet of net leasable are which amount is not included in the Estimated
     Development Size column, above.

     /3/ Reading holds a 50% tenant-in-common interest in this property. Does
     not include adjacent parking garage or parcel owned by Reading New Zealand.

     /4/ Reading holds a 50% tenant-in-common interest in this property. Does
     not include adjacent parking garage or parcel owned by Reading New Zealand.

                                    Page 13
<PAGE>
 
  also contracted to acquire a 327,000 square foot 9 story parking facility and
  a separate 38,000 square foot lot located adjacent to this entertainment
center property. Reading has granted an option to the co-owners of the
entertainment center property to acquire, on or before November 30, 1999, an
undivided 50% interest in these two properties for a price equal to Reading's
cost basis in these properties, plus carrying costs and an interest factor.
Reading New Zealand has also purchased a 678,000 square foot site and, through a
joint venture, has acquired a 9,400 square foot site, each located in suburban
areas of Auckland, on which it intends to construct an entertainment center and
a cinema complex, respectively.

     One of the currently operating cinemas, located in Townsville, Queensland,
is owned by Australia Country Cinemas Pty Limited ("ACC"), a company owned 75%
by Reading Australia and 25% by a company owned by an individual familiar with
the market for cinemas in country towns. ACC has a limited right of first
refusal to develop cinema sites identified by Reading Australia or such
individual in country towns.

     Reading New Zealand has 50% joint venture interests in a five screen
multiplex cinema located in Whangaparoa, New Zealand, a four screen multiplex
cinema located in Mission Bay, New Zealand, and a four screen cinema located in
Takapuna presently under construction and anticipated to open in 1999. Reading
New Zealand's partner in these ventures is an experienced cinema owner and
operator. Two of the joint venture cinemas are fee properties and the third is
leased.

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

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

     .    leasing risk with respect to ancillary space being constructed in
          connection with the entertainment centers -- in certain cases such
          ancillary space constitutes a substantial portion of the net leasable
          area of a particular entertainment center and there is not presently
          any established Australian and New Zealand markets for entertainment
          center space;

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

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

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

                                    Page 14
<PAGE>
 
        Reading Australia's cinemas are managed by employees of the Company.
Reading New Zealand's cinemas are operated by Reading's joint venture partner,
an experienced cinemas operator.

AUSTRALIA
---------

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

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

     Although Australia is the sixth largest country in the world in land mass,
it only has a population of approximately 19.2 million people. This population
is concentrated in a few coastal urban areas, with approximately 4 million in
the greater Sydney area, 3.4 million in the greater Melbourne area, 1.7 million
in the Brisbane area, 1.1 million in Adelaide and 1.4 million in Perth.
Australia is one of the richest countries in the world in terms of natural
resources per capita and one of the most economically developed countries in the
world, although vast areas of the interior, known as "the Outback," remain all
but uninhabited. The principal language is English, and the largest part of the
population traces its origin to Britain and Europe, although an increasing
portion of the population has immigrated from the Far East. Australian taste in
film has historically been similar to that of American audiences.

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

     Australia does not restrict the flow of currency into the country from the
U.S. or out of Australia to the United States.  Also, subject to certain review
procedures, U.S. companies are typically permitted to operate businesses and to
own real estate.

                                    Page 15
<PAGE>
 
NEW ZEALAND
-----------

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

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

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

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

     The laws for monitoring and approving significant overseas investment into
New Zealand reflect the country's generally receptive attitude towards such
investment and the generally facilitating nature of the country's foreign
investment policies. One hundred percent overseas ownership can be approved in
nearly all industry sectors, including motion picture exhibition and
distribution. A review process is also applicable to certain land transactions
and the purchase of businesses or assets having a value of NZ$l0,000 or more.

     Licensing/Pricing:  Films are licensed under agreements with major film
     -----------------                                                      
distributors and several local distributors who distribute specialized films.
Film exhibitors are provided with an opportunity to view films prior to
negotiating with the film distributor the commercial terms applicable to its
release. Films are licensed on a film-by-film, theater-by-theater basis. Reading
Australia and Reading New Zealand license films from all film distributors as
appropriate to each location. Generally, film payment terms are based upon
various formulas which provide for payments based upon a specified percentage of
box office receipts.

                                    Page 16
<PAGE>
 
       Competition: The principal exhibitors in Australia and New Zealand
       -----------
include Village Roadshow Limited ("Village") with approximately 419 screens in
Australia and 85 in New Zealand, Greater Union and affiliates with approximately
328 screens in Australia and Hoyts Cinemas ("Hoyts") with approximately 242
screens in Australia and 92 in New Zealand. Independents, as a group, operate
approximately 560 screens in Australia and 130 in New Zealand. The film
exhibition business in Australia and New Zealand is concentrated and, to a
certain extent, vertically integrated.

     Greater Union is the owner of Birch Carroll & Coyle and a part owner of
Village. All new multiplex cinema projects announced by Village are being
jointly developed by Greater Union, Village, and Warner Bros. Hoyts has
announced plans to add approximately 168 new multiplex screens in Australia by
2003 with 61 currently under construction.

     These companies have substantial capital resources. Village had a publicly
reported consolidated net worth of approximately A$938 million at June 30, 1998.
The Greater Union organization does not separately publish financial reports,
but its parent, Amalgamented Holdings, had a publicly reported consolidated net
worth of approximately A$315 million at June 30, 1998. Hoyts Cinemas had a net
worth of approximately A$347 million at June 30, 1998.

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

     In the view of the Company, the principal competitive restraint on the
development of its business in Australia and New Zealand is the availability of
sites. Reading's principal competitors and certain major commercial landlords
are currently attempting to use the historical course of land use development in
Australia to prevent the construction of freestanding cinemas in new
entertainment oriented complexes, particularly where those complexes are located
outside of an established central business district or shopping center
development. Competitors or shopping center landlords typically contest the
suitability of Reading Australia's projects, resulting in appeals to applicable
land tribunals and delays in development. In the case of Reading Australia's 50-
acre site at Burwood, the Minister for Planning and Local Government preempted
local zoning authorities to prohibit the Company's intended development of a 25-
screen cinema complex, which would have competed with complexes owned by the
principal theater operators in Australia and located in shopping centers owned
by some of the principal retail landlords in Australia.

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

     Employees:  Reading Australia has 18 full time executive and administrative
     ---------                                                                  
employees and approximately  100 theater employees.  Reading New Zealand
currently has no employees.  The Company believes its relations with its
employees to be good.

                                    Page 17
<PAGE>
 
READING LIVE THEATERS
---------------------

     In March 1999, Reading acquired a four auditorium live theater complex in
Chicago, which operates under the name "The Royal George Theater" for
approximately $2.8 million. The theater currently features the Chicago
productions of Art, Forever Plaid, Flanagan's Wake and Musical, the Musical. The
Royal George Theater is a fee property. Also, in March 1999, Reading entered
into an agreement to license the use of the Marines Theater in San Francisco
through May 2001. Reading is also investigating a number of additional venues in
major theater markets.

     In December 1998, Reading entered into an Agreement in Principle to acquire
three "Off Broadway" venues in Manhattan for approximately $10 million, to be
paid in Reading Entertainment Common Stock, priced at $9.00 per share. Two of
these theaters, the Minetta Lane and the Orpheum, are fee properties. The third
theater, the Union Square, is a leased property. It is currently anticipated
that this transaction will close in the second quarter of 1999.

     It is anticipated that theaters will be booked and managed by Union Square
Management, Inc., a live theater management company specializing in the booking
and management of "Off Broadway" style live theaters. The principal shareholder
and executive officer of Union Square Management, Inc., Alan Schuster, has more
than 20 years experience in this business.

     Although the Company is a new entrant into the live theater business, the
Company's Chairman of the Board of Directors, James J. Cotter, has been involved
in live theater for a number of years. Reading intends to focus, at least
initially, principally on the bricks and mortar or real estate based elements of
the business and not on the staging or production of plays to be shown at its
theaters. Where possible, Reading intends to purchase, rather than to lease or
license, such venues. Competition will likely come from owners of existing live
theater venues in the cities identified by Reading as good theater markets.

FINANCIAL INFORMATION RELATING TO INDUSTRY SEGMENTS AND FOREIGN AND DOMESTIC
----------------------------------------------------------------------------
OPERATIONS
----------

     See Footnote 3 to the Consolidated Financial Statements included elsewhere
herein.

ITEM 2. PROPERTIES

CRAIG PROPERTIES

     Although the ownership of real estate is an important element of the
business of Reading and Citadel, the Company does not directly own any real
estate other than a condominium property in a high rise residential building
located in Hollywood, California which the Company uses as executive offices and
which is available to the directors of the Company while they are in Los
Angeles. The Company has a lease expiring in 2001 for approximately 5,000 square
foot of office space in a Downtown Los Angeles high rise, which it uses as its
principal executive offices and shares with Citadel and is the guarantor of
approximately 3,500 square feet of leased space utilized by HSH for its
prototype store. The HSH lease provides for basic and percentage rent and has a
term ending in 2006. The Company has not guaranteed any of the leasehold or
other obligations of any of its affiliates.

                                    Page 18
<PAGE>
 
   READING PROPERTIES

REI Executive and Administrative Offices
----------------------------------------

     Reading leases approximately 25,000 square feet of office space in
Philadelphia, Manhattan and Los Angeles in the United States, Melbourne and
Sydney, in Australia and in San Juan, Puerto Rico. The space is typically held
under lease having remaining terms of less than three years.

NON-ENTERTAINMENT PROPERTIES
----------------------------

     Center City Philadelphia Properties
     -----------------------------------

     Reading's properties in center city Philadelphia, all of which are owned in
fee, consist of several parcels of land aggregating approximately .67 acres
located near or adjacent to the site of the Convention Center which are
currently leased to a parking lot operator; the Viaduct north of Vine Street to
Fairmount Avenue and adjacent parcels, comprising approximately 6.75 acres; and
properties owned by partnerships in which Reading has interests.

     Domestic Partnership Properties
     -------------------------------

     S.R. Developers:  A subsidiary of Reading is a general partner in S.R.
Developers, a partnership which owns one property in center city Philadelphia.

     Parametric Garage Associates: A subsidiary of Reading is a general partner
in Parametric Garage Associates, a partnership which owns the 750-car Gallery II
Parking Garage (the "Garage"). The Garage is adjacent to the Pennsylvania
Convention Center Complex. Reading has primary responsibility for the leasing
and management of 19,000 gross rentable square feet of retail space on the
ground level of the Garage.

     Other Domestic Non-Entertainment Real Estate
     --------------------------------------------

     When Reading's railroad assets were conveyed to Conrail, the Company
retained fee ownership of approximately 700 parcels and rights-of-way located
throughout Pennsylvania, Delaware, and New Jersey. Approximately 11 parcels and
rights-of-way located outside of center city Philadelphia are still owned by the
Company. The parcels consist primarily of vacant land and buildings, some of
which are leased.

     Reading Australia
     -----------------

     In December 1995, Reading Australia acquired a 50 acre site in a suburban
area outside of Melbourne. Reading Australia had intended to build a multiplex
theater on this site but the Minister for Planning and Local Government has
intervened to negate certain permits which were in place at the time the land
was acquired. Reading believes that the site has value as an assemblage for
other uses, even if it is unable to develop the site as a theater.

                                    Page 19
<PAGE>
 
  ENTERTAINMENT PROPERTIES
  ------------------------

     Leasehold Interests
     -------------------

     Reading currently leases approximately 280,375 square feet of completed
theater space in the mainland United States, Puerto Rico and Australia as
follows:

                             AGGREGATE            APPROXIMATE RANGE OF TERMS
                           SQUARE FOOTAGE         TERMS (INCLUDING RENEWALS)
                           --------------         --------------------------
                                                  
     United States              90,850                   10-40 years
     Puerto Rico               135,490                   15-40 years
     Australia                  54,035                   29-40 years

     In addition, Reading has signed leases or agreements to lease with respect
to additional to-be-built theater space of 46,000 square feet in the U.S.,
50,000 square feet in Puerto Rico, and approximately 130,000 square feet in
Australia. These leases have lease terms (including renewals) of forty to fifty
years including renewal options and aggregate base rents totaling $4,670,000 in
1998.

     Fee Interests
     -------------

     In Australia, Reading currently owns approximately, 930,000 square feet of
land comprised of five sites.

     In New Zealand, Reading owns, or has the right and obligation to purchase,
two parcels adjacent to the Wellington site described below under Joint Venture
Interests. Reading has granted to the owner of the remaining 50% interest in the
Wellington site, the right to acquire a 50% interest in each of these two
parcels, at a purchase price equal to 50% of Reading's cost basis in these
parcels, plus carrying cost and interest at prevailing bank rates, currently
approximately 6.5%. Reading also owns a 678,100 square foot parcel in Takanini,
which it also intends to develop as an entertainment center, subject to
obtaining the necessary land use approvals.

     In the United States, Reading owns the fee interest in the Royal George
Theater, a 30,000 square foot, four auditorium live theater office and
restaurant complex located in Chicago, Illinois. Also, Reading has an
Agreement in Principle to acquire the fee interests in the Minetta Lane and
Orpheum Theater in Manhattan, New York. Upon the closing of its Agreement in
Principle to lease four Manhattan cinemas, Reading will also hold the option to
acquire the fee interests underlying two of the cinemas.

     Joint Venture Interests
     -----------------------

     Reading Australia owns a 50% joint venture interest in a shopping center
located on leased land in the Melbourne area of Victoria, which it currently
anticipates redeveloping such facility as an entertainment center, and a 66%
joint venture interest in certain leased property in Melbourne which is
currently being developed as a 5 screen multiplex cinema. In December, 1998, the
shopping center joint venture entered into an agreement giving to it the right,
subject to certain conditions, to acquire the land underlying the shopping
center property. The joint venture's rights to acquire such fee interest is
subject to the completion of certain improvements to that shopping center.

     In New Zealand, Reading has 50% tenant in common interests in three pieces
of real property, totaling approximately 87,100 square feet. One of these
parcels is improved with a cinema/restaurant

                                    Page 20
<PAGE>
 
complex. Another parcel is currently being redeveloped as a new multiplex
cinema. The final parcel is a 76,900 square foot site located in downtown
Wellington. The Wellington site is currently used as a parking lot, and was
acquired by Reading in anticipation of development as an entertainment
center.

ITEM 3.   LEGAL PROCEEDINGS

CRAIG LEGAL PROCEEDING

     The Company has been named in certain litigation resulting from the Stock
Transactions in October 1996.  That litigation is described separately below
under the heading "Stock Transaction Litigation."

READING LEGAL PROCEEDINGS

Redevelopment Authority of the City of Philadelphia v. Reading
--------------------------------------------------------------

     On December 12, 1997, the Redevelopment Authority filed an action in the
Philadelphia Court of Common Pleas which relates to the 1993 sale of the
Headhouse property by Reading to the Authority.  Plaintiff has alleged discovery
of various contaminants -- asbestos, PCB's lead paint -- and alleges past and
future clean-up costs in excess of $1,000,000.  The action is based upon
theories of contract and state environmental laws. Reading has denied liability
and it is Reading's opinion that the Authority's claim is meritless in that
Reading adequately disclosed the condition of the property and expressly limited
its representations made in connection with the sale.

Stock Transaction Litigation
----------------------------

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

     In November 1996, plaintiffs filed an Amended Complaint against all of
Reading's present directors, its two former directors and Craig.  The Amended
Complaint does not name either REI or Reading Company as a defendant.  The
amended complaint essentially restates all of the allegations contained in the
Complaint and contends that the named defendant directors and Craig breached
their fiduciary duties to the alleged class.  The Amended Complaint seeks
unspecified damages on behalf of the alleged class and attorneys' and experts'
fees.  On December 9, 1997, the Court certified the case as a class action and
approved the plaintiff as class representatives.

                                    Page 21
<PAGE>
 
     On April 24, 1997, the plaintiff filed a purported derivative action
against the same defendants. This action included claims substantially similar
to those asserted in the class action and also alleged waste of tax benefits
relating to the Company's historic railroad operating losses. Reading moved to
dismiss this case for failure by the plaintiff to comply with the mandated
procedures for bringing such an action. On January 23, 1998, the Court dismissed
the derivative action. The dismissal of the derivative action does not affect
the class action case, nor does it preclude reassertion to the claims contained
in the derivative action.

     On September 28, 1998, the defendant of the Amended Complaint filed a
motion for summary judgment. The motion was argued on February 5, 1999 and
certain additional briefing was ordered by the court.

     Management believes that the allegations contained in the Amended Complaint
are without merit and intends to vigorously defend the directors in the matter.
Reading has Directors and Officers liability insurance and believes that the
claim is covered by such insurance.

OTHER CLAIMS
------------

     Reading and Craig are not a party to any other pending legal proceedings or
environmental actions which management believes could have a material adverse
effect on its financial position.

ITEM 4.   SUBMISSION OF MATTERS OF A VOTE OF SECURITY HOLDINGS

     At the Company's 1998 Annual Meeting of Shareholders held on December 15,
1998, shareholders elected the Company's directors.  The results of the votes
were as follows:


     ELECTION OF DIRECTORS                  FOR                 WITHHELD
     ---------------------                  ---                 --------

     James J. Cotter                     104,093,490             174,690
     S. Craig Tompkins                   104,092,854             175,326
     Margaret Cotter                     104,073,928             194,252
     William D. Gould                    104,084,490             183,690
     Gerald P. Laheney                   104,093,490             174,690
     Ralph B. Perry III                  104,093,490             174,690 

                                    Page 22
<PAGE>
 
                                    PART II
                                        
ITEM 5.  MARKET FOR THE REGISTRANT'S COMMON STOCK
         AND RELATED STOCKHOLDER MATTERS

     The Common Stock and the Class A Common Preference Stock of the Company are
traded on the New York and Pacific Stock Exchanges.  Set forth below are
quarterly high and low closing prices on the NYSE for the following periods:

                              CLASS A COMMON
                              PREFERENCE STOCK         COMMON STOCK
                              ----------------         ------------
 
                                 High      Low         High       Low
                                -------  -------      -------    ------
 
Year Ended December 31, 1998
  Quarter Ended:
     December 31, 1998           8  1/2   6 5/8         9         7 1/16
     September 30, 1998         11 3/16   7 1/16       11 7/16    7 9/16
     June 30, 1998              13  1/2  10 7/16       13 7/8    10 3/4
     March 31, 1998             11 7/16   9 1/16       12 5/16    9
 
Year Ended December 31, 1997
  Quarter Ended:
     December 31, 1997           9 5/8    8 7/8        10 1/16    9 1/4
     September 30, 1997          8 7/8    7 7/16        9 5/16    7 1/2
     June 30, 1997               8 5/8    7 7/8         9         7 3/4
     March 31, 1997              8 1/16   7 1/8         8 5/16    7 5/16

     The approximate number of holders of record of the Company's Common Stock
and Class A Common Preference Stock as of April 12, 1999 was 750 and 720,
respectively.  On April 12, 1999, the high, low and closing prices of the
Company's Common Stock was as follows:

 
                         COMMON       CLASS A
                         ------       -------
 
          High           $7 11/16      $7
          Low            $7 5/8        $6 7/8
          Closing        $7 11/16      $7


     On December 15, 1997, the Board of Directors declared a stock distribution
of one share of Class A Common Preference Stock to all shareholders of the
Common Stock (3,762,912 shares) and the Class A Common Preference Stock
(1,622,000 shares) of record on January 5, 1998.  The share prices for the 1997
and first quarter of 1998 included in the table have been adjusted to reflect
the pro forma impact on the historical market prices of the Common Stock and
Class A Common Preference Stock resulting from such Class A Common Preference
Stock distribution on February 1998 as if the distribution was a stock split.

     No cash dividends were declared or paid on the Company's Common Stock or
Class A Common Preference Stock during the fiscal years ended December 31, 1998
and 1997.  It is the current intention of the Board of Directors not to declare
cash dividends, due to the Company's intention to use its excess cash in
connection with the operation of the Company.

                                    Page 23
<PAGE>
 
ITEM 6.  SELECTED FINANCIAL DATA

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

<TABLE>
<CAPTION>
                                                                                         THREE
                                                                                         MONTHS
                                                 YEAR ENDED                            ENDED DEC.                YEAR ENDED
                                                 DECEMBER 31                               31                   SEPTEMBER 30,
                            ----------------------------------------------------     -------------    ------------------------------
                                  1998               1997               1996              1995              1995            1994
                                  ----               ----               ----              ----              ----            ----
                                                            (IN THOUSANDS, EXCEPT PER SHARE INFORMATION)
------------------------------------------------------------------------------------------------------------------------------------
<S>                         <C>                     <C>               <C>            <C>              <C>                 <C>
Revenues                         $33,929            $32,466           $27,865            $2,288            $6,182         $ 11,593
Income (loss)
 applicable to common
 shareholders before
 extraordinary item                 (854)             2,851            42,552               850             3,458            1,030
Extraordinary items                   --                 --                --                --                --           (2,408)
Net income (loss)
 applicable to common
 shareholders                    $  (854)           $ 2,851           $42,552            $  850            $3,458         $ (1,378)
====================================================================================================================================
Per share information
Basic earnings (loss)
 per share before
 extraordinary items             $ (0.08)           $  0.26           $  3.78            $ 0.07            $ 0.29         $   0.08
Extraordinary items                   --                 --                --                --                --         $  (0.19)
Basic earnings (loss)
 per share                       $ (0.08)           $  0.26           $  3.78            $ 0.07            $ 0.29         $  (0.11)
Diluted earnings
 (loss) per share                $ (0.08)           $  0.26           $  3.76            $ 0.07            $ 0.29         $  (0.11)
====================================================================================================================================
</TABLE>

<TABLE>
<CAPTION>
                                                           AS OF                                         AS OF YEAR ENDED 
                                                        DECEMBER 31,                                        SEPTEMBER 30,  
                              --------------------------------------------------------------     -----------------------------------
                                    1998                 1997                   1996                   1995                1994
                              ---------------     ------------------     -------------------     -----------------     -------------
<S>                           <C>                 <C>                    <C>                     <C>                   <C>
Total Assets                      $164,591              $167,125                $165,968              $84,669             $80,027
Long term debt                         920                 1,609                   1,016                   --                  --
Redeemable preferred stock           7,000                 7,000                   7,000                   --                  --
Shareholders' equity              $ 95,342              $ 98,239                $ 99,829              $63,891             $61,085
====================================================================================================================================
</TABLE>

     In 1996, the Company changed its fiscal year end from September 30 to
December 31, and accordingly, the previously issued Consolidated Financial
Statements reported the results of operations, cash flows and the statements of
stockholders' equity the three months ended December 31, 1995 and the years
ended September 30, 1995 and 1994.  In addition, Fiscal 1998, 1997 and 1996
assets and revenues are not comparable to previous periods due to the Company's
additional purchases of REI stock (See, "Stock Transactions"), which resulted in
REI being included in the Consolidated Financial Statements in Fiscal 1998, 1997
and 1996 on a consolidated basis as compared to the equity method of accounting
in previous periods.

                                    Page 24
<PAGE>
 
     Fiscal 1998 includes the results of three new cinemas which were opened
during the year.

     Fiscal 1997 and 1996 includes a gain of approximately $2 million and
$58.978 million, respectively, from the conversion/redemption of the Company's
common stock holdings in Stater to Preferred Stock (see Footnote 7 to
Consolidated Financial Statements included elsewhere herein). In addition,
Fiscal 1997 includes the results of five new cinemas which opened during the
year.

                                    Page 25
<PAGE>
 
    ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
             RESULTS OF OPERATIONS

General
-------

     The Company is in the business of identifying, acquiring, owning and
strategically managing controlling interests in other operating companies.  In
October 1996, the Company, along with its affiliates, REI and Citadel, entered
into the Stock Transaction described below under "The Reorganization and Stock
Transactions", which resulted in transferring a majority of the Company's assets
to REI in exchange for REI equity securities.  Accordingly, at December 31, 1998
and 1997, the Company's consolidated book value and cash flows are principally
derived from its holdings in REI.

     At December 31, 1998, the Company owned Reading Entertainment, Inc. ("REI")
Common Stock and REI Series B Preferred Stock representing approximately 78% of
the voting power of that company, and 1,096,106 shares of Citadel Common Stock,
which, together with the 2,113,173 shares of Citadel Common Stock held by
Reading, represented approximately 48% of the outstanding Common Stock of
Citadel.  As used in this Item 7, the term the "Consolidated Company" is used to
describe, for accounting purposes, the Company reporting on a consolidated basis
its ownership interest in REI (and collectively with its subsidiaries,
"Reading").  The Company is not consolidated with Reading for federal income tax
purposes, does not have common financing with Reading, does not guarantee the
obligations of Reading and maintains separate offices from Reading.

     Since 1993, Reading has been principally engaged in the "Beyond the Home"
or real estate based segment of the entertainment industry. Over the past five
years, Reading has reviewed and pursued a number of cinema acquisition
opportunities. However, in the view of management, both existing operations and
new build opportunities have generally been over priced in the U.S. market.
Consequently, Reading has attempted to concentrate efforts on markets which, in
the view of management, offer better potential returns than the exhibition of
conventional film product in the highly competitive United States market. These
markets have included the Australian, New Zealand and Puerto Rican markets for
conventional film exhibition and the United States market for upper end art and
foreign film. Furthermore, in Australia and New Zealand, Reading has focused on
a development oriented approach, emphasizing the construction of new multiplex
cinemas on properties owned by the Consolidated Company.

     This development oriented approach has meant that a longer period of time
has been required to convert Reading's cash and cash equivalent assets into
income producing assets than would have been the case if Reading had acquired
existing cinemas. It has also meant that the Consolidated Company has had
significantly higher general and administrative expenses, as a percentage of
revenues, than would a mature cinema exhibition company, or a company not
actively involved in long term real estate development. In addition, the
Consolidated Company has retained most of the senior executive staff needed to
carry Reading through its development phase and to operate its cinema and real
property assets, even though most of Reading's screens are currently in
development and are not anticipated to be producing material income in the next
year.

     At the end of 1998, Reading, either directly or through its various joint
venture relations, had 98 screens in operation. Based solely upon the
development of locations as to which the Company has signed letters of intent,
leases, or current ownership of the land, this number should increase to
approximately 200 screens by the end of 1999.

     The Consolidated Company believes that this strategy will ultimately result
in greater profitability and better long term returns (including both operating
profits from exhibition and long term gains from real estate development), than
would the purchase of an existing conventional cinema circuit. This is
particularly true given the significant number of obsolete cinemas held by most
of the circuits which have been offered for sale in

                                    Page 26
<PAGE>
 
recent periods. Reading has entered into an agreement to purchase four existing
Cinemas in Manhattan, but has done so on the basis of the belief that a greater
presence in Manhattan is important to the further development of a domestic art
circuit and that the development of new cinemas by Reading in Manhattan was not
a viable option. This basically development oriented strategy will necessarily
mean lower reported profits in the initial periods until operating revenues
increase to cover general and administrative expense, and until the long term
rewards of real estate ownership are realized.

     Reading has begun the development of circuits in Australia and New Zealand.
At the end of 1998, Reading Australia had four cinemas with 21 screens.  Reading
Australia anticipates adding an additional six cinemas with 50 screens in 1999,
for a total of 71 screens.  Reading New Zealand has entered into a joint venture
with an experienced operator.  That joint venture now operates two modern
multiplex theaters in the Auckland area, and has a third cinema under
construction, which is scheduled to open in 1999.

     In Australia and New Zealand, Reading is attempting to take advantage of
the foot traffic generated by a successful multiplex theater by developing
entire entertainment centers. These centers typically include a state-of-the-art
multiplex cinema, complementary restaurant and retail uses, and convenient
parking, all on land owned by Reading. Due to the competition for suitable
cinema sites, and Reading's view that currently attractive markets in Australia
and New Zealand will likely be developed in a relatively short period of time,
Reading has attempted to maximize the number of potential cinema locations by
purchasing or otherwise acquiring rights to acquire a number of entertainment
center sites over the past 24 months. This has adversely effected short term
profitability, as significant amounts have been invested in undeveloped land, or
land which is otherwise not currently income producing. However, it has given
Reading a level of assurance that it will have the sites available to it needed
to execute its business plan for Australia and New Zealand.

     To date, the Consolidated Company's development activities have been funded
with cash resulting, in large part, from the disposition of the Stater Bros.
Preferred Stock and Citadel Preferred Stock. A significant portion of this cash,
$24,883,000, has gone from interest earning cash balances and short term
investments to non-income producing property which is currently under
development or held for development. The Consolidated Company's assets remain
largely unencumbered. It is clear, however, that the Consolidated Company will
need to borrow funds in order to complete its currently planned buildout and
development projects. The Consolidated Company believes that it should be able
to raise the capital needed to fund its build-out, as currently staged over the
remainder of 1999, 2000 and 2001.

     In 1998, Reading determined to expand its Beyond the Home entertainment
activities from cinemas into live theater.  During the latter portion of that
year, Reading entered into agreements to purchase seven live theaters.  Three of
these theaters are in Manhattan:  the Minetta Lane, Orpheum and Union Square.
The remaining four are located in a single complex, the Royal George, in
Chicago.  All of these theaters feature smaller "Off Broadway" type plays.

     The acquisition of the Royal George theater in Chicago was completed in
March 1999. It is anticipated that the acquisition of the Manhattan theaters
will close in the second quarter of this year. In addition, Reading recently
entered into an agreement giving it the right, through May 2001, to present
plays at the Marines Theater, in San Francisco. Accordingly, Reading anticipates
booking eight live theaters in three major metropolitan areas by mid-1999.

                                    Page 27
<PAGE>
 
RESULTS OF OPERATIONS

     Due to the nature of the Consolidated Company's development and acquisition
activities and the timing associated with the results of such activities, the
effect of the gains recorded with respect to the Consolidated Company's
investment in Stater, the effect of litigation awards and settlements, the Stock
Transactions, the timing of new cinema openings and acquisition and the long
term nature of the real estate development activities, historical revenues and
earnings have varied significantly.

     The entertainment center developments are, for the most part, in the early
stage of development and generally will not produce income or cash flow for at
least eighteen to twenty-four months from the time that all development
approvals have been secured and construction commenced. It is anticipated that
one of Reading's eight entertainment center projects currently under development
will open late in 1999. Accordingly, general and administrative expenses related
to such real estate development activities will not be supported by operating
income in the near term. Further, although the Consolidated Company's cinema
operations are anticipated to expand significantly during 1999, the Consolidated
Company anticipates operating at a loss in 1999, since many of the new cinemas
are not expected to commence operations until the fourth quarter of 1999 and
most of the Consolidated Company's real estate activities will continue in the
development stage. In addition, interest and dividend revenues will decrease as
the Consolidated Company deploys its cash and cash equivalents in its real
estate and cinema development projects. Management believes that historical
financial results are not indicative of future operating results.

     The following summarizes cinema activity for the three years ended December
31, 1998 and anticipated 1999 additions:

                                    Page 28
<PAGE>
 
<TABLE> 
<CAPTION> 
                                 TOTAL        TOTAL 
                                CINEMAS      SCREENS          LOCATION
--------------------------------------------------------------------------------
<S>                             <C>          <C>          <C>  
CineVista
----------
1995
 January                        6            36
 December                       7            44           Humacao
1997                                       
 March                          8            50           Mayaguez       
 May                            8            48           Homigueros/1/  
1998                                                                      
 February                       7            44           Homigueros/1/   
 February                       7            42           San Juan/2/     
 June                           8            50           Homigueros/1/   
 September                      7            44           Bayamon/3/      
1999 (Projected)                                                          
 Second quarter                 6            40           Cayey           
 Fourth quarter                 7            52           Carolina        
DOMESTIC CINEMAS                                                          
----------------                                                          
1996                                                                      
 January/4/                     0             0                           
 August                         1             8           Soho, New York  
1997                                                                      
 December                       2            16           Houston, Texas  
 December                       3            21           Minneapolis, Minnesota
1998                                                                      
 November                       4            24           Sacramento, California
1999 (Projected)                                                          
 Second Quarter/4/             11            46           New York City   
 Second Quarter                12            64           Manville, Buffalo
READING AUSTRALIA                                                          
-----------------                                                         
1996                                                                      
 December                       1             6           Townsville      
1997                                                                      
 July                           2            10           Bundaberg       
 November                       3            16           Mandurah        
1998                                                                      
 November                       4            21           Market City     
1999 (Projected)                                                          
 Second Quarter                 5            26           Dubbo           
 Fourth Quarter/5/             10            71           Grovedale, Harbourtown,
                                                          Elsternwick, Belmont, Redbank
READING NEW ZEALAND/6/                                                    
--------------------                                                      
1998                                                                      
 June                           2             9             Mission Bay, Whangaparoa   
1999 (Projected)                                                          
 Fourth Quarter                 3            13             Takapuna      
</TABLE> 



/1/  CineVista replaced an existing six screen cinema in Homigeros with a newly
     constructed 8 screen cinema which opened in June 1998. In order to
     accommodate the construction of the new

                                    Page 29
<PAGE>
 
     cinema, two screens were closed at this location in May 1997. The remaining
     four screens were closed in January 1998.

/2/  Two Screens were closed at this San Juan location where CineVista continues
     to operate eight screens.

/3/  A location in Bayamon was damaged by Hurricane Georges.  In the fourth
     quarter of 1998 CineVista determined that it would not reopen this six-
     screen cinema.

/4/  In December 1998, Reading entered into an Agreement in Principle to lease
     and operate the cinemas constituting the City Cinemas Circuit located in
     Manhattan and to acquire three live "Off Broadway" theaters (the "Theater
     Transaction") also located in Manhattan.  Pursuant to the Agreement in
     Principle, Reading will also acquire the 16.7% interest in AFC not already
     owned by it and certain management rights with respect to three other
     cinemas located in Manhattan (the acquisition of the cinemas, the
     management rights and the minority interest in AFC are collectively
     referred to as the "Cinema Transactions").  In addition to the six-screen
     AFC, Reading will operate a total of 16 screens in four locations and
     manage an additional six screens in three locations upon conclusion of the
     Cinemas Transactions (See Note 4 to the Consolidated Financial Statements
     contained elsewhere herein).

/5/  Includes ten-screen cinema located in an entertainment center.

/6/  New Zealand cinemas are 50% owned by the Company.

     In March 1999, Reading acquired the Royal George Theater, a four stage live
theater located in Chicago.  In addition, Reading anticipates acquiring three
"Off Broadway" live theaters in Manhattan pursuant to the Theater Transactions,
and entered into a license agreement to operate a live theater in San Francisco.

REVENUE
-------

Theater Revenue
---------------

     Theater Revenue is comprised of Admissions, Concessions and Advertising,
and other revenues from Reading's cinema operations and totaled the amounts set
forth below in each of the three years ended December 31, inclusive of
minority interests where applicable:

<TABLE>
<CAPTION>
                                  1998                1997                    1996
<S>                           <C>                  <C>                    <C>
Cine Vista                    $16,210,000          $15,186,000            $15,523,000
Domestic Cinemas               11,134,000            7,978,000              2,713,000
Australia                       6,212,000            3,820,000                     --
                              -----------          -----------            -----------
                              $33,556,000          $26,984,000            $18,236,000
                              ===========          ===========            ===========
</TABLE>
                                                                                
     CineVista's Theater Revenues increased approximately $1,024,000 or 6.7% to
$16,210,000 in 1998 from $15,186,000 in 1997, primarily as a result of more
favorable film product in the first quarter of 1998.  The increase in Theater
Revenues is net of a decrease of approximately $279,000 resulting from the
closing of eight screens as outlined above in 1997 and 1998, offset in part by
increased revenues 

                                    Page 30
<PAGE>
 
  associated with a full year of operations from a six-screen cinema open in
  March 1997 and an eight-screen cinema which opened in June 1998.

     CineVista's Theater Revenues decreased $337,000 or 2.2% to $15,186,000 in
1997 from $15,523,000 in 1996 due primarily to the competitive effect of a
competitor's addition of two new multiplex cinemas in the San Juan metropolitan
market (which cinemas opened in July 1996 and January 1997), the closing of four
screens at one existing location in 1997 in order to begin construction of an
eight-screen cinema at the same location, offset somewhat by Theater Revenues
realized from a new six-screen cinema, which commenced operations in March 1997.

     Domestic Cinemas Theater Revenues increased approximately $3,156,000 to
$11,134,000 in 1998 from $7,978,000 in 1997 due in part to new cinema openings.
Reading opened a new eight-screen, 31,700 square foot cinema and cafe complex in
Houston, Texas (the "Houston Angelika") and acquired a five-screen cinema
located in Minneapolis, Minnesota (the "St. Anthony") in December 1997. Reading
also acquired the lease on an existing three-screen cinema in Sacramento,
California (the "Tower Theater") in November 1998. Theater Revenues from this
cinema were not material in 1998.

     In 1996 Reading's domestic cinema contributed $2,713,000 in Theater
Revenues (inclusive of minority interest) from August 28 through year end. Box
office and concession revenues at this cinema in 1997 increased approximately
3.3% from the amount recorded for the full year of 1996 by such cinema
(inclusive of results prior to Reading's acquisition of the cinema).

     Theater Revenues from Australian operations increased $2,392,000 or 62.6%
to $6,212,000 in 1998 from $3,820,000 in 1997. The increase from the prior year
includes the effect of a full year of operation of a four-screen cinema located
in Bundaberg, Victoria (the "Bundaberg Cinema") which was purchased in July 1997
for approximately $1,600,000 and a six-screen cinema located in Mandurah,
Western Australia (the "Mandurah Cinema") which opened in November 1997. Reading
Australia's first cinema located in Townsville, Queensland (the "Townsville
Cinema") was open throughout each of the respective periods. In November 1998,
Reading Australia opened a five-screen cinema in Sydney, Australia (the "Market
City Cinema") which it operates under a management contract. Theater Revenues
from this cinema were not material in 1998.

     Reading Australia opened the Townsville Cinema at the end of December 1996.
Revenues from the new cinema were not material in 1996 and were not included in
the consolidated financial results of the Company in 1996. The 1997 Theater
Revenues reflect a full year of operation at the Townsville Cinema, as well as
the results of Bundaberg and Mandurah cinema operations from the above-mentioned
commencement dates.

     The Company commenced cinema operations in New Zealand in 1998 through a
50% joint venture which operates 9 screens at two locations. The Company records
the results of such operations under the equity method of accounting, and
therefore does not include the revenues of such operations in its Theater
Revenues (See Equity in earnings (losses) of foreign affiliates below).

                                    Page 31
<PAGE>
 
Real Estate
-----------

     Real Estate revenues include rental income and the net proceeds of sales of
Reading's domestic real estate. Reading Australia did not have material revenues
relating to its real estate entertainment development activities. Real estate
revenues were $373,000, $180,000 and $543,000 in 1998, 1997, and 1996,
respectively. Rental income in 1996 included $289,000 from rentals on leased
equipment. The Consolidated Company does not anticipate recognizing additional
income from the leasing transaction until the residual value of the leased
equipment is realized in 2002. (See Note 8 to the Consolidated Financial
Statements included elsewhere herein.) Gains on sale of domestic real estate
were not material in any of the three years ended December 31, 1998, 1997, and
1996. Reading has approximately 11 parcels and rights-of-way remaining from its
historic railroad operations, many of which are of limited marketability. Future
domestic real estate revenues may increase as larger properties are sold,
however, management believes that most of the properties held for sale will be
liquidated within the next two years.

Income from Investment in Stater
--------------------------------

     The following summarizes earnings from the Consolidated Company's
investment in Stater prior to the repurchase of such investment by Stater in
August 1997 as included in the accompanying Consolidated Statements of
Operations for the years ended December 31, 1997 and 1996;


                                                          YEARS ENDED
                                                          DECEMBER 31,
                                                          1997    1996
                                                          ----    ----
Dividend income                                          $4,330  $ 5,978
Service fee income                                          972    1,500
Gain on conversion/repurchase of investment in Stater     2,002   58,978
Equity in earnings in Stater                                 --    1,608
                                                         ------  -------
                                                         $7,304  $68,064
                                                         ======  =======

     Prior to March 8, 1996, the Company held a 50% common stock interest in
Stater which interest was accounted for in accordance with the equity method of
accounting. Effective March 8, 1996, SBH exercised its right to convert all the
Company's common stock in SBH into 693,650 shares of Stater Preferred Stock. The
Stater Preferred Stock had a liquidation preference and redemption value of
$69,365,000 and a cumulative dividend preference beginning at 10.5%. Upon the
conversion by SBH in March 1996 of the Company's common stock interest to
redeemable preferred stock, the Company discontinued the use of the equity
method of accounting for its investment in Stater. Included in the Consolidated
Statements of Operations is the Company's equity in earnings amounting to
$1,608,000 for the 1996 period prior to the conversion of the Company's SBH
Common Stock to Preferred Stock. Prior to the preferred stock conversion, the
carrying value of the Company's 50% common stock interest amounted to
approximately $9,000,000. In Fiscal 1996, the Company recorded approximately
$58,978,000 of the difference between $67,978,000 (98% of the stated value of
the Stater Preferred Stock) and the Company's net carrying value of its previous
common stock investment ($9,000,000) at the time of the conversion as "Gain from
conversion of common stock interest in Stater".

     In August 1997, the SBH Preferred Stock was repurchased in its entirety by
SBH and a Consulting Agreement between the Company and Stater, which provided a
fee of approximately $1,500,000 annually, was terminated. Upon the SBH Preferred
Stock repurchase in August 1997, the Consolidated Company recognized income of
approximately $2,002,000 comprised of (i) $1,387,000 (difference between the
$69,365,000 stated value of the SBH Preferred Stock and the carrying value) and
(ii) $615,000 received

                                    Page 32
<PAGE>
 
from Stater at the time of the SBH Preferred Stock repurchase for REI's
agreement to enter into a covenant-not-to-compete for a one year period.

Expenses
--------

     "Theater costs", "Theater concession costs" and principally all of the
amounts reported as "Depreciation and amortization" included in the Statement of
Operations (collectively "Theater Operating Expenses") reflects the direct
theater expenses associated with cinema operations and totaled the amounts set
forth below in each of the three years ended December 31, 1998.

<TABLE>
<CAPTION>
                             1998                        1997                        1996
<S>                       <C>                         <C>                         <C>
CineVista                 $13,693,000                 $13,286,000                 $13,787,000
Domestic Cinemas            9,475,000                   5,989,000                   2,137,000
Australia                   5,286,000                   3,664,000                      11,000
                          -----------                 -----------                 -----------
                          $28,454,000                 $22,939,000                 $15,935,000
                          ===========                 ===========                 ===========
</TABLE>

     CineVista Theater Operating Expenses increased approximately $407,000 or
3.1% to $13,693,000 in 1998 from $13,286,000 in 1997 due primarily to increases
in expense items which vary in proportion to Theater Revenues, offset by a net
decrease in Theater Operating Expenses of $1,283,000 from the closing of eight
screens during the periods offset by the effect of opening eight screens in June
1998.

     CineVista Theater Operating Expenses increased approximately $501,000 to
$13,286,000 in 1997 primarily as a result of the additional expenses of
operating a new location subsequent to March 1997.

     Domestic Cinemas Theater Operating Expenses increased approximately
$3,486,000 or 58.2% to $9,475,000 in 1998 from $5,989,000 in 1997 primarily as a
result of the inclusion of a full year of operations of the Houston Angelika and
the St. Anthony and startup costs associated with the Tower Theater from
November 1998 through year end.

     Domestic Theater Operating Expenses increased $3,852,000 to $5,989,000 in
1997 from $2,137,000 in 1996, due primarily to operating expenses associated
with a full year of operations of the NY Angelika.

     Theater Operating Expenses from Australian operations increased $1,622,000
to $5,286,000 in 1998 from $3,664,000 in 1997. The increase is primarily due to
the inclusion of a full year of operations from the Bundaberg and Mandurah
Cinemas. Theater Operating Expenses as a percentage of Theater Revenues remained
constant throughout the period.

General and administrative expenses
-----------------------------------

     General and administrative expenses of the Consolidated Company amounted to
$11,897,000, $11,449,000, $8,947,000, in Fiscal 1998, 1997, 1996, respectively.
"General and administrative" expenses, without consideration of intercompany
management fees, by operating entity follows:

                                    Page 33
<PAGE>
 
<TABLE>
<CAPTION>
                                                       FISCAL           FISCAL       FISCAL           
                                                        1998             1997         1996            
                                                        ----             ----         ----            
                                                                       (000'S)    
                                                      -------------------------------------                   
<S>                                                   <C>             <C>           <C>          
READING:                                                                                         
 CineVista                                            $ 1,292         $   767       $1,050       
 Domestic Cinemas                                         597             645          202       
 Australia                                              3,739           3,714        2,816       
 New Zealand*                                             176              --           --       
 General                                                4,453           4,611        3,087       
Craig:                                                  1,640           1,712        1,792       
                                                      -------         -------       ------       
  Total                                               $11,897         $11,449       $8,947       
                                                      =======         =======       ======       
________________________

    *Relates to Reading New Zealand's real estate development segment.
</TABLE> 


     CineVista's "General and administrative" expenses increased approximately
$525,000 or 68.4% to $1,292,000 in 1998 from $767,000 in 1997, primarily as a
result of $413,000 of charges related to the closing of four screens in the
first quarter of 1998, and a charge relating to the Company' election not to
rebuild a six-screen cinema in the fourth quarter of 1998 which had been damaged
by Hurricane Georges. The first quarter charge was comprised of a $395,000 loss
on leasehold improvements, net of a reversal of a $230,000 provision for
deferred rent. The fourth quarter charge was comprised of a $336,000 loss on
leasehold improvements net of a $88,000 gain on the cancellation of a capital
lease obligation.

     CineVista's "General and administrative" expenses decreased approximately
$283,000 or 27.0% to $767,000 in 1997 from $1,050,000 in 1996, due primarily to
certain 1997 reclassifications of salary expenses from CineVista to Reading
general and administrative expense and a reduction in professional fees of
$70,000.

     "General and administrative" expenses associated with the Domestic Cinemas
include $488,000, $370,000, and $43,000 in 1998, 1997, and 1996, respectively,
of management fees to City Cinemas with respect to the management of the
Domestic Cinemas. (See Note 3 to the Consolidated Financial Statements contained
elsewhere herein.) "General and Administrative" expenses decreased $48,000 or
7.4% to $597,000 in 1998 from $645,000 in 1997, primarily due to decreased
professional fees associated with the NY Angelika and decreased travel expense
which were incurred in 1997 relating to the opening of the Houston Angelika and
the St. Anthony cinemas, offset by the increased management fees.

     "General and Administrative" expenses from Australian operations of
$3,739,000 in 1998 were comparable to $3,714,000 in 1997, resulting from a
decrease in the write-off of Property Development costs related to project
abandonments of $755,000, offset by increased payroll costs, professional fees,
office expenses, and carrying costs of land held for development, primarily of
which are associated with the continued expansion of cinema operations and
development activities in Australia.

                                    Page 34
<PAGE>
 
     "General and administrative" expenses from Australian operations increased
$910,000 or 32.5% to $3,714,000 in 1997 from $2,804,000 in 1996. The principal
components of this increase include an increase in Property Development costs of
$650,000 ($650,000 recorded in 1996 and $1,300,000 in 1997) which were written
off due to project abandonments or reconfiguration, third party theater
management fees of $185,000 and increased office, salary, and related overhead
expenses resulting from an expansion of Australia's cinema operations and
entertainment center development activities.

     Reading's corporate "General and Administrative" expenses decreased
$158,000 or 3.4% to $4,453,000 in 1998 from $4,611,000 in 1997, primarily from
the inclusion in 1997 of bonus expense of $475,000 for a bonus paid to the
Consolidated Company's Chairman of the Board of Directors and a $110,000
investment banking fee paid to the Consolidated Company's former Corporate
Secretary, offset by an increase in 1998 in non-capitalizable development costs
associated with its Domestic Cinema development activities of approximately
$140,000 and an increase in travel expenses of approximately $149,000 related to
increased Domestic Cinema development activities.

     Other "General and administrative" expenses increased $1,524,000 or 49.4%
to $4,611,000 in 1997 from $3,087,000 in 1996, primarily as a result of the
aforementioned bonus and investment banking expenses incurred in 1997, increased
salary expense and salary-related expenses of approximately $370,000 due to an
expansion of cinema development and operating personnel and increased
professional fees of approximately $200,000 relating primarily to domestic
cinema development activities.

     Craig general and administrative expenses in Fiscal 1998, 1997 and 1996 and
totaled $1,640,000, $1,712,000 and $1,792,000, respectively. The decrease in
Fiscal 1998 is principally a result of reduced salaries as a result of one
officer transferring to Reading and one employee
retiring.

     In addition to general and administrative expenses, the Company incurred
development write-offs and operating losses with respect to its 50% membership
in Hope Street Hospitality LLC ("HSH") amounting to approximately $164,000,
$207,000 and $780,000 in Fiscal 1998, 1997 and 1996, respectively.

Earnings from equity investments
--------------------------------

     The following summarizes earnings (losses) from the Consolidated Company's
investment in Citadel, Big 4 Ranch, Inc. ("BRI") and Whitehorse Property Group
as included in the accompanying Consolidated Statements of Operations for the
years ended December 31, 1998 and 1997 and 1996.

 
                                           YEARS ENDED DECEMBER 31,
                                           1998      1997       1996
                                           ----      ----       ----
                                                (in thousands)
 
Equity earnings of Citadel                $2,233     $ 392     $1,526
Preferred stock dividends                     --        --        154
Preferred stock redemption premium            --        --        716
                                          ------     -----     ------
     Total Citadel                         2,233       392      2,396
                                                                
Equity losses from Big 4 Ranch, Inc.        (520)       --         --
                                                                
Equity earnings from Whitehorse               26        --         --
                                          ------     -----     ------
Earnings from equity investments          $1,739     $ 392     $2,396
                                          ======     =====     ======


                                    Page 35
<PAGE>

Citadel
------- 

     Citadel reported net income applicable to common shareholders of
approximately $5,687,000, $1,530,000 and $6,268,000 in Fiscal 1998, 1997 and
1996, respectively (the Consolidated Company's share calculated after
consideration of preferred dividends paid by Reading to Citadel, amounting to
approximately $2,233,000, $392,000 and $1,526,000, respectively). In 1998,
Citadel's earnings include an income tax benefit of approximately $4,828,000
resulting principally from a reversal of previously reserved deferred tax assets
offset, in part, by a $990,000 loss representing Citadel's share of the loss of
certain agricultural partnerships which were accounted for under the equity
method (See Note 5 to Consolidated Financial Statements contained elsewhere
herein). Citadel's net earnings for 1998, 1997 and 1996 included approximately
$1,022,000, $820,000 and $264,000 received from the Consolidated Company, as
dividends, interest income and consulting income. Citadel's net earnings for
Fiscal 1996 include approximately $1,493,000 from the sale of a property and 
non-recurring income amounting to $4,000,000 resulting from the recognition of
previously deferred proceeds from the bulk sale of loans and properties by
Citadel's previously owned subsidiary, Fidelity Federal Bank ("Fidelity").

     In December 1996, Citadel exercised its right to redeem the 1,329,114
shares of Citadel 3% Cumulative Voting Convertible Preferred Stock owned by the
Consolidated Company. The Consolidated Company received the stated value of
$5,250,000, all accrued and unpaid dividends and a redemption premium of
$941,000, which dividends and premium, net of the amount attributable to the
Consolidated Company's common stock interest, is included in "Earnings from
equity investments" in the Consolidated Statement of Operations for the year
ended December 31, 1996.

BRI
---

     On December 29, 1997, Citadel capitalized a wholly owned subsidiary, BRI.,
with a cash contribution of $1,200,000 and then distributed 100% of the shares
of BRI to Citadel's common shareholders of record as of the close of business on
December 23, 1997, as a spin-off dividend. The Consolidated Company received
2,213,043 shares or 33.4% of BRI. During 1998, the Consolidated Company
purchased additional shares of BRI increasing its ownership to approximately
49%.

     In 1997, BRI (owning 40%), Citadel (owning 40%) and Visalia LLC (owning
20%; a limited liability company controlled by Mr. James J. Cotter, the Chairman
of the Board of Craig, REI and Citadel, and owned by Mr. Cotter and certain
members of his family) entered into three general partnerships, which
partnerships acquired on December 31, 1997 certain agricultural properties
located in Kern County, California (purchase price amounting to approximately
$7,600,000). The acquisition was financed by a 10-year purchase money mortgage
in the amount of $4,050,000, a line of credit from Citadel and pro rata
contributions from the partners. Through the Consolidated Company's holding in
Big 4 Ranch, Inc., and Citadel, the Consolidated Company owns approximately 38%
of such partnerships at December 31, 1998. In December 1998, the partnerships
suffered a freeze which destroyed the 1998-1999 citrus crop. The partnerships
have no funds to repay a $1,850,000 line of credit from Citadel or fund the
estimated $2,640,000 required to meet the costs associated with production of a
1999-2000 crop and complete the proposed 1999 planting, other than either to
call upon its partners for funding or to borrow further funds from Citadel. BRI
has no funds or resources with which to provide such funding, other than to call
upon its separate line of credit from

                                    Page 36
<PAGE>
 
Citadel. As a result of the freeze, the book value of BRI was essentially
reduced to zero and, accordingly, the Consolidated Company recorded a loss of
approximately $520,000, which loss is included in the Statement of Operations
for the year ended December 31, 1998 as a component of "Earnings from equity
investment". To date, Citadel has continued to provide the funding required by
the Partnerships, but no assurances can be given that Citadel will continue to
provide the funding.

Whitehorse Property Group
-------------------------

     In November 1997, Reading Australia acquired a 50% interest from Burstone
Victoria Pty. Ltd. ("Burstone") in the Whitehorse Property Group Unit Trust
("WPG") for approximately $1,600,000. WPG owns a shopping center located near
Melbourne, Australia located on land leased pursuant to a long-term lease. WPG
is currently studying the redevelopment of the Whitehorse Shopping Center as an
entertainment center through development of a multiplex cinema, and
complementary restaurants and retail shops.

     Pursuant to a Joint Venture Agreement, Reading Australia guarantees the
repayment of 50% of a secured bank loan which is owed by WPG. The principal
outstanding on the loan totaled approximately $7,200,000 at December 31, 1998,
resulting in a guarantee by the Company of approximately $3,600,000. The loan
bears interest at a rate equal to the cost of funds plus 1.7% or approximately
6.56% at December 31, 1998 and is due in November 1999. WPG's net income for the
year ended December 31, 1998 totaled $50,000 and the Consolidated Company's
share of such income was $26,000, which amount is included in the Consolidated
Statement of Operations for the year ended December 31, 1998 as "Earnings from
equity investments." WPG's results for the two months ended December 31, 1997
were immaterial and not included in the Company's Consolidated Statement of
Operations.

Interest income
---------------

     Interest income in Fiscal 1998, 1997 and 1996, amounted to $4,531,000,
$3,319,000, and $2,970,000, respectively. The Fiscal 1998 increase is
principally due to a full year's investment of the proceeds received from the
redemption of the Stater Preferred Stock on money market accounts since August
1997. The average yield on such investments was approximately 5.5% for the year
ended December 31, 1998. Interest income is anticipated to decrease in future
years as the Consolidated Company's balance of liquid funds are deployed in
cinema and entertainment center development projects. 

Other Income
------------

     "Other (expense) income" totaled ($587,000), $1,076,000 and $3,622,000 in
Fiscal 1998, 1997 and 1996, respectively. In Fiscal 1998, "Other Expenses" was
principally comprised of losses on foreign currency derivative contracts. The
Company does not currently have any foreign derivative contracts. Fiscal 1997,
"Other income" includes $260,000 from a third party as reimbursement of certain
acquisition related expenditures which were expensed by the Company in prior
periods, $490,000 of income realized upon settlement of certain litigation
relating to a discontinued subsidiary's operations, and a $220,000 gain from
foreign currency transactions.

     During the fourth quarter of 1997, Reading entered into several foreign
currency swaps and a currency forward position with a major bank. The agreements
provided for Reading to receive $12,363,800

                                    Page 37
<PAGE>
 
US dollars ("USD") in return for the delivery of $18,659,000 Australian dollars
("AUD") in January 1998. The value of the contracts at December 31, 1997 was
established by computing the difference between the contractual exchange rates
of the swap and forward positions (AUS/USD) and the exchange rates in effect at
December 31, 1997 resulting in the gain of $220,000. During the first quarter of
1998, the currency positions and extensions thereof matured and the Consolidated
Company recorded a loss of approximately $670,000.

     The principal components of "Other income" in Fiscal 1996 included a
$3,479,000 in litigation settlements.

Minority Interest
-----------------

     The components of "Minority Interest" is Fiscal 1998, 1997 and 1996 is as
follows:

<TABLE>
<CAPTION>
                                           1998                   1997              1996
                                           ----                   ----              ----
                                                            (in thousands)
                                    ------------------------------------------------------------------
<S>                                        <C>                    <C>               <C>
REI                                        $1,972                 $ 330             $(1,471)
Angelika NY                                  (306)                 (239)                (67)
Australian Cinema                             (37)                   42     
                                           ------                 -----             -------
Income (expense)                           $1,629                 $ 133             $(1,538)
                                           ======                 =====             =======
</TABLE>

     The principal component of minority interest is derived from the Company's
holdings in REI. The Company owns preferred stock in REI which earns an annual
dividend of approximately $3,575,000 and approximately 69% of the outstanding
REI common stock. REI minority income in Fiscal 1998 and 1997 reflects the 30.7%
minority interests share of REI losses and preferred dividends paid to the
Company. REI reported earnings in excess of such dividends paid in Fiscal 1996
resulting in Minority Interest expense in that year. The Preferred Stock was
issued in October 1996. The 16.67% minority interest in income of Angelika NY
amounted to $306,000, $239,000 and $67,000 in Fiscal 1998, 1997 and 1996. The
Angelika NY was purchased in August 1996. Minority interest in income of
the Australian Cinema represents the 25% minority interests ownership in such
cinema which was opened in 1997.

Income Taxes
------------

     Provisions from income taxes provided in Fiscal 1998, 1997 and Fiscal 1996
amounted to approximately $986,000, $1,312,000 and $25,803,000, respectively.
Fiscal 1998 income tax expense consisted of an accrual for foreign withholding
taxes of $786,000 which will by paid if certain intercompany loans are repaid,
$122,000 of Federal Alternative Minimum Tax and state taxes of $78,000 (see Note
12 to the Consolidated Financial Statements contained elsewhere herein). The
Fiscal 1997 income taxes consisted principally of REI Federal Alternative
Minimum Tax totaling $146,000, foreign withholding taxes of $698,000 and state
and federal taxes of $468,000. The Fiscal 1996 provision principally related to
deferred tax liabilities associated with the gain recognized on the conversion
of the Company's Stater Common Stock to Stater Preferred Stock. As a result of
the Stock Transactions in October 1996, the Stater Preferred Stock was
transferred to Reading. The Stock Transactions are intended to qualify as an
Exchange under Section 351 (a) of the Internal Revenue Code of 1986. Upon
receipt of the Stater Preferred Stock, Reading determined that it was more-
likely-than-not that a portion of a tax asset valuation allowance related to
Reading deferred federal tax assets would be realized.

     The Company accounted for its Fiscal 1996 Reading Stock purchases and the
Stock Transactions as a purchase. The fair value of the assets and liabilities
received were considered after realization by Reading

                                    Page 38
<PAGE>
 
of the previously reserved tax assets. Accordingly, the Company reduced its
deferred tax liabilities in the amount of approximately $22,000,000 with a
corresponding decrease to the allocated fair value of Reading assets purchased
(See Note 12 to the Consolidated Financial Statements contained elsewhere
herein).

Net income (loss) applicable to common stockholders
---------------------------------------------------

     Net income (loss) applicable to Common Stockholder's amounted to
approximately $(854,000), $2,851,000, $42,552,000, for Fiscal 1998, 1997, 1996,
respectively. "Net income applicable to common stockholders' has been reduced by
the 6.5% per annum dividend on the $7 million of Convertible Redeemable
Preferred Stock issued to Citadel by Reading in October 1996 amounting to
$455,000, $455,000 and $95,000 in Fiscal 1998, 1997 and 1996, respectively.

LIQUIDITY AND CAPITAL RESOURCES

     At December 31, 1998, Craig had cash and cash equivalents of approximately
$4,720,000. At December 31, 1998, the Consolidated Company had cash and cash
equivalents totaling approximately $63,314,000, which includes approximately
$58,593,000 held by Reading. REI is majority owned by the Company and,
accordingly, is included in the consolidated financial statements of the Company
as of December 31, 1998 and 1997. However, Craig and REI are separate public
companies and each entity's capital resources and liquidity is legally
independent of the other and any intercompany loans or receivables would require
approval of each separate company's Board of Directors.

     The Stock Transactions described below transferred the title of a material
portion of the Company assets from Craig to REI, resulting in Craig's assets
being principally comprised of REI Common and Preferred stock. Accordingly, the
future liquidity of Craig is principally dependent on Reading's ability to pay
dividends in accordance with the terms of the Reading Preferred Stock amounting
to approximately $3,575,000 annually. To date, Reading has declared and paid
such dividends, however, the Company can make no assurances that Reading would
not choose to allow such dividends to accumulate in order to further its
business plan described below. Currently, Craig's general and administrative
costs amount to approximately $1,800,000 annually. While not anticipated,
further liquidity could be achieved through the sale of shares of Citadel and/or
REI.

     Since Reading determined to become principally involved in the Beyond the
Home or real estate based segment of the entertainment industry in 1993, it has
funded its development activities principally from cash derived from the
disposition of its historic railroad assets and other operating interests. In
1996, in view of the substantial capital resources required to take advantage of
the opportunities available to it in this industry, the Consolidated Company
entered into the 1996 Stock Transaction which had the result of providing
Reading with substantial liquid resources.

     Although Reading still has little or no debt, the Consolidated Company's
cash assets are now, in essence, fully committed. A substantial portion of the
cash has been invested or internally committed to development projects which
will not be generating revenue until the latter portion of 1999 or early 2000.
In addition, approximately $32,949,000 has been invested in land, currently held
for development as entertainment centers, and $6.4 million has been invested in
a 50 acre development site in Melbourne, which though initially acquired as an
entertainment center site, is now being reviewed for possible alternative
development. These assets are, in large part, presently unencumbered. To the
extent that assets are encumbered with mortgage debt, such debt exists primarily
at the level of certain of Reading's unconsolidated affiliates, such as WPG.
This decision to commit substantial resources to the acquisition of sites
reflects the Company's view that the key to the successful penetration of the
Australian market

                                    Page 39
 
<PAGE>
 
was the acquisition of a sufficient number of sites to assure the potential to
develop a critical mass of cinema assets, and the need to acquire these sites
before the major cinema operators in Australia could control the markets which
will be serviced by these sites.

     Reading believes that it has sufficient cash on hand to complete the
projects and acquisitions currently slated for completion in 1999.  This
includes the anticipated addition of 50 screens in Australia (increasing the
screen count in that market from 21 to 71 screens), 40 screens in the United
States (increasing the screen count from 24 to 64 screens), 12 screens in Puerto
Rico (increasing the screen count from 40 to 52 screens), and 4 screens in New
Zealand (increasing the screen count from 9 to 13 screens).  It is the current
plan to leverage these assets as they commence operations, and to use the
proceeds from such financings to continue the development program through the
year 2000.  It is estimated that the total development cost of all of Reading's
entertainment center projects will exceed $230,000,000.  In the event that such
debt financing cannot be obtained on terms acceptable to Reading, consideration
will be given to seeking joint venture partners, issuing debt or equity
securities, delaying development of certain projects and/or selling land
currently held for development, or other assets.  Reading is also in discussion
with various lenders concerning the possibility of construction period finance.
Reading does not currently consider any of its assets to be held for sale.

     Reading does have commitments in excess of its current cash and cash
equivalent assets. At December 31, 1998, Reading had total commitments of
$108,500,000. Of this amount, it is currently anticipated that approximately
$48,740,000 will be funded in 1999, and approximately $59,760,000 will be funded
in or after 2000. Included among these commitments is a $32,500,000 credit
facility to be made available by Reading and a $4,000,000 option payment to be
funded in connection with the Cinema Transaction (both of which are unlikely to
be funded before the fourth quarter of 2000); a contractual obligation to
construct an entertainment center in Victoria, at an estimated remaining cost of
$20,500,000 (currently anticipated to be completed in late 2000 or early 2001),
a $6,600,000 obligation to purchase a 1,086 stall car park structure located
adjacent to property located in central Wellington, and held for entertainment
center development by an unconsolidated entity in New Zealand, and $1,400,000 in
obligations to acquire additional open land in New Zealand.

     As a consequence of business plan for Australia and New Zealand, Reading is
carrying significantly more land than might be the case with a more mature
cinema company. The acquisition of these properties has required the commitment
of significant sums. Since the acquired properties are not currently income
producing, the financing of such assets is more difficult and more expensive
than would be the financing of cash flowing assets. Accordingly, the ability for
Reading to continue its buildout program will be dependent in large part upon
the performance of the approximately 80 new screens being constructed in 1999.
While care has been taken in the identification of these cinemas, no assurances
of success can be given. For this and a variety of other reasons, including
without limitation both local and international economic issues, the
availability of financing on reasonable terms, and the health generally of the
film exhibition industry in the markets serviced by Reading, no assurances can
be given that the financing needed for the Company to carry out its business
plan into 2000 and to meet its longer term commitments can be given.

     The following summarizes the major sources and uses of cash funds in each
of the three years ended December 31, 1998, 1997 and 1996:


                                    Page 40
<PAGE>
 
Fiscal 1998
-----------
 
     "Unrestricted cash and cash equivalents decreased $34,888,000 in 1998 from
$98,202,000 in 1997 to $63,314,000 at December 31, 1998.  Working capital
decreased $42,320,000 from $89,765,000 at December 31, 1997 to $47,445,000 at
December 31,1998.

     Other sources of liquid funds in 1998 include $4,531,000 in interest
income, a net increase in purchase commitments of $4,550,000, and real estate
revenue of $373,000.

     In addition to the payment of operating expenses, the principal use of cash
funds included the repurchase of Craig common stock totaling $984,000, the
payment of $455,000 of dividends with respect to the REI Convertible Preferred
stock, purchases of property and equipment of $11,083,000 ($1,772,000 which
related to Reading Australia, $7,106,000 which related to CineVista, and
$2,205,000 relating to the Domestic Cinemas), the investment of $12,445,000 in
property held for development of ($2,645,000 relates to Reading New Zealand and
$9,800,000 relates to Reading Australia), the payment of $1,370,000 relating to
the acquisition of the Royal George Theater, the payment of $1,272,000 relating
to a deposit and other costs associated with the Cinema Transaction and the
Theater Transaction, the investment of $4,290,000 by Reading New Zealand in two
joint ventures (including a loan of $587,000 to a joint venture partner with
respect to property on which Reading New Zealand intends to develop an
entertainment center), and investments in Citadel and Big 4 common stock of
$3,636,000 (See Note 5 to the Consolidated Financial statements contained
elsewhere herein).

Fiscal 1997
-----------

     "Unrestricted cash and cash equivalents increased $46,030,000 in 1997 from
$52,172,000 in 1996 to $98,202,000 at December 31, 1998.  Working capital
increased $43,978,000 from $45,787,000 at December 31, 1996 to $89,765,000 at
December 31, 1998.

     The principal source of liquid funds in 1997 was the $73,915,000 in
proceeds from the redemption of the Stater Preferred Stock investment inclusive
of accrual dividends.  Other sources of liquid funds in 1997 include $2,360,000
in payment of a 1996 litigation settlement, $3,236,000 in "Interest and
dividend" income, and $260,000 from "Other income".

     In addition to the payment of operating expenses the principal use of cash
funds included the payment of $455,000 of dividends on the Company's REI
Convertible Preferred Stock, the additional purchase of REI Common Stock
amounting to $819,000, and purchases of a theater and property and equipment of
$20,118,000 ($11,743,000 which relates to Reading Australia, $4,079,000 relating
to CineVista and $4,296,000 to the Domestic Cinemas), and the investment of
$3,871,000 by Reading Australia in a joint venture and a loan to the joint
venture partner with respect to an existing shopping center property which
Reading Australia is considering as a potential site for redevelopment as an
entertainment center intends to develop a multiplex cinema.  (See Note 4 to the
Consolidated Financial Statements contained elsewhere herein.)

                                    Page 41
<PAGE>
 
Fiscal 1996
-----------

     "Unrestricted cash and cash equivalents increased $33,527,000 in 1996 from
$18,645,000 at December 31, 1995 to $52,172,000 at December 31, 1996 due
primarily to the effects of the accounting for the Stock Transactions. The
additional purchase of REI stock resulted in the Company consolidating the
assets and liabilities of Reading in the financial statements, which had the
effect of increasing cash and cash equivalents by approximately $41,412,000, net
of the Company's cash outlays for such purchases amounting to approximately
$1,107,000.

     Principal sources of liquid funds in 1996 were (i) dividends on the Stater
Preferred Stock and consulting fees from Stater amounting to approximately
$5,978,000 and $1,500,000, respectively, (ii)interest income amounting to
$2,970,000, (iii) $3,622,000 in "Other income," (iv) $7,000,000 in proceeds from
the sale of REI Series A Preferred Stock, and (v) $6,191,000 from the redemption
of the Citadel Preferred Stock. Additionally, principal sources of liquid funds
included a net increase of $7,504,000 in "Accounts payable and accrued
expenses."

     In addition to operating expenses, other uses of liquid funds in 1996
included the repurchase of the Company's Common Stock amounting to approximately
$7,585,000, the purchase of the Angelika for $9,217,000 (total purchase price of
$12,570,000 net of a credit of $1,285,000 for a judgment secured by a portion of
the stock of the seller of the Angelika (the "Angelika Judgment") and the
minority member contribution of $2,068,000), purchases, primarily by Reading
Australia, of $11,204,000 in property and equipment and a net increase in
current assets of approximately $2,457,000.

THE REORGANIZATION AND STOCK TRANSACTIONS

     The Reorganization of REI was effected in order to consolidate Reading's
operations under a holding company incorporated under the laws of the State of
Delaware.  The Consolidated Company believes that such a structure would
facilitate the financing of REI, by permitting it to seek new capital without
subjecting the new capital to the contingent liabilities of Reading Company's
historical railroad businesses, and permit REI to avail itself of a more
established body of corporate law than that of Pennsylvania (the state in which
Reading Company is incorporated).

     Pursuant to the Stock Transactions, REI received $7 million of cash from
Citadel.  In return REI issued to Citadel, $7 million in stated value (70,000
shares) of REI's Series A Preferred Stock and granted Citadel certain
contractual rights including the Asset Put Option.  The Asset Put Option grants
Citadel the right to require REI to acquire substantially all of Citadel's
assets and assume related liabilities in return for the issuance of REI Common
Stock at any time through a date 30 days after REI files its 1999 Annual Report
on Form 10-K. The number of shares to be issued will be determined by dividing
the appraised value of the Citadel net assets or $20 million, whichever amount
is lower, by $12.25. If the appraised value of the Citadel assets is in excess
of $20 million, REI will issue Common Stock at fair market value for such excess
up to a total of $30 million in Citadel net assets. REI received from Craig the
Stater Preferred Stock with a stated value of $69.365 million the CHC Preferred
Stock with a stated value of $5,250,000 and Craig's 50% interest in Reading
International. In return, REI issued to Craig, 2,476,190 shares of Common Stock
and 550,000 shares ($55 million stated value) of Series B Voting Cumulative
Preferred Stock (the "Series B Preferred Stock").


                                    Page 42
<PAGE>
 

Certain Financial Reporting and Tax Considerations
--------------------------------------------------

     The 1996 Reorganization and Stock Transactions have been accounted for as a
purchase.  The book value of the assets transferred by Craig to REI were as
follows:

<TABLE>
     <S>                                                   <C>          <C> 
     Citadel Preferred Stock                               $ 5,250,000   *
     Stater Bros. Preferred Stock                           67,978,000   *
     50% Ownership interest in Reading International        13,194,000
                                                           -----------
     Gross Book Value of Assets Received                   $86,422,000
                                                           ===========
</TABLE>

     *    Plus accrued and unpaid dividends

     The Stock Transactions were intended to qualify as an exchange under
Section 351(a) (a "351 Exchange") of the Internal Revenue Code of 1986, as
amended (the "Code").  In a 351 Exchange, the party acquiring the assets (in the
Stock Transactions, REI) retains the contributing parties' tax basis in the
acquired assets, with no taxable gain recognized as a result of the exchange.
The parties contributing assets (in the Stock Transactions, Craig and Citadel)
obtain a basis in the assets received in the exchange equal to the basis in the
assets which are contributed in the exchange (the Series A and Series B
Preferred Stock).  With the exception of the Stater Preferred Stock, the book
value of the assets received in the Stock Transactions approximated the tax
basis in the assets received.  Craig's adjusted tax basis (for federal tax
purposes) in the Stater Preferred Stock was approximately $5,000,000.

   The estimated federal tax liabilities associated with the assets transferred
in the Stock Transactions was approximately $22,042,000, primarily relating to
the Stater Preferred Stock.  At the time of the closing of the Stock
Transactions, REI had a gross deferred federal tax asset of $55,968,000 and a
tax asset valuation allowance (the "TAVA") in the same amount.  Upon receipt of
the Stater Preferred Stock, it was determined that it was more-likely-than-not
that a portion of the deferred tax asset which had previously been fully
reserved, would be realized and REI reduced the TAVA by $20,782,000 which amount
reflects the amount of federal tax loss carryforwards ("NOLs") which were
expected to be utilized net of $1,260,000 in alternative minimum tax ("AMT").

     The acquisition of REI securities by Craig has been accounted for as a
purchase and accordingly, the purchase price was allocated to assets and
liabilities based on their estimated fair values, after consideration of the
recognition by REI of previously reserved deferred tax assets as of the date of
the Stock Transactions. The aggregate purchase price for financial statement
purposes of the fiscal 1996 purchases of REI stock by the Company amounted to
approximately $66,400,000, of which approximately $64,400,000 represented the
carrying value of the assets contributed in the exchange amounting to
approximately $86,400,000, net of the federal tax liabilities amounting to
approximately $22,000,000. Accordingly, the purchase, for financial statement
purposes, resulted in negative goodwill in the amount of approximately
$22,000,000, which goodwill was allocated to reduce the carrying value of
previously reported intangible assets related to Craig's REI stock purchases
and to reduce the fair value of the beneficial leases and leasehold improvements
purchased.

     In December 1996, the Stater Preferred Stock was contributed to Reading
Australia. Management believes that the gain for federal tax purposes resulting
from that transfer was offset by REI's NOL carryforwards (See Note 15 to the
Consolidated Financial Statements contained elsewhere herein). However, the
amount of NOLs carried on the books of REI has not been audited by the Internal
Revenue Service (the "IRS"), and there can be no assurance that the IRS would
agree with the Company as to the amount of NOL available to offset such gains.
Use of the NOLs is subject to certain limitations, including those resulting
from certain changes in the ownership of REI. While the transfer restrictions
which are applicable to REI's equity securities are intended to minimize the
risk of such ownership changes, ownership changes unknown to the Company may
have occurred despite or in violation of such

                                    Page 43
<PAGE>
 
restrictions. In addition, the Code and related case law limit the ability to
use NOLs to offset certain "built-in" gains on contributed property. Although
the Consolidated Company does not believe that such limitations on the use of
its NOLs applied to the contribution by REI of the Stater Preferred Stock to
Reading Australia, there can be no assurance that the IRS would not take a
different position. The IRS is presenting examining Reading's 1996 tax return.
If the IRS were to determine that the principal purpose of the Stock
Transactions was to make use of the NOLs and the Consolidated Company could not
show otherwise, such use may not be available. In such case, the financial
position of the Consolidated Company could be materially adversely affected.

     REI issued Common Stock and the Convertible Preferred Stock in exchange for
the assets received in the Stock Transactions. The Series A Preferred Stock
issued to Citadel has not been included as a component of Shareholders' Equity
since it includes provisions which permit a majority of the holders to request
redemption at stated value plus accrued and unpaid dividends for a 60 day period
beginning October 15, 2001 and also provides for redemption at the option of the
majority of the holders, if REI fails to pay four quarterly dividends or in
event of a change in control.

     In addition to issuing to Citadel the Series A Preferred Stock, REI also
granted the Asset Put Option, which under certain circumstances permits Citadel
to exchange substantially all of its assets for REI Common Stock.  For financial
statement purposes no value was allocated to the Asset Put Option due in part to
the subjective nature of the assumptions utilized in option pricing models and
the fact that stock option valuation models are intended to value options and
the Asset Put Option is not transferable.

EFFECTS ON INFLATION

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

RECENT ACCOUNTING PRONOUNCEMENTS

     Effective January 1, 1998, the Company adopted Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS 130"),
which establishes new rules for the reporting and display of comprehensive
income and its components; however, the adoption of SFAS 130 had no impact on
the Company's net income or shareholders' equity.  SFAS 130 requires the
Company's currency translation adjustment which, prior to adoption, were
reported separately in shareholders' equity, to be included in accumulated other
comprehensive income.  Prior year amounts have been reclassified to conform to
the requirements of SFAS 130.

     Effective January 1, 1998, the Company adopted the Financial Accounting
Standards Board's Statement of Financial Accounting Standards No. 131,
"Disclosures about Segments of an Enterprise and Related Information" ("SFAS
131").  SFAS 131 establishes new standards for the way that public business
enterprises report information about operating segments in annual financial
statements and requires that those enterprises report selected information about
operating segments in interim financial statements.  SFAS 131 also establishes
standards for related disclosures about products and services, geographic areas,
and major customers.  The adoption of SFAS 131 did not affect results of
operations or financial position, but did affect the disclosure of segment
information.  (See Note 3 to the Consolidated Financial Statement.)

YEAR 2000

     As reasonably necessary and appropriate, the Company is conducting an audit
of the software and hardware components that it uses to assess whether such
components will properly recognize the

                                    Page 44
<PAGE>
 
dates beyond December 31, 1999 ("Year 2000 Compliance"). The Company is also
conducting a review of its major suppliers of goods and services ("service
providers") to understand their level of compliance with Year 2000 issues. Both
of these reviews are expected to be completed by June 30, 1999.

     Based on its review to date, the Company does not believe that material
problems exist relative to the internal hardware and software utilized, as the
Company uses current versions of software provided by major software vendors,
and hardware that is less than a year old, for the most part.  The Company has
adequate financial resources to replace any hardware and/or software that is
determined not to be Year 2000 compliant.  The costs of addressing Year 2000
compliance has not been, nor is expected to be, material to the Company's
financial condition or results of operations.

     Based on responses received to date, the Company believes that most of its
service providers will represent that they are Year 2000 compliant or that
formal programs are in place to ensure that they will be Year 2000 compliant.
If in its survey of significant service providers, the Company becomes concerned
that one or more providers is not Year 2000 compliant or has what the Company
believes to be inadequate programs to become Year 2000 compliant, the Company
will take action to reduce or eliminate its reliance upon such service providers
or suppliers.

FORWARD-LOOKING STATEMENTS

     From time to time, the Consolidated 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 Consolidated
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, delays in obtaining leases and permits for new multiplex locations,
construction risks and delays, the lack of strong film product, the impact of
competition, market and other risks associated with the Consolidated Company's
investment activities and other factors described herein.
 
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

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

     The Consolidated Company maintains most of its cash and cash equivalent
balances in Eurodollar time deposits and short-term money market instruments
with original maturities of six months or less.  Eurodollar time deposits are
not readily marketable and therefore are not subject to interest rate risk,
although the Consolidated Company may lose the ability to realize the benefit of
increased interest income if interest rates were to rise.  Other money market
investments are subject to interest rate risk and will decline in value if
interest rates increase.  Due to the short-term nature of such investments and
the small amount of the Consolidated Company's cash and cash equivalents
invested in such instruments (approximately 12.5% of the Consolidated
Company's total "Cash and Cash

                                    Page 45
<PAGE>
 
  Equivalents" at December 31, 1998), a change of 1% in short-term interest
  rates would not have a material effect on the Company's financial condition.

     Approximately 61.3% of the Consolidated Company's total assets at December
31, 1998 were invested in assets denominated in Australian dollars (Reading
Australia), and New Zealand dollars (Reading New Zealand).  During 1998, the
Consolidated Company recorded a foreign currency translation adjustment of
approximately $1,677,000 (included as a component of "Comprehensive income" in
the Consolidated Statement of Shareholders' Equity Contained elsewhere herein)
related primarily to a decline in the value of the Australian dollar relative to
the U.S. dollar of approximately 5.8% between December 31, 1997 and December 31,
1998 and the corresponding effect upon the carrying value of Reading Australia's
assets.  The Consolidated Company presently anticipates foreign dollar
denominated capital expenditures of approximately $35,000,000 during 1999.
Funds related to such expenditures are presently invested in U.S. dollar
denominated investments.  Accordingly, the Consolidated Company anticipates that
the exposure to fluctuations in the value of the Australian and New Zealand
dollars to the U.S. dollar will increase substantially during 1999.

     Since foreign dollar income is minimal as most of the Consolidated
Company's projects are under development, the affect upon income from operations
from fluctuations in the relative value of the U.S., the Australian and New
Zealand dollars was not material in 1998. The Consolidated Company does not
anticipate any material operating income from its foreign development in 1999 as
most of the projects are not expected to become operational until the end of the
fourth quarter of 1999.

ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

     The information required by this item is incorporated by reference to pages
F-1 through F-38.


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

     Not applicable.



                                    Page 46
<PAGE>


ITEM 10.   DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

     The names of the directors and executive officers, together with certain
information regarding them, are as follows:
 
<TABLE>
<CAPTION>
         NAME                  AGE        POSITION               
         ----                  ---        --------               
     <S>                       <C>  <C>
     James J. Cotter            61  Chairman of the Board
     S. Craig Tompkins          48  President and a Director
     Margaret Cotter            31  Director
     William D. Gould(1)(2)     60  Director
     Gerard P. Laheney(1)       61  Director
     Ralph B. Perry III (2)     63  Director
     Robin W. Skophammer        43  Chief Financial Officer, Treasurer and Secretary
     Ellen M. Cotter            32  Vice President-Business Affairs
</TABLE>

     (1) Member of the Compensation Committee.  The Compensation Committee's
         functions include the review of all compensation and employment
         agreements with the Company's officers and directors.

     (2) Member of the Audit Committee.  The Audit Committee's functions include
         the recommendation of independent auditors to the Board and approval of
         the scope of their services and proposed fees for such services.

     Mr. Cotter has been a Director of Craig since 1985 and the Chairman of the
Board of Directors since 1988.  Mr. Cotter has been Chairman of the Board of
Reading Entertainment, Inc. ("REI," and collectively with its predecessor,
Reading Company, "Reading") since its formation and of Reading since December
1991 and a director since September 1990. Between 1987 and September 1997, Mr.
Cotter served as a director of Stater Bros. Holdings Inc. ("SBH") and its
predecessors (a retail grocery chain). Mr. Cotter has been a director and the
Chairman of the Board of Citadel Holding Corporation ("Citadel") since 1991. Mr.
Cotter is the Chairman and director of Citadel Agriculture, Inc., a wholly owned
subsidiary of Citadel ("CAI"); the Chairman and member of the Management
Committees of each of three agricultural partnerships (the "Agricultural
Partnerships") which constitute the principal assets of CAI, and the Chairman
and a member of the Management Committee of Big 4 Farming, LLC, a farm
management company, 80% owned by Citadel and 20% by Visalia LLC and formed to
manage the properties owned by the Agricultural Partnerships. From 1998 through
January 1993, Mr. Cotter also served as the President and a director of Cecelia
Packing Corporation (a citrus grower and packer), a company wholly owned by Mr.
Cotter, and is the Managing Director of Visalia, LLC, which holds a 20% interest
in each of the Agricultural Partnerships. Mr. Cotter has been a director and
Chief Executive Officer of Townhouse Cinemas Corporation (motion picture
exhibition) since 1987, the parent of City Cinemas. Mr. Cotter is also an
Executive Vice President and a director of the Decurion Corporation (motion
picture exhibition) since 1969 and of Pacific Theaters, Inc., a wholly owned
subsidiary of Decurion Corporation. Mr. Cotter also has a 50% ownership in
Sutton Hills Associates (See Item 13 contained elsewhere herein) and is the
General Partner of a limited partnership which is, in turn, the General Partner
of Hecco Ventures.  Hecco Ventures owns 12.6% of the shares of Craig, 
representing 16.8% of the voting power of Craig.

     Mr. Tompkins has been President and a director of Craig and a director of
Reading since March 1993 and served as the President of Reading between March
1993 and January 1997. Since January 1997 he has served as the Vice Chairman of
REI. Prior thereto, Mr. Tompkins was a partner in the law firm of Gibson, Dunn &
Crutcher. Mr. Tompkins has been a director of Citadel since May 1993, became
Vice Chairman in July 1995 and currently serves as that Company's Secretary,
Treasurer and Principal Accounting Officer. In 1997, Mr. Tompkins became the
President of Citadel Agricultural, Inc., a member of the Management Committee of
each of the Agricultural Partnerships and of Big 4 Ranch, LLC. For
administrative convenience, Mr. Tompkins also serves as an Assistant Secretary
of Big 4 Ranch, Inc., and Visalia LLC. He has been a director of G&L Realty
Corp., a New York Stock Exchange listed REIT,

                                    Page 47
<PAGE>
 
  since December 1993 and serves as the Chairman of the Audit Committee and the
  Strategic Planning Committee of that company.

     Ms. Margaret Cotter is a member of the New York State Bar and, since
September 1997, has been Vice President of Cecelia Packing Corporation, a
company wholly-owned by Mr. James J. Cotter, engaged in the citrus packing and
marketing business in Fresno, California.   From February 1994 until September
1997, Ms. Cotter was an Assistant District Attorney for King's County in
Brooklyn, New York.  Ms. Cotter graduated from Georgetown University Law Center
in 1993 and is the daughter of Mr. James J. Cotter. Ms. Cotter is a limited
partner in James J. Cotter Ltd. (Mr. Cotter is the general partner), which is a
general partner of Hecco Ventures. James J. Cotter Ltd. has shared voting power
with respect to the Company's equity shares held by Hecco Ventures. Ms. Cotter
serves as a director of Big 4 Ranch, Inc. and is a member of Visalia LLC. During
1998, Ms. Margaret Cotter joined Union Square Management, Inc., as a Senior Vice
President (see Item 13 contained elsewhere herein).

     Mr. Gould has been a director of the Company since 1985, and is Chairman of
the Compensation Committee.  Mr. Gould served as a director of Citadel between
June 1995 and June 1996 and in December 1997 became a director of Big 4 Ranch,
Inc.  Since July 1986, Mr. Gould has been a member of Troy & Gould Professional
Corporation, a law firm that the Company has retained during its last fiscal
year.

     Mr. Laheney has been a director of the Company since 1990.  Mr. Laheney
served as s director of Reading Company between November 1993 and June 1996.  In
November 1998, Mr. Laheney became Chairman and President of Big 4 Ranch, Inc.
and a member of the management committee of each of the Agricultural
Partnerships.  Between July 1995 and July 1996, Mr. Laheney was a consultant for
Portfolio Resources Group overseeing global equities, fixed income and foreign
exchange investments.  Mr. Laheney has been President of Aegis Investment
Management Company, an investment advisory firm specializing in global
investment portfolio management since August 1993.  Mr. Laheney was Vice
President of The Partners Financial Group, Inc., between December 1993 through
June 1995 and a Vice President of Dean Witter Reynolds from April 1990 until
December 1993.

     Mr. Perry has been a director of the Company since 1985 and is Chairman of
the Audit Committee.  Mr. Perry has been a member in the Los Angeles, California
law firm of Graven Perry Block Brody & Qualls, a professional corporation, since
1968.  He served as a director of Fidelity Federal Bank (a subsidiary of Bank
Plus since May 1996) since August 1985 and of Reading Company between December
1988 and June 1996.

     Ms. Skophammer has been the Chief Financial Officer and Treasurer of Craig
since October 1991 and Secretary since September 1992.  She served as a Director
of Stater Bros. Holdings Inc. between February 1993 and March 1994.  Prior to
October 1991, Ms. Skophammer was a partner with KPMG Peat Marwick.

     Ms. Ellen Cotter has been the Vice President of Business Affairs of Craig
since August 1996 and since March 1998 is Vice President of Business Affairs of
Reading and Vice President of Angelika Cinemas, Inc. since May 1997.  Prior
thereto, she was an attorney specializing in corporate law with White & Case, a
New York law firm.  Ms. Cotter is the daughter of Mr. James J. Cotter.  Ms.
Cotter is a member of Visalia LLC and a limited partner in James J. Cotter, Ltd.
(Mr. Cotter is a general partner), which is a general partner of Hecco Ventures.
James J. Cotter Ltd. has shared voting power with respect to the Company's
equity shares held by Hecco Ventures.

                                    Page 48
<PAGE>
 
          In addition to Mr. Cotter, Mr. Tompkins and Ms. Ellen Cotter, who are
also officers of Craig, the principal executive officers of Reading, the
Company's majority owned subsidiary, are as follows:

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

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

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

     In addition, Reading has contractual arrangements with certain other
individuals and/or certain affiliated companies which make available to Reading
consulting services from the following individuals:

     Mr. Steve Wesson has been the President and Chief Executive Officer of CHC
since August 1994.  Prior to his employment by Citadel in 1993, Mr. Wesson was
the Chief Executive Officer of Burton Properties Trust Inc., the U.S. real
estate subsidiary of The Burton Group PLC, from 1989.  The Consolidated Company
owns approximately 48% of the outstanding common stock of Citadel and Reading
receives real estate consulting services from Citadel pursuant to an agreement.

SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

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

     Based solely on a review of the copies of the forms which the Company
received and written representations from certain reporting persons, the Company
believes that, during the year ended December 31, 1998, all filing requirements
applicable to reporting persons were fulfilled.

                                    Page 49
<PAGE>
 
ITEM 11.  EXECUTIVE COMPENSATION

     I.   Summary Compensation Table
          --------------------------

     The following table shows, for the year ended December 31, 1998, 1997 and
1996, , the cash compensation paid by the Company and its affiliates, as well as
certain other compensation paid or accrued for those years, to the Chairman of
the Board and each of the most highly compensated executive officers of Craig
whose compensation exceeded $100,000 in all capacities in which they served.


<TABLE>
<CAPTION>
                                                                                                     Long Term
                                                     Annual Compensation                               Awards
                           --------------------------------------------------------------------   ---------------
                                                                              OTHER ANNUAL                             ALL
                                                                              COMPENSATION                            OTHER
         NAME AND                  YEAR      SALARY            Bonus               (1)                  OPTIONS    COMPENSATION
    Principal Position                        ($)              ($)                 ($)                    (#)           ($)
--------------------------------------------------------------------------------------------------------------------------------
<S>                               <C>        <C>               <C>            <C>                 <C>              <C> 
JAMES J. COTTER:
 Chairman of the Board
   Craig(2)                        1998                                                 350,000                     
                                   1997                                                 350,000                     
                                   1996                                                 350,000                     
                                                                                                                    
 Chairman of the Board                                                                                              
   Reading (3)                     1998                                                 150,000                     
                                   1997                             475,000             150,000        460,000 (8) 
                                   1996                                                 150,000
                                          
 Chairman of the Board                    
   Citadel(3)                      1998                             200,000              45,000                     
                                   1997                                                  45,000                     
                                   1996                                                  45,000                     
                                          
S. CRAIG TOMPKINS(4):                     
 President, Craig                  1998            180,000                                                            106,931 (9)
                                   1997            180,000
                                   1996            180,000
                                          
 President, Reading(3)             1998            180,000
                                   1997            180,000                                             20,000 (8)
                                   1996            180,000
                                          
 Director, Citadel(3)              1998                             50,000               40,000
                                   1997                                                  40,000
                                   1996                                                  35,000
</TABLE>

                                    Page 50
<PAGE>
 
<TABLE>
<CAPTION>
                                                                                                        
                                                                                                     LONG TERM          
                                                     ANNUAL COMPENSATION                               AWARDS           
                           ---------------------------------------------------------------------       ------         
                                                                                                                        All
                                                                                OTHER ANNUAL                           Other
         NAME AND                YEAR          SALARY            BONUS        COMPENSATION (1)(10)  OPTIONS         Compensation
    PRINCIPAL POSITION                          ($)               ($)               ($)               (#)                $         
----------------------------------------------------------------------------------------------------------------------------------
<S>                           <C>              <C>               <C>          <C>                   <C> 
ROBIN SKOPHAMMER(5):
 Chief Financial
   Officer, Craig                1998            165,000                          16,800             30,000       135,866(9)
                                 1997            165,000                          16,800                           30,000(5)
                                 1996            165,000                          16,800
                                                                             
ELLEN M. COTTER:                                                             
 Vice President, Business                                                    
   Affairs, Craig                1998             16,700                           2,300
                                 1997             92,500                          12,220
 Vice President, Business                 
   Affairs, Reading              1998             80,770         25,000           11,148                            2,423(11)
                                 1997                                                                10,000(8)
                                          
                                          
                                          
OFFICERS OF READING                       
-------------------
ROBERT F. SMERLING(7)                     
 President, Reading                       
   Entertainment, Inc.           1998            175,000
                                 1997            175,000                                             35,000(8)
                                 1996            175,000            60,000  
                                          
B. JOHN ROCHESTER(6)                      
 President and Chief                      
   Executive Officer,                     
   Reading Australia                      
    Pty Ltd.                     1998            122,600
                                 1997            130,000
                                 1996            156,620
                                          
JAMES A. WUNDERLE(7)                      
 Exec. Vice President                     
 and Chief Financial                      
 Officer and Treasurer                    
 of REI                          1998          $ 175,000                                                            4,500(11)
                                 1997            170,000             5,000                           17,000(8)   
                                 1996            130,000            70,000  
</TABLE>

----------------------------
(1) Excludes perquisites if the aggregate amount of such annual compensation to
    the executive did not exceed $50,000 or 10% of the annual salary plus bonus,
    unless otherwise noted.

(2) Amount is paid pursuant to a consulting agreement between the Company and
    Mr. James J. Cotter which expired on September 30, 1997.  The Company and
    Mr. Cotter have agreed

                                    Page 51
<PAGE>
 
    to continue the consulting arrangement on a month-to-month basis for a
    monthly fee of approximately $29,166. The Company owns a condominium in a
    high-rise building, located in Hollywood, California, which the Company uses
    as an executive office, and which is personally used from time to time by
    the Chairman of the Board. Since the incremental cost to the Company of Mr.
    Cotter's personal use of these facilities does not exceed $50,000 or 10% of
    his annual consulting fee, the cost has not been included as compensation in
    the table.

(3) Reading Entertainment, Inc. is a majority owned subsidiary of Craig and
    Citadel Holding Corporation ("Citadel") is considered an affiliate of Craig
    and, accordingly, amounts paid or earned by the listed executives from their
    services provided to these companies are included in this schedule.  As of
    December 31, 1998, Craig has no liability to the individuals for these
    amounts.  All amounts reported are liabilities or have been paid directly by
    the respective company to the executives for services rendered in the
    capacities outlined.  Any shares listed as option awards refer to that
    respective Company's securities.

(4) Mr. Tompkins was elected as the President of the Company and was appointed
    to the Board of Directors of the Company on February 26, 1993.  On that same
    date, he was elected by the Directors of Reading Company as the President
    and as a member of the Board of Directors of that corporation.  Effective
    January 17, 1997, Mr. Tompkins was appointed Vice Chairman of the Board of
    Directors of REI and Mr. Smerling was appointed President of REI.  While no
    formal written agreement exists as to the terms of Mr. Tompkins employment
    in the case of his employment by Craig and Reading, Mr. Tompkins is entitled
    to his annual base salary from each respective company for a period of a
    year in the event that his employment is voluntarily terminated and no
    change of control has occurred.  Mr. Tompkins is entitled to a severance
    payment equal to two years his base salary in the event of a change of
    control of Craig, and to a two year severance payment in the case of a
    change of control of Reading.

(5) Ms. Skophammer and Craig entered into an employment agreement which that in
    the event of termination by Craig given for any reason other than death, Ms.
    Skophammer would be entitled to receive on the date of termination her
    annual base compensation or in the event of a merger, acquisition or any
    restructuring of Craig in which there is a change of control, as defined, a
    severance payment equal to two years base compensation.  In consideration of
    Ms. Skophammer's agreement to not exercise an option to purchase 15,000
    common shares, Craig paid to Ms. Skophammer $30,000 in January 1997.

(6) Mr. Rochester is employed under the terms of an employment contract with an
    initial term of two years beginning January 1, 1996, with automatic renewal
    terms of one year each.  Mr. Rochester's base salary is A$200,000 which
    amount is included on the attached schedule based on the U.S. dollar
    conversion rate.  The agreement provides for an incentive payment to
    Mr. Rochester after the fourth anniversary of the agreement, based on a
    multiple of cash flow of the Company's Australian theater operations.  Under
    the agreement, in the event Mr. Rochester's employment is terminated by the
    Company without cause, he will be entitled to receive such incentive payment
    plus 17 payments, each equal to his monthly remuneration, if such
    termination is during the initial term, or 11 such monthly payments if such
    termination is after the initial term.  Mr. Rochester is entitled to receive
    a lump sum distribution of such amounts, as applicable, if the Company and
    Craig both withdraws from any material investment or involvement in the
    Australian operations and he is not granted employment under comparable
    terms.

                                    Page 52
<PAGE>
 
(7)  Mr. Smerling was appointed President of REI effective January 17, 1997. Mr.
     Smerling also serves as President of City Cinemas from which he is paid
     separately. City Cinemas provides management services to Reading for a fee.
     Messrs. Smerling and Wunderle are entitled to receive a payment equal to a
     year's annual base salary in the event their individual employment with
     Reading is involuntarily terminated.

(8)  In September 1997, the shareholders of REI approved the grant of an option
     to Mr. Cotter to purchase, subject to various conditions and certain
     contingencies, up to 460,000 shares of REI Common Stock at $12.80 per
     share.  In addition, the shareholders of REI approved a 1997 Equity
     Incentive Plan under which Ms. Cotter and Messrs. Smerling, Wunderle and
     Tompkins, as employees of Reading, were granted incentive stock options to
     exercise REI common stock, subject to vesting conditions, at $12.80 per
     share in amounts as detailed in the schedule. Messrs. Tompkins, Smerling
     and Wunderle surrendered non-qualified options to purchase 17,500, 15,000
     and 5,000 shares, respectively, of REI stock in connection with such grant.

(9)  Effective January 1, 1999, the individual became a participant in a Pension
     Plan authorized by the Board of Directors. Included in Fiscal 1998 is the
     past service cost accruable to Ms. Skophammer and Mr. Tompkins since their
     date of hire amounting to approximately $135,566 and $106,927,
     respectively.

(10) Other annual compensation consists of an automobile allowance.

(11) Other compensation represents contribution under Reading Retirement Savings
     Plan.

Director Compensation
---------------------

     Directors who are not officers or employees of the Company receive for
services as a Director a fee of $25,000 per annum.  Mr. Laheney received $12,000
as an additional fee for his participation in consulting the Company on
providing retirement benefits in Fiscal 1998.

     In addition, Mr. Gould and Ms. Cotter, who serve as directors of Big 4
Ranch, Inc., received $2,000 and $4,000 from that company in Fiscal 1998. Mr.
Edward Kane (a director of REI) served as President and Chairman of the Board of
Big 4 Ranch, Inc. through October 1998 from which he was paid approximately
$9,166 in Fiscal 1998. Mr. Laheney, a director of Craig, began serving as
President and Chairman of the Board of Big 4 Ranch, Inc., in November 1998.
 
     II.    Option Grant Table
            ------------------

     The following table contains information concerning the grant of stock
options by the Company during 1998.

<TABLE>
<CAPTION>
                                          % of                                  Potential Realizable Value at           
                                         Total                                  Assumed Annual Rates of Stock           
                                        Options                                       Price Appreciation                
                           Options      Granted      Exercise                          for Option Term                  
                                                                                -----------------------------                  
                           Granted     in Fiscal      Price         Expiration      
       Name                  (#)          Year       ($/sh)            Date            5%           10%
----------------------  -------------  ----------  -----------   --------------       ---           ---
<S>                     <C>            <C>         <C>           <C>            <C>                 <C>
Robin Skophammer         30,000(1)        100%     $    9.50        3/1/2008          186,900       473,640
</TABLE>

------------------
(1)  Option to acquire shares of the Company's Common Stock granted in February
     1998.

                                         Page 53
<PAGE>
 
     On February 5, 1998, the Company distributed a stock dividend of one share
of Class A Common Preference Stock to all shareholders of record on February 5,
1998.  Ms. Cotter's and Mr. Laheney's previous option grants to purchase 15,000
shares of Common Stock were adjusted to reflect such distribution by increasing
the number of shares available by Ms. Cotter and Mr. Laheney to 15,000 Common
Shares at $10.07 and $7.05 per share, respectively, and 15,000 shares of Class A
Common Preference shares at $9.74 and $6.82 per share, respectively.  The Class
A Common Preference Stock distribution on February 5, 1998 had the effect of
increasing the number of shares exercisable by Messrs. Cotter and Tompkins to
594,940 Common shares (at an average exercise price of $5.92 per share) and
35,000 Class A Common Preference shares (at an exercise price of $5.25 per
share), respectively.


                                    Page 54
<PAGE>
 
          III. Option Exercises and Year-end Table
               -----------------------------------

     The following sets forth information with respect to the executives named
in the Summary Compensation Table, concerning the exercise of options during the
year ended December 31, 1998 and unexercised options as of December 31, 1998.

<TABLE>
<CAPTION>
                                                            NUMBER OF UNEXERCISED     VALUE OF UNEXERCISED
                                                              OPTION AT DECEMBER        IN-THE-MONEY AT
                                                                   31, 1998            DECEMBER 31, 1998
                                                SHARES           EXERCISABLE/             EXERCISABLE/
                                                            ----------------------  ------------------------
        NAME                 SECURITY          EXERCISED        UNEXERCISABLE          UNEXERCISABLE (1)
---------------------  ---------------------   ---------    ----------------------  ------------------------
<S>                    <C>                     <C>          <C>                     <C>
James J. Cotter            Common Stock           0                 594,940/0              $1,089,000/$0    
                                                                                                            
S. Craig Tompkins         Class A Common          0                  35,000/0              $  187,500/$0    
                         Preference Stock                                                                   
Robin Skophammer           Common Stock           0                  30,000/0              $         0/0    
</TABLE>

________________
     (1)  Represents the amount by which the aggregate market price on December
          31, 1997 of the shares subject to such options exceeded the exercise
          price of such options.

ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

     As of April 12, 1999, the outstanding voting securities of Craig consisted
of 3,581,112 shares of Common Stock and 7,058,412 shares of Class A Common
Preference Stock. The number of option shares outstanding reflect the effect of
the stock distribution of one share of Class A Common Preference to all
shareholders of record of Common Stock and Class A Common Preference Stock on
February 5, 1998.  Shareholders are entitled to 30 votes for each share of
Common Stock and 1 vote for each of Class A Common Preference Stock.

     The following table sets forth information as of April 12, 1999 with
respect to persons known by Craig to own beneficially more than 5% of the
outstanding shares of Common Stock or Class A Common Preference Stock of Craig
and as to the number of shares beneficially owned by each director, and by the
Company's officers and directors as a group.  All persons listed, unless
otherwise stated, have sole voting and investment power with respect to the
Common Stock and Class A Common Preference Stock beneficially owned by them.

                                    Page 55
<PAGE>
 
<TABLE>
<CAPTION>
 
                                                                                        CLASS A  
      COMMON                                                                                 
                                                 COMMON STOCK                       PREFERENCE STOCK  
                                                 ------------                       ----------------   
                                           AMOUNT          PERCENTAGE           AMOUNT             PERCENTAGE
      NAME AND ADDRESS                    BENEFICIAL           OF             BENEFICIALLY         OF CLASS A
      OF BENEFICIAL OWNER                 OWNED(11)     COMMON STOCK(11)       OWNED(11)        COMMON STOCK(11)
                                        --------------  ----------------  --------------------  ----------------
<S>                                     <C>             <C>               <C>                   <C>
James J. Cotter(1)                         2,358,242         56.1%               2,021,702              28.4%
120 N. Robertson Blvd.                                                   
Los Angeles, CA  90048                                                   
                                                                         
Hecco Ventures(1)                            617,438         14.7%                 720,838              10.1%
120 N. Robertson Blvd.                                                   
Los Angeles, CA  90048                                                   
                                                                         
Dimensional Fund Advisors, Inc.(2)           242,200          5.8%     
1299 Ocean Avenue, 11th Floor                                            
Santa Monica, CA  90401                                                  
                                                                         
First Pacific Advisors, Inc.(3)                                                    896,400              12.6%
11400 West Olympic Blvd.                                                 
Suite 1200                                                               
Los Angeles, CA  90064                                                   
                                                                         
Lawndale Capital Management, Inc.(4)                                               530,900               7.5%
One Sansome St. Ste. 3900                                                
San Francisco, CA  94104                                                 
                                                                         
S. Craig Tompkins(5)(8)                                                             37,000                 *
William D. Gould(5)(7)                        17,400            *                   21,400                 *
Margaret Cotter(6)                            17,000            *                   17,000                 *
Gerard P Laheney(5)(8)                        15,000            *                   15,000                 *
Ralph B. Perry III(5)(9)                       5,100            *                   24,600                 *
Robin W. Skophammer(5)(6)                     30,000            *        
Ellen M. Cotter (5)                            1,000            *                    1,000                 *
Officers and Directors as                                                
      a group (8 persons)(10)              2,409,992         57.3%               2,126,452              29.9%
</TABLE>

_______________
*Percentages less than 1% have not been indicated.

(1)  Includes the Common Stock and Class A Common Preference Stock owned by
     Hecco Ventures ("HV"), which is a California general  partnership.
     James J. Cotter is a general partner of a limited partnership which is the
     general partner of HV and, accordingly, has shared voting and dispositive
     power with respect to such shares held by HV.  With respect to the Common
     Stock held by Mr. Cotter, the shares also include exercisable options to
     acquire 594,940 shares held by Mr. Cotter.  Margaret Cotter, a director,
     and Ellen Cotter, Vice President of Business Affairs for the Company, are
     the daughters of James J. Cotter, and each are limited partners in the
     above referenced limited partnership.

                                    Page 56
<PAGE>
 
(2)  According to filings with the SEC, Dimensional Fund Advisors Inc.
     ("Dimensional"), a registered investment advisor, furnishes investment
     advice to four registered investment companies, and serves as investment
     manager to certain other investment vehicles, including commingled group
     trusts (the "Portfolios"). Dimensional possesses both voting and investment
     power over the 242,200 Craig securities listed, however, all Craig
     securities are owned by the Portfolios, and Dimensional disclaims
     beneficial ownership of all such shares.

(3)  According to filings with the SEC, includes 217,200 shares which have
     shared voting power. 

(4)  Includes 449,200 Class A Common Preference Shares which are owned by
     Diamond A Partners, L.P. ("DAP") and 81,700 Class A Common Preference
     Shares which are owned by Diamond A Investors L.P. ("DAI") but have shared
     voting and dispositive power with Lawndale Capital Management, Inc.
     ("LCM")and Andrew E. Shapiro. According to a report on Schedule 13D dated
     December 28, 1998, Lawndale Capital Management, Inc., is the investment
     advisor to DAP and DAI, which are investment limited partnerships and Mr.
     Shapiro is the sole manger of LCM.

(5)  Addresses are c/o Craig Corporation, 550 South Hope Street, Suite 1825, Los
     Angeles, California 9007l.

(6)  Includes 33,750 and 11,250 shares not currently vested to purchase Common
     Stock and Class A Common Preference Stock.  With regard to shares held by
     Ms. Cotter, amounts include 2,000 shares of common stock and 2,000 shares
     of Class A Common Preference Stock held directly and 3,750 shares of both
     Common and Class A Common Preference Stock subject to a vested stock
     option.

(7)  Includes 2,000 shares of Common Stock and 4,400 shares of Class A Common
     Preference Stock owned by a trust for the benefit of Mr. Gould's children,
     of which he is co-trustee; Mr. Gould disclaims beneficial ownership of the
     shares held in the trust.

(8)  Represents shares subject to an exercisable option to purchase Common Stock
     and/or Class A Common Stock.  With respect to shares held by Mr. Tompkins,
     amount includes 2,000 shares held directly.

(9)  Includes 600 shares of Common Stock and 600 shares of Class A Common
     Preference Stock owned by Mr. Perry's wife, as to which Mr. Perry disclaims
     beneficial ownership.

(10) The common shares beneficially owned excludes 33,750 shares of non-vested
     options, 22,500 held by Ms. Skophammer and 11,250 held by Ms. Margaret
     Cotter.  The Class A Common Preference shares beneficially owned exclude
     11,250 shares of non-vested stock options held by Ms. Margaret Cotter.

                                    Page 57
<PAGE>
 
(11) All shares subject to stock options currently exercisable, or which become
     exercisable within 60 days of April 12, 1999, are deemed to be outstanding
     for the purpose of determining the percentage of each class held by such
     person.  Such vested option shares together with shares outstanding,
     totaled 4,202,302 shares of Common Stock and 7,112,168 shares of Class A
     Common Preference Stock.

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
-----------------------------------------------------------

    The Compensation Committee currently is composed of two directors, William
D. Gould and Gerard P. Laheney.  Mr. Gould is a member of Troy & Gould
Professional Corporation, a law firm that Craig retained and paid approximately
$6,000 in Fiscal 1998.  Messrs. Cotter and Tompkins serve as members of REI's
Board of Directors and, as directors, approve decisions of REI's Compensation
Committee with respect to compensation of REI's officers and directors.  Messrs.
Cotter and Tompkins serve as members of Citadel Holding Corporation's Board of
Directors, and, as directors, approve decisions of Citadel's Compensation
Committee with respect to compensation of Citadel's officers and directors.  Mr.
Cotter is a member of Citadel's Compensation Committee.

    The Company, together with Reading, owns a 49% interest in BRI and Mr.
Cotter and Mr. Tompkins each have a 1.6% beneficial interest in BRI.  Directors
Messrs. Gould, Laheney and Ms. Margaret Cotter also serve as directors and
employees of BRI, from whom they receive compensation as detailed under the
caption "Director Compensation".

ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

     The Company owns Common Stock and Convertible Preferred Stock comprising
78% of the voting securities of REI.  The Chairman of the Company's Board of
Directors, James J. Cotter, serves in the same position for REI.  S. Craig
Tompkins, President and Vice Chairman of the Company also serves as Vice
Chairman and a director of REI.  Mr. Cotter owns capital stock of Craig
representing 30.9% of the voting securities and is a general partner with
Michael J. Forman in an investment partnership (Hecco Ventures) which owns
capital stock comprising 16.7% of Craig's voting security.

     The Company owns 48% of Citadel Holding Corporation (together with its
wholly-owned subsidiaries "Citadel"). See Note 5 to Consolidated Financial
Statements included elsewhere herein. Messrs. Cotter and Tompkins each serve as
directors. Mr. Cotter serves as Chairman and Mr. Tompkins serves as Vice
Chairman, Secretary and Chief Accounting Officer of Citadel. The Company
utilizes the services of certain Citadel employees, including the President and
Chief Executive Officer of Citadel, for real estate advisory services. The
Company pays Citadel for such services at a rate which is believed to
approximate the fair market value of such services. During 1998, the amount paid
to Citadel for such services totaled $410,000.

     The Consolidated Company owns approximately 49% of Big 4 Ranch, Inc.
("BRI"). In addition, Cecelia Packing ("Cecilia"), a company wholly owned
by Mr. Cotter, and a trust for the benefit of one of Mr. Tompkins' children
individually own shares of BRI which, when combined with the shares owned
by Craig and the Company, result in a voting interest in excess of 50%. On
December 31, 1997, BRI (owning 40%), Citadel (owning 40%) and Visalia, LLC (a
limited liability company controlled by James J. Cotter, the Chairman of the
Board of REI, Craig, and Citadel, and owned by Mr. Cotter and certain members of
his family) entered into three general partnerships (the "Partnerships"). On
December 31, 1997 the Partnerships acquired an agricultural property (purchase
price amounting to approximately $7.6 million) which property is improved with
citrus trees. The Partnerships currently use Big 4 Farming LLC ("Farming) to
farm their properties. Farming is owned 80% by Citadel and 20% by Visalia, and
it receives in consideration of its services reimbursement of its costs plus 5%
of the net revenues of the farming operations after picking, packing and
hauling.

                                    Page 58
<PAGE>
 
Farming, in turn, contracts with Cecelia for certain bookkeeping and
administrative services, for which it pays a fee of $6,000 per month. Cecelia
also packs fruit for the Partnerships. The acquisition was financed by a ten
year purchase money mortgage in the amount of $4.05 million, a line of credit
from Citadel and pro-rata contributions from the partners. Through its holdings
in BRI and Citadel, the Company owns approximately 38% of such Partnerships at
December 31, 1998. In December 1998, the Partnerships suffered a freeze which
destroyed the 1998-1999 crop. The Partnerships have no funds to make capital
contributions to repay a $1.85 million line of credit from Citadel or fund the
estimated $2.64 million required to fund costs associated with production of a
1999-2000 crop and complete the proposed 1999 planting other than to call upon
the partner for funding. BRI has no funds or resources with which to provide
such funding, other than to call upon its separate line of credit from Citadel.
To date, Citadel has continued to provide the funding required by the
Partnerships, but no assurances can be given that Citadel will continue to
provide the funding. The Board of Directors and executive officers of BRI are
comprised of three Craig directors, including Margaret Cotter, James Cotter's
daughter and a member of Visalia, LLC.

     The Angelika Film Center ("AFC") is owned jointly by Reading and Sutton
Hill, a partnership affiliated with City Cinemas, a Manhattan-based cinema
operator owned in equal parts by James J. Cotter and Michael Forman.  City
Cinemas manages the AFC and two other cinemas operated by Reading pursuant
to management agreements.  Robert F. Smerling, President of Reading, and
Neil Sefferman, Vice President - Film of the Company, also serve in the same
positions with City Cinemas.

     In December 1998, the Company and Sutton Hill entered into an Agreement in
Principle to lease and operate four cinemas and manage three other cinemas all
of which are located in Manhattan and which together constitute the City Cinemas
circuit.  In addition the Agreement in Principle provides for the acquisition by
the Company of three live "Off Broadway" theaters also located in Manhattan.
The Conflicts Committee of the REI Board of Directors (the "Conflicts
Committee"), comprised entirely of directors independent of Messrs. Cotter and
Foreman, reviewed and negotiated the transaction.  Consummation of the
transaction is contingent upon, among other things, receipt of fairness opinions
relating to the transactions and approval of REI's shareholders of the issuance
of Common Stock for the acquisition of the "Off Broadway Theaters."

     It is anticipated that the Manhattan "Off Broadway" theaters, as well as
another live theater owned by the Company will be booked and managed by Union
Square Management, Inc., a live theater management company specializing in the
booking and management of "Off Broadway" style live theaters.  Margaret Cotter,
daughter of Mr. James J. Cotter, is a Senior Vice President with Union Square
Management, Inc.  In December 1998 the Company agreed to guarantee a $100,000
bank loan to Alan Schuster, the principal shareholder of Union Square
Management, Inc.

     In 1997 Reading loaned Robert Smerling its President, $70,000. The non-
interest bearing loan is payable upon demand.

                                    Page 59
<PAGE>
 
                                    PART IV
                                    -------
                                        
ITEM 14.  EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM
          8-K

(a)(1)    Consolidated Financial Statements:

<TABLE>
<CAPTION>
                                                                    PAGE
                                                                    ----
<S>                                                                 <C> 
Consolidated Balance Sheets
     As of December 31, 1998 and 1997 ..............................F-1

Consolidated Statements of Operations
     Years Ended December 31, 1998, 1997 and 1996...................F-3

Consolidated Statements of Shareholders' Equity
     Years Ended December 31, 1998, 1997 and 1996...................F-4

Consolidated Statements of Cash Flows
     Years Ended December 31, 1998, 1997 and 1996...................F-5

Notes to Consolidated Financial Statements..........................F-7

Report of Independent Auditors......................................F-38
</TABLE>

All schedules are omitted because they are not applicable or the required
information is shown in the financial statements or notes therein.

(a)(2)    Exhibits.  See Item 14(c) for Index of Exhibits.

(b)       Registrant filed Reports on Form 8-K with the Securities and Exchange
          Commission on September 23, 1996 and October 30, 1996.

(c)       Exhibits (Items denoted by * represent management or compensatory
          contract)

          3.1    Restated Certificate of Incorporation of the Company
                 (incorporated by reference to the Company's Registration
                 Statement on Form S-1; No. 33-34297, dated May 15, 1990).

          3.2    Bylaws of the Company, as amended to date (i) incorporated by 
                 reference to the Company's Registration Statement on Form S-1;
                 No. 33-34297, dated May 15, 1990; (2) incorporated by reference
                 to the Company's Form 10-Q Report for the Quarter endede
                 December 31, 1992; (iii) amended on November 10, 1994
                 (incorporated by reference to the Company's Form 10-K Report
                 for the year ended September 30, 1994)

                                    Page 60
<PAGE>
 
          10.1*     Stock Option Agreement dated as of June 8, 1992 between
                    James J. Cotter and Craig Corporation (incorporated by
                    reference to the Company's Form 10-K Report for the year
                    ended September 30, 1992).

          10.2*     Employment Agreement dated as of October 7, 1991 between
                    Robin W. Skophammer and Craig Corporation (incorporated by
                    reference to the Company's Form 10-K Report for the year
                    ended September 30, 1991).

          10.3*     Amendment to Consulting Agreement between James J. Cotter
                    and Craig Corporation (incorporated by reference to the
                    Company's Report on Form 10-K for the year ended September
                    30, 1995).

          10.4*     Stock Option Agreement between James J. Cotter and Craig
                    Corporation (incorporated by reference to the Company's
                    Report on Form 10-K for the year ended September 30, 1995).

          10.5      Stock Purchase and Sale Agreement dated March 29, 1996
                    between Craig Corporation and Reading Holdings, Inc.
                    (incorporated by reference to the Company's Report on Form
                    10-Q for the quarter ended March 31, 1996).

          10.6      Stock Exchange Agreement dated May 17, 1996 between Craig
                    Corporation and James J. Cotter (incorporated by reference
                    to the Company's Report on Form 10-Q for the quarter ended
                    June 30, 1996).

          10.7*     Service Deed between Australia Cinema Management Pty Limited
                    and John Rochester dated May 7, 1996.  (Incorporated by
                    reference to Exhibit 10.20 to Reading Company's Quarterly
                    Report on Form 10-Q for the period ended June 30, 1996.

          10.8      Exchange Agreement among Reading Company, Reading
                    Entertainment, Inc., Craig Corporation, Craig Management,
                    Inc., Citadel Holding Corporation and Citadel Acquisition
                    Corp., Inc. (incorporated by reference to the Company's
                    Report on Form 10-K for the year ended December 31, 1996).

          10.9      Asset Put and Registration Rights Agreement dated October
                    15, 1996 by and among Reading Entertainment, Inc., Citadel
                    Holding Corporation, and Citadel Acquisition Corp., Inc.
                    (incorporated by reference to the Company's Report on Form
                    10-K for the year ended December 31, 1996).

          10.10     The Sale Agreement dated as of July 1, 1996, by and among
                    Reading Investment Company, Inc., as Purchaser, AFCI, as
                    Seller, and Houston Cinema, Inc., with all Exhibits and
                    Schedules omitted (incorporated by reference to the
                    Company's Report on Form 10-K for the year ended December
                    31, 1996).

          10.11     Amendment to the Sale Agreement made and entered into as of
                    July 27, 1996 by and among Reading Investment Company, Inc.,
                    AFCI and Houston Cinema, Inc. (incorporated by reference to
                    the Company's Report on Form 10-K for the year ended
                    December 31, 1996).

                                    Page 61
<PAGE>
 
          10.12     $2,000,000.00 Non-Negotiable Secured Promissory Note dated
                    as of August 27, 1996 (the "Holdback Note") by AFC, as
                    Maker, to AFCI, as Payee (incorporated by reference to the
                    Company's Report on Form 10-K for the year ended December
                    31, 1996).

          10.13     Pledge Agreement dated August 27, 1996 by and among AFCI, as
                    Secured Party, and AFC, as Debtor, concerning the cash
                    security for the Holdback Note (incorporated by reference to
                    the Company's Report on Form 10-K for the year ended
                    December 31, 1996).

          10.14     Limited Liability Company Agreement between Angelika
                    Cinemas, Inc. and Sutton Hill Associates dated August 27,
                    1996 (incorporated by reference to the Company's Report on
                    Form 10-K for the year ended December 31, 1996).

          10.15     Management Agreement dated as of August 27, 1996 between
                    Angelika Film Centers, LLC and City Cinemas Corporation
                    (incorporated by reference to the Company's Report on Form
                    10-K for the year ended December 31, 1996).

          10.16     Purchase Agreement between Equipment Leasing Associates 
                    1995-VI Limited Partnership and FA, Inc. effective December
                    20, 1996 (incorporated by reference to the Company's Report
                    on Form 10-K for the year ended December 31, 1996).

          10.17     Master Lease Agreement between FA, Inc. and Equipment
                    Leasing Associates 1995-VI Limited Partnership dated
                    December 20, 1996 (incorporated by reference to the
                    Company's Report on Form 10-K for the year ended December
                    31, 1996).

          10.18     Nonrecourse Promissory Note between FA, Inc. and Equipment
                    Leasing Associate 1995-VI Limited Partnership effective
                    December 20, 1996 (incorporated by reference to the
                    Company's Report on Form 10-K for the year ended December
                    31, 1996).

          10.19     Lease Rental Purchase Agreement between FA, Inc. and Ralion
                    Financial Services, Inc. dated December 31, 1996
                    (incorporated by reference to the Company's Report on Form
                    10-K for the year ended December 31, 1996).

          10.20     Stock Purchase Agreement dated as of April 11, 1997 by and
                    between Craig Corporation and Citadel Holding Corporation
                    (incorporated by reference to the Company's Report on Form
                    10-K for the year ended December 31, 1996).

          10.21     Secured Promissory Note dated as of April 11, 1997 issued by
                    Craig Corporation to Citadel Holding Corporation in the
                    principal amount of $1,998,000 (incorporated by reference to
                    the Company's Report on Form 10-K for the year ended
                    December 31, 1996).

                                    Page 62
<PAGE>
 
          10.22     Certificate of Designations, Preferences and Rights of
                    Series A Voting Cumulative Convertible Preferred Stock and
                    Series B Voting Cumulative Convertible Preferred Stock of
                    Reading Entertainment, Inc. (incorporated by reference to
                    the Company's Report on Form 10-K for the year ended
                    December 31, 1996).

          10.23     Master Management Agreement between Angelika Holdings, Inc.
                    and City Cinemas Corporation dated November 26, 1997
                    (incorporated by reference). Exhibit 10.50 to the Company's
                    Report on Form 10-K for the year ended December 31, 1997.

          10.24*    Amended and Restated Stock Option Agreement between Craig
                    Corporation and James J. Cotter dated December 8, 1997
                    incorporated by reference to Exhibit 10.51 to the Company's
                    Report on Form 10.-K for the year ended December 31, 1997.

          10.25*    Stock Option Agreement between Craig Corporation and S.
                    Craig Tompkins incorporated by reference to Exhibit 10.52 to
                    the Company's Report on Form 10-K for the year ended
                    December 31, 1997.

          10.26     Agreement in Principle between Reading Entertainment, Inc.
                    and City Cinemas dated December 2, 1998 (filed herewith).

          10.27*    Craig Corporation Key Personnel Retirement Plan (filed
                    herewith)

          21        Subsidiaries of the Registrant.

          27        Financial Data Schedule, Article 5.

                                    Page 63
<PAGE>
 
                                  SIGNATURES
                                  ----------


    Pursuant to the requirements of Section 13 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.

                               CRAIG CORPORATION
                                        

By:  /s/ S. Craig Tompkins            By:  /s/ Robin W. Skophammer
   ------------------------------        --------------------------------
     S. CRAIG TOMPKINS                   ROBIN W. SKOPHAMMER
     President                           Chief Financial Officer
     April 14, 1999                      Treasurer and Secretary
                                         April 14, 1999

    Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capabilities and on the dates indicated.

By:  /s/ James J. Cotter              By:  /s/ William D. Gould
   ------------------------------        --------------------------------
     JAMES J. COTTER                     WILLIAM D. GOULD
     Director                            Director
     April 14, 1999                      April 14, 1999



By:  /s/ Gerard P. Laheney            By:  /s/ Ralph B. Perry III
   ------------------------------        --------------------------------
     GERARD P. LAHENEY                   RALPH B. PERRY III
     Director                            Director
     April 14, 1999                      April 14, 1999



By:  /s/ S. Craig Tompkins            By:  /s/ Margaret Cotter
    -----------------------------        --------------------------------
     S. CRAIG TOMPKINS                   MARGARET COTTER
     Director                            Director
     April 14, 1999                      April 14, 1999

                                    Page 64
<PAGE>
 
                      CRAIG CORPORATION AND SUBSIDIARIES
                          CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
                                                           DECEMBER 31,        DECEMBER 31,
                                                               1998                1997
                                                        ----------------    --------------------
ASSETS                                                          (IN THOUSANDS OF DOLLARS)
----------------------------------------------------    ----------------------------------------
<S>                                                     <C>                 <C>
CURRENT ASSETS

Cash and cash equivalents                                       $ 63,314              $ 98,202
Receivables                                                          582                 1,206
Restricted cash                                                      904                 4,755
Note Receivable                                                       --                   720
Inventories                                                          236                   194
Prepayments and other current assets                                 543                   589

------------------------------------------------------------------------------------------------
  Total current assets                                            65,579               105,666
------------------------------------------------------------------------------------------------

Equity investment in Citadel                                      12,962                 6,594
Equity investments in foreign affiliates                           5,187                 1,608
Note receivable from joint venture partners                        2,357                 1,771
Net investment in leased equipment                                 2,125                 2,125
Property held for development                                     32,949                14,714
Property and equipment, net                                       28,063                20,944
Other assets                                                       4,758                 2,468
Excess of cost over net assets acquired, net                      10,611                11,235

------------------------------------------------------------------------------------------------
  Total assets                                                  $164,591              $167,125
================================================================================================
</TABLE>

         See accompanying notes to consolidated financial statements.

                                      F-1
<PAGE>
 
                      CRAIG CORPORATION AND SUBSIDIARIES
                    CONSOLIDATED BALANCE SHEETS (CONTINUED)

<TABLE>
<CAPTION>
                                                                         DECEMBER 31,            DECEMBER 31,
                                                                             1998                    1997
                                                                      ------------------     -------------------
LIABILITIES AND SHAREHOLDERS' EQUITY                                            (IN THOUSANDS OF DOLLARS)
------------------------------------------------------------          ------------------------------------------
<S>                                                                   <C>                    <C>
CURRENT LIABILITIES:
Accounts payable                                                             $  3,155                  $  2,513
Film rental payable                                                             1,347                     1,637
Accrued property costs                                                          1,734                     3,319
Accrued taxes                                                                     495                       987
Property purchase commitments                                                   8,066                     3,516
Note payable                                                                      149                       645
Note payable to Citadel                                                         1,998                     1,998
Short term debt                                                                   594                        --
Other liabilities                                                                 596                     1,286

----------------------------------------------------------------------------------------------------------------
Total current liabilities                                                      18,134                    15,901
----------------------------------------------------------------------------------------------------------------

Capitalized lease                                                                  --                       509
Note payable                                                                      920                     1,100
Other liabilities                                                               4,606                     3,735
Deferred tax liabilities                                                        8,368                     8,368

----------------------------------------------------------------------------------------------------------------
Total long term liabilities                                                    13,894                    13,712
----------------------------------------------------------------------------------------------------------------

Redeemable Preferred stock of Reading                                           7,000                     7,000

Minority interest in equity of subsidiaries                                    30,221                    32,273

Lease agreements and commitments          

SHAREHOLDERS' EQUITY
Preferred stock, par value $.25, 1,000,000 shares
 authorized, none issued                                                           --                        --

Class A common preference stock, par value $.01, 10,000,000
 shares authorized, 8,734,065 issued and 7,058,412 and 7,006,912                                                
 outstanding at December 31, 1998 and 1997, respectively                           87                        16 
Class B common stock, par value $.01, 20,000,000 shares
 authorized, none issued                                                           --                        --
Common Stock, par value $.25, 7,500,000 shares authorized,
 5,444,065 shares issued and 3,628,612 and 3,762,912 outstanding  at                                           
 December 31, 1998 and 1997, respectively                                       1,361                     1,361
Additional paid-in capital                                                     31,111                    30,828
Accumulated other comprehensive income                                         (6,000)                   (4,323)
Retained earnings                                                              89,257                    90,111
Cost of treasury shares, 3,491,106 and 3,408,306 at December 31, 1998                                              
 and December 31, 1997, respectively                                          (20,474)                  (19,754)
----------------------------------------------------------------------------------------------------------------
Total shareholders' equity                                                     95,342                    98,239
----------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity                                   $164,591                  $167,125
================================================================================================================
</TABLE>

         See accompanying notes to consolidated financial statements.

                                      F-2
<PAGE>
 
                      CRAIG CORPORATION AND SUBSIDIARIES
                     CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
                                                                        YEARS ENDED DECEMBER 31,
                                                              1998                 1997                   1996
                                                       ------------------   ------------------     ------------------
                                                             (IN THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS)
                                                       --------------------------------------------------------------
<S>                                                    <C>                  <C>                    <C>
Revenues:
Theater:
 Admissions                                                       $24,792             $19,978            $ 12,986
 Concessions                                                        7,625               6,078               4,486
 Advertising and other                                              1,139                 928                 764
Real estate                                                           373                 180                 543
Equity in earnings of Stater                                           --                  --               1,608
Dividend income from Stater                                            --               4,330               5,978
Service income from Stater                                             --                 972               1,500
---------------------------------------------------------------------------------------------------------------------
                                                                   33,929              32,466              27,865
---------------------------------------------------------------------------------------------------------------------

Expenses:
Theater costs                                                      24,370              20,081              13,631
Theater concession costs                                            1,653               1,296                 821
Depreciation and amortization                                       2,570               1,737               1,664
Loss from joint venture                                               164                 207                 780
General and administrative                                         11,897              11,449               8,947
---------------------------------------------------------------------------------------------------------------------
                                                                   40,654              34,770              25,843
---------------------------------------------------------------------------------------------------------------------

(Loss) earnings from operations                                    (6,725)             (2,304)              2,022
Earnings from equity investments                                    1,739                 392               2,396
Other income (expense)                                               (587)              1,076               3,622
Interest income                                                     4,531               3,319               2,970
Gain from conversion of common stock interest in
 Stater                                                                --               2,002              58,978
---------------------------------------------------------------------------------------------------------------------
(Loss) earnings before taxes and minority
 interest                                                          (1,042)              4,485              69,988
Minority interest                                                   1,629                 133              (1,538)
---------------------------------------------------------------------------------------------------------------------
Earnings before taxes                                                 587               4,618              68,450
Provision for taxes                                                  (986)             (1,312)            (25,803)
---------------------------------------------------------------------------------------------------------------------
Net (loss) earnings                                                  (399)              3,306              42,647
Dividends paid on subsidiary redeemable
 preferred stock                                                     (455)               (455)                (95)
---------------------------------------------------------------------------------------------------------------------
Net (loss) earnings applicable to Craig common
 shareholders                                                     $  (854)            $ 2,851            $ 42,552
=====================================================================================================================

Basic (loss) earnings per share                                    $(0.08)              $0.26               $3.78
=====================================================================================================================
Diluted (loss) earnings per share                                  $(0.08)              $0.26               $3.76
=====================================================================================================================
</TABLE>

         See accompanying notes to consolidated financial statements.

                                      F-3
<PAGE>

                      CRAIG CORPORATION AND SUBSIDIARIES
                CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
                 YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
                               (IN THOUSANDS)


<TABLE>
<CAPTION>
                               COMMON STOCK      CLASS A
                               OUTSTANDING    COMMON STOCK
                              --------------  -------------             ACCUMULATED
                                                                           OTHER                  TREASURY    TOTAL        
                                       PAR             PAR   PAID-IN   COMPREHENSIVE  RETAINED      STOCK   SHAREHOLDERS'  
                              SHARES  VALUE   SHARES  VALUE  CAPITAL   INCOME (LOSS)  EARNINGS     AT COST    EQUITY       
                              ------  ------  ------  -----  --------  -------------  ---------   --------- ------------   
<S>                           <C>     <C>     <C>     <C>    <C>          <C>         <C>        <C>                       
Balances at                                                                                                                
  Jan. 1, 1995                 5,444  $1,361   1,645    $16  $30,793      $   (10)     $44,708   $(12,846)    $64,022      
                                                                                                                           
Net Earnings                                                                            42,647                 42,647      
 Foreign currency translation                                                 124                                 124      
  adjustment                                                                                                   ------      
        Comprehensive earnings                                                                                 42,771      
                                                                                                               ------      
Stock repurchases                                                                                  (7,585)     (7,585)     
Issuance of treasury stock                                        35                                  677         712      
Dividends paid on                                                                                                          
 Reading redeemable                                                                                                        
 preferred stock                                                                           (95)                   (95)     
------------------------------------------------------------------------------------------------------------------------   
Balance at                                                                                                                 
  Dec. 31, 1996                5,444   1,361   1,645     16   30,828          114       87,260    (19,754)     99,825      
                                                                                                                           
Net earnings                                                                             3,306                  3,306      
Foreign currency translation                                               (4,437)                             (4,437)      
  adjustment                                                                                                   ------      
        Comprehensive (loss)                                                                                   (1,131)      
                                                                                                               ------      
Stock dividend declared                        5,385                                                                       
Dividends paid on                                                                                                          
 Reading redeemable                                                                                                        
 preferred stock                                                                          (455)                  (455)     
------------------------------------------------------------------------------------------------------------------------   
Balances at                                                                                                                
  Dec. 31, 1997                5,444   1,361   7,030     16   30,828       (4,323)      90,111    (19,754)     98,239      
                                                                                                                           
Net (loss)                                                                                (399)                  (399)     
Foreign currency translation                                                                                   (1,677)     
  adjustment                                                               (1,677)                             -------     
        Comprehensive (loss)                                                                                   (2,076)     
                                                                                                               -------     
Stock repurchases                                                                                    (984)       (984)     
Issuance of stock dividend                     1,704     71      (71)                                                      
Issuance of treasury stock                                       354                                  264         618      
Dividends paid on                                                                                                          
  Reading preferred stock                                                                (455)                  (455)      
------------------------------------------------------------------------------------------------------------------------   
Balances at                                                                                                                
  Dec. 31, 1998                5,444  $1,361   8,734    $87  $31,111      $(6,000)     $89,257   $(20,474)    $95,342      
========================================================================================================================   
</TABLE>

         See accompanying notes to consolidated financial statements.

                                      F-4
<PAGE>
 
                               CRAIG CORPORATION
                     CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
                                                                    YEARS ENDED DECEMBER 31,
                                                       1998                   1997                   1996
                                                --------------------------------------------------------------------
                                                                   (IN THOUSANDS OF DOLLARS)
                                                --------------------------------------------------------------------
<S>                                              <C>                    <C>                    <C>
OPERATING ACTIVITIES
Net (loss) earnings                                     $   (399)               $  3,306               $ 42,647
Adjustments to reconcile net (loss) earnings
 to net cash provided by operating
 activities:
Gain on conversion of Stater common stock                     --                  (2,002)               (58,978)
Depreciation                                               1,895                   1,108                    706
Amortization                                                 675                     629                    958
Deferred rent expense                                        217                     406                    245
Equity earnings (losses) of affiliates                    (1,739)                   (392)                (3,134)
Write off of capitalized development costs                   542                   1,308                     --
Loss (gain) on disposal of assets                            634                     (15)                   (43)
Preferred stock dividend income                               --                      --                   (941)
Increase (decrease) in deferred taxes                         --                     160                 24,003
Minority interest                                         (1,629)                   (133)                 1,538
Changes in operating assets and
 liabilities:
(Increase) decrease in current assets                      1,348                   2,807                 (2,457)
Increase (decrease) in payables                             (571)                 (3,410)                 6,735
Increase (decrease) in film rental                          (284)                    545                    769
Increase (decrease) in other liabilities                    (447)                    654                   (134)
Other, net                                                   (27)                   (284)                  (270)
--------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) operating
 activities                                                  215                   4,687                 11,644
--------------------------------------------------------------------------------------------------------------------

INVESTING ACTIVITIES
Purchase of property held for development                (12,445)                 (5,106)                (7,332)
Purchase of property and equipment                       (11,083)                (14,783)                (3,872)
Payments on property purchase commitments                 (3,397)                    --                     --
Purchase of Angelika theaters                                 --                    (229)               (12,570)
Purchase of Reading stock from minority interests             --                    (819)                    --
Investment in joint ventures                              (2,601)                 (1,850)                    --
Loan to joint venture partners                              (594)                 (2,021)
Proceeds from Angelika judgment                               --                      --                  1,293
Proceeds from redemption of Stater                            --                  69,980                     --
 Preferred
Proceeds from redemption of Citadel                           --                      --                  6,191
 Preferred
Investment in Citadel and Big 4 Common                    (3,636)                 (1,998)                    --
 Stock
Investment in Royal George theater                        (1,369)                     --                     --
Investment in New York live theaters and
 City Cinemas                                             (1,332)                     --                     --
Cash acquired as a result of consolidation
 of Reading, net of acquisition costs                         --                      --                 41,412
Decrease (increase) in restricted cash                     3,664                  (1,421)                (1,478)
Other investments                                             --                      --                    (75)
--------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) investing
 activities                                              (32,793)                 41,753                 23,569
--------------------------------------------------------------------------------------------------------------------
</TABLE>

                                      F-5
<PAGE>
 
                               CRAIG CORPORATION
               CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
 
<TABLE> 
<CAPTION> 
                                                               YEARS ENDED DECEMBER 31,
                                                   1998                   1997                  1996
                                           --------------------------------------------------------------
                                                              (IN THOUSANDS OF DOLLARS)
                                           --------------------------------------------------------------
<S>                                          <C>                    <C>                   <C> 
FINANCING ACTIVITIES
Proceeds from issuance of Reading
 redeemable preferred stock to Citadel                    --                     --                 7,000
Proceeds from minority partner for
 purchase of NY Angelika                                  --                     --                 2,068
Minority interest distributions                         (417)                  (371)                  (38)
Payment of Reading preferred dividends                  (455)                  (455)                  (95)
Payment of debt financing costs                           --                     --                  (256)
Proceeds from short-term debt                            601                     --                    --
Borrowings from affiliates                                --                  1,998                    --
Treasury stock repurchases                              (984)                    --                (7,585)
Proceeds from landlord                                    --                    280                    --
Decrease of note payable                                (766)                (1,500)                   --
Payment of debt and liabilities                           --                     --                (2,914)
---------------------------------------------------------------------------------------------------------
Net cash used in financing activities                 (2,021)                   (48)               (1,820)
---------------------------------------------------------------------------------------------------------
 
EFFECT OF FOREIGN EXCHANGE RATE CHANGES                 (289)                  (362)                  134
---------------------------------------------------------------------------------------------------------
 
INCREASE (DECREASE) IN CASH AND CASH
 EQUIVALENTS                                         (34,888)                46,030                33,527
CASH AND CASH EQUIVALENTS AT BEGINNING OF
 THE PERIOD                                           98,202                 52,172                18,645
 
--------------------------------------------------------------------------------------------------------- 
CASH AND CASH EQUIVALENTS AT
  END OF PERIOD                                     $ 63,314                $98,202               $52,172
=========================================================================================================
 
SUPPLEMENTAL DISCLOSURES:
  INTEREST PAID                                     $    220                $   207               $   239
  TAXES PAID                                        $    408                $ 2,405               $   139
</TABLE>

         See accompanying notes to consolidated financial statements.

                                      F-6
<PAGE>
 
CRAIG CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
(AMOUNTS IN TABLES IN THOUSANDS, EXCEPT SHARES AND PER SHARE DATA)

NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

     The consolidated financial statements include the accounts of Craig
Corporation and its wholly owned subsidiaries ("Craig" and the "Company") and
its majority owned subsidiaries (collectively, the "Consolidated Company"). Such
majority owned subsidiaries include the accounts of Reading Entertainment, Inc.
("REI" and together with its consolidated subsidiaries, "Reading").

     The Company's principal holdings at December 31, 1998 consisted of (i)
common and preferred stock representing approximately 78% of the voting power of
REI (ii) common shares representing approximately 16.4% of the outstanding
common shares of Citadel Holding Corporation ("CHC" and collectively with its
consolidated subsidiaries "Citadel") and, (iii) 16.4% of the outstanding common
stock of Big 4 Ranch, Inc., a company owing a 40% interest in certain
agricultural properties located in Kern County, California, and (iv) cash and
cash equivalents.  The Consolidated Company holds a 48% interest in Citadel and
49% interest in Big 4 Ranch, Inc.

     Through its majority owned subsidiaries, REI is principally in the business
of developing and operating multi-plex cinemas in the United States, Puerto
Rico, Australia and New Zealand and of developing, and eventually operating,
entertainment centers in Australia.  The Company operates its cinemas through
various subsidiaries under the Angelika Film Centers and Reading Cinemas names
in the United States (the "Domestic Cinemas"); 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 Australia
Entertainment Pty Limited (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 Cinema name.  The Company's entertainment center development activities
in Australia and New Zealand are conducted through Reading Australia and through
affiliates of Reading New Zealand Ltd. (collectively referred to herein as
"Reading New Zealand"), respectively.

     Through its ownership of REI, the Company principally operates in two
business segments, cinema operations and real estate development (See Note 3).

     BASIS OF CONSOLIDATION:  All significant intercompany transactions and
accounts have been eliminated in consolidation.  Minority interest in equity of
subsidiaries reflects the minority stockholders' proportionate share of Reading
and the Consolidated Company's other joint ventures.  Investments in which the
Consolidated Company holds a 20 to 50 percent ownership interest are accounted
for using the equity method.  Investments in other companies are carried at
cost.

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

                                      F-7
<PAGE>
 
CRAIG CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
(AMOUNTS IN TABLES IN THOUSANDS, EXCEPT SHARES AND PER SHARE DATA)

     INCOME TAXES: Craig and Reading file separate consolidated federal and
state tax returns.  Deferred income taxes reflect the net effects of temporary
differences between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes.

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

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

     PROPERTY HELD FOR DEVELOPMENT:  Property held for development consists of
land (including land acquisition costs) acquired for the potential development
of multiplex cinemas and/or entertainment centers and currently held either for
such purposes or for other development purposes.  Property held for development
is carried at cost and, at such time that construction of the related multiplex
cinema and/or entertainment center commences, is transferred to Property and
Equipment with future construction costs accounted for as Construction-in-
Progress.

     PROPERTY AND EQUIPMENT:  Property and equipment is carried at cost.
Depreciation of buildings, capitalized lease, leasehold improvements and
equipment is recorded on a straight-line basis over the estimated useful lives
of the assets or, if the assets are leased, the remaining lease term, whichever
is shorter. The estimated useful lives are generally as follows:

          Building and Improvements              40 years
          Equipment                            7-15 years
          Furniture and Fixtures                5-7 years
          Leasehold Improvements                 20 years

     CONSTRUCTION IN PROGRESS AND PROPERTY DEVELOPMENT COSTS:  Construction-in-
progress and property development costs are comprised of direct costs associated
with the development of potential cinemas (whether for purchase or lease) or
entertainment center locations.  Startup costs and other costs not directly
related to the acquisition of long term assets are expensed as incurred.
Amounts are carried at cost unless management decides that a particular location
will not be pursued to completion or if the costs are no longer relevant to the
proposed project.  If such a judgment is made, previously capitalized costs
which are no longer of value to the Consolidated Company are expensed.  Included
in the Statement of Operations as "General and administrative expenses" are
write-offs of such development costs for the years ended December 31, 1998, 1997
and 1996, amounting to approximately $542,000, $1,308,000 and $650,000,
respectively.

     COST IN EXCESS OF NET ASSETS ACQUIRED:  Cost in excess of net assets
acquired resulted from the acquisition of the Angelika Film Center, a six screen
cinema located in the Soho area of Manhattan, New York (the "NY Angelika") by
Reading in August 1996 and the December 1997 acquisition of a five screen cinema
located in Minneapolis, Minnesota (the "St. Anthony").  The amount of the
purchase price of the NY Angelika assets in excess of the appraised value of the
assets acquired is being amortized on a straight line basis over a period of 20
years. The fair value of the NY Angelika assets was determined by an

                                      F-8
<PAGE>
 
CRAIG CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
(AMOUNTS IN TABLES IN THOUSANDS, EXCEPT SHARES AND PER SHARE DATA)

independent appraiser. The purchase price of the St. Anthony is being amortized
on a straight line basis over the remaining life of the lease which is
approximately 5 years. Accumulated amortization at December 31, 1998 and 1997
was approximately $1,426,000 and $791,000, respectively.

     ADVERTISING COSTS: The Company expenses the costs of advertising as
incurred.  Advertising expense was $1,005,000, $670,000 and $376,000 for the
years ended December 31, 1998, 1997, and 1996, respectively.

     ACCOUNTING FOR THE IMPAIRMENT OF LONG LIVED ASSETS: The Company accounts
for its long lived assets consistent with Statement of Accounting Standard No.
121 "Accounting for the Impairment of Long Lived Assets and for Long Lived
Assets to be Disposed Of" which requires the evaluation of the impairment of
long lived assets, certain intangible assets and costs in excess of net assets
related to those assets to be held and used and for long-lived assets and
certain identifiable intangibles to be disposed of.

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

     EARNINGS (LOSS) PER SHARE: Basic earnings (loss) per share is calculated by
dividing net earnings (loss) applicable to common shareholders by the weighted
average shares outstanding during the periods presented.  The weighted average
number of shares used in the computation of basic earnings (loss) per share was
10,777,325, 10,769,824, and 11,270,812, for the years ended December 31, 1998,
1997 and 1996, respectively.  Diluted earnings (loss) per share, is calculated
by dividing net earnings (loss) applicable to common shareholders by the
weighted average common shares outstanding for the period presented plus the
dilutive effect of stock options.  The weighted average number of shares used in
the computation of diluted earnings (loss) per share was 10,777,325, 10,966,079,
and 11,331,185 for the years ended December 31, 1998, 1997 and 1996,
respectively.  During fiscal 1998 stock options to purchase 719,940 shares of
Common Stock were outstanding at an average market price of $6.24 per share,
however, the Company reported a net loss in Fiscal 1998 and therefore, the stock
options were anti-dilutive in such period.  Basic and diluted net earnings
(loss) per share for Fiscal 1998, 1997 and 1996 was calculated based on net
earnings (loss) applicable to common stock shareholders, which includes a
reduction for dividends declared on the redeemable preferred stock of REI
amounting to $455,000, $445,000 and $95,000 (See Note 12).

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

                                      F-9
<PAGE>
 
CRAIG CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
(AMOUNTS IN TABLES IN THOUSANDS, EXCEPT SHARES AND PER SHARE DATA)

     RECENT ACCOUNTING PRONOUNCEMENTS:  Effective January 1, 1998, the Company
adopted Statement of Financial Accounting Standards No. 130, "Reporting
Comprehensive Income" ("SFAS 130"), which establishes new rules for the
reporting and display of comprehensive income and its components.  The adoption
of SFAS 130 had no impact on the Company's net income or shareholders' equity.
SFAS 130 requires the Company's currency translation adjustment which, prior to
adoption, was reported separately in shareholders' equity, to be included in
accumulated other comprehensive income.  Prior year amounts have been
reclassified to conform to the requirements of SFAS 130.

     Effective January 1, 1998, the Company adopted the Financial Accounting
Standards Board's Statement of Financial Accounting Standards No.
131,"Disclosures about Segments of an Enterprise and Related Information" ("SFAS
131").  SFAS 131 establishes new standards for the way that public business
enterprises report information about operating segments in annual financial
statements and requires that those enterprises report selected information about
operating segments in interim financial statements.  SFAS 131 also establishes
standards for related disclosures about products and services, geographic areas,
and major customers.  The adoption of SFAS 131 did not affect results of
operations or financial position, but did affect the disclosure of segment
information (See Note 3).

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

NOTE 2 -- ACQUISITION OF READING ENTERTAINMENT, INC. ("READING")

     During Fiscal 1996, Craig increased its voting ownership in Reading to
approximately 78% through (1) the acquisition of shares on the open market at a
cost of approximately $2,571,000, (2) the issuance of 66,042 shares of Craig
Common Stock and (3) the consummation of a transaction between Craig, Reading,
Citadel Holding Corporation ("CHC" and collectively with its consolidated
subsidiaries, "Citadel") and certain of their affiliates (the "Stock
Transactions") whereby Craig exchanged substantially all of its assets other
than REI Common Stock for preferred and additional common stock of REI.

     In the Stock Transactions, Craig and its wholly owned subsidiary, Craig
Management, Inc. ("CMI"), and Citadel contributed assets in exchange for REI
convertible preferred and common stock and certain contractual rights.  In the
Stock Transactions, REI issued (i) 70,000 shares of Series A Voting Cumulative
Convertible Preferred Stock, (the "REI Series A Preferred Stock"), to Citadel
(See Note 12), and granted certain contractual rights to Citadel in return for
$7,000,000 in cash and (ii) 550,000 shares of Series B 6.5% Voting Cumulative
Convertible Preferred Stock with a stated value of $55,000,000, (the "REI Series
B Preferred Stock"), and 2,476,190 shares of Common Stock to Craig in exchange
for certain assets owned by Craig (the "Craig Assets").  The REI Series B
Preferred Stock bears a cumulative dividend of 6.5%, payable quarterly and is
convertible into REI common shares at a conversion price of $12.25 per share.
The Craig Assets consisted of 693,650 shares of Stater Bros. Holdings, Inc.'s
("Stater") Series B Preferred Stock (the "Stater Preferred Stock"), a 50%
membership interest in Reading International, of which an indirect wholly owned
subsidiary of REI was the sole other member, and 1,329,114 shares of Citadel's
3% Cumulative Voting Convertible Preferred Stock, stated value $3.95 per share
(the "CHC Preferred Stock").

                                      F-10
<PAGE>
 
CRAIG CORPORATION AND SUBSIDIARIES

NOTES OF CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
(AMOUNTS IN TABLES IN THOUSANDS, EXCEPT SHARES AND PER SHARE DATA)

     The contractual rights granted to Citadel in the Stock Transactions are set
forth in an Asset Put and Registration Rights Agreement pursuant to which
Citadel has the right (the "Asset Put Option"), until 30 days after REI files
its Annual Report on Form 10-K for the year ending December 31, 1999, to require
REI to acquire substantially all of Citadel's assets, and assume related
liabilities (such as mortgages), for shares of REI Common Stock. In exchange for
up to $20,000,000 in aggregate appraised value of Citadel assets on exercise of
the Asset Put Option, REI is obliged to deliver to Citadel a number of shares of
REI Common Stock determined by dividing the appraised value of the Citadel net
assets by $12.25.  The closing price of REI stock on December 31, 1998 was
$7.875 per share.  If the value of the Citadel net assets is in excess of
$20,000,000, REI is obliged to pay for the excess by issuing common stock at the
then fair market value for up to a maximum of $30,000,000 of assets. For
financial reporting purposes, no value was allocated to the Asset Put Option,
due to the belief that the value, if any, is immaterial and that the methods of
valuing options include numerous subjective assumptions and are not intended to
value non-transferable options such as the Asset Put Option.  Also, in
conjunction with the Stock Transactions, REI reimbursed Citadel for its out of
pocket costs with respect to the transaction amounting to approximately
$280,000.

     The acquisition of the REI securities by Craig has been accounted for as a
purchase, and accordingly, the purchase price has been allocated to assets and
liabilities based on their estimated fair values, after consideration of the
recognition by REI of previously reserved deferred tax assets as of the date of
the Stock Transactions (See Note 15).  The aggregate purchase price of the
fiscal 1996 Stock Transaction purchases of REI stock amounted to approximately
$66,400,000, which amount represented the carrying value of the assets
contributed in the exchange amounting to approximately $86,400,000, net of
federal tax liabilities amounting to approximately $22,000,000 less transaction
costs.  Accordingly, the purchase, for financial statement purposes, resulted in
negative goodwill in the amount of approximately $22,000,000, which goodwill was
allocated to reduce the carrying value of previously reported intangible assets
related to Craig's REI stock purchases and the beneficial leases and leasehold
improvements purchased.  

     Included in the accompanying Consolidated Statements of Operations as
"Minority interest" and the Consolidated Balance Sheets as "Minority interests
in equity of subsidiaries" for the years ended December 31, 1998 and 1997 is the
30.7% separate public ownership of REI, as follows:

<TABLE>
<CAPTION>
                                                                YEAR ENDED DECEMBER 31,  
                                                                1998      1997     1996  
                                                              -------  --------  ------- 
     <S>                                                      <C>      <C>       <C>    
                                                                                        
     Minority interest in earnings (loss) of Reading          $ 1,972  $  (330)  $ 1,471
     Minority interest in equity of Reading                   $28,294  $30,277   $31,316 
</TABLE>

NOTE 3 -- BUSINESS SEGMENTS AND GEOGRAPHIC AREA INFORMATION

     The Company, through its ownership of REI, develops and operates multiplex
cinemas in the United States, Puerto Rico, Australia and New Zealand and is
developing cinema based entertainment centers in Australia and New Zealand.

     In order to more accurately identify its operating activities and future
development plans, the Consolidated Company undertook steps to separate its real
estate development activities from its cinema operations during 1997.
Accordingly, effective as of January 1997, the Consolidated Company 

                                      F-11
<PAGE>
 
CRAIG CORPORATION AND SUBSIDIARIES

NOTES OF CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
(AMOUNTS IN TABLES IN THOUSANDS, EXCEPT SHARES AND PER SHARE DATA) 

commenced operations in two business segments, cinema development and
operations, and real estate development (entertainment center development
activities). During 1996, the Consolidated Company principally conducted
operations in one business segment, the development and operation of cinemas.

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

     The corporate component of operating income (loss) from operations includes
general and administrative expenses, and other income.  Corporate assets
primarily consist of corporate cash, the investments in Citadel and Big 4, net
investment in leased equipment and certain other corporate property and
equipment.

     The following sets forth certain information concerning the Company's two
segments, real estate development and cinema operations, in 1997 and 1998, the
only periods in which it operated in more than one segment:

<TABLE>
<CAPTION>
                                           REAL ESTATE           CINEMA        CORPORATE AND
                1998                       DEVELOPMENT         OPERATIONS       ELIMINATIONS         CONSOLIDATED
                ----                       -----------         ----------       ------------         ------------
<S>                                      <C>                  <C>              <C>                   <C>
Revenues                                      $     0            $33,556           $   373              $ 33,929               
Operating income (loss)                        (3,197)             2,511            (6,039)               (6,725)              
Identifiable assets 2/3/4                      42,125             39,286            83,180               164,591               
Depreciation and amortization                       0              2,394               176                 2,570               
Capital expenditures 1/5                       12,445             11,011                72                23,528               
 
 
<CAPTION>                                                                                
                                          REAL ESTATE            CINEMA        CORPORATE AND
                1997                      DEVELOPMENT          OPERATIONS       ELIMINATIONS         CONSOLIDATED
                ----                      -----------          ----------       ------------         ------------
<S>                                      <C>                  <C>              <C>                   <C> 
Revenues6                                     $     0            $26,984           $ 5,482             $ 32,466
Operating income (loss) 6                      (3,198)               778               116               (2,304)
Identifiable assets 2/3/4                      18,910             34,372           113,843              167,125
Depreciation and amortization                       0              1,531               206                1,737
Capital expenditures 1/5                        7,586             12,213                92               20,118
</TABLE> 

                                      F-12
<PAGE>
 
CRAIG CORPORATION AND SUBSIDIARIES                               
                                                                 
NOTES OF CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)           
DECEMBER 31, 1998                                                 
(AMOUNTS IN TABLES IN THOUSANDS, EXCEPT SHARES AND PER SHARE DATA)

1 Real estate capital expenditures are net of "Purchase commitments" of
  $8,066,000 and $3,516,000 in 1998 and 1997, respectively.

2 Real estate identifiable assets includes investments in unconsolidated
  affiliates of $3,608,000 and $1,608,000 at December 31, 1998 and 1997,
  respectively.

3 Cinema operations identifiable assets includes investments in unconsolidated
  affiliates of $1,578,000 and $0 at December 31, 1998 and 1997, respectively.

4 Corporate identifiable assets includes investments in Citadel of $12,962,000
  and $6,594,000 at December 31, 1998 and 1997, respectively.

5 Includes purchases of property held for development of $12,445,000 and
  $7,382,000 at December 31, 1998 and 1997, respectively.

6 Corporate revenue and operating (loss) in 1997 include "Dividend and service
  income from Stater" amounting to $5,302,000.

     The following table indicates the relative amounts of revenues from theater
operations (excluding revenue from the Company's previous holdings in Stater)
and property, plant, and equipment of the Company by geographic area during the
three-year period ended December 31, 1998. The Company has no export revenues.

<TABLE>
<CAPTION>
                                                                   1998           1997           1996
                                                               -------------  -------------  -------------
<S>                                                            <C>            <C>            <C>
Revenues:

     Puerto Rico.............................................        $16,210        $15,186        $15,523
     Mainland United States..................................         11,507          8,158          3,256
     Australia...............................................          6,212          3,820              0
 
Property, plant & equipment:
     Puerto Rico.............................................         13,224          7,949                
     Mainland United States..................................          8,819          7,160                
     Australia/1/............................................         29,420         20,549                
     New Zealand/2/..........................................          9,549              0                
</TABLE>

____________________
1  Includes property held for development of $23,400,000, $14,714,000 and
   $7,332,000 at December 31, 1998, 1997 and 1996, respectively.

2  Entire amount represents property held for development.
 
NOTE 4 -- THEATER ACQUISITION AND DEVELOPMENT ACTIVITIES

Domestic Activity
-----------------

     Reading sub-leased a three-screen cinema located in Sacramento, California
in November 1998 and commenced operation of the eight-screen Houston Angelika
cinema located in downtown Houston, in December 1997. 

                                      F-13
<PAGE>
 
CRAIG CORPORATION AND SUBSIDIARIES                               
                                                                 
NOTES OF CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)           
DECEMBER 31, 1998                                                 
(AMOUNTS IN TABLES IN THOUSANDS, EXCEPT SHARES AND PER SHARE DATA)

     Reading acquired the St. Anthony, a leased five-screen cinema, located in
Minneapolis, Minnesota from a national cinema owner operator in December 1997.
The cinema operates under the Reading Cinemas name.  The former lessee was paid
approximately $229,000 for the theater.

     Reading has under construction a 12 screen cinema in Manville, N.J. which
is expected to open in mid 1999.

     In August 1996, Reading and Sutton Hill (a partnership affiliated with City
Cinemas, a Manhattan-based cinema operator, owned in equal parts by James J.
Cotter and Michael Forman, the controlling shareholders of the Company),
acquired the Angelika Film Center, a multiplex cinema located in Soho area of
New York City (the "NY Angelika").  The purchase price was approximately
$12,570,000 inclusive of acquisition costs of approximately $529,000.  Reading
and Sutton Hill formed a limited liability company, Angelika Film Centers LLC
("AFC"), to hold their interest in the NY Angelika.  AFC acquired the NY
Angelika assets with a combination of available cash, a promissory note
collateralized by escrowed cash issued to the sellers in the amount of
$2,000,000 (the "Sellers Note") and credit in full satisfaction of a judgment
encumbering certain of the stock of the sellers.  The final payment on the
Sellers Note of $500,000 was made in February 1998.

     Reading contributed 83.3% of the capital of AFC and Sutton Hill contributed
the remaining 16.7%.  The operating agreement of AFC provides that all
depreciation and amortization (the "Special Deductions") will first be allocated
to Sutton Hill until the aggregate amount of such Special Deductions equals
Sutton Hill's initial investment.  Thereafter, Reading will receive all Special
Deductions until the relative ownership interests are equal to the initial
ownership interests of the parties.  Sutton Hill has agreed to subordinate its
interest in AFC to Reading's interest in order to permit Reading to pledge AFC
and its assets as collateral to secure borrowing by Reading.  In addition,
Sutton Hill has agreed that Reading will be entitled to receive up to 100% of
the proceeds of borrowing by AFC, up to the amount of Reading's initial capital
contribution to AFC.  

     The Houston Angelika, the St. Anthony and the NY Angelika are managed by
City Cinemas, a New York motion picture exhibitor and an affiliate of Sutton
Hill, pursuant to management agreements. The management agreements for the St.
Anthony and the Houston Angelika provide for City Cinemas to receive a fee equal
to 2.5% of revenues. The NY Angelika management agreement provides for the
payment of a minimum fee of $125,000 plus an incentive fee equal to 50% of
annual cash flow (as defined) over prescribed levels provided, however, that the
maximum annual aggregate fee cannot exceed 5% of NY Angelika's revenues.

     Reading's 83.3% interest in the NY Angelika was accounted for using the
purchase method and the NY Angelika's operating results since the acquisition on
August 27, 1996 have been consolidated with the operating results of the
Consolidated Company.  Sutton Hill's initial capital investment and share of the
NY Angelika's net earnings for the period subsequent to the acquisition of the
NY Angelika have been recorded as "Minority interest's in equity of
subsidiaries" in the Consolidated Balance Sheet as of December 31, 1998 and 1997
in the amount of approximately $1,853,000 and $1,967,000, respectively.

     The unaudited pro forma consolidated operating results set forth below
assume that the acquisition of the NY Angelika was completed at the beginning of
1996 and include the impact of certain 

                                      F-14
<PAGE>
 
CRAIG CORPORATION AND SUBSIDIARIES                               
                                                                 
NOTES OF CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)           
DECEMBER 31, 1998                                                 
(AMOUNTS IN TABLES IN THOUSANDS, EXCEPT SHARES AND PER SHARE DATA)

adjustments, including amortization of intangibles, depreciation and reductions
in interest and dividend income resulting from payment of the purchase price.

<TABLE>
<CAPTION>
                                           YEAR ENDED DECEMBER 31, 1996
                                           ----------------------------         
<S>                                        <C>
Revenues                                           $ 32,364                   
                                                    =======                   
Net earnings                                       $ 42,505                   
                                                    =======                   
Earnings per share:                                                          
     Basic                                         $   3.77                  
                                                    =======                  
     Diluted                                       $   3.75                  
                                                    =======
</TABLE>

     New York Acquisition - In December 1998, Reading entered into an Agreement
in Principle with Sutton Hill to lease and operate the cinemas constituting the
City Cinemas Circuit located in Manhattan and to acquire three live "Off
Broadway" theaters (the "Theater Transaction") also located in Manhattan.
Pursuant to the Agreement in Principle, Reading will also acquire the 16.7%
interest in AFC not already owned by it and certain management rights with
respect to three other cinemas located in Manhattan (the acquisition of the
cinemas, the management rights and the minority interest in the AFC are
collectively referred to as the "Cinema Transactions").  In addition to the six-
screen NY Angelika, Reading will operate a total of 16 screens in four locations
and manage an additional six screens in three locations upon conclusion of the
Cinema Transactions, for a total of 28 screens in Manhattan.

     Reading will lease the City Cinemas Circuit for an initial term of ten
years.  In addition, Reading will acquire, in consideration of an option payment
of $5 million ($4 million of which is payable eighteen months from closing), the
right to purchase, at the end of the initial term of the lease, the City Cinemas
Circuit for a purchase price of $44 million (including the option fee). The City
Cinemas Circuit includes the right to acquire the fee interests underlying two
of the cinemas for $4 million. Reading will acquire the 16.7% interest in AFC
for $4.5 million which purchase price will be paid in a ten-year installment
sale note. Reading has agreed to provide to the sellers, at the election of the
sellers, standby credit facilities of up to $32.5 million maturing in 10 years.

     The Agreement in Principal provides that Reading will acquire the three
live theaters from Off Broadway Investments, Inc. ("OBI"), Messrs. Cotter and
Forman's wholly owned company, in exchange for approximately 1.1 million shares
of REI Common Stock valued at $9.00 per share. The closing price of the Common
Stock on December 2, 1998 was $9.00, the date the Agreement in Principle was
approved by Reading. If any of the conditions to REI's obligation to issue
Common Stock are not satisfied, the acquisition will close on a cash basis, for
a purchase price of approximately $9.9 million. Two of the three OBI theaters
are owned by OBI and the third leased with a right of first refusal over any
sale of the property.

     In connection with the Cinema Transactions, Reading has made a deposit of
$1,000,000.  Such deposit is included as a component of "Other Assets" in the
Consolidated Balance Sheet.

     Closing of the transactions are subject to certain conditions, including
approval by the REI Conflicts Committee and City Cinemas of the definitive
documentation memorializing the transactions, the issuance of fairness opinions
and, in the case of the issuance of the Common Stock, the approval of the
shareholders of REI.  The issuance of 1.1 million shares of REI stock to Messrs.
Cotter and Forman upon the purchase of OBI would result in a decrease of the
Company's voting ownership of REI to 72% 

                                      F-15
<PAGE>
 
CRAIG CORPORATION AND SUBSIDIARIES

NOTES OF CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
(AMOUNTS IN TABLES IN THOUSANDS, EXCEPT SHARES AND PER SHARE DATA)

as compared to 78% as of December 31, 1998.

     On March 18, 1999, Reading acquired the Royal George Theatre, a multi-stage
theater offering live "Off Broadway" type live performances.  The $2,800,000
purchase was funded through application of a $1,300,000 deposit (made prior to
December 31, 1998 and included as a component of "Other assets" in the
Consolidated Balance Sheet), and a seller provided purchase mortgage of
$1,182,000 due May 2000.

     Puerto Rico
     -----------

     Reading acquired CineVista effective in 1994.  Since that time Reading has
opened three new cinemas with a total of twenty-two screens, including the
opening of an eight-screen cinema at one location in June 1998 which replaced a
six-screen cinema at the same location.  CineVista currently has twelve screens
under construction and scheduled to open during the fourth quarter 1999.

     New Zealand
     -----------

     During 1998, Reading New Zealand Limited (together with its subsidiaries,
"Reading New Zealand") entered into two 50/50 joint ventures, one of which
currently operates nine screens in two locations and has an additional 4 screens
under construction.

     The second joint venture owns a parcel of land on which the joint venture
intends to develop an entertainment center featuring a 12 screen multiplex
cinema.  In addition, Reading New Zealand has acquired ownership of a property
adjacent to the joint venture site and a multiple story parking garage also
located adjacent to the joint venture site.  Reading New Zealand's joint venture
partner has an option through November, 1999 to acquire a 50% interest in each
of these properties (See Note 6).

NOTE 5 -- INVESTMENT IN CITADEL HOLDING CORPORATION ("CITADEL") AND BIG 4
          RANCH, INC. ("BRI")

     Citadel, whose stock is traded on the American Stock Exchange, has been
engaged primarily in the business of owning and managing commercial properties
and, since December 31, 1997, the management of the farming operations of Big 4
Agricultural Properties described below.  Also, as described in Note 2, in
October 1996, Citadel invested $7,000,000 to acquire 70,000 shares of REI
Redeemable Cumulative Voting Convertible Stock (Note 12), which represents 5% of
the outstanding voting securities of REI, and an Asset Put Option.

     During 1998, the Consolidated Company increased its common stock ownership
in Citadel to approximately  3,209,779 shares (48%) from 2,230,473 shares
(33.4%) at December 31, 1997.  In addition to the purchase of 979,306 CHC
shares, the Consolidated Company purchased 1,091,806 shares of BRI from the
sellers of the CHC securities.  The purchase price of 430,106 CHC securities and
BRI securities by Craig was $4.625 per share and $0.125 per share, respectively,
and the purchase price of the CHC securities and BRI securities by REI were
$3.875 and $0.125 per share, respectively.  The purchase of such shares by Craig
was consummated pursuant to the delivery by the Consolidated Company of
$3,636,000 and the issuance of 51,500 treasury shares of Craig Corporation Class
A Common Preference Stock.  The issuance of the Company's Class A Common
Preference Stock was reflected in the Balance Sheet as an increase to

                                      F-16
<PAGE>
 
CRAIG CORPORATION AND SUBSIDIARIES

NOTES OF CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
(AMOUNTS IN TABLES IN THOUSANDS, EXCEPT SHARES AND PER SHARE DATA)

shareholders' equity in the amount of $618,000 as of December 31, 1998.

     As of December 31, 1998 and 1997, the Consolidated Company's investment in
Citadel was $12,962,000 and $6,594,000, respectively.  Retained earnings
represented by undistributed earnings of the Consolidated Company's investment
in Citadel amounted to approximately $4,253,000 at December 31, 1998. Based upon
the closing price of Citadel's common stock of $3.9375 at December 31, 1998, the
aggregate market value of the Consolidated Company's common stock interest in
Citadel was approximately $12,638,000.

     The following summarizes earnings (losses) from the Consolidated Company's
investment in Citadel as included in the accompanying Consolidated Statements of
Operations for the years ended December 31, 1998, 1997 and 1996.

<TABLE>
<CAPTION>
 
                                      YEARS ENDED DECEMBER 31,
                                        1998    1997    1996
                                      --------  -----  -------
<S>                                   <C>       <C>    <C>
 
Equity earnings                         $2,233  $ 392   $1,526
Preferred stock dividends                   --     --      154
Preferred stock redemption premium          --     --      716
                                                -----   ------
                                        $2,233  $ 392   $2,396
                                        ======  =====   ======
</TABLE>

     Between November 1994 and December 1996, the Consolidated Company owned
1,329,114 shares of Citadel 3% Cumulative Voting Convertible Preferred Stock
(the "CHC Preferred Stock") with a Stated Value of $5,250,000. In December 1996,
Citadel exercised its right to redeem the CHC Preferred Stock. The Consolidated
Company received the stated value of $5,250,000, plus all accrued and unpaid
dividends and a redemption premium of $941,000, which premium, net of the amount
attributable to the Consolidated Company's common stock interest, is included in
"Earnings from equity investments" in the Consolidated Statement of Operations
for the year ended December 31, 1996.

     On December 29, 1997, Citadel capitalized a wholly owned subsidiary, BRI.,
with a cash contribution of $1,200,000 and then distributed 100% of the shares
of BRI to Citadel's common shareholders of record as of the close of business on
December 23, 1997, as a spin-off dividend. The Consolidated Company received
2,213,043 shares or 33.4% of BRI. The Company recorded such distribution of Big
4 Ranch, Inc. as a reduction of its investment in Citadel in the amount of
approximately $401,000 and a corresponding increase as investment in Big 4
Ranch, Inc., which is included in "Other Assets" at December 31, 1997. As
described above in 1998, the Company increased its ownership in BRI to
approximately 49% for a purchase price of approximately $136,000.

     In 1997, BRI (owning 40%), Citadel (owning 40%) and Visalia LLC (owning
20%; a limited liability company controlled by Mr. James J. Cotter, the Chairman
of the Board of Craig, REI and Citadel, and owned by Mr. Cotter and certain
members of his family including Margaret Cotter) entered

                                      F-17
<PAGE>
 
CRAIG CORPORATION AND SUBSIDIARIES

NOTES OF CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
(AMOUNTS IN TABLES IN THOUSANDS, EXCEPT SHARES AND PER SHARE DATA)

into three general partnerships, which partnerships acquired on December 31,
1997 certain agricultural properties located in Kern County, California
(purchase price amounting to approximately $7,600,000). The acquisition was
financed by a 10-year purchase money mortgage in the amount of $4,050,000, a
line of credit from Citadel and pro rata contributions from the partners.
Through the Consolidated Company's holding in Big 4 Ranch, Inc., and Citadel,
the Company owns approximately 38% of such partnerships at December 31, 1998. In
December 1998, the Partnerships suffered a freeze which destroyed the 1998-1999
citrus crop. The Partnerships have no funds to repay a $1,850,000 million line
of credit from Citadel or fund the estimated $2,640,000 required to fund costs
associated with production of a 1999-2000 crop and complete the proposed 1999
planting, other than to call upon the partners for funding or borrowing further
funds from Citadel. BRI has no funds or resources with which to provide such
funding, other than to call upon its separate line of credit from Citadel. As a
result of the freeze, the book value of BRI was essentially reduced to zero and,
accordingly, the Consolidated Company recorded a loss of approximately $520,000,
which loss is included in the Statement of Operations for the year ended
December 31, 1998 as a component of "Earnings from equity investment". To date,
Citadel has continued to provide the funding required by the Partnerships, but
no assurances can be given that Citadel will continue to provide the funding.

     Summarized financial information of Citadel as of December 31, 1998 and
1997 and for each of the three years ended December 31, 1998 follows:

<TABLE>
<CAPTION>
                                                                  YEARS ENDED DECEMBER 31,
                                                            -----------------------------------------      
CONDENSED BALANCE SHEETS:                                      1998                       1997
-------------------------                                      ----                       ----
<S>                                                         <C>                        <C> 
Cash and cash equivalents                                   $ 4,367                    $ 4,364             
Rental Properties and Properties held for sale               13,877                     13,652             
Investment in Reading                                         7,000                      7,000             
Investment and advance to Agricultural                                                                      
 Partnerships                                                 1,561                      1,960              
Other assets                                                  3,842                      1,884             
Deferred tax asset                                            4,398                         --             
Accrued and other liabilities                                 2,080                      1,411             
Mortgage liabilities                                          9,224                      9,395             
Stockholder's equity                                         23,741                     18,054             
</TABLE>

<TABLE>
<CAPTION>
                                                                      YEARS ENDED DECEMBER 31,
                                                           -----------------------------------------------   
CONDENSED STATEMENTS OF OPERATIONS:                           1998              1997               1996
-----------------------------------                           ----              ----               ----     
<S>                                                        <C>                <C>               <C> 
Revenues                                                   $ 5,985            $ 5,350           $ 5,101       
Expenses                                                    (4,982)            (4,665)           (5,107)      
Loss from investment in Agricultural Partnerships             (990)                --                --       
Dividends from Reading                                         455                455                95       
Interest income                                                391                451               844       
Gain (loss) on sale of rental property                          --                (16)            1,493       
Gain from investment in Fidelity                                --                 --             4,000
Income tax benefit (expense)                                 4,828                (45)               --       
                                                           -------            -------           -------       
Net earnings                                               $ 5,687            $ 1,530           $ 6,426       
                                                           =======            =======           =======       
</TABLE>

      Citadel's net earnings in 1998 include an income tax benefit of $4,828,000
resulting principally from the reversal of previously reserved deferred income
tax benefits offset, in part, by Citadel's share of 

                                      F-18
<PAGE>
 
CRAIG CORPORATION AND SUBSIDIARIES

NOTES OF CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
(AMOUNTS IN TABLES IN THOUSANDS, EXCEPT SHARES AND PER SHARE DATA)

equity losses from its investment in the Agricultural Partnerships amounting to
approximately $990,000.

     Citadel's net earnings for  the year ended December 31, 1998, 1997 and
1996 include dividends, interest income and consulting fees from the
Consolidated Company amounting to $1,022,000, $820,000, and $264,000,
respectively.

     Citadel's net earnings for the year ended December 31, 1996 are inclusive
of non-recurring income of $4,000,000 from the recognition for financial
statement purposes of previously deferred proceeds from the bulk sale of loans
and real estate by a previously owned subsidiary of Citadel.

     During 1997, Craig acquired 666,000 CHC shares upon the exercise of a
warrant at a cost of approximately $3.00 per share, or $1,998,000.  Such
exercise was consummated pursuant to delivery by Craig of its secured promissory
note in the amount of $1,998,000, secured by 500,000 shares of REI Common Stock.
Interest is payable quarterly in arrears at the prime rate, which amounted to
7.75% at December 31, 1998.  Interest expense paid pursuant to this note
amounted to approximately $169,000 and $125,000 for the years ended December 31,
1998 and 1997, respectively. Principal and accrued but unpaid interest is due
upon the earlier of April 11, 2002 or 120 days following Citadel's written
demand for payment and has been included in the accompanying Balance Sheet as
"Note Payable to Citadel."

NOTE 6 - EQUITY INVESTMENTS IN FOREIGN AFFILIATES

     Whitehorse Property Group
     -------------------------

     In November 1997, Reading Australia acquired a 50% interest from Burstone
Victoria Pty. Ltd. ("Burstone") in the Whitehorse Property Group Unit Trust
("WPG") for approximately $1,600,000.  WPG owns a shopping center located near
Melbourne, Australia located on land leased pursuant to a long-term lease.  WPG
is currently studying the redevelopment of the Whitehorse Shopping Center as an
entertainment center through development of a multiplex cinema, and
complementary restaurants and retail shops.  The carrying value of the
investment at December 31, 1998 of approximately $1,483,000 is included in
"Equity investments in foreign affiliates" in the Consolidated Balance Sheet.
In conjunction with Reading Australia's acquisition of its interest in WPG,
Reading Australia loaned approximately $1,400,000 to the joint venture partner,
the proceeds of which were used by the joint venture partner to acquire its
interest in WPG.  The loan balance of $1,463,000 (inclusive of interest at 7.5%
per annum) at December 31, 1998 is included as "Notes Receivable from joint
venture partners" in the Consolidated Balance Sheet.  Pursuant to the Joint
Venture Agreement, Reading Australia guarantees the repayment of 50% of a
secured bank loan which is owed by WPG.  The principal outstanding on the loan
totaled approximately $7,200,000 at December 31, 1998, resulting in a guarantee
by the Company of approximately $3,600,000.  The loan bears interest at a rate
equal to the cost of funds plus 1.7% or approximately 6.56% at December 31, 1998
and is due in November 1999.  WPG's net income for the year ended December 31,
1998 totaled $50,000 and the Consolidated Company's share of such income was
$26,000, which amount is included in the Consolidated Statement of Operations
for the year ended December 31, 1998 as "Earnings from equity investments".
WPG's results for the two months ended December 31, 1997 were immaterial and not
included in the Company's Consolidated Statement of Operations.  WPG's assets
and liabilities totaled $10,458,000 and $7,590,000,  respectively, at December
31, 1998.  In December 1998, WPG entered into a purchase agreement which
provides WPG with the right to acquire the fee interest in the land on which the
shopping center is located for approximately 

                                      F-19
<PAGE>
 
CRAIG CORPORATION AND SUBSIDIARIES

NOTES OF CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
(AMOUNTS IN TABLES IN THOUSANDS, EXCEPT SHARES AND PER SHARE DATA)

$3,700,000, provided that the joint venture spends at least approximately
$6,100,000 to redevelop the center.

     New Zealand Joint Ventures
     --------------------------

     During the second quarter of 1998, Reading New Zealand entered into two
50/50 joint ventures, one with a cinema operator and one with a property
developer in New Zealand (the "NZ JVs").  At December 31, 1998, the Company's
aggregate investment in these joint ventures totaled $3,703,000.  This amount is
reflected in the December 31, 1998 Consolidated Balance Sheet under "Equity
investments in foreign affiliates."  In connection with the cinemas joint
venture, the Company has made a loan to the joint venture of $588,000 in order
to finance a portion of the acquisition price of a multiplex cinema and the
underlying property and acquire certain land on which the joint venture intends
to develop on entertainment center.

NOTE 7 -- INVESTMENT IN STATER BROS. HOLDINGS, INC.
          ("SBH" and together with its subsidiaries, "STATER")

     Stater is a supermarket chain in Southern California.  Between 1989 and
March 8, 1996, Craig held a 50% common stock interest in SBH which for
accounting purposes was accounted for in accordance with the equity method of
accounting.  During March 1994, Craig consummated several agreements with Stater
which, among other things, provided Stater with the right to convert the
Company's common stock interest in SBH into a preferred stock and an option to
purchase the Company's equity interest in SBH at a formula price.  Also, as part
of the transactions, Craig entered into a consulting agreement with Stater
pursuant to which Craig, among other things, agreed to render consulting
services for through March 1999 for $1,500,000 annually.

     The following summarizes earnings from the Consolidated Company's
investment in Stater prior to the repurchase of such investment and termination
of the consulting agreement by Stater in August 1997 as included in the
accompanying Consolidated Statements of Operations for the years ended December
31, 1997 and 1996:

<TABLE>
<CAPTION>
                                                          YEARS ENDED DECEMBER 31,
                                                              1997         1996
                                                          -----------  -----------
<S>                                                       <C>          <C>
Dividend income                                               $4,330      $ 5,978
Service fee income                                               972        1,500
Gain on conversion/repurchase of investment in Stater          2,002       58,978
Equity in earnings in Stater                                      --        1,608
                                                              ------      -------
                                                              $7,304      $68,064
                                                              ======      =======
</TABLE>

     Effective March 8, 1996, Stater exercised its right to convert all Craig's
common stock in Stater into 693,650 shares of Stater Series B Preferred Stock,
stated value $100 per share (the "Stater Preferred Stock").  The Stater
Preferred Stock had a liquidation preference and redemption value of $69,365,000
and a cumulative dividend preference beginning at 10.5%.  Upon this conversion,
the Consolidated Company discontinued the use of the equity method of accounting
for its investment in Stater.  Prior to this conversion, the carrying value of
Craig's 50% common stock interest, net of the $14.65 option proceeds 

                                      F-20
<PAGE>
 
CRAIG CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31,1998
(AMOUNTS IN TABLES IN THOUSANDS, EXCEPT SHARES AND PER SHARE DATA)


received in 1994, amounted to approximately $9,000,000. During the twelve months
ended December 31, 1996, Craig recorded approximately $58,978,000 of the
difference between $67,978,000 (98% of the stated value of the Stater Preferred
Stock) and Craig's net carrying value of its previous common stock investment
amounting to $9,000,000 as "Gain from conversion of common stock interest in
Stater".

     In October 1996, the SBH Preferred Stock was transferred to Reading in the
Stock Transactions.  In August 1997, the SBH Preferred Stock was repurchased in
its entirety by SBH and the Consulting Agreement between the Company and Stater
was terminated.  Upon its repurchase in August 1997, the Consolidated Company
recognized income of approximately $2,002,000 comprised of (i) $1,387,000
(difference between the approximately $69,365,000 stated value of the SBH
Preferred Stock and the $67,978,000 carrying value) and (ii) $615,000 received
from Stater at the time of the SBH Preferred Stock repurchase for REI's
agreement to enter into a covenant-not-to-compete for a one year period.

NOTE 8 -- NET INVESTMENT IN LEASED EQUIPMENT

     During 1996, a wholly-owned subsidiary of REI purchased computer equipment
for $40,934,000 which equipment was leased to various retail companies (the
"User Leases"). Concurrent with the purchase of the equipment, the Company
leased the equipment back to the seller, subject to the User Leases, for a
period of five years (the "Wrap Lease"). Reading's investment in the equipment
was funded through a cash payment of $1,944,000 and the issuance of a non-
recourse promissory note (the "Promissory Note") in the amount of $38,900,000.
Payments due under the Wrap Lease were subsequently sold to a third party in
return for a $32,000 payment and assumption by the purchaser of all obligations
under the Promissory Note. Reading has retained all rights and interest in the
equipment subject to the User Leases and the Wrap Lease. Therefore, Reading has
rights to the residual value of the equipment upon conclusion of the Wrap Lease
(which term exceeds the term of the User Leases). The residual interest has been
reflected at its net cost, $2,125,000, in the Consolidated Balance Sheet at
December 31, 1998 and 1997 as "Net investment in leased equipment."

                                     F-21
<PAGE>
 
CRAIG CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31,1998
(AMOUNTS IN TABLES IN THOUSANDS, EXCEPT SHARES AND PER SHARE DATA)

NOTE 9 -- PROPERTY, PLANT AND EQUIPMENT

     The Consolidated Company's property, plant and equipment at December 31,
1998 and 1997 consisted of the following:

<TABLE>
<CAPTION>
                                       DECEMBER 31, 1998      DECEMBER 31, 1997
                                       ------------------     -----------------
<S>                                    <C>                    <C>
Land*                                        $   378                $   401
Buildings                                      1,858                  1,959
Capitalized lease premises                        --                    538
Leasehold improvements                        15,722                  9,007
Equipment                                      9,205                  8,074
Construction in progress                       5,714                  4,599
                                             -------                -------
Property, plant and equipment                 32,877                 24,578
Less: Accumulated depreciation                (4,814)                (3,634)
                                             -------                -------
Property, plant and equipment, net           $28,063                $20,944
                                             =======                =======
</TABLE> 
_________________________
 
     *Includes land associated with owned cinema properties. Does not include
      land held for development, which is included in "Property held for
      development" in the Consolidated Balance Sheets.

NOTE 10 -- LEASE AGREEMENTS AND COMMITMENTS

     Annual base rent expense is determined by amortizing total minimum lease
obligations on a straight line basis over the lease terms.  The Consolidated
Company's base rental expense for the twelve months ended December 31, 1998,
1997 and 1996 was $4,753,000, $4,225,000 and $2,974,000.  Subrental income paid
by Citadel to Craig for the rental of office space to Citadel amounted to $2,000
monthly since July 15, 1995.  In 1998, 1997 and 1996, contingent rental expense
under operating lease totaled $134,000, $25,000 and $220,000, respectively.  The
following separately summarizes the lease and purchase commitments of Craig and
Reading.

Craig
-----

     Craig leases certain office space under a lease expiring in October 2001.
The lease agreements require that Craig pay for its share of building operating
costs and taxes, which together with the base rent is estimated at $75,000
annually.

     During the year ended December 31, 1996, Craig entered into a 50/50
corporate joint venture in a newly formed company, Hope Street Hospitality LLC,
established to develop the concept for a chain retail store/restaurant
specializing in woodfire baked goods.  To date, the joint venture has had
significant operating losses and, accordingly, the Company has reported in the
Statements of Operations for the year ended December 31, 1998, 1997 and 1996, a
loss from this joint venture of $163,000, $207,000 and $780,000, respectively,
representing the operating losses and cost writedowns incurred as a result of
the development nature of this venture.  In addition, Craig has signed as a
corporate guarantor, the facility lease obtained by Hope Street Hospitality LLC.
The lease commenced on March 1, 1996, the terms of which

                                     F-22
<PAGE>
 
CRAIG CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31,1998
(AMOUNTS IN TABLES IN THOUSANDS, EXCEPT SHARES AND PER SHARES DATA)

included a prepayment of approximately $150,000 and annual minimum payments of
approximately $103,000, to be paid monthly for ten years.

Reading Leases and Purchase Commitments
---------------------------------------

     CineVista and the Domestic Cinemas conduct their operations in leased
premises. Two of Reading Australia's four operating multiplexes are in leased
facilities. The cinema leases have remaining terms inclusive of options of 10 to
40 years. Certain of the cinema leases provide for contingent rentals based upon
a specified percentage of theater revenues with a guaranteed minimum.
Substantially all of the leases require the payment of property taxes, insurance
and other costs applicable to the property. Reading also leases office space,
warehouse space and equipment under noncancellable operating leases. All leases
are accounted for as operating leases.

     Future minimum lease payments by year and in the aggregate, under
noncancellable operating leases consist of the following at December 31, 1998:


<TABLE>
<CAPTION>
                                                 OPERATING LEASES
<S>                                              <C>
     1999                                           $ 3,925
     2000                                             4,779
     2001                                             4,768
     2002                                             4,644
     2003                                             4,168
     Thereafter                                      76,789
                                                    -------
     Total net minimum lease payments               $99,073
                                                    =======
</TABLE>

     At December 31, 1998, Reading had commitments for major capital
expenditures, property purchase commitments, and purchase money debt commitments
for 1999 and thereafter which totaled approximately $72,000,000 inclusive of
approximately $57,100,000 related to Australia and New Zealand projects.
Included in this amount are projected construction and equipment expenditures of
approximately $48,740,000 for 1999 comprised of the following: $26,900,000
relating to commitments under seven cinema leases with a total of 64 screens
which are anticipated to be completed in 1999, $11,200,000 relating to property
purchase commitments, and $12,200,000 relating to construction and fixture
expenditures with respect to an entertainment center with a 10 screen cinema and
a 4 screen cinema presently under construction both of which are located on land
owned by the Consolidated Company and anticipated to be completed in 1999. Also
included with respect to periods after 1999 are a development commitment of
approximately $20,500,000 and a $1,200,000 purchase mortgage commitment (See
Note 16). The U.S. dollar cost of such Australia and New Zealand projects was
based on a conversion rate of .6133 U.S. dollars to each Australian dollar and a
conversion rate of .5282 U.S. dollars to each New Zealand dollar. Amounts
reflect as commitments may fluctuate based upon foreign exchange rates at the
time of payments.

     In 1999, Reading entered into a theater purchase mortgage and a property
purchase agreement which requires the payment of approximately $4,500,000 in May
2000. In addition, pursuant to the provisions of an Agreement in Principle (See
Note 4), if Reading completes the Cinemas Transaction, it will be required to
provide the existing owners, with a ten-year line of credit of up to $32,500,000

                                     F-23
<PAGE>
 
CRAIG CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
(AMOUNTS IN TABLES IN THOUSANDS, EXCEPT SHARES AND PER SHARE DATA)

commencing 18 months from the conclusion of the transaction and will be required
to pay $4,000,000 pursuant to a deferred option fee 18 months from closing.
While no assurances can be given that the transaction will be concluded,
management presently anticipates closing to occur in the second quarter of 1999,
in which case such amounts would be funded in late 2000.

     The Agreement in Principle contemplates the acquisition of certain live
theater assets, in exchange for stock. However, under certain circumstances,
Reading could be required to fund the Theater Transaction with a cash payment of
approximately $9,900,000. While no assurances can be given that the Theater
Transaction will be completed, management presently anticipates closing of the
transaction in the second quarter of 1999 and that the transaction will be
structured as a stock transaction and not as a cash transaction.

     Under the terms of the joint venture agreement with WPG (see Note 6), the
Company has guaranteed approximately $3,600,000 of WPG debt.

NOTE 11 -- BANK CREDIT FACILITIES

     CineVista recently renegotiated a bank credit line reducing the amount
available thereunder from $7,500,000 to $6,000,000. The revolving credit
agreement (the "Credit Agreement") expires in March 2003. Under terms of the
Credit Agreement, CineVista may borrow up to $6.0 million to fund new cinema
development costs. Commencing June 30, 1999 the commitment under the Credit
Agreement is reduced pursuant to increasing quarterly amounts over the balance
of the loan term. At December 31, 1998 and 1997, no amounts were outstanding
under the Credit Agreement.

     As security for the loan, CineVista has pledged substantially all of its
assets. In addition, the stock of CineVista's parent company has been pledged as
security for the loan. In conjunction with the loan, the Company has also agreed
to subordinate to the lender its right to payment of certain loans and fees
payable by CineVista to the Company under certain circumstances.

     The provisions of the Credit Agreement require CineVista to maintain a
minimal level of net worth and other financial ratios, restrict the payment of
dividends, and limit additional borrowing and capital expenditures. Borrowings
under the Credit Agreement accrue interest at LIBOR (the London Interbank
Offered Rate) plus 2.25%, or the base rate plus 1/2 of 1%, at CineVista's
election. In accordance with the provisions of the Credit Agreement, CineVista
is required to pay a commitment fee on the unused commitment equal to 1/2 of 1%.

     In July 1998, Reading New Zealand borrowed approximately $600,000 from a
commercial bank. The one year borrowing accrues interest at 11% and is secured
by a Reading New Zealand's interest in a joint venture property.

NOTE  12 -- REDEEMABLE PREFERRED STOCK OF READING

     The 70,000 shares of REI Series A Preferred Stock have a stated value of
$100 per share or $7,000,000 and holders of the REI Series A Preferred Stock are
entitled to receive cumulative dividends at the rate of $6.50 per share. Citadel
has the right during the 90 day period beginning October 15, 2001, or in the
event of a change of control of REI, to require REI to repurchase the Series A
Preferred Stock at, its

                                     F-24
<PAGE>
 
CRAIG CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
(AMOUNTS IN TABLES IN THOUSANDS, EXCEPT SHARES AND PER SHARE DATA)


stated value plus accrued and unpaid dividends or, in the case of a change in
control, a premium. In addition, the holders of the Series A Preferred Stock may
require REI to repurchase the shares at the stated value plus accrued and unpaid
dividends in the event that REI fails to pay dividends on the Series A Preferred
Stock in any four quarterly periods. In the event of a change in control of REI,
the holders of a majority of the Series A Preferred Stock may require redemption
at a premium. Due to the redemption provisions, the Series A Preferred Stock has
not been included as a component of Shareholders' Equity in the Consolidated
Balance Sheet and is separately categorized as "Redeemable Preferred Stock of
Reading", until such time that the redemption provision is exercised.

     Each share of Series A Preferred Stock is convertible into shares of REI
Common Stock at a conversion price of $11.50 per share.  REI also has the right
to require conversion of the Series A Preferred Stock in the event that the
average market price of the REI Common Stock over a 180 day period exceeds
$15.525 per share.  REI may, at its option, redeem the Series A Preferred Stock
at any time after October 15, 2001, in whole or in part, at a redemption price
equal to a percentage of the stated value (initially 108%, declining 2% per
annum until the percentage equals 100%) plus accrued and unpaid dividends to the
date of redemption.  Dividends paid during the years ended December 31, 1998,
1997 and 1996 amounted to approximately $455,000, $455,000 and $95,000,
respectively.

NOTE 13 -- COMMON AND CLASS A COMMON PREFERENCE STOCK

     The rights of the holders of Class A Common Preference stock and the Common
stock differ with respect to dividend, voting and liquidation rights. Holders of
Class A Common Preference stock are entitled to receive such dividends as may be
declared thereon exclusively and, in addition, such dividends as may be paid on
the common stock in equal amounts as if a single class of securities; they will
be entitled to one vote per share, while holders of the common stock are
entitled to 30 votes per share; and, in the event of a liquidation, they will be
entitled to receive a liquidation preference of $5.00 per share.

     On December 15, 1997, the Board of Directors declared a stock dividend
which provided all Common Stock and Class A Common Preference Stock shareholders
of record on January 5, 1998 to receive one share of Class A Common Preference
Stock. Such stock distribution occurred on February 5, 1998 resulting in an
increase in the outstanding Class A Common Preference Stock to 7,006,912 shares.
In addition, at the date of stock distribution, the Company held 1,704,412
shares of the Company's Common Stock (1,683,912) and Class A Common Preference 
Stock (23,000) in treasury and received a Class A Common Preference stock
dividend on such treasury shares. Approximately $71,000 was transferred from
additional paid in capital to the Class A Common Preference account to record
this stock distribution in February 1998.

     Craig repurchased 134,300 common shares in Fiscal 1998 and 539,100 common
shares in Fiscal 1996 at a purchase price of approximately $984,000 and
$7,585,000, respectively.  Subsequent to December 31, 1998, the Company has
repurchased an additional 47,500 shares at an aggregate cost of approximately
$311,000.

     As described in Note 4, the Company issued 51,500 shares of Class A common
Preference stock in connection with the Company's purchase of CHC and Big 4
common stock which resulted in an increase in shareholders' equity of
approximately $618,000.

                                     F-25
<PAGE>
 
CRAIG CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
(AMOUNTS IN TABLES IN THOUSANDS, EXCEPT SHARES AND PER SHARE DATA)


     On May 17, 1996, Craig agreed to purchase 67,000 shares of Reading Common
stock from the Chairman of the Board, James J. Cotter, in exchange for 66,042
shares of its Common stock. Issuance of these shares was recorded based on the
closing price of Reading Company Common stock on May 17, 1996, or $10.625 per
share, as an increase to shareholders' equity amounting to approximately
$712,000.

NOTE 14 -- STOCK OPTIONS AND PENSION PLANS

     A stock option plan adopted in 1984, as amended, provided for the granting
of options to purchase a maximum of 200,000 shares of common stock at exercise
prices not less than the market price at the date of grant. Under the terms of
the plan, which expired in 1995, options could be granted to officers, directors
and other key employees who owned 10% or less of the voting power and value of
all classes of Craig's stock. Options under this plan expired, unless extended,
after five years and may be exercisable in installments, generally beginning one
year after the date of grant. During 1997, the Board extended for two years the
exercise date of 30,000 shares originally issued and due to expire in October
1997 under this plan. At December 31, 1997, no other options are outstanding
pursuant to the plan.

     As described in Note 13, the Board of Directors declared a stock dividend
of Class A Common Stock on December 5, 1997. The stock option data below has
been adjusted to reflect the stock option activity since January 1, 1996 as if
the adjustments to the options granted had occurred on such date. The stock
distribution had the effect of increasing the number of shares outstanding under
option. With the exception of the Chairman of the Board, the number of shares
available for option was increased by the number of option shares previously
granted, however the increase was in Class A Common Preference stock. In
December 1997, the Board of Directors amended the option agreement with the
Chairman of the Board providing for his options to be increased in the same
security as the options were granted (common stock), adjusted for the variance
in market price between the two stocks. Changes in the number of shares subject
to options granted are as follows:

<TABLE>
<CAPTION>
                                                                                        Class A Common
                                                        Common Stock                   Preference Stock
                                                    --------------------              -------------------
                                                                    Weighted                       Weighted
                                                                    Average                        Average 
                                                  Options            Price          Options         Price
                                                  -------            ----           -------         -----    
<S>                                               <C>               <C>             <C>             <C>
Outstanding at December 31, 1995 and 1996         639,940           $ 5.97           50,000          $5.72
 Granted(1)                                        15,000           $10.07           15,000          $9.74
 Expired(2)                                       (30,000)          $(6.38)  
                                                  -------           ------           ------          ------
Outstanding at December 31, 1997                  624,940           $ 6.05           65,000          $6.65
Granted(1)                                         30,000           $ 9.50           
                                                  -------           ------           ------          -----
Outstanding at December 31, 1998                  654,940           $ 6.20           65,000          $6.65
                                                  -------           ------           ------          -----
Exercisable at December 31, 1998                  613,690           $ 5.97           65,000          $6.00
                                                  -------           ------           ------          -----
</TABLE>

     (1)  Such options have a 10 year life and vest 25% each year.
     (2)  In agreement for the holder to not exercise such shares, the Company
          paid $30,000 to such holder subsequent to the option expiration in
          January 1997.

          The weighted-average remaining contractual life of all options
outstanding at December 31, 1998 


                                     F-26
<PAGE>
 
CRAIG CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
(AMOUNTS IN TABLES IN THOUSANDS, EXCEPT SHARES AND PER SHARE DATA)

was 6.12 years.


     Pro forma net earnings and earnings per share information reflecting the
fair value approach to valuing stock options and the corresponding increase in
compensation expense is required by SFAS No. 123 in each of the years that a
company grants stock options. The Company granted 30,000 options in 1998 and
1997. The fair value of the 1998 options granted was estimated at the date of
grant using a Black-Scholes option pricing model with the following weighted
average assumptions: stock option exercise price of $9.50, risk free interest
rate of 6%, expected dividend yield of 0%, expected option life of five years
and expected volatility of 23.8% The fair value of the 1997 option granted was
estimated at the date of grant using a Black-Scholes option pricing model with
the following weighted average assumptions: stock option exercise price of
$9.90, risk free interest rate of 5.73%, expected dividend yield at 0%, expected
option life of 5 years and expected volatility of 24.8%. The weighted-average
fair value of options granted in 1998 and 1997 was $2.00 and $2.17 per share,
respectively. The pro forma effect of the issuance of these options would have
been to increase the "Net loss applicable to common shareholders" for the year
ended December 31, 1998 and 1997 by $58,934 and $1,511, respectively. The pro
forma adjustments may not be representative of future disclosures because the
estimated fair value of stock options is amortized to expense over the vesting
period, and additional options may be granted in future years. Further, SFAS No.
123 requires assumptions by management, regarding the likelihood of events on
which the vesting of contingent, performance based options are predicated.

     During the first quarter of 1999, the Board of Directors finalized the
Craig Corporation Key Personnel Retirement Plan. Such plan provides that any
participant, as permitted by the Board, will be credited an amount equal to 10%
of such participants compensation (up to the maximum allowed by Section
401(c)(17) of the Internal Revenue Code). As of the effective date of the Plan,
January 1, 1999 only two employees have been granted participation in the Plan
which resulted in past service costs accruing of approximately $243,000. Any
amounts credited to the Participants account earn interest at LIBOR and may be
paid to the employee upon their termination. While no election has been made by
either participant, each participant may from time to time irrevocably elect to
convert a part or all of such amounts accrued to their account into Phantom
Common Stock based upon the closing price of such stock on the date of election.

NOTE 15 -- INCOME TAXES

     Craig and Reading file separate federal and state income tax returns. The
future utilization of net operating loss carryforwards and capital loss
carryforwards described below, therefore, cannot be used to offset each separate
companies' tax liabilities. Significant components of the provisions for income
taxes attributable to operations are as follows:


<TABLE>
<CAPTION>
                                                  YEARS ENDED DECEMBER 31
                                                  -----------------------
                                              1998       1997         1996
                                              ----       ----         ----
<S>                                         <C>         <C>         <C>
Earnings (loss) consists of the following:  
 United States                              $ 6,924     $ 7,945     $73,180
 Foreign                                     (6,337)     (3,327)     (4,730)
                                            -------      -------    -------
  Total:                                    $   587     $ 4,618     $68,450
                                            =======     =======     =======
</TABLE>

                                     F-27
<PAGE>
 
CRAIG CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
(AMOUNTS IN TABLES IN THOUSANDS, EXCEPT SHARES AND PER SHARE DATA)


     Significant components of the provisions for income taxes attributable to
operations are as follows:

<TABLE>
<CAPTION>
                                            YEARS ENDED DECEMBER 31
                                            -----------------------
                                      1998          1997          1996
                                      ----          ----          ----  
<S>                                  <C>          <C>         <C>       
Income taxes (benefit):
 Current:
   Federal                          $  253        $   181     $    946
   Foreign                             786            698          446
   State and local                      78            273           83
                                     -----         ------       ------
 Total current                       1,117          1,152        1,475
                                     -----         ------       ------ 
 Deferred:
  Federal                             (131)           160       20,621
  State                                 --             --        3,707
                                     -----         ------       ------
 Total deferred:                      (131)           160       24,328
                                     -----         ------       -------
 Total income taxes                 $  986        $ 1,312     $ 25,803
                                     =====         ======       =======
</TABLE> 
 
   The reconciliation of income taxes at United States statutory rates to
income taxes as reported are as follows:
 
<TABLE>
<CAPTION>  
                                              YEARS ENDED DECEMBER 31,
                                              1998      1997       1996
                                             -----   -------    -------
<S>                                          <C>     <C>        <C>     
Tax at U.S. statutory rates                  $ 200   $ 1,570    $23,958
Foreign withholding tax                        786       698        446
Use of net operating loss carryforwards         --    (2,344)        --
Foreign and U.S. losses not benefited          161     1,593        234 
Dividend exclusion on preferred dividends     (242)     (698)    (1,811)
Unrealized tax benefits, net of AMT             --       238       (886)
Other                                           --        --       (276)
State taxes, net of federal benefit             81       255      4,138
                                              -----   -------    -------
  Total income expense                       $ 986   $ 1,312    $25,803
                                              =====   =======    =======
</TABLE>

     The Stock Transactions described in Note 2 are intended to qualify as
an exchange under Section 351(a) (a "351 Exchange") of the Internal Revenue Code
of 1986, as amended (the "Code").  In a 351 Exchange, the party acquiring the
assets retains the contributing parties' tax basis in the acquired assets, with
no taxable gain recognized as a result of the exchange.  The parties
contributing assets obtain a tax basis in the assets received in the exchange
equal to the basis in the assets which are contributed in the exchange.  With
the exception of the Stater Preferred Stock, the book value of the assets
transferred to Reading from Craig in the Stock Transactions approximated the tax
basis in the assets received.  Craig's adjusted tax basis (for federal tax
purposes) in the Stater Preferred Stock was approximately $5,000,000 and,
accordingly, upon Reading's contribution of the Stater Preferred Stock in Fiscal
1996 to Reading Australia, a taxable gain (for federal tax purposes) occurred at
Reading.

                                     F-28
<PAGE>
 
CRAIG CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENT (CONTINUED)
DECEMBER 31, 1998
(AMOUNTS IN TABLES IN THOUSANDS, EXCEPT SHARES AND PER SHARE DATA)


     The estimated tax liabilities associated with the assets received in
the Stock Transactions were $22,042,000 in deferred federal income taxes
primarily relating to the Stater Preferred Stock.  At the time of the closing of
the Stock Transactions, Reading had a gross deferred federal tax asset of
$55,968,000 and a valuation allowance in the same amount.  Upon receipt of the
Stater Preferred Stock, it was determined that it was more-likely-than-not that
a portion of the deferred tax asset which had previously been fully reserved by
Reading, would be realized and Reading reduced the valuation allowance by
$20,782,000 which amounts reflects the value of Reading's federal tax loss
carryforwards which were expected to be utilized by Reading, net of $1,260,000
in federal alternative minimum tax ("AMT").  For financial statement purposes,
the exchange was treated as a purchase, and accordingly, the assets and
liabilities were valued at the date of the exchange based on their estimated
fair value after consideration of the recognition by Reading of the previously
reserved net operating loss carryforward, net of the AMT. Accordingly, for
financial statement purposes, the purchase of REI by Craig resulted in a
decrease to previously recognized deferred federal income taxes related to the
Stater Preferred Stock and a corresponding decrease to the cost basis of REI
assets included in the Consolidated Balance Sheet amounting to approximately
$22,000,000 of such federal deferred tax.

     Carryforwards and temporary differences which give rise to deferred tax
liabilities and assets are as follows:

<TABLE>
<CAPTION>
                                                        DECEMBER 31,
DEFERRED TAX LIABILITIES:                            1998             1997
                                                     ---             ----   
<S>                                                  <C>             <C>
 Tax basis difference of investments in affiliates   $12,286         $ 12,286
                                                     -------         --------
DEFERRED TAX ASSETS:                              
 Craig:
  Capital loss carryforward                            1,370            1,370
  Federal benefit of state taxes                       2,385            2,385
  Other                                                  163              163
 Reading:
  Net operating loss carryforwards                    16,314           14,996
  Alternative minimum taxes                            3,189            3,073
  Foreign tax credit                                      --            1,168
  Wrap lease rental sale                               8,485           10,712
  Other                                                1,578            1,311
                                                     -------         --------
 Gross deferred asset                                 33,484           35,178
 Valuation allowance                                 (29,566)         (31,260)
                                                     -------         --------
 Net deferred tax asset                                3,918            3,918
                                                     -------         --------
 
 Net deferred tax liabilities                        $ 8,368         $  8,368
                                                     =======         ========
</TABLE>

     Based on an analysis of the likelihood of realizing Reading's deferred tax
assets (taking into consideration applicable statutory carryforward periods),
the Consolidated Company concluded that under SFAS No. 109, a valuation
allowance for approximately $29,566,000 was necessary at December 31, 1998.
Reading's federal tax net operating loss carryforwards amounting to $27,824,000
expire as follows:

                                     F-29
<PAGE>
 
CRAIG CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
(AMOUNTS IN TABLETS IN THOUSANDS, EXCEPT SHARES AND PER SHARE DATA)

<TABLE>
<CAPTION>
                                Year                            Amount
                     ----------------------------            ----------
                     <S>                                     <C>         
                     2000........................               $16,196
                     2002........................                 7,382
                     2003........................                   589
                     2007........................                 1,443
                     2008........................                 1,155
                     2009........................                    32
                     2013........................                 1,027
                                                                -------
                                                                $27,824
                                                                =======
</TABLE>

     In addition to the federal net operating loss carryforwards, Reading has
alternative minimum tax credits of $3,189,000 which can be carried forward
indefinitely, as well as, foreign net operating loss carryforwards of
$16,949,000, $12,631,000 of which expires between 2002 and 2005 unless utilized
prior thereto. In 1996, Reading had $13,426,000 of federal net operating loss
carryforwards that expired unused. At December 31, 1998, Craig has capital loss
carryforwards of approximately $3,200,000 which expire in 2001 unless utilized
prior thereto.

     Reading was required to pay AMT for 1998, 1997, 1996.  AMT is calculated
separately from the regular federal income tax and is based on a flat rate
applied to a broader tax base.  Taxes payable thereunder cannot be totally
eliminated through the application of net operating loss carryforwards.  The
Consolidated Company paid AMT expense of $92,000, $2,405,000 and $139,000 in
income taxes in fiscal years 1998, 1997 and 1996.  Reading's 1996 consolidated
federal income tax return is under examination by the Internal Revenue Service.

NOTE 16 -- OTHER INCOME (EXPENSE) AND FINANCIAL INSTRUMENTS

     "Other income (expense)" totaled $(587,000), $1,076,000 and $3,622,000,
for the years ended December 31, 1998, 1997 and 1996, respectively.  Other
expense in 1998 was principally a result of a loss on foreign currency contract
transactions.  Other income in 1997 included (i) a $490,000 reversal of a
provision for estimated costs incurred in prior years, (ii) $260,000 received
from a third party as reimbursement of certain acquisition related expenditures
which were expensed in prior periods, and (iii) approximately $220,000 from
foreign currency agreements.

     During the fourth quarter of 1997, the Company entered into several foreign
currency swaps and a currency forward position with a major bank.  The agreement
provided for the Company to receive $12,363,800 U.S. dollars ("USD") in return
for the delivery of $18,659,300 Australian dollars ("AUD") in January 1998.  The
value of the contracts at December 31, 1997 was established by computing the
difference between the contractual exchange rates of the swap and forward
positions (AUD/USD) and the exchange rates in effect at December 31, 1997 and an
unrealized gain of $220,000 was recorded as "Other income" as of December 31,
1997.  During the first quarter of 1998, the currency positions and extensions
thereof matured and the Company incurred a loss of approximately $670,000 which
has been included in the Consolidated Statements of Operations as a component of
"Other expenses".

                                     F-30
<PAGE>
 
CRAIG CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
(AMOUNTS IN TABLES IN THOUSANDS, EXCEPT SHARES AND PER SHARE DATA)

       The principal components of other income in fiscal 1996 were a result of
certain litigation settlements totaling $3,479,000.

NOTE 17 -- COMMITMENTS AND CONTINGENCIES

Certain Shareholder Litigation -- Craig and REI
-----------------------------------------------

     In September 1996, the holder of 50 shares of REI's Common Stock commenced
a purported class action on behalf of Reading Company's minority shareholders
owning Reading Company Class A Common Stock in the Philadelphia County Court of
Common Pleas relating to the October REI Reorganization and Stock Transactions
(See Note 2).  The complaint in the action (the "Complaint") named REI, Craig,
two directors of Craig (former directors of Reading) and all of the current
directors of REI (other than Gregory R. Brundage) as defendants.  The Complaint
alleged, among other things, that the REI Independent Committee set up to review
the transactions and the current and former directors of REI breached their
fiduciary duty to the minority shareholders of REI in the review and negotiation
of the Reorganization and Stock Transactions and that none of the directors of
REI were independent and that they all were controlled by James J. Cotter (the
Chairman of the Board of Craig and REI), Craig or those controlled by them. The
Complaint also alleged, in part, that the defendants failed to disclose the full
future earnings potential of REI and that Craig would benefit unjustly by having
its credit rating upgraded and its balance sheet bolstered and that the value of
the minority shareholders' interest in REI was diluted by the transactions.  The
Complaint sought injunctive relief to prevent the consummation of the REI Stock
Transactions and recision of the Stock Transactions if they were consummated and
divestiture by the defendants of the assets or shares of the Company that they
obtained as a result of the Stock Transactions, and unspecified damages and
other relief.

     In October 1996, all of the defendants filed preliminary objections to the
Complaint and thereafter, by agreement of the parties and Order of the Court,
REI was dismissed as a defendant without prejudice.  Plaintiff dismissed with
prejudice his request for preliminary and permanent injunctive relief to prevent
the consummation of the Stock Transactions and his request to rescind and set
aside the Stock Transactions if and when consummated.

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

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

                                      F-31
<PAGE>
 
CRAIG CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
(AMOUNTS IN TABLES IN THOUSANDS, EXCEPT SHARES AND PER SHARE DATA)

     On September 28, 1998, the defendants filed a motion for summary judgment.
The motion was argued on February 15, 1999 and certain additional briefing was
order by the Court.

     Management of both Craig and REI believe that the allegations contained in
the complaint are without merit and intends to vigorously defend themselves in
the matter.  REI has Directors and Officers liability insurance and believes
that the claim is covered by such insurance.

Redevelopment Authority of the City of Philadelphia v. Reading
--------------------------------------------------------------

     On December 12, 1997 the Redevelopment Authority of the City of
Philadelphia (the "RDA") filed an action in the Philadelphia Court of Common
Pleas which relates to the 1993 sale of the Headhouse property by Reading to the
RDA.  Plaintiff has alleged discovery of asbestos, PCB's, lead paint, and
alleges past and future clean-up costs in excess of $1,000,000.  The action is
based upon theories of contract and state environmental law.  The Company has
denied liability and intends to vigorously defend.  It is management's opinion
that the RDA's claim is meritless in that Reading adequately disclosed the
condition of the property and expressly limited its representations made in
connection with the sale.

NOTE 18 -- RELATED PARTY TRANSACTIONS

     Reading acquired the NY Angelika on August 27, 1996 (See Note 4). The
theater is owned jointly by Reading and Sutton Hill, a partnership affiliated
with City Cinemas, a Manhattan-based theater operator and owned in equal parts
by Mr. James J. Cotter, the Company's Chairman, and Mr. Michael Forman. City
Cinemas (also owned indirectly in equal parts by Messrs. Cotter and Forman)
operates the theater pursuant to a Management Agreement. Mr. Cotter is the
Chairman of the Board of REI and Craig and the principal shareholder of Craig,
owning 23% of the Company's outstanding securities which represents
approximately 31% of the vote of the Company's outstanding securities. Hecco
Ventures, a company controlled by Mr. Forman and his family beneficially own
approximately 12.6% of Craig's outstanding securities. Mr. Cotter votes directly
or by proxy shares representing approximately 16.8% of the voting power of
Craig, is a general partner of a limited partnership which is the general
partner of Hecco Ventures and accordingly, has shared voting power with respect
to shares held by Hecco Ventures.

     City Cinemas manages the AFC and two other cinemas operated by Robert F.
Smerling, President of the Company, and Neil Sefferman, Vice President - Film of
the Company also serve in the same positions with City Cinemas.

     In December 1998, the Company and Sutton Hill entered into an Agreement in
Principle to lease and operate four cinemas and manage three other cinemas all
of which are located in Manhattan and which together constitute the City Cinemas
circuit.  In addition the Agreement in Principle provides for the acquisition by
the Company of three live "Off Broadway" theaters also located in Manhattan. 
The Conflicts Committee of the REI Board of Directors (the "Conflicts
Committee"), comprised entirely of directors independent of Messrs. Cotter and
Forman, reviewed and negotiated the transaction. Consummation of the transaction
is contingent upon, among other things, receipt of fairness opinions relating to
the transactions and approval of REI's shareholders of the issuance of Common
Stock for the acquisition of the "Off Broadway Theaters".

     Reading will lease the City Cinemas Circuit for an initial term of ten
years.  In addition, Reading will acquire, in consideration of an option payment
of $5 million ($4 million of which is payable eighteen months from closing), the
right to purchase, at the end of the initial term of the lease, the City Cinemas
Circuit for a purchase price of $44 million (including the option fee). The City
Cinemas Circuit includes the right to acquire the fee interests underlying two
of the cinemas for $4 million. Reading will acquire the 16.7% interest in AFC
for $4.5 million which purchase price will be paid in a ten-year installment
sale note. Reading has agreed to provide to the sellers, at the election of the
sellers, standby credit facilities of up to $32.5 million maturing in 10 years.

     The Agreement in Principal provides that Reading will acquire the three
live theaters from Off Broadway Investments, Inc. ("OBI"), Messrs. Cotter and
Forman's wholly owned company, in exchange for approximately 1.1 million shares
of REI Common Stock valued at $9.00 per share. The closing price of the Common
Stock on December 2, 1998 was $9.00, the date the Agreement in Principle was
approved by Reading. If any of the conditions to REI's obligation to issue
Common Stock are not satisfied, the acquisition will close on a cash basis, for
a purchase price of approximately $9.9 million. Two of the three OBI theaters
are owned by OBI and the third leased with a right of first refusal over any
sale of the property.

                                      F-32
<PAGE>
 
CRAIG CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
(AMOUNTS IN TABLES IN THOUSANDS, EXCEPT SHARES AND PER SHARE DATA)

     The Agreement in Principle provides that the Manhattan "Off Broadway"
theaters, as well as another live theater owned by the Company will be booked
and managed by Union Square Management, Inc., a live theater management company
specializing in the booking and management of "Off Broadway" style live
theaters. Margaret Cotter, daughter of Mr. James J. Cotter, is a Senior Vice
President with Union Square Management, Inc. In December 1998 the Company agreed
to guarantee a $100,000 bank loan to Alan Schuster, the principal shareholder of
Union Square Management, Inc.

     A company owned by a consultant of Reading Australia is a corporate partner
of Reading Australia in certain theaters to be developed by Reading Australia.
Pursuant to the agreement between that Company and Reading Australia, such
officer purchased a 25% interest in the theater which was opened by Reading
Australia in December 1996 which amount totaling $A500,000 was funded by a loan
from Reading Australia.

     The Consolidated Company owns approximately 48% of Citadel Holding
Corporation (See Note 5). Messrs. Cotter and Tompkins each serve as directors of
that company. Mr. Cotter serves as Chairman and Mr. Tompkins serves as Vice
Chairman, Secretary and Chief Accounting Officer of Citadel. During the years
ended December 31, 1998, 1997 and 1996, Reading utilized the services of certain
Citadel employees, including the President and Chief Executive Officer of
Citadel, for real estate advisory services for which Reading paid Citadel
$410,000, $240,000 and $169,000, respectively, a rate which is believed to
approximate the fair market value of such services. In addition, Craig provided
certain administrative services to Citadel which it was paid $72,000 for the
years ended December 31, 1998, 1997 and 1996.

     The Consolidated Company owns approximately 49% of BRI.  In addition,
Cecelia Packing ("Cecelia"), a company wholly owned by Mr. Cotter, and a trust
for the benefit of one of Mr. Tompkins children  individually own shares of BRI
which, when combined with the shares owned by the Consolidated Company, result
in a voting interest in excess of 50%. The Board of Directors and executive
officers of BRI are comprised of three Craig directors, including Margaret
Cotter, the daughter of James Cotters and a member of Visalia, LLC.

     On December 31, 1997, BRI (owning 40%), Citadel (owning 40%) and Visalia,
LLC (a limited liability company controlled by James J. Cotter, the Chairman of
the Board of REI, Craig, and Citadel, and owned by Mr. Cotter and certain
members of his family) entered into three general partnerships (the
"Partnerships").  December 31, 1997 the Partnerships acquired an agricultural
property (purchase price amounting to approximately $7.6 million) which
property is improved with citrus trees.  The Partnerships currently use Big 4
Farming LLC ("Farming) to farm their properties.  Farming is owned 80% by
Citadel and 20% by Visalia, and it receives in consideration of its services
reimbursement of its costs plus 5% of the net revenues of the farming operations
after picking, packing and hauling.  Farming, in turn, contracts with Cecelia
for certain bookkeeping and administrative services, for which it pays a fee of
$6,000 per month.  Cecelia also packs fruit for the Partnerships.  The
acquisition was financed by a ten year purchase money mortgage in the amount of
$4.05 million, a line of credit from Citadel and pro-rata contributions from the
partners.  Through its holdings in BRI and Citadel, the Company owns
approximately 38% of such Partnerships at December 31, 1998.  In December 1998,
the Partnerships suffered a freeze which destroyed the 1998-1999 crop.  The
Partnerships have no funds to repay a $1,850,000 million line of credit from
Citadel or fund the estimated $2,640,000 required to fund costs associated with
production of a 1999-2000 crop and complete the proposed 1999

                                      F-33
<PAGE>
 
CRAIG CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
(AMOUNTS IN TABLES IN THOUSANDS, EXCEPT SHARES AND PER SHARE DATA)

planting other than to call upon the partners for funding or to borrow
additional funds from Citadel. BRI has no funds or resources with which to
provide such funding, other than to call upon its separate line of credit from
Citadel. To date, Citadel has continued to provide the funding required by the
Partnerships, but no assurances can be given that Citadel will continue to
provide the funding.

     As described in Note 13, the Company in May 1996 purchased 67,000 shares of
Reading Common Stock from the Chairman of the Board in exchange for 66,042
shares of Craig Common Stock. In December 1997, the Board of Directors declared
a stock dividend of Class A Common Stock to all holders of record of common
stock and Class A Common Preference Stock on December 5, 1997. Also, in December
1997, the Board of Directors amended the option agreement with the Chairman of
the Board providing for his option to purchase 300,000 shares of Common Stock to
be increased in the same security as the options were granted (common stock),
adjusted for the variance in market price between the two stocks. 

     In 1997 Reading loaned Robert Smerling, President of REI, $70,000.  The
non-interest bearing loan is payable upon demand.

NOTE 19 -- QUARTERLY FINANCIAL INFORMATION (UNAUDITED)

     Quarterly financial information for the years ended December 31, 1998 and
1997, are summarized below:

<TABLE>
<CAPTION>
                                                                               NET (LOSS)              BASIC AND
                                                                                EARNINGS                DILUTED
                                                         NET                  APPLICABLE TO            EARNINGS 
                                                       REVENUES               STOCKHOLDERS             PER SHARE
                                                       --------               ------------             ---------
YEAR ENDED DECEMBER 31, 1998                                   (IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
-------------------------------------------     ------------------------------------------------------------------
<S>                                             <C>                           <C>                      <C>
Quarter ended March 31, 1998                                 $ 8,745                  $ (173)               $(0.02)
Quarter ended June 30, 1998                                    8,559                    (141)                (0.01)
Quarter ended September 30, 1998                               8,820                    (455)                (0.04)
Quarter ended December 31, 1998                                7,805                     (85)                (0.01)
                                                             -------                  ------
                                                             $33,929                  $ (854)
                                                             =======                  ======
 
YEAR ENDED DECEMBER 31, 1997
-------------------------------------------
 
Quarter ended March 31, 1997                                 $ 7,979                  $1,387                $ 0.13
Quarter ended June 30, 1997                                    8,827                     685                  0.06
Quarter ended September 30, 1997                               8,553                   1,536                  0.14
Quarter ended December 31, 1997                                7,107                    (757)                (0.07)
                                                             -------                  ------
                                                             $32,466                  $2,851
                                                             =======                  ======
</TABLE>

1998:
-----

     The first quarter loss applicable to common shareholders reflects a charge
of $165,000 relating to the closing of four screens at a CineVista location.
The results of the third quarter included a loss of $114,000 representing the
Company's share in losses of unconsolidated affiliates.  In the fourth quarter
1998, the Company closed a CineVista cinema as a result of damage sustained from
Hurricane George and recorded a write-off of $248,500 related to abandoned
assets.  Further, in the fourth quarter, the Company recorded a charge of
$332,000 for previously capitalized project costs related to Australian
development activities.  Additionally, in the fourth quarter, the Consolidated
Company recorded income of $1,743,000 representing the Company's share of
earnings (losses) in Citadel and BRI.

                                      F-34
<PAGE>
 
CRAIG CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
(AMOUNTS IN TABLES IN THOUSANDS, EXCEPT SHARES AND PER SHARE DATA)

1997:
-----

     Revenues in the first three quarters of Fiscal 1997 include income from
Stater Preferred Stock and Stater's Consultancy Agreement of $2,350,000,
$2,191,000 and $2,308,000, respectively.  First quarter revenues include
$260,000 received from a third party as reimbursement of certain acquisition
related expenditures which were expensed by the Company in prior periods. Third
Quarter income includes $615,000 received from Stater in return for REI's
agreement not to provide consulting services for, nor own a controlling interest
in, a business which competes with Stater for a period of one year. During the
fourth quarter, the Company concluded all obligations related to a previously
owned subsidiary. The Company had been guarantor on various performance bonds
issued by this subsidiary. As a result of the conclusion of activities, $490,000
was recorded as income to reverse the provision for this matter recorded in
prior years. Also, during the fourth quarter, Reading Australia wrote off
$554,000 of previously capitalized project costs.

NOTE 20 -- PARENT COMPANY CONDENSED FINANCIAL STATEMENTS

     As described in Note 1, the accompanying consolidated financial statements,
include the accounts of Craig and its majority owned subsidiaries. The following
information reflects only the accounts of Craig and its wholly owned
subsidiaries.  As described in Note 2, on October 15, 1996, Craig and REI
consummated the Stock Transactions which resulted in Craig exchanging
substantially all of its assets for REI preferred and common stock.  Craig and
Reading are separate public companies and each entity's capital resources and
liquidity is legally independent of the other and any intercompany loans or
receivables would require approval of each separate company's Board of
Directors.  Accordingly, the future working capital of Craig is primarily
dependent on Reading's ability to pay dividends in accordance with the terms of
the Series B Preferred Stock (Note 2).

                                      F-35
<PAGE>
 
CRAIG CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
(AMOUNTS IN TABLES IN THOUSANDS, EXCEPT SHARES AND PER SHARE DATA)

<TABLE>
<CAPTION>
                                                                                      DECEMBER 31,
                                                                        --------------------------------------
CONDENSED BALANCE SHEET:                                                        1998               1997
                                                                                ----               ----        
<S>                                                                     <C>                    <C>
Assets:
------
 Cash                                                                       $  4,721           $  5,332
 Other current assets                                                             18                 31
                                                                            --------           --------
  Total current assets                                                         4,739              5,363
 Investment in Citadel                                                         4,804              1,972
 Investment in Common Stock of Reading                                        63,761             68,055
 Investment in Preferred Stock of Reading                                     55,000             55,000
 Property and equipment, net                                                     694                788
 Other assets                                                                    157                323
 Excess of cost over net assets acquired                                       1,109              1,153
                                                                            --------           --------
  Total assets                                                              $130,264           $132,654
                                                                            ========           ========
 
Liabilities and stockholders equity:
-----------------------------------
 Accounts payable and accrued expenses                                      $    674           $    723
 Note payable to Citadel, current                                              1,998              1,998
 Deferred tax liabilities                                                     30,410             30,410
 Stockholders' equity                                                         97,182             99,523
                                                                            --------           --------
 Total liabilities and stockholders' equity                                 $130,264           $132,654
                                                                            ========           ========
</TABLE>

<TABLE>
<CAPTION>
                                                                         YEARS ENDED DECEMBER 31,
                                                    -------------------------------------------------------------------
CONDENSED STATEMENT OF OPERATIONS:                           1998                   1997                   1996
                                                             ----                   ----                   ----        
<S>                                                 <C>                     <C>                    <C>
Revenues:
--------
 Equity in earnings of Stater                              $    --                  $   --               $ 1,608
 Equity earnings (losses) of Reading                        (3,175)                    543                 2,304
 Equity in earnings of Citadel                                 843                      94                    --
 Equity losses of Big 4                                       (174)                     --                    --
 Dividend income from Reading                                3,575                   3,575                   748
 Dividend income from Stater                                                            --                 4,534
 Service income from Stater                                     --                     972                 1,500
 Interest income                                               235                     196                   415
                                                           -------                  ------               -------
                                                             1,304                   5,380                11,109
                                                           -------                  ------               -------
Expenses:
--------
 General and administrative                                  1,640                   1,712                 1,792
 Depreciation and amortization                                 185                     240                   232
 Interest expense                                              169                     125                    --
 Loss from Australian theatre developments                      --                      --                   388
 Loss from joint venture                                       164                     207                   780
                                                           -------                  ------               -------
                                                              2158                   2,284                 3,192
                                                           -------                  ------               -------
 (Loss) earnings before other income and income taxes         (854)                  3,096                 7,917
 Gain from interest in Stater                                   --                      --                58,978
                                                           -------                  ------               -------
 (Loss) earnings before income taxes                          (854)                  3,096                66,895
 Income taxes                                                   --                     245                24,342
                                                           -------                  ------               -------
        Net (loss) earnings                                $  (854)                 $2,851               $42,553
                                                           =======                  ======               =======
</TABLE>

                                      F-36
<PAGE>
 
CRAIG CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
(AMOUNTS IN TABLES IN THOUSANDS, EXCEPT SHARES AND PER SHARE DATA)

<TABLE>
<CAPTION>
                                                                           YEARS ENDED DECEMBER 31,
                                                       -------------------------------------------------------------------
CONDENSED STATEMENT OF CASH FLOWS:                           1998                    1997                     1996
                                                             ----                    ----                     ----          
<S>                                                    <C>                           <C>                    <C> 
Operating Activities:
--------------------
 Net earnings                                               $  (853)                 $ 2,808                $ 42,553
 Adjustments to reconcile net earnings to net
  cash provided by operating activities:
 Gain on conversion of Stater common stock                       --                       --                 (58,978)
 Equity earnings (losses) of equity affiliates                2,506                     (594)                 (3,912)
 Increase in deferred taxes                                      --                      160                  24,003
 Other                                                          150                      287                     844
                                                            -------                  -------                --------
 Net cash provided by operating activities                    1,803                    2,661                   4,510
 
Investing Activities:
--------------------
 Acquisition of Reading Stock                                    --                     (819)                 (1,107)
 Sale of Citadel common stock to Reading                         --                       --                   3,394
 Purchase of Citadel common stock                            (1,425)                  (1,998)                     --
 Purchase of equipment                                           (5)                      (2)                   (129)
                                                            -------                  -------                --------
 Net cash provided by (used in)investing                     (1,430)                  (2,819)                  2,158
  activities
 
Financing Activities:
--------------------
 Investment in Reading Australia                                 --                       --                 (13,928)
 Purchase of Citadel stock for a note                            --                    1,998                      --
 Payment of Stock Transaction Costs                              --                       --                    (213)
 Treasury Stock Repurchases                                    (984)                      --                  (7,584)
                                                            -------                  -------                --------
 Net cash (used in) financing activities                       (984)                   1,998                 (21,725)
                                                            -------                  -------                --------
 
Decrease in cash and cash equivalents                          (611)                   1,840                 (15,057)
Cash and cash equivalents at January 1,                       5,332                    3,492                  18,549
                                                            -------                  -------                --------
Cash and cash equivalents at December 31,                   $ 4,721                  $ 5,332                $  3,492
                                                            =======                  =======                ========
</TABLE>

                                      F-37
<PAGE>
 
                        REPORT OF INDEPENDENT AUDITORS



The Board of Directors
Craig Corporation


We have audited the accompanying consolidated balance sheets of Craig
Corporation and subsidiaries as of December 31, 1998 and 1997, and the related
consolidated statements of operations, shareholders' equity, and cash flows for
each of the three years in the period ended December 31, 1998. These financial 
statements are the responsibility of the Company's management. Our 
responsibility is to express an opinion on these financial statements based 
on our audits.

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

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Craig
Corporation and subsidiaries at December 31, 1998 and 1997, and the consolidated
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1998 in conformity with generally accepted
accounting principles.


                               ERNST & YOUNG LLP



Los Angeles, California
March 31, 1999

                                     F-38