<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, 1997

                                 OR

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

      For the transition period from ______________ to ________________


                         Commission file number 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:
<TABLE> 
<CAPTION> 
                                                                            Names of exchanges on
                Title of each class                                     which each class registered
                -------------------                                     ---------------------------
<S>                                                                      <C> 
            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
</TABLE> 

   Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 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        No  x
                                  ---       ---
   The aggregate market value of voting stock held by non-affiliates of the
Registrant was $87,805,000 as of April 13, 1998.

   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 13, there were
3,762,912 shares of Common Stock, $0.25 par value per share, and 7,006,912
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, 1997
                                     INDEX
 
<TABLE> 
<CAPTION> 
 
                                                                      PAGE
<S>            <C>                                                    <C>
PART I.
 
Item 1.        Business                                                  1
Item 2.        Properties                                               20
Item 3.        Legal Proceedings                                        22
Item 4.        Submission of Matters to a Vote of Security Holders      24
 

 
PART II.
 
Item 5.        Market for the Registrant's Common Stock and Related
               Stockholder Matters                                      25
Item 6.        Selected Financial Data                                  26
Item 7.        Management's Discussion and Analysis of Financial
               Condition and Results of Operations ("MD&A")             28
Item 8.        Financial Statements and Supplementary Data              44
Item 9.        Change in and Disagreements with Accountants on
               Accounting and Financial Disclosure                      44
 
 
 
PART III.
 
Item 10.       Directors and Executive Officers of the Registrant       44
Item 11.       Executive Compensation                                   48
Item 12.       Security Ownership of Certain Beneficial Owners
               and Management                                           53
Item 13.       Certain Relationships and Related Transactions           56
 
PART IV.

Item 14.       Exhibits, Financial Statement Schedule, and
               Reports on Form 8-K                                      58
               Signatures
</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.

     Principally as a result of the exchange transaction with Citadel Holding
Corporation ("CHC" and collectively with its consolidated subsidiaries,
"Citadel") and Reading Entertainment, Inc. ("REI" and collectively with its
consolidated subsidiaries, "Reading"), described below, consummated on October
15, 1996 (the "Stock Transactions"), the Company's principal holdings at the end
of 1997 consisted of (i) common and preferred stock representing approximately
78% of the voting power of REI, (ii) common shares representing approximately
10% of the outstanding common shares of CHC, (iii) 10% 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, (iv) cash and cash
equivalents, and (v) a 50% membership interest in a developmental restaurant
operation, Hope Street Hospitality LLC ("HSH"). The Consolidated Company holds a
33.4% interest in each of Citadel and Big 4 Ranch, Inc.

     Prior to the Stock Transactions, the Company's principal assets had been a
50% common stock interest in Stater Bros. Holdings, Inc., the holding company
for a Southern California retail grocery store chain with approximately 110
stores ("SBH" and collectively with its consolidated subsidiaries, "Stater"); a
controlling interest in Reading, a cinema exhibition and real estate development
company; and a controlling interest in Citadel Holding Corporation, a company
engaged, since a restructuring in August 1994, primarily in the holding and
management of its commercial real estate assets and the providing of real estate
consulting services to Reading.

     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 acquiring 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" and collectively with its direct and indirect
subsidiaries, "Reading Australia"), owned in equal portions by the Company and
Reading, to pursue the development of cinemas in Australia.  During the first

                                      -1-
<PAGE>
 
quarter of 1996, Reading acquired from the Company 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.

     While engaged in certain other activities, such as the sale of its residual
interests in certain real estate previously used by it in its days as an
operating railroad and certain equipment leasing matters, Reading is principally
engaged in the development, ownership and management of cinemas and the
development of cinema-based entertainment centers. Reading's current cinema
related activities include (1) the ownership, operation and expansion of a chain
of multiplex cinemas located in Puerto Rico and operated under the "CineVista"
name, (2) the ownership of an 83.3% interest in the Angelika Film Center, an art
and specialty multi-plex cinema and cafe complex located in the Soho area of New
York City, and the expansion through a wholly owned affiliate of that concept to
other strategic US urban centers, and (3) the ownership, operation and
development of a chain of multiplex cinemas and cinemas-based entertainment
retail centers in Australia.

     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.

     Stater:  The Company first acquired an equity interest in Stater in 1986.
     ------                                                                    
By 1989, this interest represented 50% of the outstanding voting equity of that
company.  In 1994, the Company received from Stater pre-tax cash proceeds of
approximately $42 million and a return of 311,404 shares of its Common Stock,
and Stater acquired the right to convert the Company's common stock interest in
SBH into a preferred stock interest and an option to purchase the Company's
entire equity interest in that company at a formula price.  In March 1996,
Stater exercised its right to exchange 693,650 shares of Stater Series B 10.5%
Voting Preferred Stock, stated value $100 per share (the "Stater Preferred
Stock"), for the Company's common stock interest in Stater.  In October 1996,
the Company contributed this Stater Preferred Stock to Reading as part of the
Stock Transaction.  In August 1997, Stater repurchased the Stater Preferred
Stock from Reading at its stated value of $69.365 million plus accumulated
dividends.

     The Company provided consulting services to Stater pursuant to a consulting
agreement (the "Stater Consulting Agreement"), under which it 

                                      -2-
<PAGE>
 
received a fee of $1.5 million per year until its termination in August 1997.

     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 was diluted, as a consequence of the issuance by Fidelity of new
equity securities, from 100% to approximately 16%.  Following that
recapitalization, the Company during 1994 increased its voting interest in CHC
from approximately 9% to approximately 25%, represented by 667,012 shares of CHC
Common Stock and 1,329,114 shares of CHC 3% Cumulative Voting Convertible
Preferred Stock (the "CHC Preferred Stock" and collectively with certain
successor securities described in greater detail below, the "Citadel Preferred
Stock"), and thereafter to approximately 48% at December 31, 1995 represented by
1,564,673 shares of CHC Common Stock and the Citadel Preferred Stock.  In April
1995, the Company acquired two year warrants to purchase, at $3.00 per share,
666,000 shares of CHC Common Stock. The Company transferred its CHC Common Stock
and Citadel Preferred Stock to Reading in 1996, and exercised its warrants in
April 1997. Citadel redeemed the Citadel Preferred Stock in the fourth quarter
of 1996. As of April 1998, the Consolidated Company holds 2,230,472 shares of
CHC Common Stock representing approximately 33.4% of the voting power of CHC.

     At December 31, 1997, Citadel's assets had a book value for purposes of
Citadel's consolidated financial statements on CHC's consolidated balance sheet
of $28.8 million, 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 $9.4
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"). As of December 31, 1997, the Asset Put Option
provides for a conversion price of $12.25 per share. The closing price of REI
stock at December 31, 1997 was $12.75 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.

                                      -3-
<PAGE>
 
     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 2,213,043 shares or 33.4%
of Big 4 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., which
is included in "Other Assets" at December 31, 1997.  The Board of Directors and
executive officers of Big 4 Ranch, Inc. are comprised of Edward L. Kane (a
director of REI), 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, which partnerships on December 31, 1997 acquired approximately
1,580 acres of agricultural property 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 26.7% of such Partnerships at December 31, 1997. 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.

     HSH:  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
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 liquidation of its investment.  HSH
is pursuing its options to sell its interests or close the store.

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

     In October 1996, two transactions were approved by shareholders of REI,
including a reorganization of Reading Company under a Delaware corporation, (the
"Reorganization") and 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 

                                      -4-
<PAGE>
 
"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, exercisable at any time after October 15, 1996 and
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 assets by $12.25 per
share. If the appraised value of the Citadel 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, at any time after April 15, 1998.  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,
after April 15, 1998, 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 component of Shareholders' Equity in the Consolidated Balance
Sheet and is separately categorized as "Redeemable Preferred Stock of Reading."

                                      -5-
<PAGE>
 
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).

     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 SBH 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). Mr. James J. Cotter, the
Company's Chairman, is the Chairman of REI, the Chairman of CHC and a director
of SBH, and provides services to the Company pursuant to a consulting
arrangement. Mr. Cotter owns, assuming exercise of his outstanding options,
26.8% of the Company's then issued equity securities and, together with other
securities which Mr. Cotter has beneficial voting ownership, represents
approximately 52.8% 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.

     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.  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 the lease of approximately 3,500 square
feet of space utilized by HSH for its store.  The HSH lease provides for basic
and percentage rent and has a term ending in 2006, but is terminable at the
option of HSH in 1999 for a cancelation fee of $45,000.  The Company does not
guarantee any of the leasehold or other obligations of any of its other
affiliates.

     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, 1997, 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 

                                      -6-
<PAGE>
 
(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, at any time after April 15, 1998. For financial statement purposes, REI
is consolidated as a majority owned subsidiary of the Company and, accordingly,
the Company's investment in REI is eliminated in the December 31, 1997 and 1996
consolidated financial statements.

READING BUSINESS

READING GENERAL

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

     Prior to the creation of the Consolidated Rail Corporation ("Conrail"),
Reading was principally in the transportation business, owning and operating the
Reading Railroad.  Following the transfer of substantially all of its rolling
stock and active rail lines to Conrail 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 25.

     In 1993, following the sale of its last major railroad real estate asset,
the Reading Terminal Headhouse, and a thorough review of the opportunities
available to it, Reading determined to refocus its activities on 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 through the
acquisition of two existing  multiplex cinemas and the construction of a third
multiplex cinema, the development of a chain of  cinemas in the United States
featuring principally art, specialty and sophisticated or upper end conventional
film product (the "US Circuit"); and begun through the acquisition of one
existing multiplex cinema and the construction of two new multiplex cinemas, the
development of a chain of cinemas in Australia featuring conventional film
product ("Reading Cinemas").  In addition, Reading has entered into various
agreements which are expected to add a material number of new screens to each of
its Puerto Rico, US and Australian operations in future periods.

                                      -7-
<PAGE>
 
     In Australia, Reading is also in the real estate development business,
focusing upon the development of entertainment centers, typically consisting of
a multiplex cinema, complementary restaurant and retail uses, and convenient
parking, principally located on land owned or controlled by Reading.

     In recognition of the significant amounts of capital required to compete in
the cinema exhibition and real estate development businesses, and in furtherance
of its plan to focus on the development of cinemas and cinema based
entertainment centers, on October 15, 1996, the reorganization and stock
transactions were consummated.

     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 and competition from well established and well financed
developers) have caused Reading to focus on leasehold sites.  However, an
ownership oriented approach is being pursued in urban centers in Australia. This
will necessarily mean that many of Reading's projects will be much more capital
intensive, have longer lead times and entail greater development risks than
would the development of cinemas in leased facilities in established malls. To
date, Reading Australia has acquired, or has contracts giving it the right to
acquire, 4 potential entertainment center  sites, consisting of over 1 million
square feet of land area.   Reading Australia has also acquired a 50% joint
venture interest in an existing 150,000 square foot shopping center in the
Melbourne area of Victoria, which it is studying as a candidate for
redevelopment as an entertainment center. Accordingly, Reading Australia
business plan involves a material amount of development risk. Due principally to
the scope and extent of its development activities in Australia, Reading views
itself as being involved in essentially two lines of business, the development
and operation of cinemas in Puerto Rico, the United States and Australia and the
development and operation of entertainment centers in Australia.

     Most of these entertainment center projects are in the early stage of
development.  While one of the entertainment center projects involves the
redirection of an existing and cash flowing shopping center, none of these
entertainment projects have reached the construction phase.  Three of the
Company's existing entertainment centers projects, representing approximately
880,000 square feet of land area, have completed or substantially completed the
zoning and entitlement process.  The zoning on the fourth is currently subject
to litigation.  No approvals have been sought with respect to the redevelopment
site. It is not anticipated that construction of any entertainment center
projects will commence in Australia until the later half of 1998.  Further,
Reading Australia continues to encounter significant opposition to this project
from established Australian cinema operators and shopping center landlords.

     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 Australia also owns a 50 acre property assemblage located in the greater
Melbourne area. Originally
                                      -8-
<PAGE>
 
acquired in 1996 as a potential entertainment site, the property is currently
held for non-cinema development. Reading Australia is reviewing its alternatives
with respect to the site.

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

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

     Reading is primarily engaged in the real estate development business in
Australia (focusing on the development in Australia 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 and Australia, and featuring principally art, specialty and more
sophisticated upper-end film product in the United States).  While exceptions
may be made 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
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 effective July 1, 1994, for a cash purchase price of $22.7 million
(inclusive of acquisition expenses in the amount of $323,000), CineVista at the
date of its acquisition by Reading operated motion picture exhibition facilities
consisting of 36 screens in six leased locations in Puerto Rico.  Since that
date, CineVista has added fourteen screens in two new complexes.  In addition,
an eight screen complex is under development to replace an out-of-date six-
screen facility (currently expected to open in June 1998).  Reading has entered
into a lease to develop and operate twelve screens in a regional shopping center
(currently anticipated to open in 1999) and is negotiating the expansion, from
an original ten to eighteen screens, of a complex located in the largest
shopping center in Puerto Rico.  Reading is also negotiating with respect to
additional multiplex sites on the island.  No assurances can be given that such
negotiations will result in operating facilities.

     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 development are being
constructed either in existing regional malls with proven foot traffic and self
contained parking or in new centers being developed by experienced and well
financed developers.  All of CineVista's theaters are modern multi-screen
facilities.

     The CineVista chain is managed by the Reading, principally through
management and administrative staff located in San Juan, Puerto Rico.

                                      -9-
<PAGE>
 
     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.  In recent years, there have been two major views concerning the
future relationship with the United States Government; one favoring statehood
and the other favoring continuation of commonwealth status.  In 1993, Puerto
Rico voters were asked in a plebiscite to express their preference for statehood
(48.4%), commonwealth status (46.2%) or independence (4.4%).  The US House of
Representatives has passed and there is before the Senate a bill which, if
passed by the Senate and signed by the President, would permit Puerto Rico to
vote to i) continue its status as a commonwealth, ii) convert to statehood or
iii) elect independence.  Reading cannot now determine what effect, if any, any
vote which would change the status of Puerto Rico might have upon its investment
in CineVista.  The United States mainland is Puerto Rico's largest trading
partner.

     During the last four years, Puerto Rico has undergone significant retail
shopping center development.  During this period, the number of multiplex
theaters has increased substantially.  The principal competitor, Caribbean
Cinemas, a privately-owned company, has opened three complexes representing
approximately 33 screens in the San Juan metropolitan area since the beginning
of 1996.  All of these complexes were under development at the time the Company
purchased its interest in CineVista.  These new screens have adversely affected
Reading's current operations, reducing in the near term the market share from
approximately 42% in 1995 to approximately 26% percent in 1997.  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 by
the year 2000.  It is unlikely that Reading will develop more than an additional
20 to 30 screens in Puerto Rico over the next three years (excluding the 30
screens currently under development).

     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.

                                      -10-
<PAGE>
 
     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-by-film, theater-by-theater
basis.  Generally, film payment terms provide for payment to film distributors
under various formulae 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 1997, films licensed from CineVista's four largest film suppliers
accounted for approximately 65% of CineVista's box office revenues.

     Competition:  Reading believes there are approximately 29 first-run movie
     ------------                                                             
theaters in daily operation with approximately 179 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 1997,
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.  Competitors of
CineVista are expected to continue to open theaters competitive with those of
CineVista.  Since the beginning of 1996, the Company's principal competitor has
opened three complexes in the San Juan metropolitan area, adding 33 screens, all
of which are competitive with the CineVista theaters, and which have attracted
business that would otherwise have gone to theaters owned by CineVista.  This
competitor has at least 2 additional competitive theaters under development,
which are expected to add 30 screens to the San Juan market.

     In Puerto Rico, Reading'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 

                                      -11-
<PAGE>
 
stadium design structure a consistent element of its cinemas. CineVista
principal competitor has historically constructed conventional auditoriums, with
fewer amenities.

     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.

     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.  The
Company believes its relations with its employees in Puerto Rico to be good.

Domestic Cinemas (Angelika Film Centers)
----------------------------------------

     On August 27, 1996, Reading and Sutton Hill Associates ("Sutton Hill"), a
New York cinema exhibitor, acquired, for approximately $12,570,000 (inclusive of
$529,000 in acquisition costs), the Angelika Film Center (the "NY Angelika"), a
multiplex theater located in the Soho district of New York City and which
Reading believes to be the premier specialty theater in the United States.  The
Company and Sutton Hill formed a limited liability company, Angelika Film
Centers LLC ("AFC"), to hold their interest in the NY Angelika.

     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 Hills 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 borrowings by Reading.  In addition,
Sutton Hill has agreed that Reading will be entitled to receive up to 100% of
the proceeds of borrowings by AFC, up to the amount of Reading's initial capital
contribution of AFC.

     Reading is currently working to develop additional Angelika Film Centers in
major urban areas located throughout the United States.  It is not currently
anticipated that City Cinemas would participate in centers located outside of
New York City.  In accordance with Reading's business plan, in February 1997,
Reading entered into an agreement for the construction and lease of property and
in December 1997 opened a 1,480-seat, eight-screen, 31,700 square foot art and
specialty cinema and cafe facility at the Bayou Place entertainment center in
Houston, Texas.  The complex sits over a 3,500-car parking garage and is located
in the middle of Houston's theater district.  In December 1997, the Company
acquired from United Artists an existing 1,066 seat, five screen, 18,100 square
foot facility located in Minneapolis, at which Reading intends to exhibit a
combination of conventional and art and specialty film under the Reading Cinemas
name.  Reading has signed a lease with respect to the development of an
additional 12 screen Reading Cinema 

                                      -12-
<PAGE>
 
complex, has leases under negotiation with respect to an additional 25 screens
in three new Angelika complexes, has projects representing an additional 10
screens in two additional complexes under various letters of intent, and is
currently 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.

     AFC is managed by City Cinemas Corporation ("City Cinemas"), a cinema
management company owned by Sutton Hill, pursuant to the terms of a management
agreement (the "NY Management Agreement").  The NY Management Agreement provides
for City Cinemas to manage the NY Angelika for a minimum annual fee of $125,000
plus an incentive fee equal to 50% of annual cash flow (as defined in the NY
Management Agreement) over specified levels, provided, however, that the
maximum annual fee (minimum fee plus incentive fee) may not exceed 5% of the NY
Angelika's annual revenues.  In addition, the Company has out-sourced certain
theater level management services with respect to the remainder of its domestic
cinemas by entering into a second management agreement with City Cinemas.  Under
the terms of the second agreement, City Cinemas has agreed to provide cinema
management, human resources and accounting services for Reading's remaining
domestic cinemas for a fee equal to 2.5% of the gross revenues generated by such
theaters.  This arrangement has allowed the Company to defer the cost of
indemnifying and retaining full time employees to perform such functions, until
such time as it has acquired a critical mass of screens domestically.

     While major chains specializing in conventional wide release film product
also may exhibit art and specialty product from time to time, these chains have
typically limited themselves to the exhibition of such crossover art films as
The English Patient, Pulp Fiction, Emma, Shine and Chasing Amy.  This may change
as more megaplex complexes with sixteen or more screens are constructed,
particularly if the number of films released by the distributors of conventional
wide release film product decreases or if art and specialty film develops in
popularity to the point where it enjoys a wider release than is currently
typically the case with such films.  Current levels of film production continue
to provide megaplex exhibitors with sufficient film products to make such
exhibitors inconsistent sources of screens for the distributors of art and
specialty film.  Art cinema complexes, which typically do not exhibit
conventional wide release films, are accordingly currently a more consistent
source of screens to the distributors of art and art specialty film.

     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
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 

                                      -13-
<PAGE>
 
exhibiting bigger budget wide release films. At the present time, the only
national chain specializing in art and specialty film is Landmark Theaters which
operates approximately 140 screens in approximately 50 locations, principally in
California and Washington. Many larger cities have smaller chains which operate
in one to five locations. In addition, General Cinemas has announced a joint
venture with the Sundance Institute to develop cinemas specializing in the
exhibition of independent film. No specific projects have, however, been
opened by this joint venture.

     Reading believes that there is currently a window of opportunity to
construct, in a number of under-serviced urban markets, a nationwide chain of
state-of-the-art multiplex cinemas specializing in art and specialty and in more
sophisticated higher end film product.  Reading further believes that the
distributors of such films may favor distribution of art and specialty film to
such a specialized chain as opposed to distribution to conventional megaplex
operators, since megaplex operators will typically prefer to exhibit mainstream
bigger budget film rather than art product and, accordingly, may not be as
consistent and as dependable a source of screens as exhibitors who show only art
and specialty film product.  Reading also believes that patrons of art and
specialty film may prefer a cinema experience that is different from that
offered by a megaplex complex and that the familiarity and goodwill associated
with the Angelika name and the strength of Reading's balance sheet may give the
Company a competitive advantage over other independent exhibitors of art and
specialty films.

     Reading also believes that it may be better positioned than its principal
competitors in the market for art and specialty film due to its financial
condition and strategic presence in the Manhattan market.  However, 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 domestic operations and the geographical dispersion
of its US 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 from sites from much larger and
better known competitors.

     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 and $525,000,000 in 1992 through 1997,
respectively, (based upon management estimates).

     Employees: City Cinemas employs approximately fifty employees pursuant to
     ---------                                                                
the management agreements with Reading in the operations of the Reading's U.S.
cinemas, three of whom are employed under the terms of a collective bargaining
agreement which expires in October 1998.  Reading has approximately fifteen
executive and administrative staff which, while located in the United 

                                      -14-
<PAGE>
 
States, provide service with respect to all of Reading's operations.

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

     Reading commenced activities in Australia in mid-1995, and currently
conducts business in Australia through its wholly-owned subsidiary, Reading
Australia Pty. Limited ("RAPL" 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.  Presently, Reading Australia operates
sixteen screens at two leased and one owned location.  Reading Australia has
signed agreements to lease,  leases or management agreements for an additional
forty-three screens in four locations, three of which presently have all
necessary land use approvals, and is currently in discussions with respect to a
number of additional potential sites.

     Reading Australia is 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 Australia.  At the present time, Reading
Australia owns two locations (representing over 300,000 square foot of
developable land), and has contractual rights to acquire two other locations
(representing over 750,000 square foot of developable land) for entertainment
center purposes.  None of these properties currently produce any cash flow.
Reading Australia also owns a 50% joint venture interest in an existing 150,000
square foot shopping center located on leased land in the Melbourne area of
Victoria, which it is currently evaluating as a potential site for redevelopment
as an entertainment center.

     The five potential entertainment center sites described above (calculated
inclusive of the one existing shopping center) include the potential for the
development of in the range of an additional 55 screens.  Land use permits have
been granted or approval with respect to the two owned entertainment center
sites, one of which grant is currently being challenged by the owner of a
competing shopping center, and the two entertainment center sites under
contract.   No applications have yet been made with respect to the shopping
center site, where cinema use should be "as of right" under existing Australian
land use policies.  However, historically, the Company's attempts to get
necessary land use approvals have been strenuously opposed by competing cinema
operators and shopping center landlords, and no assurances can be given that
needed land use approvals will be obtained, or if obtained, that they will be
upheld on appeal.

                                      -15-
<PAGE>
 
     Summarized below are the entertainment center projects currently under
development by Reading Australia:

<TABLE>
<CAPTION>
                                                                                           Estimated       
                                                     Approximate     Approximate          Development     
                                   Land Size            Land          Cinema Size        Size in Square   
                                   in Square           Purchase        in Square          Footage of 
         Site                       Footage             Price            Feet            Improvements 
         ----                       -------             -----            ----            ------------ 
<S>                                 <C>              <C>                 <C>                <C>
Auburn, NSW(5)                      522,720          $6,800,000          60,000             210,000
Frankston, Victoria                 227,750                 N/A(1)       64,000              94,000
Moonee Ponds, Victoria(2)           129,949          $4,200,000          54,000             103,000
Newmarket, Queensland(3)            172,160          $4,500,000          49,000             161,000
Whitehorse, Victoria(3)(4)          171,365          $1,600,000          60,000             230,000
</TABLE>
________________


     (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)  Property acquired in March 1998.
     (3)  Property acquired prior to December 31, 1997.
     (4)  The Company holds a 50% interest in this shopping center. Purchase
          price does not include $1,400,000 loan to the Company's joint venture
          partner in this development.  The center currently consists of
          approximately 150,000 square feet of net leasable area which amount is
          not included in the capitalized Estimated Developments Size column,
          above.
     (5)  Property not yet acquired.

     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 approximately $7.3 million for development
of a mega-plex cinema.  However, such use is currently prohibited as a
consequence of an adverse land use determination, which negated certain permits
for the constructions of cinemas on the site.  These permits were in place at
the time the land was acquired.  Due to the size of the accumulation and its
location at the demographic center of the greater Melbourne metropolitan area,
Reading 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.

     One of the currently operating cinemas, located in Townsville, Queensland,
is owned by Australia Country Cinemas Pty, Limited ("ACC"), a company owned 75%
by a subsidiary of Reading Australia and 25% by a company owned by a consultant
to the Company and an Australian national 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.

                                      -16-
<PAGE>
 
     At the present time, Reading's activities in Australia are principally in
the nature of speculative real estate development. While, in each case, Reading
Australia would be its own anchor tenant, the success of the real estate aspects
of Reading Australia's business will depend upon a number of variables and are
subject to a number of risks, some of which are outside of Reading Australia'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 market for entertainment center space;

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

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

     In light of the opposition encountered to date, no assurances can be given
that Reading will be able to accomplish its business objectives in Australia.
Furthermore, even if those objectives are eventually achieved, the realization
of these objectives will likely require a longer period of time and a greater
level of developmental costs than originally anticipated.  While Reading remains
committed to its plans with respect to Australia, no assurances can be given
that Reading will be able to obtain all of the governmental approvals needed to
develop its entertainment center sites or that such sites will attract its
ancillary tenancies required for a profitable project.  Reading does not
anticipate that it will have any of its entertainment centers locations open
before late 1999, at the earliest.

     Reading Australia's cinemas are managed by employees of the company,
however, at the present time, Reading Australia does make use of an independent
booking firm for the booking of film product.  This will likely continue until
Reading has sufficient screens operating in Australia to justify the cost of a
full time film buyer.

     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 

                                      -17-
<PAGE>
 
(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.

     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 licenses films from all film distributors as appropriate to
each location.  Generally, film payment terms are based upon various formulas
which provide for payments upon a specified percentage of gross box office
receipts.

     Competition: The film exhibition business in Australia is concentrated and,
     -----------                                                                
to a certain extent, vertically integrated.  The principal exhibitors in
Australia include Village Roadshow Limited ("Village") with approximately 156

                                      -18-
<PAGE>
 
screens, Greater Union and affiliates with approximately 308 screens and Hoyts
Cinemas ("Hoyts") with approximately 166 screens.  Independents as a group
operate approximately 560 screens.

     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 140 new multiplex screens.

     These companies have substantial capital resources.  Village had a publicly
reported consolidated net worth of approximately A$830 million at June 30, 1997.
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$288 million at June 30, 1997.  Hoyts Cinemas had a net
worth of approximately A$237 million at March 1997.

     The industry is somewhat vertically integrated in that Village also serves
as a distributor of film in Australia for Warner Bros. and
Disney/Touchstone/Buena Vista.  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.  The practical impact of this vertical integration is mitigated
to some extent, however, by the Australian legal requirement that all films be
made reasonably available to all exhibitors.

     In the view of Reading, the principal competitive restraint on the
development of its business in Australia is the availability of sites.  The
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 the Company's 50-acre site at
Burwood, the Minister for Planning and Local Government preempted local zoning
authorities to prohibit Reading Australia'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 would expect to record greater revenues and earnings during the first
half of the calendar year.

     Employees: Reading Australia has fifteen full time executive and
     ---------                                                       
administrative employees, and approximately 80 theater employees.

                                      -19-
<PAGE>
 
FINANCIAL INFORMATION RELATING TO INDUSTRY SEGMENTS AND FOREIGN AND DOMESTIC
----------------------------------------------------------------------------
OPERATIONS
----------

     See Footnote 19 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, has a
term ending in 2006, but is terminable at the option of HSH in 1999 for a
cancelation fee of $45,000.  The Company does not guarantee any of the leasehold
or other obligations of any of its affiliates.

READING PROPERTIES

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

     REI leases approximately 6,600 square feet of office space in center city
Philadelphia.  A subsidiary of Reading shares office space in New York City with
City Cinemas.  This space approximates 2,600 square feet, and the cost is shared
equally by City Cinemas and REI.

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 

                                      -20-
<PAGE>
 
space on the ground level of the Garage pursuant to a management agreement and
provides certain other management services to the partnership.

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

     When Reading's railroad assets were conveyed to Conrail, Reading 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 Reading.  The
parcels consist primarily of vacant land and buildings, some of which are
leased.


Reading Australia Properties
----------------------------

     Reading Australia maintains leased offices in Melbourne and Sydney,
Australia.  The total leased space is approximately 9,500 square feet of which
3,500 square feet is occupied pursuant to a short term lease and 6,200 square
feet which is occupied under a lease with a minimum of four years with renewal
options.  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 Australia believes that the site has value
as an assemblage for other uses, even if it is unable to develop the site as a
theater.

Entertainment Properties
------------------------

     The Company currently leases approximately 262,175 square feet of completed
theater space in the United States, Puerto Rico and Australia, as follows:

<TABLE>
<CAPTION>
                                            Aggregate             Approximate Range of 
                                             Square                 Terms (including 
                                             Footage                    renewals)
                                             -------                    --------
<S>                                        <C>                       <C>
             United States                    72,650                    10-40 years 
             Puerto Rico                     135,490                    15-40 years
             Australia                        54,035                    29-40 years 
</TABLE>

     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 average terms (including renewals) of forty years
and fifty years including renewal options and average base rents totaling
$760,000.  Reading Australia has also entered into an agreement to lease a site
on which it intends to build a 48,000 square foot cinema.  The lease provides
for a one-time payment of approximately $850,000 for its two hundred year term.

     The Company currently owns 300,000 square fee comprised of two sites and
has contracted to purchase or otherwise acquire 750,000 square feet of land

                                      -21-
<PAGE>
 
comprised of two sites for the construction of cinemas and entertainment
complexes in Australia.

     Reading Australia also owns a 50% joint venture interest in a shopping
center located on leased land in the Melbourne area of Victoria, and is
currently studying the possibility of redeveloping such facility 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

Environmental
-------------

  Reading Company has been advised by the Environmental Protection Agency
("EPA") that it is a  potentially responsible party ("PRP") under environmental
laws including Federal Superfund legislation ("Superfund") for a site located in
Douglassville, Pennsylvania.  In 1995, the federal district court judge who
presided over Reading Company's bankruptcy reorganization ruled that all
liability asserted against Reading Company relating to the site was discharged
pursuant to the consummation order issued in conjunction with Reading Company's
bankruptcy on December 31, 1980. The decision was upheld on appeal.

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

  On December 12, 1997, the Redevelopment Authority filed an action in the
Philadelphia Court of Common Pleas which relates to the 1993 sale of the
Headhouse property by Reading to the Authority.  Plaintiff has alleged discovery
of various contaminants -- asbestos, PCB's lead paint -- and 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 intends to vigorously defend.  It is Reading's opinion that the Authority's
claim in 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.  (See Note 13 to
the Consolidated Statements contained elsewhere herein).  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) as defendants.  The Complaint alleged, among other things,

                                      -22-
<PAGE>
 
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.  The Complaint sought injunctive relief to
prevent the consummation of the Stock Transactions and rescission of the Stock
Transactions if they were consummated and divestiture by the defendants of the
assets or shares of Reading 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,
Reading 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.

  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 April 24, 1997, plaintiff filed a purported derivative action against the
same defendants.  This action included claims substantially similar to those
asserted in the class action and also alleged waste of tax benefits relating to
the Company's historic railroad operating losses.  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.  Reading and Craig intend to pursue recovery of counsel fees
expended in the defense of the case.  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.

  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 action which management believes could have a material adverse
effect on its financial position.

                                      -23-
<PAGE>
 
ITEM 4.  SUBMISSION OF MATTERS OF A VOTE OF SECURITY HOLDINGS

     At the Company's 1997 Annual Meeting of Shareholders held on December 15,
1997, shareholders elected the Company's directors.  The results of the votes
were as follows:

<TABLE>
<CAPTION>
     ELECTION OF DIRECTORS                                      FOR                               WITHHELD   
     ---------------------                                      ---                               --------   
<S>                                                        <C>                                     <C>         
     James J. Cotter                                         107,855,430                            95,430     
     S. Craig Tompkins                                       107,885,520                            65,250     
     Margaret Cotter                                         107,838,720                           112,050     
     William D. Gould                                        107,894,520                            56,250     
     Gerald P. Laheney                                       107,897,520                            53,250     
     Ralph B. Perry III                                      107,897,520                            53,250      
</TABLE>

                                      -24-
<PAGE>
 
                                    PART II
                                        
ITEM 5.  MARKET FOR THE REGISTRANT'S COMMON EQUITY 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:
<TABLE> 
<CAPTION> 
                                  Class A Common
                                 Preference Stock          Common Stock
 
                                  High       Low           High       Low
--------------------------------------------------------------------------
<S>                               <C>        <C>           <C>        <C>
                                                              
Year Ended December 31, 1997                                  
  Quarter Ended:                                              
     December 31, 1997              19 1/4    17 1/2         20 3/8    18 1/2
     September 30, 1997             17 1/2    14 7/8         18 5/8    15
     June 30, 1997                  17 1/4    15 3/4         18        15 3/4
     March 31, 1997                 16 1/8    14 1/4         16 5/8    14 5/8
                                                                         
                                                                         
Year Ended December 31, 1996                                             
  Quarter Ended:                                                         
     December 31, 1996              14 1/4    13 1/2         14 3/4    13 3/4
     September 30, 1996             14 3/8    11 1/4         16        12 1/8
     June 30, 1996                  11 1/2    10 1/4         12 3/4    10 3/8
     March 31, 1996                 11 1/2     9             12         9 3/4
</TABLE>

     The approximate number of holders of record of the Company's Common Stock
and Class A Common Preference Stock as of April 9, 1998 was 820 and 11,
respectively.

     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 table above has not 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. Immediately following
such distribution on February 5, 1998, the Company had 3,762,912 shares of
Common Stock and 7,006,912 shares of Class A Common Preference Stock
outstanding.

     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, 1997
and 1996.  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.

                                      -25-
<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                    YEAR ENDED
                                    DECEMBER 31,          DEC. 31,                SEPTEMBER 30,
                             --------------------------              ---------------------------------------
                                 1997         1996          1995         1995         1994          1993
                                -------      -------      --------      ------      --------      --------
<S>                             <C>          <C>          <C>           <C>         <C>           <C>
                                              (IN THOUSANDS, EXCEPT PER SHARE INFORMATION)
---------------------------------------------------------------------------------------------------------
Revenues                        $32,466      $27,865        $2,288      $6,182      $11,593       $ 2,337
Income (loss) applicable
 to common shareholders
 before extraordinary item        2,851       42,552           850       3,458        1,030        (5,915)

Extraordinary items                  --           --            --          --       (2,408)           --
Net income (loss)
 applicable to common
 shareholders                   $ 2,851      $42,552        $  850      $3,458      $(1,378)      $(5,915)
 
=========================================================================================================
Per share information
Basic earnings (loss) per
 share before
 extraordinary items            $  0.26      $  3.78        $ 0.07      $ 0.29      $  0.08       $ (0.46)
 
Extraordinary items                  --           --            --          --        (0.19)           --

Basic earnings (loss) per
 share                          $  0.26      $  3.78        $ 0.07      $ 0.29      $ (0.11)      $ (0.46)
 
Dilutive earnings (loss)
 per share                      $  0.26      $  3.76        $ 0.07      $ 0.29      $ (0.11)      $ (0.46)
 
=========================================================================================================
</TABLE>


<TABLE>
<CAPTION>
                                      AS OF DECEMBER 31,         AS OF YEAR ENDED SEPTEMBER 30,
                                      1997          1996         1995         1994         1993
                                    --------      --------     --------     --------     --------
<S>                                 <C>           <C>           <C>          <C>          <C>
Total Assets                        $167,125      $165,968      $84,669      $80,027      $84,181
Long term debt                         1,609         1,016           --           --       13,400
Redeemable preferred stock             7,000         7,000           --           --           --
Stockholders' equity                $ 98,239      $ 99,825      $63,891      $61,085      $65,268
=================================================================================================
</TABLE>

     Fiscal 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 1997 and 1996 on a consolidated basis as compared
to the equity method of accounting in previous periods.

                                      -26-
<PAGE>
 
     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 6 to
Consolidated Financial Statements included elsewhere herein).

                                      -27-
<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.

     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 Reading for the years ended December 31, 1997 and
1996.  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.

     At December 31, 1997, the Company owned REI Common Stock and REI Series B
Preferred Stock representing approximately 78% of the voting power of that
company, and 666,000 shares of Citadel Common Stock, which, together with the
1,564,473 shares of Citadel Common Stock held by Reading represented
approximately 33.4% of the outstanding Common Stock of Citadel.  On this same
date, the Consolidated Company has elected to focus its theater development and
related real estate development activities in two principal areas, the
development and operation of state of the art multiplex cinemas in Puerto Rico,
the United States and Australia, and the development and operation in Australia
of entertainment centers typically consisting of a multiplex cinema,
complementary restaurant and retail uses, and self contained parking.

RESULTS OF OPERATIONS

     In 1996, the Company changed its fiscal year end from September 30 to
December 31, and accordingly, the Consolidated Financial Statements report the
result of operations, cash flows and the statement of stockholders' equity for
the years ended December 31, 1997 and 1996, the three months ended December 31,
1995 and the year ended September 30, 1995.

     In August 1997, Stater redeemed the Stater Preferred Stock held by Reading.
Prior to March 1996, the Company accounted for its interests in Stater, Reading
and Citadel on the equity method. During 1996, certain transactions were
effected which resulted in the transfer of the Company's entire interest in
Stater and substantially all of its interest in Citadel to Reading and the
consolidation, for accounting purposes, of Craig and Reading.

                                     -28-
<PAGE>
 
     Due to the change in fiscal year end coupled with the changes in the
Company's accounting for its ownership interest in Reading and Stater, the
presentation of the Consolidated Company's financial position, results of
operations and cash flows for the years ended December 31, 1997 and 1996 are not
comparative to the presentation of its financial position, results of operations
and cash flows for the previous periods.

     In addition, due to the nature of the 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 Company's investment in Stater,
the effect of litigation awards and settlements, the acquisition of the Angelika
Film Center (the "NY Angelika") in the third quarter of 1996, the Stock
Transaction described below in the fourth quarter of 1996, and the results of
operations of five new cinemas opened during 1997, historical revenues and
earnings have varied significantly. The Company's entertainment center
developments are 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. Management believes that
historical financial results are not indicative of future operating results.

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, the three months
ended December 31, 1995 and the year ended September 30, 1995:

<TABLE>
<CAPTION>
                                             Years                   Three Months             Year
                                             Ended                      Ended                Ended
                                         December 31,                December 31,        September 30,
                                     1997             1996               1995                 1995
                                     ----             ----               ----                 ----
<S>                                <C>              <C>                <C>                  <C>
Dividend income                    $4,330           $ 5,978                --                   --
Service fee income                    972             1,500            $  375               $1,500
Gain on conversion/                                                          
 repurchase of investment                                                    
 in Stater                          2,002            58,978                --                   --
Equity in earnings in                                                        
 Stater                                --             1,608             1,881                3,693
                                   ------           -------            ------               ------
                                   $7,304           $68,064            $2,256               $5,193
                                   ======           =======            ======               ======
</TABLE>
     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.  In March 1994, the Company received, among other things, a $14.65
million option payment from SBH which provided Stater with the option to acquire
all, but not less than all, of the Company's interest in Stater.  The option had
an initial term of two years (ending March 8, 1996), but could be extended for
ten additional years if Stater converted the Company's common stock interest in
SBH to preferred stock prior to March 8, 1996.  Also, as part of the 1994
transaction, Craig entered into a consulting agreement with Stater 

                                      -29-
<PAGE>
 
pursuant to which Craig, among other things, agreed to render consulting
services for a five-year period for $1.5 million annually.

     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 million 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.  Prior to the preferred stock
conversion, the carrying value of the Company's 50% common stock interest, net
of the $14.65 million option proceeds received in 1994, amounted to
approximately $9 million.  In Fiscal 1996, the Company recorded approximately
$58.978 million of the difference between $67.978 million (98% of the stated
value of the Stater Preferred Stock) and the Company's net carrying value of its
previous common stock investment ($9 million) at the time of the conversion 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.  The SBH Preferred Stock was included in the accompanying
Consolidated Balance Sheet as December 31, 1996, as "Investment in Stater
Preferred Stock" at a value of $67,978,000 or 98% of stated value.  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
$69,365,000 stated value of the SBH Preferred Stock and the 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.

Theater Revenue and Theater Costs
---------------------------------

     Fiscal 1997 and 1996 include the results of Reading on a consolidated basis
rather than the equity method of accounting and, accordingly, the Statements of
Operations do not reflect theater revenue and theater costs for periods prior to
Fiscal 1996.  See Note 2 to the Consolidated Financial Statements for a
comparison of Reading's operating results for the periods prior to January 1,
1996.

     The following summarizes Theater Revenues and Theater Costs (exclusive of
depreciation and amortization) of Reading for the financial reporting periods
included herein:

<TABLE>
<CAPTION>
                                                                   Theater                             Theater
                                                                   Revenues                             Costs
                                                                   --------                             -----
                                                                                      (000's)
<S>                                                                <C>                                <C>
Year ended December 31, 1997                                        $26,984                             $21,377
Year ended December 31, 1996                                         18,236                              14,452
Three months ended December 31, 1995                                  3,205                               2,642
Year ended September 30, 1995                                        14,878                              11,451
</TABLE>

                                      -30-
<PAGE>
 
     Theater Revenue is comprised of Admissions, Concessions and Advertising and
other revenues from cinema operations in the U.S., Puerto Rico (CineVista) and
Australia.

     CineVista's Theater Revenues decreased from $15,523,000 in 1996 to
$15,186,000 in 1997 due primarily to the competitive effect of the opening 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
CineVista 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.  CineVista's
Theater Revenues increased approximately 4% in 1996 as compared to the
corresponding twelve month period in 1995 as a result of the addition of a new
eight screen theater which commenced operations in late 1995, offset somewhat by
the effect of competitive theater operations in the San Juan metropolitan
market.

     Theater Revenues in 1997 include revenues of $7,978,000 from the Domestic
Cinemas (the NY Angelika, a new eight screen cinema opened in December 1997 and
an existing five screen cinema acquired in December 1997).  In 1996, the
Company's only Domestic Cinema contributed $2,713,000 in Theater Revenues
(inclusive of minority interest) from its date of acquisition through year end
1996.  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 the Company's acquisition of the theater).
Theater revenues from the Company's two new domestic cinemas opened in December
1997 were not material in 1997.

     Reading Australia opened its first cinema in Australia, a newly constructed
six screen cinema at the end of December 1996 and purchased an operating four
screen cinema for approximately $1,600,000 in the third quarter of 1997.  A
third six screen cinema opened in November 1997.  Theater Revenues from the
three cinemas totaled $3,820,000 in 1997.  Reading Australia recorded no Theater
Revenues in 1996 or 1995.

     In 1998, the Company will receive the benefit of a full year of operation
of the five cinemas (representing 29 screens) opened during 1997.

     Theater expenses reflect the direct theater costs and theater concession
costs inclusive of minority interests.  Fiscal 1997 costs amounting to
$21,377,000 increased approximately $6,925,000 from $14,452,000 in Fiscal 1996
primarily due to the operating expenses associated with a full year of
operations of the NY Angelika and the commencement of the Australia theaters
which amounts totaled $8,546,000 in Fiscal 1997 and $2,148,000 in Fiscal 1996.

   CineVista theaters operating expenses increased approximately $286,000 to
$12,831,000 in 1997 primarily as a result of the additional expenses of
operating a new location subsequent to March 1997.

                                      -31-
<PAGE>
 
Real Estate Revenue
-------------------

     Real Estate revenues from Reading include rental income and the net proceed
of sales of Reading's domestic real estate.  Reading Australia did not have any
revenues related to its real estate activities.  Real estate revenues totaled
$180,000 and $543,000 in Fiscal 1997 and 1996, respectively.  Fiscal 1996 real
estate revenue included $289,000 from rentals on certain leased equipment (See
Note 7 to the Consolidated Financial Statements included elsewhere herein).  It
is not anticipated that any additional revenue will be recognized from the
leasing transaction until the residual value of the lease equipment, if any, is
realized in 2002.  In addition to its entertainment properties and
administrative offices, Reading has approximately 25 parcels and rights-of-way
remaining, 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.

Equity in earnings of affiliates
--------------------------------

     As described above, in the first half of 1996, the Company's common stock
interests in SBH was exchanged for preferred stock and the Company increased its
ownership in REI to greater than 50%.  As a result of increasing its ownership
in REI to greater than 50%, the Company began reporting its ownership in Reading
on a consolidated basis as compared to the prior periods presentation under the
equity method of accounting in the Consolidated Statements of Operations as
"Equity earnings of affiliates".  Upon receipt by the Company of the Stater
Preferred Stock in exchange for its common stock interest, the Company
discontinued the use of the equity method of accounting for its investment in
Stater.   Equity in earnings of affiliates for Fiscal 1996, the three months
ended December 31, 1995 and the year ended September 30, 1995 reflects the
Company's share of net earnings of Stater and Reading prior to the
discontinuation of the equity method of accounting for those investments in 1996
as follows:

<TABLE>
<CAPTION>
 
              Year Ended    Three Months    Year Ended
             December 31,   December 31,   September 30,
                 1996           1995           1995
             ------------   ------------   -------------
                           (in thousands)
             -------------------------------------------
<S>          <C>            <C>            <C>
 
Reading         $   --         $   32          $  989
Stater           1,608          1,881           3,693
                ------         ------          ------
                $1,608         $1,913          $4,682
                ======         ======          ======
</TABLE>

          For the twelve month period ended September 30, 1995, Reading reported
net income of approximately $2,097,000 (the Company's share amounting to
approximately $989,000).  Reading's income for the twelve month period ended
September 30, 1995 includes approximately $1,890,000 from the settlement of
various litigation claims.

                                      -32-
<PAGE>
 
Earnings (losses) from investment in Citadel
--------------------------------------------

   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, 1997 and 1996, the three months
ended December 31, 1995 and the year ended September 30, 1995.

<TABLE>
<CAPTION>
                                             Years                   Three Months             Year
                                             Ended                      Ended                Ended
                                          December 31,               December 31,        September 30,
                                      1997          1996                 1995                 1995
                                      ----          ----                 ----                 ----
                                                              (in thousands)
                                                              --------------
<S>                              <C>              <C>             <C>                  <C> 
Equity earnings (losses)               $392        $1,526                 $20                $(474)
Preferred stock dividends                --           154                  40                  140
Preferred stock
 redemption premium                      --           716                  --                   --
                                       ----        ------                 ---                -----
                                       $392        $2,396                 $60                $(334)
                                       ====        ======                 ===                =====
</TABLE>

  Until November 1994, Craig held approximately a 9% interest in Citadel, which
for accounting purposes was reported at cost as adjusted for market declines
considered to be other than temporary.  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.  The CHC Preferred Stock was issued to Craig in November 1994 in
satisfaction of $5,250,000 of outstanding indebtedness of Citadel to Craig.  As
described in Note 2, the CHC Preferred Stock was transferred to REI in the Stock
Transaction and the CHC Preferred Stock was exchanged by REI for 1,329,114
shares of Series B Cumulative Voting Convertible Preferred Stock (the "Citadel
Series B Preferred Stock"). In December 1996, Reading elected to exercise its
rights to convert the Citadel Series B Preferred Stock into CHC Common Stock,
whereupon, Citadel exercised its right to redeem the Citadel Series B Preferred
Stock.  The Consolidated Company received the stated value of $5,250,000, 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 (losses) from investment in Citadel" in
the Consolidated Statement of Operations for the year ended December 31, 1996.

     Citadel reported net income of approximately $1,530,000 and $6,426,000 in
Fiscal 1997 and 1996, respectively (the Consolidated Company's share after
consideration of preferred dividends paid by Reading to Citadel amounting to
approximately $392,000 and $1,526,000, respectively).  Citadel's net earnings
for 1997 included approximately $820,000 received from the Consolidated Company,
as dividends, interest income and consulting income as compared to $264,000 and
$120,000 in Fiscal 1996 and 1995, respectively. 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 million 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").

                                      -33-
<PAGE>
 
     CHC reported a net loss for the three months ended December 31, 1994 of
$8,898,000, including a writedown of its remaining investment in Fidelity of
$7,081,000 and net earnings of $1,282,000 for its nine months ended September
30, 1994.  The Company has included its share of such losses amounting to a loss
of $474,000 for the twelve months ended September 30, 1995, offset by $140,000
of dividend income received pursuant to the terms of the CHC Preferred Stock, as
Earnings (losses) and Writedown of investment in Citadel.

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

     General and administrative expenses of the Consolidated Company amounted to
$11,449,000, $8,947,000, $995,000 and $2,064,000 in Fiscal 1997, Fiscal 1996 the
three months ended December 31, 1995 and the year ended September 30, 1995,
respectively. Fiscal 1997 and 1996 periods include the consolidated accounts of
Reading whose contribution to the Consolidated Company's general and
administrative expenses are detailed below.

     "General and administrative" expenses by operating entity follows:

<TABLE>
<CAPTION>
                                        Fiscal                 Fiscal           December 31,     September 30, 
                                         1997                   1996                1995              1995  
                                         ----                   ----                ----              ----
                                                                          (000'S)
                               -------------------------------------------------------------------------------------------
Reading:
<S>                               <C>                   <C>                    <C>                   <C>
 CineVista                            $   767                 $1,050               $  --                --
 Domestic Cinemas                         645                    202                  --                --
 Australia                              3,714                  2,816                 492                --
 General                                4,611                  3,087                  --                --
Craig:                                  1,712                  1,792                 503             2,064
                                      -------                 ------                ----            ------
  Total                               $11,449                 $8,947                $995            $2,064
                                      =======                 ======                ====            ======
</TABLE>
                                        
     In addition to the increase in general and administrative expenses caused
by consolidating Reading, the Company incurred development and operating losses
with respect to its 50% membership in HSH amounting to approximately $207,000
and $780,000 in Fiscal 1997 and 1996, respectively.

     CineVista's "General Administrative" expenses decreased approximately
$283,000 in 1997 to $767,000 from $1,050,000 in 1996 due primarily to certain
reclassifications of salary expenses ($200,000) and a reduction in professional
fees of $70,000.

     "General and Administrative" expenses associated with the Domestic Cinemas
include $370,000 in 1997 and $43,000 in 1996 of management fees paid to City
Cinemas with respect to the management of the Domestic Cinemas.  The first
Domestic Cinema was not purchased until August 1996, and accordingly, the costs
of operations between Fiscal 1997 and 1996 are not comparable.  (See Note 3 to
the Consolidated Financial Statements contained elsewhere herein.)

     Reading Australia's "General and Administrative" expenses increased from
$2,816,000 in 1996 to $3,714,000 in 1997.  The principal components of this
increase include (i) an increase in property development costs of $650,000

                                      -34-
<PAGE>
 
($650,000 recorded in 1996 and $1,300,000 in 1997) which were written off due to
project abandonments or reconfiguration, (ii) third party theater management
fees of $185,000 and (iii) increased office, salary and related overhead
expenses resulting from an expansion of Reading Australia's theater operations
and entertainment center development activities.

     Reading Australia costs for the three months ended December 31, 1995
reflect only those costs incurred subsequent to the formation of Reading
Australia in the last quarter of 1995.  Reading Australia anticipates continuing
losses until additional new theaters and entertainment centers are developed and
operations increased.

     Other Reading "General and Administrative" expense increased from
$3,087,000 in 1996 to $4,611,000 in 1997, and includes the Company's non-
capitalized expenses associated with its US cinema development activities.  The
increase in 1997 includes bonus expense of $475,000 for a bonus paid to the
Company's Chairman of the Board of Directors and a $110,000 investment banking
fee paid to Reading's former Corporate Secretary as well as increased salary and
salary related expenses of approximately $370,000 due to an expansion of cinema
development and operating personnel and an increase of professional fees of
approximately $200,000 relating primarily to domestic cinema development
activities.

     Craig general and administrative expenses were comparative between Fiscal
1997 and 1996 amounting to $1,712,000 and $1,792,000, respectively.  Craig
general and administrative amounted to approximately $503,000 for the three
months ended December 31, 1995 and $2,064,000 for the year ended September 30,
1995. The September 30, 1995 year included bonus awards of approximately
$125,000.

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

     Interest income in Fiscal 1997 and Fiscal 1996, the three months ended
December 31, 1995 and the year ended September 30, 1995 amounted to $3,319,000,
$2,970,000, $280,000 and $1,490,000, respectively.  Interest income increased in
Fiscal 1997 and 1996 as compared to previous periods due to the impact of
consolidating Reading for financial statement purposes.  Interest income for the
year ended September 30, 1995 included approximately $301,000 earned pursuant to
a loan agreement with Citadel which was paid in full in May 1995. Interest
income is expected generally to decrease as interest generating cash deposits
are drawn dawn to fund the development of Reading Australia.  However, such
general decrease will be mitigated by an increase in interest income in Fiscal
1998 due to the increase in investible funds resulting from the redemption of
the Stater Preferred.

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

     "Other income" totaled $1,076,000 and $3,622,000 in Fiscal 1997 and 1996,
respectively.  In 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

                                      -35-
<PAGE>
 
$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 US dollars ("USD") in return for the delivery of $18,659,000
Australian dollars ("AUD") in January 1998.  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 resulted in a gain of $220,000.
During the first quarter of 1998, the currency positions and extensions thereof
matured and the Consolidated Company incurred a loss.  The loss, which will be
recognized in the first quarter of 1998, totals approximately $700,000.

     The principal components of "Other income" in 1996 included a $2,360,000
settlement of Reading's claim against Conrail, the City of Philadelphia, the
Southeastern Pennsylvania Transportation Authority and several other parties for
reimbursement of costs incurred by the Company associated with cleanup of PCB
contamination in certain properties formerly owned by Reading and $1,119,000
received net of expenses in settlement of a claim against a third party for
failure to pay certain fees.

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

     Minority interest amounted to $133,000 in 1997 including a provision for
$239,000 for the 16.67% minority interest in the NY Angelika less the minority
interests portion of Reading's operating results amounting to $330,000 as well
as a reduction of $42,000, representing 25% of the loss related to the joint
venture partner's interest in one of the Company's Australian theaters.

     Minority interest amounted to approximately $1,538,000 in Fiscal 1996 and
includes the minority interests share of the Company's consolidated net earnings
of REI amounting to $1,471,000 and $67,000 of the minority interests share of
the Angelika income.

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

     Provisions from Income Taxes provided in Fiscal 1997 and Fiscal 1996
amounted to approximately $1,312,000 and $25,803,000, respectively. Fiscal 1997
income taxes consisted principally of $146,000 of REI Federal Alternative
Minimum Tax, 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 of the previously 

                                      -36-
<PAGE>
 
reserved tax assets. Accordingly, the Company reduced its deferred tax
liabilities in the amount of approximately $22 million 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 available to common stockholders
-------------------------------------------

   Net income applicable to Common Stockholders amounted to approximately
$2,851,000, $42,552,000, $850,000 and $3,458,000 for Fiscal 1997, 1996, the
three months ended December 31, 1995 and the year ended September 30, 1995,
respectively.  Net income applicable to common stockholders has been reduced
by the 6.5% per annum dividend on the $7,000,000 of Convertible Redeemable
Preferred Stock issued to Citadel by Reading in October 1996 amounting to
$455,000 and $95,000 in Fiscal 1997 and 1996, respectively.

LIQUIDITY AND CAPITAL RESOURCES

     At December 31, 1997, the Consolidated Company had cash and cash
equivalents totaling approximately $98,200,000 which includes approximately
$92,870,000 held by Reading.  At December 31, 1997, Craig had cash and cash
equivalents of approximately $5,332,000.  REI is majority owned by the Company
and, accordingly, is included in the consolidated financial statements of the
Company as of December 31, 1997 and 1996.  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 transferred the title of the above described 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.  Liquidity could be achieved, however, through the sale of shares of
CHC or Reading Common Stock, both of which securities are publicly traded.

     The Consolidated Company, 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 and competition from well established
and well financed developers) have caused the Company to focus on leasehold
sites.  However, an ownership oriented approach is being pursued in Australia
with respect to the Consolidated Company's entertainment center projects (See
Item 1, Business).  These projects will be more capital intensive, have longer
lead times and entail greater development risks that the leasing of facilities
in established malls.  The entertainment centers will generally consist of a
multiplex cinema with complementary retail and restaurant use and convenient
parking all constructed on land owned or controlled by the Consolidated Company.
Accordingly, such centers are capital intensive at this stage of development.
Reading Australia has acquired three sites (inclusive of a joint venture
shopping center site), which the Company may develop as entertainment centers,
and has agreements relating to two other possible entertainment center sites.
Reading Australia also has a fifty acre 

                                      -37-
<PAGE>
 
property assemblage in the Melbourne area. The Consolidated Company is
considering development options for this site. However, if capital were required
to fund the company's entertainment center or other projects, this site could be
sold to fund such projects. If all of these potential entertainment center
projects are developed, Reading Australia estimates the total development cost
(exclusive of land costs) for these projects will exceed $100 million over the
next two to three years.

     The Consolidated Company anticipates that it will invest approximately
$6,200,000 during 1998 in furtherance of its expansion of an existing CineVista
theater scheduled to be completed in 1998.  CineVista has also signed a lease
agreement for a new twelve screen cinema, and has a letter of intent relating to
an expansion of an existing location.  CineVista's share of the estimated costs
of these two projects is approximately $15 million and will be expended in 1998
and 1999.  CineVista may use funds available under its Line of Credit (See Note
15 to the Consolidated Financial Statements contained elsewhere herein) to fund
a portion of its theater development costs.

     The Consolidated Company is actively seeking sites to develop Angelika-type
theaters throughout the United States and will consider acquiring leasehold or
ownership interests in conjunction with such developments. In addition, the
Consolidated Company may from time-to-time, develop theaters which specialize in
conventional commercial film product if the Consolidated Company views the
markets as attractive.  The Consolidated Company has entered into a lease for a
site on which the Consolidated Company plans to build a twelve screen commercial
cinema in New Jersey.  The theater is presently under development and scheduled
to open in late 1998.  In addition, the Consolidated Company has entered into
letters of intent relating to the development of Angelika type cinemas with a
total of 35 screens in five locations.  The Consolidated Company's share of the
development costs of these projects are estimated to total approximately $30
million.  However, with the exception of the one commercial theater referred to
above, it cannot be assured any of these projects will be completed as leases
have not yet been executed.  The cash cost of the Consolidated Company's
domestic cinema projects can range from approximately $1.5 million for a turnkey
leased facility to over $10 million for an owned site.

     If the Consolidated Company is successful in its efforts to develop all of
the projects which it is presently considering, its capital requirements over
the next three years will exceed its existing liquid funds and anticipated cash
flow.  However, the Consolidated Company believes that additional funding could
be realized through, among other things, bank borrowings, sale and lease back
transactions and the issuance/sale of additional equity either of Craig, REI,
Reading Australia or at the project level.

     The following summarizes the major sources and uses of cash funds for the
years ended December 31, 1997 and 1996, the three months ended December 31, 1995
and the year ended September 30, 1995.

                                      -38-
<PAGE>
 
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, 1997.  Working capital
increased $43,978,000 from $45,787,000 at December 31, 1996 to $89,765,000 at
December 31, 1997.

     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.)

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. Such
purchase 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
$2.97 million, (iii) $3,622,000 in "Other income," (iv) $7 million in proceeds
from the sale of REI Series A Preferred Stock, and (v) $6,191,000 from the
redemption of the Citadel Series B 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, 

                                      -39-
<PAGE>
 
primarily by Reading Australia, of $11,204,000 in property and equipment and a
net increase in current assets of approximately $2,457,000.

Three Months Ended December 31, 1995
------------------------------------

     Cash and cash equivalents decreased approximately $2,414,000 during the
three months ended December 31, 1995 primarily as a result of (i) additional
acquisitions of CHC Common stock and Reading Common stock amounting to
$1,281,000 and $645,000 respectively, (ii) repurchases of the Company's common
stock amounting to approximately $709,000, and (iii)the liabilities and
purchase by Reading Australia of services and land financed in part by a
contractual land obligation.

Fiscal 1995
-----------

     Cash and cash equivalents decreased $146,000 from $21,205,000 at September
30, 1994 to $21,059,000 at September 30, 1995.  Principal sources of funds
during Fiscal 1995 included service income from SBH of $1,500,000 and interest
and dividend income of approximately $1,630,000.  During Fiscal 1995, the
Company agreed to acquire in partial satisfaction of a loan made to Citadel,
1,329,114 shares of newly issued CHC Preferred Stock in the amount of
$5,250,000. In fiscal 1995 the Company received interest earnings and dividend
income from Citadel amounting to $192,000 as a result of its ownership of CHC
Preferred Stock and loans made to Citadel. In addition, the Company received
$950,000 from Citadel in repayment of all outstanding loans.

     In addition to operating expenses, principal uses of funds during Fiscal
1995 were $320,000 for the acquisition of Reading Common Stock and $1.011
million for the acquisition of Citadel common stock.

     During Fiscal 1995, the Company repurchased 90,000 shares of the Company's
Common Stock for approximately $823,000.

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

                                     -40-
<PAGE>
 
determined by dividing the appraised value of the Citadel 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 assets. In
addition, REI agreed to exchange the Citadel Preferred Stock, which was acquired
from Craig in the Stock Transactions, for Citadel's Series B Preferred Stock
containing terms modified in certain respects from the terms of the CHC
Preferred Stock. 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 million 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
($55,000,000 stated value) of Series B Voting Cumulative Preferred Stock (the
"Series B Preferred Stock").

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>             
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 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 (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 million.

     The estimated federal tax liabilities associated with the assets
transferred in the Stock Transactions was approximately $22.042 million,
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
million 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
million which amount reflects the amount of federal tax loss carryforwards
("NOLs") which were expected to be utilized net of $1.260 million in alternative
minimum tax ("AMT").

                                      -41-
<PAGE>
 
     The acquisition of the Reading 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 $66.4 million, of which approximately $64.4 million represented
the carrying value of the assets contributed in the exchange amounting to
approximately $86.4 million, net of the federal tax liabilities amounting to
approximately $22 million.  Accordingly, the purchase, for financial statement
purposes, resulted in negative goodwill in the amount of approximately $22
million, which goodwill was allocated to reduce the carrying value of previously
reported intangible assets related to Craig's Reading 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 12 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 the Company. While the transfer
restrictions which are applicable to Reading'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 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.
Also, 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 

                                      -42-
<PAGE>
 
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.

COMPUTER SYSTEMS

     The Company has determined that it will not need to modify or replace
significant portions of its software so that its computer systems will function
properly with respect to dates in the year 2000 and beyond.  The Company also
does not believe that the failure of any third party suppliers or other parties
to remediate year 2000 issues will have a material impact upon the Company's
operations.

EFFECTS ON INFLATION

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

RECENT ACCOUNTING PRONOUNCEMENTS

     In 1997, the Company adopted the provisions of Statement of Financial
Accounting Standards ("SFAS) No. 128, "Earnings Per Share."  SFAS No. 128
requires net income per share to be presented under two calculations, basic
income per share and diluted income per share.

     In June 1997, the Financial Accounting Standards Board issued SFAS No. 130,
"Reporting Comprehensive Income," and SFAS No. 131, "Disclosure About Segments
of an Enterprise and Related Information."  SFAS No. 130 established standards
for reporting comprehensive income and its components in the financial
statements.  SFAS No. 131 requires publicly held companies to report financial
and other information about key revenue-producing segments of the entity and is
utilized by the chief operation decision-maker.  The Company is evaluating its
implementation approach for SFAS No. 130 and 131, both of which will be adopted
in 1998.

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 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

                                      -43-
<PAGE>
 
competition, market and other risks associated with the Company's investment
activities and other factors described herein.

ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

     The information required by this item is incorporated by reference to pages
F-1 through F-39.


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

     Not applicable.

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              59   Chairman of the Board
     S. Craig Tompkins            47   President and a Director
     Margaret Cotter              30   Director
     William D. Gould(1)(2)       58   Director
     Gerard P. Laheney(1)         60   Director
     Ralph B. Perry III (2)       62   Director
     Robin W. Skophammer          42   Chief Financial Officer, Treasurer
                                       and Secretary
     Ellen M. Cotter              31   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. 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.
From October 1991 to June 1992, Mr. Cotter also served as the acting Chairman of
Citadel's then

                                      -44-
<PAGE>
 
wholly-owned subsidiary, Fidelity Federal Bank, FSB ("Fidelity") and served as a
director of Fidelity until December 1993. Mr. Cotter is the Chairman and
director of Citadel Agriculture, Inc., a wholly owned subsidiary of Citadel
("CAI"); the Chairman and a member of the Management Committees of each of three
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. 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 Theatres, Inc., a wholly-
owned subsidiary of Decurion Corporation. From 1988 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. 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 1977.  Since January 1997 he has served as the Vice Chairman of
REI, Reading Cinemas of Puerto Rico, Inc. and Reading Australia.  Prior thereto,
Mr. Tompkins was a partner in the law firm of Gibson, Dunn & Crutcher for more
than five years.  Mr. Tompkins has been a director of Citadel  since May 1993,
became Vice Chairman in August 1994 and Secretary, Treasurer and Principal
Accounting Officer in September 1994.  In 1997, Mr. Tompkins became the Vice
Chairman and President of Citadel Agriculture, Inc., and a member of the
Management Committee of Big 4 Farming, LLC and of each of the Agricultural
Partnerships.  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, since
December 1993.

     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 a director of Reading Company between November 1993 and June 1996.
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.

                                      -45-
<PAGE>
 
     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 Citadel Holding Corporation from August 1985
through April 1993 and has 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. Margaret Cotter is a member of the New York State Bar and, since
September 1997, has been a 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 a general partner), which is a
general partner of Hecco Ventures I.  James J. Cotter has shared voting power
with respect to the Company's equity shares held by Hecco Ventures I.  Ms.
Cotter serves as a director of Big 4 Ranch, Inc. and is a member of Visalia LLC.

     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
I. James J. Cotter has shared voting power with respect to the Company's equity
shares held by Hecco Ventures I.

     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 and the Chief
Executive Officer of Reading Australia. 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

                                      -46-
<PAGE>
 
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. John Foley has been a full time employee of City Cinemas since January
1997, and in this capacity provides booking and site identification advice to
Reading. He became an officer of REI in April 1997. Prior to joining City
Cinemas, Mr. Foley was the President of Distribution for Miramax, where he,
among other things, developed and implemented the distribution plan for The
English Patient, the winner of nine Academy Awards and one of the most
profitable art films of all time. Prior to joining Miramax in 1994, Mr. Foley
was the President of Distribution for MGM/UA from 1989 through 1993.

     Mr. 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 33.4% 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, 1997, all filing requirements
applicable to reporting persons were fulfilled except for Ms. Margaret Cotter 
who did not make a timely filing on Form 3 upon her election to the Board of 
Directors.

                                      -47-
<PAGE>
 
ITEM 11.  EXECUTIVE COMPENSATION

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

     The following table shows, for the year ended December 31, 1997 and 1996,
the three months ended December 31, 1995 and for the year ended September 30,
1995, the cash compensation paid by the Company, 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.  As a
result of Craig increasing its ownership in Reading, to greater than 50% in
Fiscal 1996, Craig reports its ownership interest on a consolidated basis.
Accordingly, the officers listed below for the year ended December 31, 1997 and
1996 include certain officers of Reading.

<TABLE>
<CAPTION>
                                                                                                      
                                                                                         Long Term    
                                                 Annual Compensation                      Awards      
                               -------------------------------------------------          ------
                                                                  Other Annual    
           Name and                           Salary    Bonus     Compensation (1)        Options
      Principal Position           Period       ($)      ($)            ($)                 (#)
      ------------------           ------     -------   ------          ---                 ---             
-----------------------------------------------------------------------------------------------------
<S>                               <C>         <C>       <C>       <C>                     <C>             
JAMES J. COTTER:                                                                                    
 Chairman of the Board
   Craig (2)                      Dec. 1997                        $350,000                            
                                  Dec. 1996                         350,000                            
                                  Dec. 1995                          87,500                            
                                  Sept.1995                         350,000(2)              300,000 (6)
                                                                                           (175,000)(6)                        
                                                                                                          
 Chairman of the Board                                                                                    
   Reading (3)                    Dec. 1997           $475,000     $150,000                 460,000 (9)                
                                  Dec. 1996                         150,000                            
                                  Dec. 1995                          37,500                            
                                  Sept.1995                         150,000                            
                                                                                                       
 Director of SBH(3)               Dec. 1996                          25,550                            
                                  Dec. 1995                           6,250                            
                                  Sept.1995                          25,000                            
                                                                                                       
 Chairman of the Board                                                                                 
   Citadel(3)                     Dec. 1997                        $ 45,000                            
                                  Dec. 1996                          45,000                            
                                  Dec. 1995                          11,250                            
                                  Sept.1995           $192,500       52,243                            
                                  Sept.1994                          84,511                            
</TABLE>

                                      -48-
<PAGE>
 
<TABLE>
<CAPTION>
                                                                                                 
                                                                                       LONG TERM 
                                                 ANNUAL COMPENSATION                    AWARDS   
                               ---------------------------------------------------      ------
                                                                     OTHER ANNUAL    
           NAME AND                            SALARY     BONUS    COMPENSATION (1)    OPTIONS
      PRINCIPAL POSITION           PERIOD        ($)       ($)           ($)             (#)
-------------------------------   ---------   ---------   ------   ----------------   ----------
------------------------------------------------------------------------------------------------
<S>                               <C>         <C>         <C>      <C>                <C>
S. CRAIG TOMPKINS(4):
 President, Craig                 Dec. 1997   $180,000
                                  Dec. 1996    180,000
                                  Dec. 1995     45,000
                                  Sept.1995    180,000    $80,000
 
 President, Reading(3)            Dec. 1997   $180,000                                    20,000(9)
                                  Dec. 1996    180,000
                                  Dec. 1995     45,000
                                  Sept.1995    180,000
 
 Director, Citadel(3)             Dec. 1997                               $40,000
                                  Dec. 1996                                35,000
                                  Dec. 1995                                 8,750
                                  Sept.1995               $60,000          41,184
 

ROBIN SKOPHAMMER(5):
 Chief Financial
   Officer, Craig                 Dec. 1997   $165,000
                                  Dec. 1996    165,000
                                  Dec. 1995     41,200
                                  Sept.1995    150,000    $15,000
  
 
OFFICERS OF READING
-------------------
ROBERT F. SMERLING(8)
 President, Reading
   Entertainment, Inc.            Dec. 1997   $175,000                                    35,000(9)
                                  Dec. 1996    175,000     60,000
 
B. JOHN ROCHESTER(7)
 President and Chief
   Executive Officer,
   Reading Australia
    Pty Ltd.                      Dec. 1997   $130,000
                                  Dec. 1996    156,620
</TABLE>

                                      -49-
<PAGE>
 
<TABLE>
<CAPTION>
                                                                                               
                                                                                             LONG TERM  
                                                ANNUAL COMPENSATION                            AWARDS   
                               ----------------------------------------------------------    ---------- 
                                                                                     
                                                                            OTHER ANNUAL       
       NAME AND                                      SALARY       BONUS    COMPENSATION (1)    OPTIONS
   PRINCIPAL POSITION              PERIOD             ($)          ($)           ($)             (#)
   ------------------              ------             ---          ---           ---             ---
--------------------------------------------------------------------------------------------------------
<S>                                <C>                <C>          <C>           <C>             <C>    
JAMES A. WUNDERLE(8)
 Exec. Vice President
 and Chief Financial
 Officer and Treasurer
 of REI                           Dec. 1997          $ 170,000      5,000                       17,000(9)
                                  Dec. 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,
    if less.

(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 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
    Stater Bros. Holdings Inc. ("SBH") and Citadel Holding Corporation
    ("Citadel") are considered affiliates 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, 1997,
    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 

                                      -50-
<PAGE>
 
    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 provides
    for pension benefits recognizing that the Company does not currently have a
    pension plan.  Craig agreed to create a plan in which Ms. Skophammer will be
    provided with a pension benefit commensurate with her salary and position.
    In addition, the agreement provides 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) In June 1995, in consideration of, among other things, Mr. Cotter's
    agreement to cancel his previously vested option rights and to extend his
    consulting agreement with Craig for an additional year with no increase in
    compensation, the Board canceled an option to purchase 175,000 shares of
    Class A Common Preference Stock and approved the grant of an option to
    acquire 300,000 shares of Craig's Common Stock at an exercise price of
    $11.75 per share.

(7) 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 a one-time incentive payment to
    Mr. Rochester after the fourth anniversary of the agreement, based on a
    multiple of cash flow of the Company's Australian theater operations.  Under
    the agreement, in the event Mr. Rochester's employment is terminated by the
    Company without cause, he will be entitled to receive such incentive payment
    plus 17 payments, each equal to his monthly remuneration, if such
    termination is during the initial term, or 11 such monthly payments if such
    termination is after the initial term.  Mr. Rochester is entitled to receive
    a lump sum distribution of such amounts, as applicable, if the Company and
    Craig both withdraw from any material investment or involvement in the
    Australian operations and he is not granted employment under comparable
    terms.

(8) 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.

                                      -51-
<PAGE>
 
(9) 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 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.

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 $24,000
as an additional fee for his participation in consulting the Company on
providing retirement benefits.

     II.  Option Grant Table
          ------------------

     The following table contains information concerning the grant of stock
options by the Company during 1997.

<TABLE>
<CAPTION>
 
                                                                                                         Potential Realizable
                                                                                                      Value at Assumed Annual
                                              % of Total                                                Rates of Stock Price 
                                                Options                                                     Appreciation 
                                 Options      Granted in       Exercise                                    for Option Term     
                                 Granted        Fiscal          Price         Expiration                   ----------------
        Name                       (#)           Year          ($/sh)            Date                       5%          10%
        ----                       ---           ----          ------            ----                       --          ---
<S>                             <C>           <C>           <C>               <C>                        <C>         <C>
Margaret Cotter                  15,000(1)       100%         $19.8125        12/15/2008                  186,900      523,650
</TABLE> 
------------------
(1)  Option to acquire shares of the Company's Common Stock granted upon 
election to the Board of Directors in December 1997.

     During Fiscal 1997, the expiration date of Mr. Laheney's options to
purchase 15,000 shares of Common Stock at $13.875 per share were extended to 
October 1999. 

     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 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.

     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, 1997 and unexercised options as of December 31, 1997.
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:

                                      -52-
<PAGE>
 
<TABLE>                                            
<CAPTION>                                                                
                                                                                      NUMBER OF                      VALUE OF  
                                                                                     UNEXERCISED                    UNEXERCISED  
                                                                                      OPTION AT                    IN-THE-MONEY AT
                                                                                   DECEMBER 31, 1997              DECEMBER 31, 1997
                                                                                     EXERCISABLE/                   EXERCISABLE/
                                                                                     ------------                   ------------
      NAME                      SECURITY               SHARES EXERCISED             UNEXERCISABLE                  UNEXERCISABLE(1)
      ----                      --------               -----------------            -------------                  ----------------
<S>                              <C>                   <C>                          <C>                            <C>
James J. Cotter                Common Stock                    0                      300,000/0                      $2,587,000/$0
                                                                                                                                  
S. Craig Tompkins             Class A Common                   0                       17,500/0                      $  146,562/$0 
                             Preference Stock
</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.  The Class A Common Preference Stock
          distribution on February 5, 1998 had the effect of increasing the
          number of shares exercisable by Mr. Cotter and Mr. 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.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

     As of April 13, 1998, the outstanding voting securities of Craig consisted
of 3,762,912 shares of Common Stock and 7,006,912 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 13, 1998 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 nominee,
and by all the 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.

                                      -53-
<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        53.9%          2,021,702              28.6%      
120 N. Robertson Blvd.                                                                                       
Los Angeles, CA  90048                                                                                       
                                                                                                             
Hecco Ventures(1)                            617,438        14.1%            720,838              10.2%      
120 N. Robertson Blvd.                                                                                       
Los Angeles, CA  90048                                                                                       
                                                                                                             
Dimensional Fund Advisors, Inc.(2)           242,300         5.5%            242,300               3.4%      
1299 Ocean Avenue, 11th Floor                                                                                
Santa Monica, CA  90401                                                                                      
                                                                                                             
First Pacific Advisors, Inc.(3)                                              910,400              12.9%      
11400 West Olympic Blvd.                                                                                     
Suite 1200                                                                                                   
Los Angeles, CA  90064                                                                                       
                                                                                                             
Lawndale Capital Management, Inc.(4)                                         358,500               5.1%      
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)                            15,000           *              15,000                 *       
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)                 2,441,742        55.8%          2,135,702              30.2%      
</TABLE>

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

(1)  Includes the Common Stock and Class A Common Preference Stock owned by
     Hecco Ventures I ("HVI"), which is a California general partnership. James
     J. Cotter is a general partner of a limited partnership which is the
     general partner of HVI and, accordingly, has shared voting and dispositive
     power with respect to such shares held by HVI. 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

                                      -54-
<PAGE>
 
     daughters of James J. Cotter, and each are limited partners in the above
     referenced limited partnership.

(2)  Dimensional Fund Advisors Inc. ("Dimensional"), a registered investment
     advisor, is deemed to have beneficial ownership of 242,300 shares of Craig
     Corporation Common and Class A Common Preference Stock, all of which shares
     are held in portfolios of DFA Investment Dimensions Group Inc., a
     registered open-end investment company, or in series of the DFA Investment
     Trust Company, a Delaware business trust, or the DFA Group Trust and DFA
     Participation Group Trust, investment vehicles for qualified employee
     benefit plans, all of which Dimensional Fund Advisors Inc. serves as
     investment manager.  Dimensional disclaims beneficial ownership of all such
     shares.

(3)  Includes 231,200 shares which are owned by FPA Capital Fund, Inc. over
     which First Pacific Advisors, Inc. has shared dispositive power.

(4)  Includes 303,300 Class A Common Preference Shares which are owned by
     Diamond A Partners, L.P. ("DAP") and 55,200 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. and
     Andrew E. Shapiro.  According to a report on Schedule 13D dated February
     18, 1998, Lawndale Capital Management, Inc., is the investment advisor to
     DAP and DAI, which are investment limited partnerships.

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

(6)  Represents shares not currently vested to purchase Common Stock and Class A
     Common Preference Stock.

(7)  Includes 2,400 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 1,200 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 include (i) 609,940 shares of Common
     Stock subject to currently exercisable stock options and 30,000 shares of
     non-vested options and (ii) an aggregate of 4,200 shares of Common Stock as
     to which Messrs. Gould and Perry disclaim beneficial ownership. The Class A
     Common Preference shares beneficially owned include 50,000 shares of
     currently exercisable stock options, 15,000 shares of non-vested options
     and 1,500 shares as to which Mr. Gould disclaims beneficial ownership.

                                      -55-
<PAGE>
 
(11) All shares subject to stock options currently exercisable, or which become
     exercisable within 60 days of April 10, 1998, are deemed to be outstanding
     for the purpose of determining the percentage of each class held by such
     person.

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
$16,000 in Fiscal 1997.  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.  Mr.
Cotter was a member of REI's Executive Committee which served as REI's
Compensation Committee until October 1996, however, no action concerning
compensation matters was taken by the REI Executive Committee in 1996.  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.

ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

    In December 1997, Citadel capitalized a wholly owned subsidiary, Big 4
Ranch, Inc. (BRI), with a cash contribution of $1,200,000 and then distributed
100% of the shares of Big 4 Ranch, Inc. to Citadel's common shareholders of
record as of the close of business on December 23, 1997, as a spin-off dividend.
The Consolidated Company received 2,213,043 shares or 33.4% of Big 4 Ranch, Inc.

    Also, in December 1997, BRI (owning 40%), Citadel (owning 40%) and Visalia
LLC (owning 20%; a limited liability company controlled by Mr. James J. Cotter,
the Chairman of the Board of 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 holdings in
Big 4 Ranch, Inc., and Citadel, the Company owns approximately 26.7% of such
partnerships at December 31, 1997.

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

    Mr. Smerling serves as President of Reading and Mr. John Foley, Vice 
President of Marketing of Reading also serve in the same positions with City
Cinemas, a New York motion picture theater exhibitor. City Cinemas is an
affiliate of Mr. Cotter, Chairman of the Board of Craig and Reading. Reading,
Cine Vista and City Cinemas entered into an Executive Sharing Agreement pursuant
to which Mr. Smerling provides services to both Cine Vista and City Cinemas
entities and the cost of such services is shared equally by the parties, if such
costs cannot be allocated directly to such parties.

     Reading acquired the Angelika on August 27, 1996. 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 and Mr. Michael Forman. City Cinemas (also owned indirectly in equal
parts by Messrs. Cotter and Forman) operates Reading Domestic theaters pursuant
to management agreements. Management fees paid to City Cinemas for the year
ended December 31, 1997 and 1996 amounted to approximately $370,000 and $43,000,
respectively. Mr. Cotter is the principal shareholder of Craig and a company
owned by Mr. Forman and his family owns 16.4% of Craig's currently outstanding
Common Stock and 10.3% of Craig's Class A Common Preference Stock.

     Reading utilizes the services of certain Citadel employees, including the
President and Chief Executive Officer of Citadel, for real estate advisory
services. Reading pays Citadel to such services at a rate amounting to $240,000
and $169,000 in fiscal 1997 and 1996, respectively. In addition, Craig

                                     -56-
<PAGE>
 
provided certain administrative services and office rental to Citadel for which
it was paid $96,000, $96,000 and $24,000 for the year ended December 31, 1997
and 1996 and the three months ended December 31, 1995, respectively.

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

                                      -57-
<PAGE>
 
                                    PART IV
                                    -------
                                        
ITEM 14.  EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K

(a)(1)    Consolidated Financial Statements:

                                                            PAGE
                                                            ----

<TABLE>
<CAPTION>

<S>                                                          <C>
Consolidated Balance Sheets
     Years Ended December 31, 1997 and 1996................  F-1

Consolidated Statements of Operations
     Years Ended December 31, 1997 and 1996, Three
     Months Ended December 31, 1995 and
     the Year Ended September 30, 1995.....................  F-2

Consolidated Statements of Shareholders' Equity
     Years Ended December 31, 1997 and 1996, Three
     Months Ended December 31, 1995 and
     the Year Ended September 30, 1995.....................  F-3

Consolidated Statements of Cash Flows
     Years Ended December 31, 1997 and 1996, Three
     Months Ended December 31, 1995 and
     the Year Ended September 30, 1995.....................  F-4

Notes to Consolidated Financial Statements.................  F-6

Report of Independent Auditors............................. F-39
</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 

                                      -58-
<PAGE>
 
                    Form 10-Q Report for the Quarter ended December 31, 1992;
                    (iii) amended on November 10, 1994 and incorporated by
                    reference to the Company's Form 10-K Report for the year
                    ended September 30, 1994.

          10.1      Stock Agreement dated as of May 10, 1989 among Craig
                    Corporation, Stater Bros. Holdings Inc., La Cadena
                    Investments and James J. Cotter (incorporated by reference
                    to the Company's Form 8-K Report, dated May 25, 1989).

          10.2      Agreement of Stockholders of Stater Bros. Holdings Inc.
                    dated May 10, 1989 among Craig Corporation, La Cadena
                    Investments, Stater Bros. Holdings Inc. and Stater Bros.
                    Inc. (incorporated by reference to the Company's Form 8-K
                    Report dated May 25, 1989.

          10.4*     Amendment to 1984 Stock Option Plan (incorporated by
                    reference to the Company's Registration Statement on Form S-
                    1; No. 33-34297, dated May 15, 1990).

          10.5      Consulting Agreement between Craig Management, Inc., Craig
                    Corporation and Stater Bros. Holdings Inc. dated as of
                    February 1, 1992 (incorporated by reference to the Company's
                    Form 10-K Report for the year ended September 30, 1992).

          10.6*     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).

          10.7*     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).

          10.8      Reclassification Agreement dated September 3, 1993 between
                    Stater Bros. Holdings Inc., the Company and La Cadena
                    Investments (incorporated by reference to the Company's Form
                    10-K Report for the year ended September 30, 1993).

          10.9      Amendment to Agreement of Stockholders dated September 3,
                    1993 between Stater Bros. Holdings Inc., the Company and La
                    Cadena Investments (incorporated by reference to the
                    Company's Form 10-K Report for the year ended September 30,
                    1993).

          10.10     Option Agreement dated September 3, 1993 between Stater
                    Bros. Holdings Inc. and the Company (incorporated by

                                      -59-
<PAGE>
 
                    reference to the Company's Form 10-K Report for the year
                    ended September 30, 1993).

          10.11     Consulting Agreement dated September 3, 1993 between Stater
                    Bros. Holdings Inc. and the Company (incorporated by
                    reference to the Company's Form 10-K Report for the year
                    ended September 30, 1993).

          10.12     Second Amended and Restated Stock Agreement of Stockholders
                    dated January 12, 1994 between Stater Bros. Holdings Inc.,
                    the Company, La Cadena Investments and James J. Cotter
                    (incorporated by reference to the Company's Form 10-K/A
                    Amendment No. 1 for the year ended September 30, 1993).

          10.13     Amendment to Option Agreement dated January 12, 1994 between
                    Stater Bros. Holdings Inc. and the Company (incorporated by
                    reference to the Company's Form 10-K/A Amendment No. 1 for
                    the year ended September 30, 1993).

          10.14     Credit Agreement among Citadel Realty, Inc. Citadel Holding
                    Corporation and Craig Corporation (incorporated by reference
                    to the Company's Form 10-Q Report for the quarter ended June
                    30, 1994).

          10.19     Limited Liability Company Agreement of Reading International
                    Cinemas LLC dated November 9, 1995 (incorporated by
                    reference to the Company's Report on Form 10-K for the year
                    ended September 30, 1995).

          10.20     Certificate of Formation of Reading International Cinemas
                    LLC (incorporated by reference to the Company's Report on
                    Form 10-K for the year ended September 30, 1995).

          10.21*    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).

          10.22*    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).

          10.23     Conversion Deferral, Warrant and Reimbursement Agreement
                    dated April 11, 1995 between Citadel Holding Corporation and
                    Craig Corporation (incorporated by reference to the
                    Company's Report on Form 10-Q for the quarter ended March
                    31, 1995).

                                      -60-
<PAGE>
 
          10.24     Settlement Agreement dated April 3, 1995 between Craig
                    Corporation, Dillon Investors L.P., Roderick H. Dillon, Jr.
                    (incorporated by reference to the Company's Report on Form
                    10-K for the year ended September 30, 1995).

          10.25     Capital Funding Agreement between Reading International
                    Cinemas LLC, Craig Corporation, Reading Investment Company,
                    Inc., and Craig Management, Inc. dated March 29, 1996
                    (incorporated by reference to the Company's Report on Form
                    10-Q for the quarter ended March 31, 1996).

          10.26     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).

          10.27     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).

          10.28     Letter of Intent dated August 12, 1996 by and between Craig
                    Corporation, Reading Company, Citadel Holding Corporation,
                    Reading Entertainment, Inc., Craig Management, Inc. and
                    Citadel Acquisition Corp., Inc. (incorporated by reference
                    to the Company's Report on Form 10-Q for the quarter ended
                    June 30, 1996).

          10.29     Credit Agreement by and between Reading Cinemas of Puerto
                    Rico, Inc. and Citibank, N.A., as administrative agent for
                    the Lenders thereunder dated as of December 20, 1995.
                    (Incorporated by reference to Exhibit 10.11 of Reading
                    Company's Annual Report on Form 10-K for the year ended
                    December 31, 1995.)

          10.30     The First Amendment dated February 7, 1996 to the Credit
                    Agreement by and between Reading Cinemas of Puerto Rico,
                    Inc., and Citibank, N.A. as administrative agent for the
                    Lenders thereunder dated as of December 20, 1995.
                    (Incorporated by reference to Exhibit 10.12 to Reading
                    Company's Annual Report on Form 10-K for the year ended
                    December 31, 1995.)

          10.31     Amended and Restated Capital Funding Agreement by and
                    between Craig Corporation, Craig Management, Inc., Reading
                    Investment Company and Reading International Cinemas LLC.
                    (Incorporated by reference to Reading Company's Annual
                    Report on Form 10-K for the year ended December 31, 1995).

                                      -61-
<PAGE>
 
          10.32*    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.

          10.33     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).

          10.34     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).

          10.35     Certificate of Designation of the Series B 3% Cumulative
                    Voting Convertible Preferred Stock of Citadel Holding
                    Corporation (incorporated by reference to the Company's
                    Report on Form 10-K for the year ended December 31, 1996).

          10.36     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).

          10.37     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).

          10.38     $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).

          10.39     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).

                                      -62-
<PAGE>
 
          10.40     The Agreement of Lease between Cable Building Associates and
                    Houston Cinema, Inc. dated March 4, 1988 together with
                    Amendment of Lease dated December 26, 1989 (incorporated by
                    reference to the Company's Report on Form 10-K for the year
                    ended December 31, 1996).

          10.41     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).

          10.42     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).

          10.43     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).

          10.44     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).

          10.45     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).

          10.46     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).

          10.47     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).

          10.48     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).

                                      -63-
<PAGE>
 
          10.49     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).

          10.50     Master Management Agreement between Angelika Holdings, Inc.
                    and City Cinemas Corporation dated November 26, 1997. (filed
                    herewith)

          10.51*    Amended and Restated Stock Option Agreement between Craig
                    Corporation and James J. Cotter dated December 8, 1997.
                    (filed herewith)

          10.52*    Stock Option Agreement between Craig Corporation and S.
                    Craig Tompkins (filed herewith)

          21        Subsidiaries of the Registrant.

          27        Financial Data Schedule, Article 5.

                                      -64-
<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, 1998                                 Treasurer and Secretary   
                                                    April 14, 1998            

    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, 1998                                     April 14, 1998      
 

 
By:  /s/ Gerard P. Laheney                          By: /s/ Ralph B. Perry III 
     ---------------------                              ---------------------- 
     GERARD P. LAHENEY                                  RALPH B. PERRY III     
     Director                                           Director               
     April 14, 1998                                     April 14, 1998         



By:  /s/ S. Craig Tompkins                          By: /s/ Margaret Cotter
     ---------------------                              -------------------
     S. CRAIG TOMPKINS                                  MARGARET COTTER    
     Director                                           Director           
     April 14, 1998                                     April 14, 1998     
<PAGE>
 
<TABLE>
<CAPTION>
                                                CRAIG CORPORATION AND SUBSIDIARIES
                                                    CONSOLIDATED BALANCE SHEETS

                                                                           DECEMBER 31,                   DECEMBER 31,
                                                                               1997                           1996
                                                                      ------------------------    -------------------------
ASSETS                                                                             (IN THOUSANDS OF DOLLARS)
------------------------------------------------------------------    -----------------------------------------------------
<S>                                                                     <C>                                 <C> 
CURRENT ASSETS
  Cash and cash equivalents                                                      $ 98,202                       $ 52,172
  Receivables, net                                                                  1,206                          3,361
  Restricted cash                                                                   4,755                          3,683
  Note Receivable                                                                     720                             --
  Inventories                                                                         194                            151
  Prepayments and other current assets                                                589                            856
                                                                                 --------                       --------
      Total current assets                                                        105,666                         60,223
  Investment in Stater                                                                 --                         67,978
  Equity investment in Citadel                                                      6,594                          4,625
  Net investment in leased equipment                                                2,125                          2,125
  Investment in and advances to joint venture                                       3,379                             --
  Property and equipment, net                                                      35,658                         16,376
  Other assets                                                                      2,255                          2,519
  Restricted cash                                                                     213                            517
  Excess of cost over net assets acquired, net                                     11,235                         11,605
                                                                                 --------                       --------
      Total assets                                                               $167,125                       $165,968
                                                                                 ========                       ========
 
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------------------------------------
CURRENT LIABILITIES:
  Accounts payable                                                               $  2,513                       $  5,143
  Film rental payable                                                               1,637                          1,102
  Accrued property costs                                                            3,319                          1,240
  Accrued taxes                                                                       987                          3,580
  Property purchase commitment                                                      3,516                             --
  Note payable                                                                        645                             --
  Note payable to Citadel                                                           1,998                          1,500
  Other accrued expenses and liabilities                                            1,286                          1,871
                                                                                 --------                       --------
      Total current liabilities                                                    15,901                         14,436
  Capitalized lease                                                                   509                            516
  Note payable                                                                      1,100                            500
  Other long-term liabilities                                                       3,735                          1,972
  Deferred tax liabilities                                                          8,368                          8,208
  Minority interests in equity of subsidiaries                                     32,273                         33,511
  Redeemable Preferred stock of Reading                                             7,000                          7,000
 
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, 7,029,912 issued and 7,006,912 outstanding                             16                             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 3,762,912 outstanding                                         1,361                          1,361
  Additional paid-in capital                                                       30,828                         30,828
  Foreign currency translation adjustment                                          (4,323)                           114
  Retained earnings                                                                90,111                         87,260
  Cost of treasury shares, 1,704,153 (including 23,000 Class A shares)            (19,754)                       (19,754)
                                                                                  -------                       --------
   Total shareholders' equity                                                      98,239                         99,825
                                                                                 --------                       --------
      Total liabilities and shareholders' equity                                 $167,125                       $165,968
                                                                                 ========                       ========
 
</TABLE> 
See accompanying notes to consolidated financial statements.
 
                                      F-1
<PAGE>
 
<TABLE>
<CAPTION>
                                    CRAIG CORPORATION AND SUBSIDIARIES
                                  CONSOLIDATED STATEMENTS OF OPERATIONS
 
                                                                                         
                                                           YEARS                   THREE                  
                                                           ENDED                  MONTHS           YEAR   
                                                        DECEMBER 31,               ENDED          ENDED   
                                                --------------------------       DEC. 31,       SEPT. 30, 
                                                     1997           1996           1995            1995
                                                ---------------------------------------------------------
<S>                                                <C>            <C>            <C>            <C>
                                                    (In thousands of dollars, except per share amounts)
                                                ---------------------------------------------------------
Revenues:
  Theater admissions                                $19,978       $ 12,986         $   --         $    --
  Theater concessions                                 6,078          4,486             --              --
  Theater advertising and other                         928            764             --              --
  Real estate                                           180            543             --              --
  Equity in earnings of
    affiliates                                           --          1,608          1,913           4,682
  Dividend income from Stater                         4,330          5,978             --              --
  Service income from Stater                            972          1,500            375           1,500
                                                    -------       --------         ------         -------
                                                     32,466         27,865          2,288           6,182
                                                    -------       --------         ------         -------
Expenses:
  Theater costs                                      20,081         13,631             --              --
  Theater concession costs                            1,296            821             --              --
  Depreciation and amortization                       1,737          1,664             41             166
  Loss from joint venture                               207            780             --              --
  General and administrative expenses                11,449          8,947            995           2,064
                                                    -------       --------         ------         -------
                                                     34,770         25,843          1,036           2,230
                                                    -------       --------         ------         -------
Earnings (loss) before minority interest, 
 other income items and taxes                        (2,304)         2,022          1,252           3,952
 
Earnings (losses) from investment in Citadel            392          2,396             60            (334)
Other income                                          1,076          3,622             --              --
Interest income                                       3,319          2,970            280           1,490
Gain from conversion of common stock interest
 in Stater                                            2,002         58,978             --              --
                                                    -------       --------         ------         -------
Earnings before taxes and minority interest           4,485         69,988          1,592           5,108
Minority interest                                       133         (1,538)           125              --
                                                    -------       --------         ------         -------
Earnings before taxes                                 4,618         68,450          1,717           5,108
Provision for taxes                                  (1,312)       (25,803)          (867)         (1,650)
                                                    -------       --------         ------         -------
Net earnings                                          3,306         42,647            850           3,458
Dividends paid on subsidiary redeemable
 preferred stock                                       (455)           (95)            --              --
                                                    -------       --------         ------         -------
Net earnings available to Craig common
 shareholders                                       $ 2,851       $ 42,552         $  850         $ 3,458
                                                    =======       ========         ======         =======
 
Basic earnings per share                            $  0.26       $   3.78         $ 0.07         $  0.29
                                                    =======       ========         ======         =======
Diluted earnings per share                          $  0.26       $   3.76         $ 0.07         $  0.29
                                                    =======       ========         ======         =======
</TABLE>



          See accompanying notes to consolidated financial statements.

                                      F-2
<PAGE>

                      CRAIG CORPORATION AND SUBSIDIARIES
                CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
                    YEARS ENDED DECEMBER 31, 1997 AND 1996,
                     THREE MONTHS ENDED DECEMBER 31, 1995
                       AND YEAR ENDED SEPTEMBER 30, 1995
                           (IN THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
                         COMMON STOCK       CLASS A
                         OUTSTANDING      COMMON STOCK
                       ---------------   ---------------
                                                                      VALUA-                TREASURY
                                 PAR                PAR    PAID-IN     TION     RETAINED      STOCK
                       SHARES   VALUE    SHARES    VALUE   CAPITAL   RESERVE    EARNINGS     AT COST
                       ------   ------   ------    -----   -------   --------   --------    ---------
<S>                    <C>      <C>      <C>       <C>     <C>       <C>        <C>         <C>

Balances at
  Oct. 1, 1994          5,444    1,361    1,645      16     30,793      (171)   40,400        (11,314)

Stock repurchases                                                                                (823)
Net earnings                                                                     3,458
Investment
  valuation
  reserve                                                                171
                        -----   ------    -----     ---    -------   -------   -------       --------
Balances at
  Sept. 30, 1995        5,444    1,361    1,645      16     30,793       ---    43,858        (12,137)

Stock repurchases                                                                                (709)
Foreign currency
  translation                                                            (10)
Net earnings                                                                       850
                        -----   ------    -----     ---    -------   -------   -------       --------
Balances at
  Dec. 31, 1995         5,444    1,361    1,645      16     30,793       (10)   44,708        (12,846)

Stock repurchases                                                                              (7,585)
Issuance of
  treasury stock                                                35                                677
Foreign currency
  translation                                                            124
Dividends paid
  on Reading
  redeemable
  preferred
  stock                                                                            (95)
Net earnings                                                                    42,647
                        -----   ------    -----     ---    -------   -------   -------       --------
Balance at
  Dec. 31, 1996         5,444    1,361    1,645      16     30,828       114    87,260        (19,754)

Stock dividend                            5,385 
Foreign currency
  translation                                                         (4,437)
Dividends paid
  on Reading
  redeemable
  preferred
  stock                                                                           (455)
Net earnings                                                                     3,306
                        -----   ------    -----     ---    -------   -------   -------       --------
Balances at
  Dec. 31, 1997         5,444   $1,361    7,030     $16    $30,828   $(4,323)  $90,111       $(19,754)
                        =====   ======    =====     ===    =======   =======   =======       ========
</TABLE>


          See accompanying notes to consolidated financial statements.

                                      F-3
<PAGE>

                               CRAIG CORPORATION
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE> 
<CAPTION> 
                                                                                          THREE
                                                                 YEARS ENDED              MONTHS          YEAR
                                                                 DECEMBER 31,             ENDED           ENDED
                                                          ------------------------       DEC. 31,       SEPT. 30
                                                             1997           1996           1995           1995
                                                          --------       ---------      ----------     ---------
                                                                         (IN THOUSANDS OF DOLLARS)
                                                          ------------------------------------------------------
<S>                                                        <C>            <C>            <C>            <C>
OPERATING ACTIVITIES
Net earnings (loss)                                        $  3,306       $ 42,647        $   850        $ 3,458
Adjustments to reconcile net earnings (loss) to net
 cash provided by (used in) operating activities:
Gain on conversion of common stock investment in
 Stater                                                      (2,002)       (58,978)            --             --
 
Appreciation                                                  1,108            706             31            100
Amortization                                                    629            958             10             66    
Deferred rent                                                   406            245             --             --
Undistributed earnings of affiliates                           (392)        (3,134)        (1,933)        (4,208)
Preferred stock divided income                                   --           (941)            --             --
Increase (decrease) in deferred taxes                           160         24,003            867          1,595
Minority interest                                              (133)         1,537             --             --
Changes in operating assets and liabilities:
(Increase) decrease in current assets                         2,807         (2,457)             3             --
(Increase) decrease in other assets                               7             --           (445)          (176)
Increase (decrease) in payables                              (3,410)         6,735             --            289
Increase (decrease) in film rental                              545            769             --             --
Increase (decrease) in other liabilities                        654           (134)           356             --
Other, net                                                    1,002           (312)            --             --
                                                           --------       --------        -------        -------
Net cash provided by (used in) operating activities           4,687         11,644           (261)         1,124
 
INVESTING ACTIVITIES
Purchase of theaters                                           (229)       (12,570)            --             --
Purchase of Reaading stock                                     (819)            --             --             --
Investment in and advances to joint venture partners         (3,871)            --             --             --
Proceeds from Angelika judgment                                  --          1,293             --             --
Purchase of property, plant and equipment                   (19,889)       (11,204)        (4,232)           (18)
Proceeds from redemption of Stater Preferred                 69,980             --             --             --
Proceeds from redemption of Citadel Preferred                    --          6,191             --             --
Acquisition of stock of equity affiliates                    (1,998)            --         (1,926)        (1,331)
Cash acquired as a result of consolidation of
 Reading, net of acquisition costs                               --         41,412             --             --
 
Proceeds from Citadel loan pay-off                               --             --             --            950
Increase in restricted cash                                  (1,421)        (1,478)            --             --
Other investments                                                --            (75)          (100)            --
                                                            --------       --------        -------        -------
Net cash provided (used in) investing activities             41,753         23,569         (6,258)          (399)
</TABLE>

                                      F-4
<PAGE>

                               CRAIG CORPORATION
               CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
<TABLE> 
<CAPTION> 
                                                                 YEARS ENDED                                        YEAR
                                                                DECEMBER 31,            THREE MONTHS ENDED          ENDED
                                                     ---------------------------------       DEC. 31,            SEPT. 30,
                                                             1997          1996                1995                 1995
                                                     --------------    ---------------    ----------------   -------------
                                                                              (IN THOUSANDS OF DOLLARS)
                                                     ---------------------------------------------------------------------
<S>                                                        <C>           <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                       --              --
 
Distributions to NY Angelika minority partner                 (371)           (38)                      --              --
Payment of Reading preferred dividends                        (455)           (95)                      --              --
Payment of debt financing costs                                 --           (256)                      --              --
Debt incurred for land purchase                                 --             --                    3,144              --
Borrowings from affiliates                                      --             --                    1,690              --
Treasury stock repurchases                                      --         (7,585)                    (709)           (823)
Proceeds from landlord                                         280             --                       --              --
                                                                                                   -------         -------
Decrease of note payable                                    (1,500)
Payment of debt and liabilities                                 --         (2,914)                      --             (48)
                                                           -------          -----                  -------         -------
Net cash provided (used in) financing activities             2,030         (1,820)                   4,125            (871)
 
EFFECT OF FOREIGN EXCHANGE RATE CHANGES                       (362)           134                      (20)             --
                                                           -------        -------                  -------         -------
 
INCREASE (DECREASE) IN CASH
  AND CASH EQUIVALENTS                                      46,030         33,527                   (2,414)           (146)

CASH AND CASH EQUIVALENTS AT BEGINNING OF THE PERIOD        52,172         18,645                   21,059          21,205
                                                           -------        -------                  -------          ------
  CASH AND CASH EQUIVALENTS AT
  END OF PERIOD                                            $98,202        $52,172                  $18,645         $21,059
                                                           =======        =======                  =======         =======
Supplemental disclosures:
  Interest paid                                               $207           $239                       $0              $0
  Taxes paid                                                $2,405           $139                       $0              $0  

</TABLE>

         See accompanying notes to consolidated financial statements.

                                      F-5
<PAGE>
 
CRAIG CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
(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 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").

     As described in Note 2, during the years ended December 31, 1997 and 1996,
Craig increased its voting ownership in REI to approximately 78%.  As a result
of increasing its ownership in REI to greater than 50%, the Consolidated Company
reports its ownership interest in REI for the years ended December 31, 1997 and
1996 on a consolidated basis, as compared to the equity method for the three
months ended December 31, 1995 and the year ended September 30, 1995.  In
accordance with the provisions of Accounting Research Bulletin 51, "Consolidated
Financial Statements", Craig's purchase of REI has been reflected in the
Consolidated Statements of Operations and Cash Flows as though it had been
acquired as of January 1, 1996.

     Through its majority owned subsidiaries, REI is in the business of
developing and operating multi-plex cinemas in the United States, Puerto Rico
and Australia 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 "US Circuit"); through Reading Cinemas of Puerto Rico, Inc., a wholly owned
subsidiary,  under the CineVista name in Puerto Rico ("CineVista" or the "Puerto
Rico Circuit"); and through Reading Australia Pty, Limited (collectively with
its subsidiaries referred to herein as "Reading Australia") under the Reading
Cinemas name in Australia (the "Australia Circuit").  The Company's
entertainment center development activities in Australia are also conducted
through Reading Australia, under the Reading Station name.

     REI is also a participant in two real estate joint ventures in
Philadelphia, Pennsylvania and holds certain property for sale located primarily
in Philadelphia and has acquired certain leased equipment which it leases to
third parties.

     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.

     In September 1996, Craig changed its fiscal year end date from a September
30 year end to December 31, and accordingly, the consolidated financial
statements report the results of operations, cash flows and the statement of
stockholders' equity for the years ended December 31, 1997 and 

                                      F-6
<PAGE>
 
CRAIG CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
(AMOUNTS IN TABLES IN THOUSANDS, EXCEPT SHARES AND PER SHARE DATA)


1996, the three months ended December 31, 1995 and the year ended September 30,
1995.

     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.

     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.

     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 AND EQUIPMENT:  Property and equipment is carried at cost.
Depreciation of buildings, capitalized premises 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
(inclusive of options, if likely to be exercised), whichever is shorter.  The
estimated useful lives are generally as follows:


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

     CONSTRUCTION IN PROGRESS AND PROPERTY DEVELOPMENT COSTS:  Construction-in-
progress and property development costs are comprised of all direct costs
associated with the development of potential theater locations (whether for
purchase or lease).  Amounts are carried at cost unless management decides that
a particular theater 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 are write-offs of
such development costs for the years ended December 31, 1997 and 1996, amounting
to approximately $1,300,000 and $650,000, respectively.  Included in property,
plant and equipment of December 31, 1997 is approximately $1,440,000 

                                      F-7
<PAGE>
 
CRAIG CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
(AMOUNTS IN TABLES IN THOUSANDS, EXCEPT SHARES AND PER SHARE DATA)


of property development costs capitalized on Australian property development
projects.

     COST IN EXCESS OF NET ASSETS ACQUIRED:  Cost in excess of net assets
acquired at December 31, 1997 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 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, 1997
was approximately $791,000.

     TRANSLATION OF NON-U.S. CURRENCY AMOUNTS:  The financial statements and
transactions of Reading Australia's cinema and real estate operations are
maintained in their functional currency (Australian dollars) and translated into
U.S. dollars in accordance with SFAS No. 52 "Foreign Currency Translation."
Assets and liabilities denominated in Australian dollars and are 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.

     INCOME (LOSS) PER COMMON SHARE: In 1997, the Company adopted the provisions
of Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings Per
Share".  SFAS No. 128 requires companies to present net earnings per share to be
calculated under two calculations, basic earnings per share and diluted earnings
per share.

     As described in Note 11, on December 15, 1997, the Board of Directors
declared a stock distribution of one share of Class A Common Preference Stock on
each share of the Common Stock and Class A Common Preference Stock outstanding.
The stock distribution occurred on February 5, 1998, resulting in an increase of
the number of Class A Common Shares outstanding to 7,006,912 as compared to
1,622,000 at December 31, 1997. All prior period per share amounts have been
restated to reflect this stock distribution.

     Income (loss) per share is calculated by dividing net earnings (loss)
available to common shareholders by the weighted average shares outstanding
during the periods presented. The retroactive application of SFAS 128 did not
result in any difference between primary EPS reported previously and basic EPS
calculated under SFAS 128. The weighted average number of shares used in the
computation of basic EPS was 10,769,824, 11,270,812, 11,832,440 and 11,939,170
for the years ended December 31, 1997 and 1996, the three months ended December
30, 1995 and the year ended September 30, 1995, respectively. Earnings per
share, assuming dilution is calculated by dividing net earnings available to
common shareholders by the weighted average common shares outstanding for the
period presented plus the dilutive effect of stock

                                      F-8
<PAGE>
 
CRAIG CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
(AMOUNTS IN TABLES IN THOUSANDS, EXCEPT SHARES AND PER SHARE DATA)


options. The weighted average number of shares used in the computation of
diluted EPS was 10,966,079, 11,331,195, 11,832,440 and 11,939,170 for the years
ended December 31, 1997 and 1996, the three months ended December 31, 1995 and
the year ended September 30, 1995, respectively. Basic net earnings per share
for fiscal 1997 and 1996 was calculated based on net earnings available to
common stock shareholders, which includes a reduction for dividends declared on
the redeemable preferred stock of REI amounting to $445,000 and $95,000 (See
Note 9).

     RECENT ACCOUNTING PRONOUNCEMENTS:  In June 1997, the Financial Accounting
Standards Board issued SFAS No. 130, "Reporting Comprehensive Income," and SFAS
No. 131, "Disclosure About Segments of an Enterprise and Related Information."
SFAS No. 130 establishes standards for reporting comprehensive income and its
components in the financial statements.  SFAS No. 131 requires publicly held
companies to report financial and other information about key revenue-producing
segments of the entity and which is utilized by the chief operation decision-
maker.  The Company is evaluating its implementation approach for SFAS Nos. 130
and 131, both of which will be adopted in 1998.

     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")

     Since September 30, 1995, Craig has increased its voting ownership in
Reading from 47.6% to approximately 78% at December 31, 1997 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 9), 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 anytime after April 15, 1998 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

                                      F-9
<PAGE>
 
CRAIG CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
(AMOUNTS IN TABLES IN THOUSANDS, EXCEPT SHARES AND PER SHARE DATA)

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"). Upon
consummation of the transaction on October 15, 1996, Craig and Citadel held
approximately 77.4% and 5%, respectively, of the voting power of REI.

     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
assets by $12.25. The closing price of REI stock on December 31, 1997 was $12.75
per share. If the value of the Citadel 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 agreed to reimburse 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 12). 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.

     The pro forma consolidated operating results set forth below gives effect
to Craig's fiscal 1996 acquisition of Reading, the August 1996 purchase of the
NY Angelika by Reading described in Note 3, the issuance of the REI redeemable
preferred stock to Citadel in the Stock Transactions and the amortization of the
negative goodwill allocated to the assets purchased, as if they had occurred on
October 1, 1994.

                                      F-10
<PAGE>
 
CRAIG CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
(AMOUNTS IN TABLES IN THOUSANDS, EXCEPT SHARES AND PER SHARE DATA)


<TABLE>
<CAPTION>
                                                PRO FORMA
                              ----------------------------------------------
                                   YEAR       THREE MONTHS        YEAR      
                                  ENDED          ENDED            ENDED     
                              DEC. 31, 1996   DEC. 31, 1995   SEPT. 30, 1995
                              -------------   -------------   --------------
<S>                             <C>              <C>            <C>
Revenues                         $32,364          $7,305         $27,438
Net earnings                     $43,438          $1,059         $ 4,295
Net earnings available to                                     
  common shareholders            $42,983          $  946         $ 3,840
Per Share net earnings                                        
  available to common                                         
  shareholders(1)                $  3.81          $  .08         $   .32
</TABLE>

____________________
(1)       Adjusted for the stock distribution declared on December 15, 1997.

          The pro forma consolidating results are based upon certain assumptions
and estimates and do not necessarily represent results which would have occurred
if the acquisition of Reading and NY Angelika had taken place on the basis
assumed, nor are they indicative of the future results of the combined
operations.

          Prior to the January 1, 1996, Craig owned approximately 47.6% of
Reading and accounted for its ownership using the equity method of accounting.
Included in equity earnings of affiliates for the three months ended December
31, 1995 and the year ended September 30, 1995 is Craig's share of Reading's net
earnings for those periods amounting to a net equity loss of approximately
$18,000, and net equity earnings of $989,000, respectively.

          Summarized financial information of Reading for the periods which
Craig included Reading in its consolidated financial statements using the equity
method of accounting is as follows:

<TABLE>
<CAPTION>
                                                      THREE MONTHS                YEAR
                                                         ENDED                    ENDED
                                                      DECEMBER 31,             SEPTEMBER 30,
CONDENSED STATEMENT OF INCOME                            1995                      1995
------------------------------------------------      -------------            -------------
<S>                                                      <C>                     <C>
Revenue:                                        
      Theatre                                             $3,205                  $14,878
      Interest and dividend                                  648                    2,194
      Other                                                  442                    2,461
                                                           -----                   ------
                                                           4,295                   19,533
Theater costs                                              2,642                   11,451
Depreciation and amortization                                348                    1,339                            
General and administrative                                 1,048                    4,457
Equity losses from Reading International                     246                       --
Earnings (Loss) before income taxes             
   and accounting change                                      11                    2,286   
Income taxes (benefit)                                        48                      189
                                                           -----                   ------
Net earnings (loss)                                       $  (37)                 $ 2,097
                                                           =====                   ======
</TABLE>

                                      F-11
<PAGE>
 
CRAIG CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
(AMOUNTS IN TABLES IN THOUSANDS, EXCEPT SHARES AND PER SHARE DATA)


        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, 1997 and 1996 is
that portion of Reading's financial statement results of operations and equity
that is not owned by the Consolidated Company as follows:

<TABLE> 
<CAPTION> 
                                                   YEAR ENDED
                                                   DECEMBER 31,
                                                   ------------
                                                1997         1996
                                                ----         ----
<S>                                           <C>           <C> 
Minority interest                             $  (330)      $ 1,471
Minority interest in equity of subsidiary     $30,277       $31,316
</TABLE> 

NOTE 3 -- THEATER ACQUISITION AND DEVELOPMENT ACTIVITIES

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

     Reading commenced operation of an eight screen Houston Angelika theater
located in downtown Houston, in December 1997.  The cinema and a cafe, which is
included in the lobby area and operated by a local restaurant operator, occupy
approximately 31,700 square feet and is leased pursuant to a long-term lease.

     Reading acquired the St. Anthony, a leased five screen theater, located in
Minneapolis Minnesota from a national theater owner operator in December 1997.
The theater operates under the Reading Cinemas name.  Reading paid the former
lessee $229,000 for the theater and assumed all obligations of the lessee under
the lease, which lease has a remaining term of approximately five years, subject
to an option to extend for an additional five years.

     In August 1996, Reading and Sutton Hill Associates ("Sutton Hill"),
acquired the assets comprising the NY Angelika, a multiplex theater located in
the Soho area of New York City.  The purchase price of the Angelika was
approximately $12,570,000 (subject to certain adjustments), 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 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 "Seller's Note") and
credit in full satisfaction of a judgment encumbering certain of the stock of
the Sellers.  The final payment on the Sellers Notes of $500,000 which is
included in the Consolidated Balance Sheet at December 31, 1997 as accrued "Note
Payable" was made in February 1998. The short-term portion of the Sellers Note
($1,500,000, bearing interest based on the 13 week T-bill rate) and the long-
term portion ($500,000, bearing interest at 9%) were classified as a current and
long term note payable in the Consolidated Balance Sheet as of December 31,
1996.

                                      F-12
<PAGE>
 
CRAIG CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
(AMOUNTS IN TABLES IN THOUSANDS, EXCEPT SHARES AND PER SHARE DATA)


     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 the 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 the Company will be entitled to receive up to 100%
of the proceeds of borrowing by AFC, up to the amount of the Company's initial
capital contribution to AFC.

     The Consolidated Company's domestic cinemas are managed by City Cinemas, a
New York motion picture exhibitor and an affiliate of Sutton Hill, pursuant to
management agreements.  The management agreement for the NY Angelika provides
for City Cinemas to manage the NY Angelika for a minimum annual fee of $125,000
plus an incentive fee equal to 50% of annual cash flow (as defined) over
prespecified levels provided, however, that the maximum annual fee may not
exceed 5% of the Angelika's annual revenues.  The management agreement with
respect to the remaining two domestic theaters provides  for a fee of 2.5% of
revenues.  Management fees paid to City Cinemas for the years ended December 31,
1997 and 1996 amounted to approximately $370,000 and $43,000, respectively.

     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 are included in the Consolidated Statements of Operations.
Sutton Hill's initial capital investment and share of the NY Angelika's net
earnings are included in Minority Interest in the accompanying Consolidated
Balance Sheet and amounted to approximately $1,960,000 and $2,000,000 as of
December 31, 1997 and 1996, respectively.

     Australia
     ---------

     In November 1995, the Consolidated Company formed Reading International to
develop and operate multiplex cinemas in Australia under the operating name
Reading Cinemas.  Reading International was equally owned by the Company and
Reading prior to the conclusion of the Stock Transaction in October 1996.  (See
Note 2).

     Since formation, Reading Australia has opened two new cinemas in leased
facilities and acquired a fee interest in an existing cinema, representing a
total of sixteen screens. In addition, Reading Australia has acquired several
sites which may be developed as entertainment center projects.

     During the three months ended December 31, 1995, Craig consolidated the
financial results of Reading International reflecting Craig's 74.5% financial
interest (Craig's 50% direct interest, together with its ownership interest in
Reading at December 31, 1995 resulted in a 74.5% interest for financial
statement purposes).  Reading's minority shareholders interest in such losses

                                      F-13
<PAGE>
 
CRAIG CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
(AMOUNTS IN TABLES IN THOUSANDS, EXCEPT SHARES AND PER SHARE DATA)


for the three months ended December 31, 1995 amounted to approximately $125,000.

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

     Reading acquired Cine Vista effective as of July 1, 1994.  Since that time,
Reading has opened two new cinemas with a total of fourteen screens and has
eight screens under construction and scheduled to open in summer 1998, which
cinema replaces a six screen cinema at the same location.

NOTE 4 -- INVESTMENT IN WHITEHORSE

     In November 1997, Reading Australia acquired a 50% interest from in the
Whitehorse Property Group Unit Trust ("WPG") for approximately $1,600,000. WPG
owns a shopping center located near Melbourne Australia, and is controlled
pursuant to a joint venture agreement between Reading Australia and a third
party.  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.  In conjunction with Reading
Australia's acquisition of its interest in WPG, Reading Australia loaned
approximately $1,400,000 to that joint venture partner which loan accrues
interest at 7.5% annum and is included in "Investment and advances in joint
venture" in the Consolidated Balance Sheet at December 31, 1997.  Reading
Australia also guaranteed 50% of the underlying property debt of WPG, which
amount totaled approximately $4,000,000.  The carrying amount of the
Consolidated Company's 50% interest approximates half the appraised value of WPG
and management believes that the December 31, 1997 carrying value of the WPG
investment approximates its fair value.  The Consolidated Company's investment
in WPG has been accounted for using the equity method.  WPG operated at a break
even level from the November 1997 acquisition date through the end of the year
and, accordingly, no equity earnings or losses have been recorded from the
investment in the 1997 Consolidated Statement of Operations.

NOTE 5 -- INVESTMENT IN CITADEL HOLDING CORPORATION ("CITADEL")

     Citadel, whose stock is traded on the American Stock Exchange, has been
engaged primarily in the business of owning and managing commercial and
residential properties since August 1994.  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 9), which represents 5% of the
outstanding voting securities of REI and an Asset Put Option.

     The Consolidated Company increased its common stock ownership in Citadel to
33.4% from 1,564,473 shares (26%) at December 31, 1996 through the Company's
purchase of an additional 666,000 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 8.5% at
December 31, 1997.  Interest expense paid pursuant to this note amounted to

                                      F-14
<PAGE>
 
CRAIG CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
(AMOUNTS IN TABLES IN THOUSANDS, EXCEPT SHARES AND PER SHARE DATA)


approximately $125,000 for the year ended December 31, 1997. 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."

     As of December 31, 1997 and 1996, the Consolidated Company's investment in
Citadel was $6,594,000 and $4,625,000, respectively.  Retained earnings
represented by undistributed earnings of the Consolidated Company's investment
in Citadel amounted to approximately $2,514,000 at December 31, 1997. Based upon
the closing price of Citadel's common stock of $4.50 at December 31, 1997, the
aggregate market value of the Consolidated Company's common stock interest in
Citadel was approximately $10,000,000.

     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, 1997 and 1996, the three months
ended December 31, 1995 and the year ended September 30, 1995.

<TABLE>
<CAPTION>
                                   Years      Three Months      Year
                                   Ended         Ended          Ended
                                December 31,  December 31,   September 30,
                               1997     1996      1995           1995
                               ----     ----      ----           ---- 
                                                                     
<S>                            <C>    <C>          <C>          <C>  
Equity earnings (losses)       $392   $1,526       $20          $(474)
Preferred stock dividends        --      154        40            140
Preferred stock                                                      
 redemption premium              --      716        --             --
                               ----   ------       ---          -----
                               $392   $2,396       $60          $(334)
                               ====   ======       ===          ===== 
</TABLE>

     Until November 1994, Craig held approximately a 9% interest in Citadel,
which for accounting purposes was reported at cost as adjusted for market
declines considered to be other than temporary. 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, Reading elected to exercise its
rights to convert the CHC Preferred Stock into CHC Common Stock, whereupon,
Citadel exercised its right to redeem the CHC Preferred Stock. The
Consolidated Company received the stated value of $5,250,000, 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 (losses) from investment in Citadel" in the Consolidated
Statement of Operations for the year ended December 31, 1996.

     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 2,213,043 shares or 33.4% of Big 4 Ranch, Inc.
The Company recorded such distribution of Big 4 Ranch, Inc. as 

                                      F-15
<PAGE>
 
CRAIG CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
(AMOUNTS IN TABLES IN THOUSANDS, EXCEPT SHARES AND PER SHARE DATA)


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. The Board of Directors and
executive officers of Big 4 Ranch, Inc. are comprised of Edward L. Kane (an REI
director), William D. Gould and Margaret Cotter (Craig Directors).

     In 1997, 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, 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 26.7% of such
partnerships at December 31, 1997.

     Summarized financial information of Citadel as of December 31, 1997 and
1996 and for each of the three years ended December 31, 1997 follows:


<TABLE>
<CAPTION>
                                                      YEARS ENDED DECEMBER 31,
                                                -----------------------------------
CONDENSED BALANCE SHEETS:                       1997                           1996
-------------------------                       ----                           ----
<S>                                           <C>                            <C> 
Cash and cash equivalents                     $ 4,364                        $ 6,356
Rental Properties                              13,652                         14,433
Investment in Reading                           7,000                          7,000
Equity investment and note receivable
  from Agricultural Partnerships                1,960                             --
Other assets                                    1,884                          2,503
Accrued and other liabilities                   1,411                          2,265
Mortgage liabilities                            9,395                         10,303
Stockholder's equity                           18,054                         17,724
</TABLE> 

<TABLE>
<CAPTION>
 
                                                          YEARS ENDED DECEMBER 31,
                                                  ----------------------------------------
CONDENSED STATEMENTS OF OPERATIONS:               1997             1996               1995
-----------------------------------               ----             ----               ----
<S>                                            <C>              <C>                 <C> 
Rental Income                                  $ 5,110          $ 4,932             $ 5,402
Interest income                                    326              844                 710
Real estate operating expenses                  (2,090)          (2,481)             (2,660)
Depreciation                                      (391)            (395)               (420)
Interest expense                                (1,009)          (1,317)             (1,327)
General and administrative expenses             (1,220)            (914)             (1,927)
Gain from Investment in Fidelity                    --            4,000                 (41)
Dividends from Investment in Reading               455               95                  --
Interest income from Craig                         125               --                  --
Consulting income from Reading                     240              169                 120
Gain (loss) on sale of rental property             (16)           1,493               1,541
                                               -------          -------             -------
Net earnings                                   $ 1,530          $ 6,426             $ 1,398
                                               =======          =======             =======
</TABLE>

                                      F-16
<PAGE>
 
CRAIG CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
(AMOUNTS IN TABLES IN THOUSANDS, EXCEPT SHARES AND PER SHARE DATA)


      Citadel net earnings for 1997, 1996 and 1995 include dividends, interest
income and consulting fees from the Consolidated Company amounting to $820,000,
$264,000 and $120,000, respectively.  In addition, stockholders equity at
December 31, 1997 includes the effect of the Big 4 Ranch, Inc. stock
distribution amounting to $1,200,000, the Consolidated Company's portion
amounting to $401,000.

      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.

NOTE 6 -- INVESTMENT IN STATER BROS. HOLDINGS, INC. ("SBH" AND TOGETHER WITH ITS
SUBSIDIARIES, "STATER")

      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.  The remaining 50% interest in Stater was owned by
La Cadena Investments ("La Cadena"), a general partnership consisting of key
executives of Stater.  Stater is a supermarket chain in Southern California,
operating 110 supermarkets in the Inland Empire Region of Southern California.

     During March 1994, Craig consummated several agreements with Stater and La
Cadena with respect to a series of separate transactions as a result of which
Craig, among other things, received from Stater pretax cash proceeds
approximating $42,000,000 and a return of 311,404 shares of Craig Common Stock,
La Cadena obtained voting control over SBH, and Stater, among other things,
acquired 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.  As part of the 1994 transactions, Craig entered into a
consulting agreement with Stater pursuant to which Craig, among other things,
agreed to render consulting services for a five year period for $1,500,000
annually.

      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 the conversion by
Stater in March 1996 of Craig's common stock interest to redeemable preferred
stock, the Consolidated Company discontinued the use of the equity method of
accounting for its investment in Stater.  Prior to the preferred stock
conversion, the carrying value of Craig's 50% common stock interest, net of the
$14.65 option proceeds 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".

                                      F-17
<PAGE>
 
CRAIG CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
(AMOUNTS IN TABLES IN THOUSANDS, EXCEPT SHARES AND PER SHARE DATA)


      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.  The SBH Preferred Stock was included in the accompanying
Consolidated Balance Sheet as December 31, 1996, as "Investment in Stater
Preferred Stock" at a value of $67,978,000 or 98% of stated value.  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
$69,365,000 stated value of the SBH Preferred Stock and the 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.

      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, the three
months ended December 31, 1995 and the year ended September 30, 1995:

<TABLE>
<CAPTION>
                                     Years      Three Months        Year
                                     Ended          Ended           Ended     
                                  December 31,    December 31,   September 30,
                                 1997      1996      1995            1995     
                                 ----      ----      ----            ----     
<S>                            <C>      <C>        <C>             <C>        
Dividend income                $4,330   $ 5,978        --              --     
Service fee income                972     1,500    $  375          $1,500     
Gain on conversion/                                                           
 repurchase of investment                                                     
 in Stater                      2,002    58,978        --              --     
Equity in earnings in                                                         
 Stater                            --     1,608     1,881           3,693     
                               ------   -------    ------          ------     
                               $7,304   $68,064    $2,256          $5,193     
                               ======   =======    ======          ======      
</TABLE>

      The unaudited pro forma effect on Net Earnings available to common
shareholders resulting from the repurchase of the Stater Preferred Stock and
termination of the Consulting Agreement would have been to reduce such net
earnings available to common stockholders by $5,018,000 and $40,794,000 for the
twelve months ended December 31, 1997 and 1996, respectively. The pro forma net
loss available to common shareholders for the year ended December 31, 1997 would
have been $2,167,000 (basic and diluted loss of $0.20 per share) and the pro
forma net earnings for the year ended December 31, 1996 would have been
$1,853,000 (basic and diluted earnings of $0.16 per share). Such pro forma
results assume that the redemption of the Company's investment in Stater had
accrued on January 1, 1996, thereby eliminating the income previously reported,
as detailed above, net of the related income tax provisions. In addition, the
proceeds received of $69,365,000 was assumed to have been invested at rate of
5.5% as of the beginning of the periods being reported.

                                      F-18
<PAGE>
 
CRAIG CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
(AMOUNTS IN TABLES IN THOUSANDS, EXCEPT SHARES AND PER SHARE DATA)


NOTE 7 -- 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, 1997 and 1996 as "Net investment in leased equipment."

NOTE 8 -- PROPERTY, PLANT AND EQUIPMENT

     The Consolidated Company's property, plant and equipment at December 31,
1997 and 1996 consisted of the following:



<TABLE>
<CAPTION>
                                        December 31,       December 31,
                                            1997              1996
                                        ------------       ------------
<S>                                       <C>              <C> 
Land*                                     $10,978          $ 7,332
Property held for development*              4,137               --
Property development costs*                 1,440            1,207
Buildings                                   1,959              743
Capitalized lease premises                    538              538
Leasehold improvements                      9,007              974
Equipment                                   8,074            6,450
Construction in progress                    3,159            1,356
                                          -------          -------
Property, plant and equipment              39,292           18,600
Less: Accumulated depreciation             (3,634)          (2,224)
                                          -------          -------
Property, plant and equipment, net        $35,658          $16,376
                                          =======          =======
</TABLE>

* Represents land, property held for development and property development costs
  capitalized with Respect to potential Reading Australia projects. Property
  held for development reflects the net purchase price of a property which was
  acquired by Reading Australia in March 1998 and which Reading Australia was
  obligated at December 31, 1997 to reimburse the seller for demolition costs.
  See Note 14.

                                      F-19
<PAGE>
 
CRAIG CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
(AMOUNTS IN TABLES IN THOUSANDS, EXCEPT SHARES AND PER SHARE DATA)


NOTE  9 -- 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 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 will be separately
categorized as "Redeemable Preferred Stock of subsidiary", 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 at any time after April
15, 1998. 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, 1997 and 1996 amounted to approximately $455,000 and $95,000,
respectively.

NOTE 10 -- STOCK OPTIONS

  In October 1995, the Financial Accounting Standards Board issued SFAS No. 123,
"Accounting for Stock-Based Compensation." SFAS No. 123 encourages companies to
adopt a fair value approach to valuing stock options that would require
compensation costs to be recognized based upon the fair value of the stock
option granted.  As permitted by SFAS No. 123, the Company has elected to follow
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" (APB 25) and related Interpretations in accounting for its employee
stock options and will provide the footnote disclosures required by SFAS No.
123. Under APB 25, if the exercise price of Craig's employee stock options
equals or exceeds the market price of the underlying stock on the date of grant,
no compensation expense is recognized.

  As described in Note 11, the Board of Directors declared a stock dividend of
Class A Common Stock on December 5, 1997.  Stock option data regarding shares
and exercise prices has been reflected as an adjustment in the data for 1997 as
it impacted the terms of each individual stock option grant differently.

                                      F-20
<PAGE>
 
CRAIG CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
(AMOUNTS IN TABLES IN THOUSANDS, EXCEPT SHARES AND PER SHARE DATA)


  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.

 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 October 1, 1994                   30,000      $ 13.32           192,500           $10.50
 Canceled(3)                                                                  (175,000)          $10.50
 Granted(3)                                     300,000      $ 11.75   
                                               --------      -------          --------           ------
Outstanding at September 30, 1995               330,000      $ 11.90            17,500           $10.50
                                               --------      -------          --------
Outstanding at December 31, 1995                330,000      $ 11.90            17,500           $10.50
                                               --------      -------          --------           ------
Outstanding at December 31, 1996                330,000      $ 11.90            17,500           $10.50
 Granted(1)                                      15,000      $ 19.81
 Expired(2)                                     (15,000)     $(12.75)               
                                               --------      -------          --------           ------
Outstanding at December 31, 1997                330,000      $ 12.21            17,500           $10.50
                                               --------      -------          --------           ------
Exercisable at December 31, 1997                315,000      $ 11.85            17,500           $10.50
                                               --------      -------          --------           ------

Outstanding at December 31, 1997
adjusted for declared stock distribution(4)     624,940      $  6.05            60,000           $ 7.20
                                               --------      -------          --------           ------
</TABLE>

     (1)  Represents an option to acquire 15,000 common shares granted to
          Margaret Cotter upon her election to the Board of Directors in
          December 1997.  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.
     (3)  The Board of Directors approved the grant of a ten year option to
          acquire 300,000 shares of Craig's common stock at an exercise price of
          $11.75 per share in June 1995 to the Chairman of the Board.  Such
          grant was made in consideration of, among other things, the Chairman's
          agreement to extend his consulting agreement with Craig through
          September 30, 1997 with no increase in compensation and the
          cancellation of 

                                      F-21
<PAGE>
 
CRAIG CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
(AMOUNTS IN TABLES IN THOUSANDS, EXCEPT SHARES AND PER SHARE DATA)

          a previously issued vested option to purchase 175,000 shares of
          Craig's Class A Common Preference Stock at an exercise price of $10.50
          per share.
     (4)  The stock distribution had the effect of increasing the number of
          shares outstanding.  With the exception of the Chairman of the Board,
          the number of shares available for option was increased by the number
          of options previously granted, however, the increase was in the Class
          A Common Preference Stock.  In December 1997, the Board 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.


          The weighted-average remaining contractual life of all options
outstanding at December 31, 1997 was 6.5 years.

          Pro forma net income and earnings per share information reflecting the
fair value approach to valuing stock options and the corresponding increase in
compensation expense is required by SFAS No. 123 in each of the years that a
company grants stock options. The Company granted 15,000 options in 1997. The
fair value of this option was estimated at the dates of grant using a Black-
Scholes option pricing model with the following weighted average assumptions:
stock option exercise price of $19.8125, 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 1997
was $4.35 per share. There is no pro forma effect of the issuance of these
options to diluted earnings per share for the year ended December 31, 1997. 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.

NOTE 11 -- 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 

                                      F-22
<PAGE>
 
CRAIG CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
(AMOUNTS IN TABLES IN THOUSANDS, EXCEPT SHARES AND PER SHARE DATA)


Common Preference Stock. Such stock distribution occurred on February 5, 1998.
Immediately following such distribution, the Company had 3,762,912 shares of
Common Stock and 7,006,912 shares of Class A Common Preference Stock
outstanding. The amount of approximately $54,000 will be transferred from
additional paid in capital to the Class A Common Preference account to record
this distribution in February 1998. Previously reported earnings per share has
been restated to reflect such stock distribution.

          Craig purchased 539,100 shares of its common stock at a purchase price
of approximately $7,585,000 during the twelve months ended December 31, 1996;
54,000 shares of its Common stock and 23,000 shares of its Class A Common
Preference stock at a purchase price of approximately $709,000 during the three
months ended December 31, 1995; and 90,000 shares of its Common stock at a
purchase price of approximately $823,000 during the year ended September 30,
1995.

          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.  Under the terms of the agreement, Mr. Cotter
granted to Craig, for a two year period, the right of first refusal to acquire
the 66,042 shares of its Common Stock and 66,042 shares of the Class A Common
Preference Stock received in the February 1998 distribution at a price of $9.00
per share in the event that Mr. Cotter determines to sell, assign or convey any
interest in such shares.  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 12 -- 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          Three Months     Year 
                                     Ended             Ended         Ended
                                  December 31,      December 31,  September 30, 
                               1997         1996        1995          1995
                               ----         ----        ----          ----
<S>                           <C>          <C>         <C>           <C>  
Earnings (loss) consists                                                  
of the following:                                                         
 United States                $7,945       $73,180     $1,717        $5,108
 Foreign                      (3,327)       (4,730)        --            --
                              ------        ------     ------        ------
  Total:                      $4,618       $68,450     $1,717        $5,108
                              ======       =======     ======        ======
</TABLE>

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

                                      F-23
<PAGE>
 
CRAIG CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
(AMOUNTS IN TABLES IN THOUSANDS, EXCEPT SHARES AND PER SHARE DATA)



<TABLE>
<CAPTION>
                                                Years            Three Months        Year
                                                Ended               Ended            Ended
                                             December 31,         December 31,   September 30,
                                         1997            1996        1995            1995
                                         ----            ----        ----            ----
<S>                                    <C>            <C>            <C>            <C>
Income taxes (benefit):
 Current:
  Federal                              $  181         $   946        $245           $   85
  Foreign                                 698             446          20               --
  State and local                         273              83          50              (30)
                                       ------         -------        ----           ------
 Total current                          1,152           1,475         295               55
                                       ------         -------        ----           ------
 Deferred:                                                                                
  Federal                                 160          20,621         490            1,090
  State                                    --           3,707          82              505
                                       ------         -------        ----           ------
 Total deferred:                          160          24,328         572            1,595
                                       ------         -------        ----           ------
                                                                                          
   Total income taxes                  $1,312         $25,803        $867           $1,650
                                       ======         =======        ====           ====== 
 
</TABLE>
     The reconciliation of income taxes at United States statutory rates to
income taxes as reported are as follows:

<TABLE>
<CAPTION>
                                                Years             Three Months       Year
                                                Ended                Ended           Ended
                                             December 31,        December 31,    September 30,
                                         1997            1996        1995            1995
                                         ----            ----        ----            ----
<S>                                    <C>            <C>            <C>            <C>
Tax at U.S. statutory rates            $ 1,570        $23,958        $584           $1,737
Foreign withholding tax                    698            446          --               --
Use of net operating                                                                      
 loss carryforwards                     (2,344)            --          --               --
Foreign and U.S. losses                                                                   
 not benefited                           1,593            234          --               --
Dividend exclusion on                                                                     
 preferred dividends                      (698)        (1,811)        (10)             (35)
Unrealized tax benefits,                                                                  
 net of AMT                                238           (886)         --             (365)
Other                                       --            276         165               --
State taxes, net of                                                                       
 federal benefit                           255          4,138         128              313
                                       -------        -------        ----           ------
  Total income expense                 $ 1,312        $25,803        $867           $1,650
                                       =======        =======        ====           ====== 
</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

                                      F-24
<PAGE>
 
CRAIG CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
(AMOUNTS IN TABLES IN THOUSANDS, EXCEPT SHARES AND PER SHARE DATA)


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.

          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 the Company'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:

                                      F-25
<PAGE>
 
CRAIG CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
(AMOUNTS IN TABLES IN THOUSANDS, EXCEPT SHARES AND PER SHARE DATA)


<TABLE>
<CAPTION>
                                                 DECEMBER 31,
DEFERRED TAX LIABILITIES:                1997                 1996
                                         ----                 ----
<S>                                   <C>                   <C> 
 Tax basis difference of
  investments in affiliates           $ 12,286              $ 18,658
                                      --------              --------
DEFERRED TAX ASSETS:
Craig:
  Capital loss carryforward              1,370                 7,804
  Federal benefit of state
   taxes                                 2,385                 2,368
  Other                                    163                   278
Reading:
  Net operating loss
   carryforwards                        14,996                15,310
  Alternative minimum taxes              3,073                 2,928
  Foreign tax credit                     1,168                    --
  Wrap lease rental sale                10,712                13,171
  Other                                  1,311                 1,134
                                      --------              --------
Gross deferred asset                    35,178                42,993
Valuation allowance                    (31,260)              (32,543)
                                      --------              --------
Net deferred tax asset                   3,918                10,450
                                      --------              --------
Net deferred tax liabilities          $  8,368              $  8,208
                                      ========              ========
</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 $31,260,000 was necessary at December 31, 1997.
Reading's federal tax net operating loss carryforwards amounting to $32,584,000
expire as follows:


<TABLE>
<CAPTION>
                         Year                      Amount
             ------------------------      --------------------
             <S>                                  <C>
             2000....................              21,983
             2002....................               7,382
             2003....................                 589
             2007....................               1,443
             2008....................               1,155
             2009....................                  32
                                                  -------
                                                  $32,584
                                                  =======
</TABLE>



       In addition to the federal net operating loss carryforwards, Reading has
alternative minimum tax credits of $3,073,000 which can be carried forward
indefinitely. Also, Reading has foreign net operating loss carryforwards of
$9,517,000, $8,189,000 of which expires between 2000 and 2002 unless utilized
prior thereto. In 1996, Reading had $13,426,000 of federal net operating loss
carryforwards that expired unused. At December 31, 1997, Craig has capital loss
carryforwards of approximately $3,200,000 which expire in 2001 unless utilized
prior thereto.

                                      F-26
<PAGE>
 
CRAIG CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
(AMOUNTS IN TABLES IN THOUSANDS, EXCEPT SHARES AND PER SHARE DATA)


       Reading is required to pay AMT for 1997 and 1996.  AMT is calculated
separately from the regular federal income tax and is based on a flat rate
applied to a broader tax base.  Amounts payable thereunder cannot be totally
eliminated through the application of net operating loss carryforwards.  The
Consolidated Company recorded AMT expense of $146,000 and $935,000 in fiscal
year 1997 and 1996.

NOTE 13 -- 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 compliant 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

                                      F-27
<PAGE>
 
CRAIG CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
(AMOUNTS IN TABLES IN THOUSANDS, EXCEPT SHARES AND PER SHARE DATA)


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, plaintiff filed a purported derivative action against
the same defendants.  This action included claims substantially similar to those
asserted in the class action and also alleged waste of tax benefits relating to
the Company's historic railroad operating losses.  The Company moved to dismiss
this case for failure to comply with the mandated procedures for bringing such
an action.  On January 23, 1998, the Court dismissed the derivative action.  The
Company intends to pursue recovery of counsel fees expended in the defense of
the case.  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.

     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.

REI -Environmental
------------------

       Reading Company has been advised by the Environmental Protection Agency
("EPA") that it is a potentially responsible party ("PRP") under environmental
laws including Federal Superfund legislation ("Superfund") for a site located in
Douglassville, Pennsylvania.  In 1995, the federal district court judge who
presided over Reading Company's bankruptcy reorganization ruled that all
liability asserted against Reading Company relating to the site was discharged
pursuant to the consummation order issued in conjunction with the bankruptcy on
December 31, 1980. The judge's decision was appealed and the appeal was heard in
July 1996. A decision upholding the Company's position was rendered in June 1997
by the United States Court of Appeals for the Third Circuit (the "Appeals
Court").  A subsequent request for a rehearing was rejected by the Appeals
Court, and the period for appeal to the United States Supreme Court has expired.
Accordingly, the Company believes that Reading Company has no liability relating
to the site.  However, a subsidiary of Reading Company was also named as a PRP
at the site and if that subsidiary's defenses (including insolvency), proved
ineffective the liability is estimated to be less than $300,000.

       Pursuant to a settlement of litigation, the City of Philadelphia,
Conrail, and the Southeastern Pennsylvania Transportation Authority have agreed
to pay an amount ranging from 52% to 55% of future costs that Reading may incur
in cleaning environmental contamination on one of its other properties, the
Viaduct, which Reading believes may be contaminated by polychlorinated biphenyls
("PCBs"). Reading Company has advised the EPA of the potential contamination.
Reading Company has not determined the scope and extent of any such PCB
contamination. However, Reading has been advised by counsel that, given the lack
of regulatory attention to the Viaduct in the fourteen years 

                                      F-28
<PAGE>
 
CRAIG CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
(AMOUNTS IN TABLES IN THOUSANDS, EXCEPT SHARES AND PER SHARE DATA)


which have elapsed since EPA was notified of the likelihood of contamination, it
is unlikely that the Reading will be required to decontaminate the Viaduct or
incur costs related thereto.

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 14 -- LEASE AGREEMENTS AND PURCHASE COMMITMENTS

       The Consolidated Company's rental expense for the twelve months ended
December 31, 1997, 1996, the three months ended December 31, 1995 and the year
ended September 30, 1995 was $4,225,000, $2,974,000 (inclusive of $220,000 of
contingent rental expense), $23,000 and $69,000, respectively; subrental income
paid by Citadel to Craig for the rental of office space to Citadel amounted to
$2,000 monthly since July 15, 1995.  The increase during the year ended December
31, 1996 reflects the result of Craig's consolidation of REI's operations in the
consolidated financial statements of the Company as of January 1, 1996.  The
following summarizes separately the lease and purchase commitments of Craig and
Reading.

Craig
-----

       Craig leases certain office space under a lease expiring in October 2001.
Pursuant to the lease, the Company has the right to terminate the lease between
February and July 1998 for a cancellation fee of $45,000.  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 $67,000 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, 1997 and 1996, a loss
from this joint venture of $207,000 and $780,000 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 included a prepayment of approximately
$150,000 and annual minimum payments of approximately $103,000, to be paid

                                      F-29
<PAGE>
 
CRAIG CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
(AMOUNTS IN TABLES IN THOUSANDS, EXCEPT SHARES AND PER SHARE DATA)


monthly for ten years.  The lease provides the lessor with a one time option to
cancel the lease at the end of the third year for approximately $45,000.

Reading Lease and Purchase Commitments
--------------------------------------

     CineVista and the domestic cinemas conduct their operations in leased
premises.  Two of Reading Australia's three operating multiplexes are in leased
facilities.  Reading's cinema leases have remaining terms, inclusive of options,
of 12 to 40 years.  Certain of Reading's cinema leases provide for contingent
rentals based upon a specified percentage of theater revenues with a guaranteed
minimum.  Substantially all of the leases require the payment of property taxes,
insurance and other costs applicable to the property.  Reading also leases
office space, warehouse space and equipment under noncancellable operating
leases. With the exception of one capital lease, all leases are accounted for as
operating leases.

       Future minimum lease payments by year and in the aggregate, under
noncancellable operating leases and the Cine Vista capital lease consist of the
following at December 31, 1997:


<TABLE>
<CAPTION>
                                           CAPITAL       OPERATING
                                            LEASE         LEASES
                                            -----         ------
<S>                                        <C>            <C>
1997                                       $   95         $ 3,215
1998                                           95           3,101
1999                                           95           3,068
2000                                           95           3,098
2001                                           95           3,099
Thereafter                                  1,069          41,511
                                           ------         -------
Total net minimum lease payments            1,544         $57,092
                                                          =======
Less amount representing interest           1,028
                                           ------
Present value of net minimum              
   lease payments under capital lease      $  516
                                           ======
</TABLE>

      At December 31, 1997, Reading had four lease agreements for theater
facilities with a total of 46 screens which were then under construction or for
which construction is anticipated to be completed in 1998 and 1997.  The
aggregate anticipated contribution for construction costs for such facilities
was approximately $27,000,000 at December 31, 1997.  The aggregate minimum
annual rental for such leases is approximately $1,900,000, (excluding one lease
which provides for the payment of rent currently, which amount is included in
the minimum lease payments set forth above) which rentals commence upon the
opening the theaters.

     During 1997, Reading Australia entered into two property purchase
agreements and one option agreement to acquire land.  Pursuant to the terms of
the agreements, Reading Australia has made deposits of approximately $700,000,
which amounts have been classified as "Restricted Cash" on the Company's
Consolidated Balance Sheet.

                                      F-30
<PAGE>
 
CRAIG CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
(AMOUNTS IN TABLES IN THOUSANDS, EXCEPT SHARES AND PER SHARE DATA)


     Under the terms of one of the purchase contracts, Reading Australia was
required to pay the balance of the purchase price, approximately $4,137,000 upon
completion of certain demolition activities to be performed by the property
owner.  Reading Australia also issued a fully cash-collateralized guarantee
prior to the commencement of the demolition activities in favor of the property
owner in the amount of $2,900,000, which amount has been reflected as
"Restricted Cash" in the Company's Consolidated Balance Sheet.  The Company has
included the full amount of the purchase price of the property as "Property
under development" in the 1997 Consolidated Balance Sheet and reflected the
obligation for the remaining purchase price, $3,516,000, as a "Purchase
Commitment" on the Consolidated Balance Sheet.  Closing in the property purchase
occurred in March 1998.   Reading Australia intends to develop an entertainment
center on the site at an estimated cost of approximately $19,000,000, exclusive
of the property purchase price.

     Reading Australia has an option to acquire a 12 acre site located in
Sydney, Australia.  The option exercise price is approximately $6,800,000.  If
the option is exercised, the Company intends to develop an entertainment center
on the site at an estimated cost of in excess of $23,000,000.

     In April 1997, Reading Australia entered into a joint venture agreement
with an experienced theater operator whereby the joint venture partner may
borrow up to approximately $650,000 from Reading Australia to invest in certain
country cinema developments.  In accordance with the agreement, the partner has
borrowed approximately $325,000 from Reading Australia and utilized the proceeds
of the borrowing to acquire a 25% ownership interest (computed after
consideration of certain management fees payable to Reading Australia) in
Reading Australia's theater in Townsville, Queensland.

     Under the terms of the joint venture agreement with WPG (See Note 4),
Reading Australia is required to build a multiplex theater with a minimum of ten
screens with a cost of not less than $6,500,000, if Reading Australia's joint
partner prepares and funds a plan to renovate and expand the joint venture
property.

NOTE 15 -- LONG-TERM  DEBT

      Cine Vista has a $7,500,000, eight-year revolving credit agreement (the
"Credit Agreement") with a bank.  Under terms of the Credit Agreement, Cine
Vista may borrow up to $7,500,000 to fund certain new theater development
expenditures. Through December 31, 1998, Cine Vista may borrow and repay amounts
outstanding under the Credit Agreement.  Amounts, if any, outstanding at
December 31, 1998 are payable in increasing quarterly installments over the
balance of the loan term.  At December 31, 1997 and 1996, no amounts were
outstanding under this agreement.

      As security for the loan, Cine Vista has pledged substantially all of its
assets.  In addition, the stock of Cine Vista's parent company has been pledged
as security for the loan.  In conjunction with the loan, Reading has also agreed
to subordinate to the lender its right to payment of the Subsidiary 

                                      F-31
<PAGE>
 
CRAIG CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
(AMOUNTS IN TABLES IN THOUSANDS, EXCEPT SHARES AND PER SHARE DATA)


Loans as well as certain other fees payable by Cine Vista to the Company under
certain circumstances.

      The provisions of the Credit Agreement require Cine Vista 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 Cine Vista's
election.  In accordance with the provisions of the Credit Agreement, Cine Vista
is required to pay a commitment fee on the unused commitment equal to 1/2 of 1%.

NOTE 16 -- RELATED PARTY TRANSACTIONS

      Reading acquired the NY Angelika on August 27, 1996 (See Note 3).  The
theater is owned jointly by the Consolidated Company 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 the Management Agreement.
Mr. Cotter is the Chairman of the Board of REI and Craig and the principal
shareholder of Craig. A company controlled by Mr. Forman and his family
beneficially own 12.4% of Craig's outstanding securities. City Cinemas also
manages the remainder of the Consolidated Company's domestic cinemas. (See Note
3). Robert F. Smerling, President of the Company and John Foley, Vice President
of Marketing of the Company, also serve in the same positions with City Cinemas
for which they are paid by City Cinemas.

      As described in Note 11, Craig purchased 67,000 shares of Reading Common
Stock from the Chairman of the Board, James J. Cotter in exchange for 66,042
shares of Craig Common Stock.

      During the years ended December 31, 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 $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, 1997 and 1996 and $18,000 for the three
months ended December 31, 1995.

      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.

                                      F-32
<PAGE>
 
CRAIG CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
(AMOUNTS IN TABLES IN THOUSANDS, EXCEPT SHARES AND PER SHARE DATA)


NOTE 17 -- OTHER INCOME AND FINANCIAL INSTRUMENTS

      "Other income" totaled $1,157,000 and $3,622,000, for the years ended
December 31, 1997 and 1996, respectively.  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
resulting in a gain of $220,000 as of December 31, 1997.  During the first
quarter of 1998, the currency positions and extensions thereof matured and the
Company incurred a loss.  The loss, which will be recognized in the first
quarter of 1998, totals approximately $700,000.

     The principal components of "Other income" in 1996 included a $2,360,000
settlement of Reading's claim against Conrail, the City of Philadelphia, the
Southeastern Pennsylvania Transportation Authority and several other parties for
reimbursement of costs incurred by Reading associated with cleanup of PCB
contamination in certain properties formerly owned by Reading and $1,119,000
received, net of expenses, in settlement of a claim against a third party for
failure to pay certain fees.

                                      F-33
<PAGE>
 
CRAIG CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
(AMOUNTS IN TABLES IN THOUSANDS, EXCEPT SHARES AND PER SHARE DATA)


NOTE 18 -- QUARTERLY FINANCIAL INFORMATION (UNAUDITED)

      Quarterly financial information for the years ended December 31, 1997 and
1996, are summarized below:


<TABLE>
<CAPTION>
                                                                NET                     NET                        BASIC AND
                                                              REVENUES                EARNINGS                      DILUTED
                                                                                     AVAILABLE TO                   EARNINGS 
                                                                                     STOCKHOLDERS                  PER  SHARE
                                                         --------------------     -------------------           ----------------
YEAR ENDED DECEMBER 31, 1997                                           (IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
-----------------------------------------------------    -----------------------------------------------------------------------
<S>                                                            <C>                     <C>                          <C>   
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                            
                                                                                                                          
YEAR ENDED DECEMBER 31, 1996                                                                                              
                                                                                                                          
Quarter ended March 31, 1996                                   $ 6,068                 $31,293                       $2.70
Quarter ended June 30, 1996                                      6,228                   7,274                        0.62
Quarter ended September 30, 1996                                 7,245                   1,853                        0.17
Quarter ended December 31, 1996                                  8,324                   2,132                        0.20 
                                                               -------                 -------
                                                               $27,865                 $42,552
                                                               =======                 =======
</TABLE>

   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 relating to SWS
Industries.  The Company had been guarantor on various performance bonds issued
on behalf of SWS.  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.

   The first, second, and fourth quarters of fiscal 1996 include the gain from
the conversion of Craig's common stock holdings in Stater to preferred stock
amounting to $49,961,000, $8,325,000 and $693,000, respectively. Dividend income
from the Stater Preferred Stock in each of the four quarters of Fiscal 1996
beginning March 31, amounted to $478,000, $1,816,000, $1,836,000 and $1,848,000,
respectively.

   The second quarter of 1996 includes approximately $1,433,000 of equity
earnings from the Citadel Common Stock investment.  These equity earnings
included the Consolidated Company's 26.1% share of a nonrecurring gain on sale
of real estate of $1,473,000 and nonrecurring income of $4,000,000 from the

                                      F-34
<PAGE>
 
CRAIG CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
(AMOUNTS IN TABLES IN THOUSANDS, EXCEPT SHARES AND PER SHARE DATA)


recognition for financial statement purpose of previously deferred proceeds from
the bulk sale of loans by a previously owned subsidiary of Citadel (See Note 4).
The third quarter includes $1,119,000 received net of expenses in full
settlement of a claim relating to a prior year purchase offer.  Fourth quarter
revenues include $2,360,000 recorded as income related to a settlement of a
claim for property clean-up amounts previously expensed by Reading.  The fourth
quarter also includes the effects of the $941,000 preferred stock redemption
premium by Citadel (See Note 5). Reading Australia's fourth quarter loss totaled
$1,468,000.

NOTE 19 -- BUSINESS SEGMENTS AND GEOGRAPHIC AREA INFORMATION


     In order to more accurately insulate and segregate its operating activities
and future real estate development plans from each other, Reading Australia
undertook steps to separate its real estate development activities from its
cinema operations in Australia during 1997.  Accordingly, effective as of
January 1997 Reading Australia commenced operations in two business segments,
cinema development and operations, and real estate development.  Domestically,
and in Puerto Rico, the Consolidated Company is primarily engaged in one
business segment, the operation and development of motion picture theaters.  The
following sets forth certain information concerning the Consolidated Company's
two segments, real estate development, and cinema operations in 1997 the only
period in which the Consolidated Company's operated in more than one segment:

<TABLE>
<CAPTION>
 
                         REAL ESTATE        CINEMA       CORPORATE AND
      1997               DEVELOPMENT      OPERATIONS     ELIMINATIONS         CONSOLIDATED
      ----               -----------      ----------     ------------         ------------
<S>                      <C>              <C>            <C>                  <C>
Revenues(2)                     0             26,984          1,152                28,136
Operating income       
  (loss)(2)                (2,506)               778         (4,906)               (6,634)
Identifiable assets        18,910             34,372        113,843               167,125
Depreciation                    0              1,687             50                 1,737
Capital expenditures(1)     7,586             12,463             69                20,118
</TABLE> 
_____________________

     (1) Capital expenditures are net of $3,516,000 purchase commitment.
     (2) Amounts do not include "Divided income from Stater".

     The following table indicates the relative amounts of revenues from
operations and identifiable assets of the Company by geographic area during the
two-year period ended December 31, 1997.  Prior to January 1, 1996, the Company
accounted for its investment in REI using the equity method of accounting and
accordingly, all revenues and identifiable assets were considered U.S.
corporate, and accordingly, have not been separately detailed in the table
below.  The Company has no export revenues.

                                      F-35
<PAGE>
 
CRAIG CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
(AMOUNTS IN TABLES IN THOUSANDS, EXCEPT SHARES AND PER SHARE DATA)


<TABLE>
<CAPTION>
                                                                                  December 31,
                                                                            ----------------------
                                                                            1997              1996
                                                                            ----              ----
<S>                                                                      <C>                <C>
Revenues:(4)
  Puerto Rico.................................................           $ 15,186           $ 15,523
  United States...............................................              9,130              3,256
  Australia...................................................              3,820                 --

Income (loss) from operations:(1)(4)
  Puerto Rico.................................................           $    (70)          $    385
  United States...............................................              1,288                956
  Australia...................................................             (3,518)            (2,817)
  Corporate and Other(2)......................................             (4,334)            (2,480)

Identifiable assets:(3)
  Puerto Rico.................................................           $  7,420           $  6,207
  United States...............................................             20,860             15,824
  Australia...................................................             28,379             12,948
  Corporate and other.........................................            110,466            130,989
  Consolidated Assets(1)......................................           $167,125           $165,968
</TABLE>

     (1)  Reflects earnings before interest expense, taxes and intercompany
          interest and management fees.
     (2)  Corporate and other income includes corporate General and 
          Administrative expense and excludes intercompany interest and
          management fees.
     (3)  Reading Australia has cash and cash equivalents which had a value of
          $60,889,000 and $14,232,000 in 1997 and 1996, respectively.  Such
          amounts have been included in the value of Corporate and other Assets.
     (4)  Amounts do not include dividend income from Stater.

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 will be primarily
dependent on Reading's ability to pay dividends in accordance with the terms of
the Series B Preferred Stock (Note 2).

                                      F-36
<PAGE>
 
CRAIG CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
(AMOUNTS IN TABLES IN THOUSANDS, EXCEPT SHARES AND PER SHARE DATA)


<TABLE>
<CAPTION>
                                                                                  YEARS ENDED
                                                                                  DECEMBER 31,
CONDENSED BALANCE SHEET:                                                     1997              1996
                                                                             ----              ----
<S>                                                                       <C>                <C>
Assets:
-------
 Cash                                                                     $  5,332           $  3,492
 Other current assets                                                           31                146
                                                                          --------           --------
  Total current assets                                                       5,363              3,638
 Investment in Citadel                                                       1,972                 --
 Investment in Common Stock of Reading                                      68,055             69,737
 Investment in Preferred Stock of Reading                                   55,000             55,000
 Property and equipment, net                                                   788                943
 Other assets                                                                  323                252
 Excess of cost over net assets acquired                                     1,153              1,196
                                                                          --------           --------
  Total assets                                                            $132,654           $130,766
                                                                          ========           ========
Liabilities and stockholders equity:
------------------------------------
 Accounts payable and accrued expenses                                    $    723           $    803
 Note payable to Citadel, current                                            1,998                 --
 Deferred tax liabilities                                                   30,410             30,250
 Stockholders' equity                                                       99,523             99,713
                                                                          --------           --------
 Total liabilities and stockholders' equity                               $132,654           $130,766
                                                                          ========           ========
</TABLE>

     The Consolidated Statements of Operations and Cash Flows for Craig for the
three months ended December 31, 1995 and the year ended September 30, 1995 are
the same as those included in the accompanying Consolidated Statement of
Operations and Cash Flows and, thus, they are not repeated below.

                                      F-37
<PAGE>
 
CRAIG CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
(AMOUNTS IN TABLES IN THOUSANDS, EXCEPT SHARES AND PER SHARE DATA)


<TABLE>
<CAPTION>
                                                                 YEARS ENDED
                                                                 DECEMBER 31,
                                                         ---------------------------
CONDENSED STATEMENT OF OPERATIONS:                       1997                   1996
                                                         ----                   ----
<S>                                                     <C>                  <C>
Revenues:
---------
 Equity in earnings of Stater                           $   --               $  1,608
 Equity in earnings of Reading                             500                  2,304
 Equity in earnings of Citadel                              94                     --
 Dividend income from Reading                            3,575                    748
 Dividend income from affiliates                            --                  4,534
 Service income from Stater                                972                  1,500
 Interest income                                           196                    415
                                                        ------               --------
                                                        $5,337               $ 11,109
                                                        ------               --------
Expenses:
---------
 General and administrative                              1,952                  2,024
 Interest expense                                          125                     --
 Loss from Australian theatre   developments                --                    388
 Loss from joint venture                                   207                    780
                                                        ------               --------
                                                         2,284                  3,192
                                                        ------               --------
 Earnings before other income and income taxes           3,053                  7,917
 Gain from interest in Stater                               --                 58,978
                                                        ------               --------
 Earnings before income taxes                            3,053                 66,895
 Income taxes                                              245                 24,342
                                                        ------               --------
        Net earnings                                    $2,808               $ 42,553
                                                        ======               ========
CONDENSED STATEMENT OF CASH FLOWS:
Operating Activities:
---------------------
 Net earnings                                            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)
 Undistributed earnings of equity affiliates              (594)                (3,912)
 Increase in deferred taxes                                160                 24,003
 Other                                                     287                    844
                                                        ------               --------
 Net cash provided by operating activities               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                       (1,998)                    --
 Purchase of equipment                                      (2)                  (129)
                                                        ------               --------
 Net cash provided by investing activities              (2,819)                 2,158
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                                 --                 (7,584)
                                                        ------               --------
 Net cash (used in) financing activities                 1,998                (21,725)
Decrease in cash and cash equivalents                    1,840                (15,057)
Cash and cash equivalents at January 1,                  3,492                 18,549
                                                        ------               --------
Cash and cash equivalents at December 31,               $5,332               $  3,492
                                                        ======               ========
</TABLE>

                                      F-38
<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, 1997 and 1996, and the related
consolidated statements of operations, shareholders' equity, and cash flows for
the years ended December 31, 1997 and 1996, the three months ended December 31,
1995 and for the year ended September 30, 1995.  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, 1997 and 1996, and the consolidated
results of their operations and their cash flows for the years ended December
31, 1997 and 1996, the three months ended December 31, 1995 and the year ended
September 30, 1995, in conformity with generally accepted accounting principles.


                               ERNST & YOUNG LLP



Los Angeles, California
April 14, 1998

                                      F-39