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                           SCHEDULE 14A INFORMATION

          Proxy Statement Pursuant to Section 14(a) of the Securities
                    Exchange Act of 1934 (Amendment No.  )
        
Filed by the Registrant [X]

Filed by a Party other than the Registrant [_] 

Check the appropriate box:

[_]  Preliminary Proxy Statement        [_]  Confidential, for Use of the 
                                             Commission Only (as permitted by
                                             Rule 14a-6(e)(2))
[X]  Definitive Proxy Statement 

[_]  Definitive Additional Materials 

[_]  Soliciting Material Pursuant to Section 240.14a-11(c) or Section 240.14a-12

                          CITADEL HOLDING CORPORATION
- --------------------------------------------------------------------------------
               (Name of Registrant as Specified In Its Charter)

- --------------------------------------------------------------------------------
   (Name of Person(s) Filing Proxy Statement, if other than the Registrant)

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Notes:

 
                          CITADEL HOLDING CORPORATION
                       550 SOUTH HOPE STREET, SUITE 1825
                         LOS ANGELES, CALIFORNIA 90071
 
                   NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
                        TO BE HELD ON DECEMBER 15, 1997
 
To the Stockholders:
 
  The Annual Meeting of Stockholders (the "Annual Meeting") of Citadel Holding
Corporation, a Delaware corporation ("Citadel"), will be held at the Regal
Biltmore Hotel, 506 S. Grand Avenue, Los Angeles, California on December 15,
1997, at 9:00 a.m. local time, subject to adjournment or postponement, for the
following purposes:
 
    1. To elect four directors to the Board of Directors of Citadel (the
  "Board of Directors") to serve until the 1998 Annual Meeting of
  Stockholders; and
 
    2. To transact such other business as may properly come before the Annual
  Meeting.
 
  A copy of the Company's Annual Report on Form 10-K for its fiscal year ended
December 31, 1996 and a Quarterly Report on Form 10-Q for the three and nine
months periods ended September 30, 1997 are enclosed. Only holders of record
of the voting stock of Citadel on November 5, 1997 will be entitled to notice
of, and to vote at, the Annual Meeting and any adjournment or postponement
thereof. Prior to the voting thereof, a proxy may be revoked by the person
executing such proxy by (i) filing with the Corporate Secretary of Citadel,
prior to the commencement of the Annual Meeting, either a written notice of
revocation or a duly executed proxy bearing a later date or (ii) by voting in
person at the Annual Meeting. Citadel shall make available for examination at
its principal executive offices located at 550 S. Hope St., Suite 1825, Los
Angeles, California 90071, at least ten days prior to the date of the Annual
Meeting, a list of the stockholders entitled to vote at the Annual Meeting.
 
                                          By order of the Board of Directors,
 
                                          /s/ S. Craig Tompkins
                                          S. CRAIG TOMPKINS
                                          Corporate Secretary
 
November 24, 1997
 
                            YOUR VOTE IS IMPORTANT.
  TO VOTE YOUR SHARES, PLEASE MARK, SIGN AND DATE THE ENCLOSED PROXY CARD AND
               MAIL IT PROMPTLY IN THE ENCLOSED RETURN ENVELOPE.

                          CITADEL HOLDING CORPORATION
 
                                PROXY STATEMENT
 
                        ANNUAL MEETING OF STOCKHOLDERS
                               DECEMBER 15, 1997
 
                              GENERAL INFORMATION
 
  This proxy statement (the "Proxy Statement") is furnished in connection with
the solicitation by the Board of Directors (the "Board" or the "Board of
Directors") of Citadel Holding Corporation, a Delaware corporation ("Citadel"
and, collectively with its subsidiaries, the "Company"), of proxies for use at
the 1997 Annual Meeting of Stockholders of Citadel (the "Annual Meeting")
scheduled to be held at the time and place for the purposes set forth in the
accompanying Notice of Annual Meeting of Stockholders. Shares represented by
properly executed proxies received by Citadel will be voted at the Annual
Meeting in the manner specified therein or, if no instructions are marked on
the enclosed proxy card, FOR each of the nominees for director as identified
on such card. Although management does not know of any other matter to be
acted upon at the Annual Meeting, shares represented by valid proxies will be
voted by the persons named on the accompanying proxy card in accordance with
their respective best judgments with respect to any other matters that may
properly come before the Annual Meeting.
 
  Execution of a proxy will not in any way affect a stockholder's right to
attend the Annual Meeting and vote in person, and any person giving a proxy
has the right to revoke it at any time before it is exercised by (i) filing
with the Corporate Secretary of Citadel, prior to the commencement of the
Annual Meeting, a duly executed instrument dated subsequent to such proxy
revoking the same or a duly executed proxy bearing a later date or (ii)
attending the Annual Meeting and voting in person.
 
  The mailing address of the principal executive offices of Citadel is 550
South Hope St., Suite 1825, Los Angeles, California 90071, and its telephone
number is (213) 239-0540. The approximate date on which this Proxy Statement
and the enclosed proxy card are first being sent to stockholders is November
24, 1997.
 
RECORD DATE AND VOTING
 
  Only stockholders of record on November 5, 1997 (the "Record Date") will be
entitled to notice of and to vote at the Annual Meeting. There were
outstanding on the Record Date 6,669,924 shares of Citadel common stock, par
value $.01 per share ("Common Stock"). Each share of Common Stock is entitled
to one vote on each matter to be voted on at the Annual Meeting.
 
  The holders of the majority of the outstanding shares of Citadel Common
Stock, whether present in person or represented by proxy, shall constitute a
quorum for the transaction of business at the Annual Meeting. Abstentions and
broker non-votes (shares held by a broker or nominee which are represented at
the Annual Meeting, but which have not been voted for a specific proposal) are
counted for purposes of determining the presence or absence of a quorum for
the transaction of business. Directors will be elected by a plurality of the
votes of the shares of Citadel Common Stock present in person or represented
by proxy at the Annual Meeting.
 
  With regard to Proposal 1 (election of directors), votes may either be cast
in favor of the nominees named herein or be withheld. Votes withheld will not
be counted towards a nominee's achievement of a plurality.
 
                                       1

                            SOLICITATION OF PROXIES
 
  The cost of preparing, assembling and mailing the Notice of Annual Meeting
of Stockholders, this Proxy Statement and the enclosed proxy card will be paid
by Citadel. Following the mailing of this Proxy Statement, directors, officers
and regular employees of Citadel may solicit proxies by mail, telephone,
telegraph or personal interview. Such persons will receive no additional
compensation for such services. Brokerage houses and other nominees,
fiduciaries and custodians nominally holding shares of Common Stock of record
will be requested to forward proxy soliciting material to the beneficial
owners of such shares, and will be reimbursed by Citadel for their reasonable
charges and expenses in connection therewith.
 
  In addition, Citadel has retained Corporate Investor Communications, Inc.
("CIC") to assist in the solicitation of proxies. CIC may solicit proxies by
mail, telephone, telegraph and personal solicitation, and will request
brokerage houses and other nominees, fiduciaries and custodians nominally
holding shares of Voting Stock of record to forward proxy soliciting material
to the beneficial owners of such shares. Citadel has agreed to pay CIC $2,500
plus out-of-pocket expenses.
 
                       PROPOSAL 1: ELECTION OF DIRECTORS
 
  At the Annual Meeting, stockholders of Citadel will be asked to vote on the
election of four directors. The four nominees receiving the highest number of
votes at the Annual Meeting will be elected directors of Citadel.
 
  To fill these four board positions, the enclosed proxy, unless indicated to
the contrary, will be voted FOR the nominees listed below (the "Board
Nominees") and on the enclosed proxy card. All directors elected at the Annual
Meeting will be elected to one-year terms and will serve until the 1998 Annual
Meeting of Stockholders and until their respective successors have been duly
elected and qualified.
 
  Set forth below are the names of the persons nominated by the Board of
Directors for election as directors at the Annual Meeting. Your proxy, unless
otherwise indicated, will be voted FOR Messrs. Cotter, Simon, Tompkins and
Villasenor. For a description of each nominee's principal occupation and
business experience during the last 5 years and present directorships, please
see below.
 
BOARD NOMINEES

                                                                        FIRST
                                                                        BECAME
          NAME          AGE            CURRENT OCCUPATION              DIRECTOR
          ----          ---            ------------------              --------
                                                              
 James J. Cotter         58 Chairman of the Board of Citadel,            1986
                             Chairman of the Board of Craig
                             Corporation ("Craig"), and Chairman of
                             the Board of Reading Entertainment,
                             Inc. ("REI")
 S. Craig Tompkins       46 Corporate Secretary/Treasurer and            1993
                             Principal Accounting Officer of
                             Citadel, Vice Chairman of the Board of
                             Citadel, President and Director of
                             Craig, Vice Chairman of the Board of
                             REI, and Director of G&L Realty Corp.
 Ronald I. Simon         59 Vice President/Chief Financial Officer       1995
                             of Western Water Company, Chairman of
                             Softnet Systems, Inc. and Director of
                             Westcorp Investments
 Alfred Villasenor, Jr.  67 President of Unisure Insurance Services,     1987
                             Inc.

  Mr. Cotter was first elected to the Board in 1986, and resigned in 1988. He
was re-elected to the Board in June 1991, named Acting Chairman of the Board
of Directors of Citadel and Fidelity Federal Bank, a federal savings bank
("Fidelity") previously owned by Citadel, in October 1991, and named Chairman
of the Board of Citadel on June 5, 1992. Mr. Cotter has been Chairman of the
Board of Craig since 1988 and a Director of that company since 1985. Since
1996, Mr. Cotter has served as a Director of REI (motion picture exhibition
and real
 
                                       2

estate), which the company was formed pursuant to a reorganization of Reading
Company under a Delaware holding company, effective October 1996. Since 1990
Mr. Cotter has also served as a Director of Reading Company, currently a
wholly owned subsidiary of REI, and since 1991, as the Chairman of the Board
of that company. Craig owns common and convertible preferred stock
representing approximately 78% of the voting power of the outstanding
securities of REI and the Company owns convertible preferred stock
representing approximately 5% of the voting power of REI. Craig owns
approximately 10% of the Company's outstanding Common Stock and Reading owns
approximately 23% of such Company securities. Mr. Cotter is also the Executive
Vice President and a Director of The Decurion Corporation (motion picture
exhibition). Mr. Cotter began his association with The Decurion Corporation in
1969. Mr. Cotter is also a Director and Executive Vice President of Pacific
Theatres, Inc., a wholly owned subsidiary of the Decurion Corporation.
Mr. Cotter has been the Chief Executive Officer and a Director of Townhouse
Cinemas Corporation (motion picture exhibition) since 1987. Mr. Cotter is the
General Partner of James J. Cotter, Ltd., a general partner in Hecco Ventures
I, a California General Partnership ("HVI") is involved in investment
activities and is a shareholder in Craig), and was a Director of Stater Bros.,
Inc. (retail grocery) between 1987 and September 1997.
 
  Mr. Simon has been a director of the Company since June 1995. Mr. Simon is
the Vice President, Chief Financial Officer of Western Water Company. In
addition, he is Chairman of the Board of Directors of SoftNet Systems Inc.,
and a director of Westcorp Investments, a wholly owned subsidiary of Westcorp
Inc. Formerly, Mr. Simon was the Managing Director of the Henley Group, Inc.
through March 1990, a Director of Craig Corporation from 1987 to 1990 and a
Director of Reading Company from 1989 to 1995.
 
  Mr. Tompkins was a partner of Gibson Dunn & Crutcher until March 1993 when
he resigned to become President of each of Craig and Reading Company. Mr.
Tompkins has served as a Director of each of Craig and Reading Company since
February 1993 and has served as a Director of REI since its formation in 1996.
In February 1997, Mr. Tompkins resigned as President of REI and was made Vice
Chairman of REI. Mr. Tompkins was elected to the Board of Directors of G&L
Realty Corp., a New York Stock Exchange listed real estate investment trust,
in December of 1993, and was elected Vice Chairman of the Board of Citadel in
July of 1994. Mr. Tompkins has also served as the Secretary/Treasurer and
Principal Accounting Officer for Citadel since August 1994.
 
  Mr. Villasenor is the President and the owner of Unisure Insurance Services,
Incorporated, a corporation which has specialized in life, business life and
group health insurance for over 35 years. He is also a general partner in the
2368 Torrance Partnership, a California real estate holding company. Mr.
Villasenor served on the Board of Directors of ELAR, a reinsurance company
from 1986 to 1991. In 1987, Mr. Villasenor was elected to the Board of
Directors of Citadel and Fidelity and served on the Board of Fidelity until
1994. Mr. Villasenor also served as a Director of Gateway Investments, Inc. (a
wholly owned subsidiary of Fidelity) from June 22, 1993 until February 24,
1995.
 
  THE BOARD OF DIRECTORS RECOMMENDS THAT YOU VOTE FOR THE NOMINEES LISTED
ABOVE.
 
                                       3

                       DIRECTORS AND EXECUTIVE OFFICERS
 
EXECUTIVE OFFICERS
 
  The officers of Citadel currently include Steve Wesson, Brett Marsh and S.
Craig Tompkins.
 
MEETINGS AND COMMITTEES OF THE BOARD OF DIRECTORS
 
  During the fiscal year ended December 31, 1996, there were four (4) meetings
of the Board of Directors of Citadel. All directors attended at least 80% of
the meetings of the Board of Directors, after the election of such individuals
to the Board.
 
  Citadel currently has standing Audit, Executive, Conflicts and Compensation
Committees. The Board of Directors does not have a nominating committee.
 
  The members of the Audit Committee are Ronald I. Simon and Alfred
Villasenor, Jr. The Audit Committee held one (1) meetings during 1996. The
Audit committee's responsibilities are generally to assist the Board in
fulfilling its legal and fiduciary responsibilities relating to accounting,
audit and reporting policies and practices of Citadel and its subsidiaries.
The Audit Committee also, among other things, recommends to the Board the
engagement of the company's independent accountants; monitors and reviews the
quality and activities of the Company's independent accountants; and, monitors
the adequacy of the Company's operating and internal controls as reported by
management and the independent accountants.
 
  The members of the Executive Committee are James J. Cotter, Ronald I. Simon
and S. Craig Tompkins. The Executive Committee held no meetings during 1996.
The Executive Committee exercises the authority of the Board of Directors in
the management of the business and affairs of the Company between meetings of
the Board of Directors.
 
  The members of the Conflicts Committee are Ronald I. Simon and Alfred
Villasenor, Jr. The Conflicts Committee was chartered to consider and make
recommendations with respect to all matters as to which one or more directors
may have conflicts of interest. The Conflicts Committee held nine (9) meetings
during 1996.
 
  The Compensation Committee is currently comprised of James J. Cotter and
Alfred Villasenor, Jr. The Compensation Committee held one (1) meeting during
1996. The Compensation Committee is responsible for recommending to the Board
of Directors remuneration for executive officers of Citadel. It is currently
Citadel's policy that directors who are executive officers and whose
compensation is at issue are not involved in the discussion of, or voting on,
such compensation.
 
COMPENSATION OF DIRECTORS
 
  Other than the Chairman of the Board, directors who are not officers or
employees of the Company receive for their services as a director, an annual
retainer of $15,000 plus $1,500 if serving as a Committee Chairman and $800
for each meeting attended in person (or $300 in the case of telephonic
meetings). The Chairman of the Board receives $45,000 annually. Mr. Tompkins
receives no compensation for his services as an executive officer, but
received directors fees for his services as Vice Chairman in the amount of
$35,000. During 1996, Messrs. Villasenor and Simon received $10,000 as
additional fees for their participation as members of the Independent
Committee formed by the Company to review the Reading Investment Transaction
more fully described in "Certain Transactions".
 
  Additionally, pursuant to the Citadel Holding Corporation 1996 Nonemployee
Director Stock Option Plan effective October 1996 (the "1996 Stock Option
Plan"), each director of the Company who is not an employee or officer of the
Company, upon becoming a member of the Board of Directors, is automatically
granted immediately vested options to purchase 10,000 shares of Common Stock
at an exercise price that is greater or less than the fair market value (as
such term is defined in the 1996 Stock Option Plan) per share of Common Stock
on the date of grant by an amount equal to the amount by which $3.00 per share
is greater or less than the
 
                                       4

fair market value per share of Common Stock on the effective date of the 1996
Stock Option Plan (the "Plan Effective Date"). Messrs. Simon and Villasenor
who were incumbent on the Plan Effective Date received immediately vested
options to purchase 10,000 shares of Common Stock at an exercise price of
$3.00 per share.
 
                            EXECUTIVE COMPENSATION
 
  The federal proxy disclosure regulations require Citadel to disclose certain
specific information with respect to executive compensation in this Proxy
Statement.
 
SUMMARY COMPENSATION TABLE
 
  The officers of Citadel currently include Steve Wesson, S. Craig Tompkins
and Brett Marsh. The Summary Compensation Table sets forth the compensation
earned for the years ended December 31, 1996, 1995 and 1994 by each of the
most highly compensated executive officers of the company whose compensation
exceeded $100,000 in all capacities in which they served.

                                                                     LONG TERM
                                   ANNUAL COMPENSATION              COMPENSATION
                         ------------------------------------------ ------------
                                                                     SECURITIES
                                                                     UNDERLYING
NAME AND PRINCIPAL                                   OTHER ANNUAL     OPTIONS     ALL OTHER
POSITION                 YEAR     SALARY   BONUS   COMPENSATION (1)   GRANTED    COMPENSATION
- ------------------       ----    -------- -------- ---------------- ------------ ------------
                                                               
Steve Wesson............ 1996    $175,000 $ 50,000       (1)              --           --
 President and Chief     1995     175,000  100,000       (1)              --           --
 Executive Officer       1994(2)   70,564   25,000       (1)           33,000       $5,564
Brett Marsh............. 1996    $130,000                (1)              --           --
 Director of Real Estate 1994     130,000 $ 10,000       (1)              --           --
                         1994(2)   52,419                (1)              --           --

- --------
(1) Excludes perquisites if the aggregate amount thereof is less than $50,000,
    or 10% of salary plus bonus, if less.
 
(2) Includes compensation received from August 5, 1994 to December 31, 1994.
 
OPTION/SAR GRANTS IN LAST FISCAL YEAR

  The following summarizes options which were granted in 1996.

                                                                          POTENTIALLY   
                                                                          REALIZABLE    
                                        INDIVIDUAL GRANTS                  VALUE AT     
                          --------------------------------------------- ASSUMED ANNUAL  
                                        PERCENT OF                      RATES OF STOCK  
                           NUMBER OF      TOTAL                              PRICE      
                           SECURITIES  OPTIONS/SARS                      APPRECIATION   
                           UNDERLYING   GRANTED TO  EXERCISE            FOR OPTION TERM 
                          OPTIONS/SARS EMPLOYEES IN OR BASE  EXPIRATION ---------------  
NAME                        GRANTED    FISCAL YEAR   PRICE      DATE      5%      10%
- ----                      ------------ ------------ -------- ---------- ------- -------
                                                              
Alfred Villasenor, Jr...     10,000         50%      $3.00      2006    $18,900 $47,800
Ronald I. Simon.........     10,000         50%      $3.00      2006     18,900  47,800

                                       5

AGGREGATED OPTION/SAR IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION/SAR
VALUES

                                                     NUMBER OF SECURITIES
                                                    UNDERLYING UNEXERCISED   VALUE OF UNEXERCISED IN-
                                                        OPTIONS/SARS AT        THE-MONEY OPTION/SARS
                            SHARES                        FY-END (#)              AT 12/31/96 (#)
                         ACQUIRED ON     VALUE     ------------------------- -------------------------
NAME                     EXERCISE (#) REALIZED ($) EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
- ----                     ------------ ------------ ------------------------- -------------------------
                                                                 
Steve Wesson............     N/A          N/A              33,000/0                   $2,062
Alfred Villasenor,
 Jr.(1).................     N/A          N/A              10,000/0                        0
Ronald I. Simon(1)......     N/A          N/A              10,000/0                        0

- --------
(1) The options were not in-the-money.
 
EMPLOYMENT CONTRACTS AND CHANGE IN CONTROL AGREEMENTS
 
  Citadel and Steve Wesson entered into an Executive Employment Agreement,
effective as of August 4, 1994 (the "Employment Agreement"). The term of the
Employment Agreement is two years and is automatically renewed for subsequent
one-year terms unless either party gives notice of non-renewal. Mr. Wesson is
paid an annual salary of $175,000 and a minimum annual bonus of $50,000.
Pursuant to the Employment Agreement, Mr. Wesson was granted options to
purchase 33,000 shares of Common Stock of Citadel.
 
  On June 27, 1990 the Board authorized Citadel to enter into indemnity
agreements with its then current as well as future directors and officers.
Since that time, Citadel's officers and directors have entered such
agreements. Under these agreements, Citadel agrees to indemnify its officers
and directors against all expenses, liabilities and losses incurred in
connection with any threatened, pending or completed action, suit or
proceeding, whether civil or criminal, administrative or investigative, to
which any such officer or director is a party or is threatened to be made a
party, in any manner, based upon, arising from, relating to or by reason of
the fact that he is, was, shall be or shall have been an officer or director,
employee, agent or fiduciary of Citadel. Each of the current Citadel directors
have entered into indemnity agreements with Citadel. Similar agreements also
exist between Citadel's subsidiaries and the officers and directors of such
subsidiaries.
 
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
 
  Mr. Tompkins is President of Craig and a Director of Craig and REI. Mr.
Cotter is the Chairman of the Board of Craig and REI. Mr. Cotter is a member
of the executive committees of REI, which, among other things, is responsible
for the compensation of the executive officers of such companies.
 
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
 
  Section 16(a) of the Exchange Act requires the Company's officers, directors
and persons who own more than 10% of the Company's Common Stock to file
reports to ownership and changes in ownership with the SEC. The SEC rules also
requires such reporting persons to furnish the Company with a copy of all
Section 16(a) forms they file.
 
  Based solely on a review of the copies of the forms which the Company
received and written representations from certain reporting persons, the
Company believes that, during the fiscal year ended December 31, 1996, all
filing requirements applicable to its reporting persons were complied with
except Mr. Alfred Villasenor filed one late Form 4 in December 1996 to report
the sale of 900 shares of the Company's Common Stock, which transaction
occurred in April 1996.
 
COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
 
  The report of the Compensation Committee of the Board of Directors with
respect to executive compensation shall not be deemed incorporated by
reference by any general statement incorporating by reference
 
                                       6

this Proxy Statement into any filing under the Securities Act of 1933, as
amended (the "Securities Act"), or under the Securities Exchange Act of 1934,
as amended (the "Exchange Act"), except to the extent that Citadel
specifically incorporates this information by reference, and shall not
otherwise be deemed filed under such Acts.
 
  The Compensation Committee of the Board of Directors of the Company is
composed of James J. Cotter and Alfred Villasenor, Jr. The Compensation
Committee, is principally responsible for reviewing the performance of, and
determining the compensation for the executive officers of the Company. The
Company's executive compensation program is designed to attract and retain
talented executives and motivate them to achieve the business objectives of
the Company that the Board of Directors believes will enhance stockholder
value.
 
  The Company's current compensation strategy is to supplement the executive
officer's base level compensation with periodic cash bonuses in recognition of
individual performance, and from time to time, grant stock options designed to
link the executives' long term compensation to appreciation in stockholder
value. Specific components of the compensation of executive officers are as
follows:
 
  Base Salary: The base salary of the Chief Executive Officer of the Company
is set in accordance with his Employment Agreement. It is anticipated that in
the event the base salaries of other executive officers are to be set, such
base salaries will be established upon a general review by the Compensation
Committee of comparable compensation for positions requiring similar skills
and capabilities and will reflect the performance of the officer in fulfilling
his or her duties. Base salary does not directly reflect the financial
performance of the Company.
 
  Bonus: The Company may award officers an annual bonus in an amount to be
determined by the Compensation Committee. The Compensation Committee will
consider such factors as it deems appropriate in determining such bonuses. As
previously discussed, the Employment Agreement of Citadel's Chief Executive
Officer provides for a minimum annual bonus.
 
  Amounts earned during 1996 by the Steve Wesson and Mr. Brett Marsh are shown
in the Summary Compensation Table. In 1997, Messrs. Wesson and Marsh were each
granted discretionary bonuses of $30,000, in addition to the minimum bonus of
$50,000 paid to Mr. Wesson in 1996 required by the terms of his Employment
Agreement. The amount of Messrs. Wesson and Marsh's bonus reflects among other
things, the successful leasing of the Brand Building to Disney Enterprises
Inc., the successful disposition of several of the Company's properties, and
the redeployment of a portion of the proceeds thereof in the REI Convertible
Preferred Stock acquired in October 1996.
 
  Stock Options: The Company previously adopted the 1987 Stock Option and
Stock Appreciation Rights Plan in order to provide key employees with a long-
term incentive which is based upon citadel's long-term return to shareholders.
 
James J. Cotter
Alfred Villasenor, Jr.
 
                                       7

PERFORMANCE GRAPH
 
  The following line graph below shall not be deemed incorporated by reference
by any general statement incorporating by reference this Proxy Statement into
any filing under the Exchange Act, except to the extent Citadel specifically
incorporates this information by reference, and shall not otherwise be deemed
filed under the Exchange Act.
 
  The following line graph compares the cumulative total stockholder return on
Common Stock from December 31, 1991 through December 31, 1996 against the
cumulative total return of the Center for Research in Securities Prices
("CRSP") Total Return Index for the Standard & Poor's 500 Stocks, and (ii) the
cumulative total return of the Company's current peer group, the CRSP Total
Return Index for New York Stock Exchange, American Stock Exchange and NASDAQ
Companies in the SIC Group Code 6510-6519 (US Companies) (Real Estate
Operators (Except Developers) and Lessors). Peer group returns have been
weighted by the market capitalization of the individual peers. The graph
assumes a $100 dollar investment on December 31, 1991 and reinvestment of all
dividends on a daily basis.
 
  Through August 4, 1994, Citadel was primarily engaged in the savings and
loan business; therefore the Company prior to that date measured its
performance against that of the savings and loan industry in the compilation
of this graph. Since the Company disposed of principally all of its remaining
interest in Fidelity in April 1995, Citadel has focused primarily on the
management of a limited portfolio of commercial properties previously owned by
Fidelity. In light of this focus, Citadel believes current performance is more
appropriately compared to this new real estate peer group.

               COMPARISON OF FIVE-YEAR CUMULATIVE TOTAL RETURN
               AMONG CITADEL HOLDINGS, S&P INDEX AND PEER GROUP
 
                        PERFORMANCE GRAPH APPEARS HERE

 
Measurement Period           CITADEL       
(Fiscal Year Covered)        HOLDINGS       S&P INDEX    Peer Group
- -------------------          ----------     ---------     ----------
                                                  
Measurement Pt-  1991        $100           $100         $100
FYE   1992                   $107.4         $107.7       $111.2   
FYE   1993                   $863           $118.2       $138.1
FYE   1994                   $ 18.4         $119.8       $139.9
FYE   1995                   $ 17.4         $164.9       $179.4
FYE   1996                   $ 20.2         $203.3       $206.6

                                       8

        SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
 
  The following table sets forth the shares of Common Stock, beneficially
owned as of November 5, 1997 by (i) each director and nominee, (ii) all
directors and executive officers as a group, and (iii) each person known to
Citadel to be the beneficial owner of more than 5% of the Common Stock. Except
as noted, the indicated beneficial owner of the shares has sole voting power
and sole investment power.

                                                       COMMON STOCK
                                            -----------------------------------
                                               AMOUNT AND NATURE      PERCENT
NAME AND ADDRESS OF BENEFICIAL OWNER        OF BENEFICIAL OWNERSHIP OF CLASS(7)
- ------------------------------------        ----------------------- -----------
                                                              
James J. Cotter(1)(4)......................        2,230,473           33.2%
Steve Wesson(2)(4).........................           33,000             *
Alfred Villasenor, Jr.(3)(4)...............           10,000             *
S. Craig Tompkins(4).......................              --             --
Ronald I. Simon(3)(4)......................           10,000             *
Craig Corporation(1)(4)....................        2,230,473           33.2%
Reading Holdings, Inc., an indirect wholly         1,564,473           23.3%
 owned subsidiary of REI(1)................
 30 South Fifteenth Street, Suite 1300
 Philadelphia, PA 19102-4813...............
Lawndale Capital Management, Inc.(5).......          579,000            8.6%
 One Sansome Street, Suite 3900
 San Francisco, California 94104
Andrew E. Shapiro(5).......................          579,000            8.6%
 One Sansome Street, Suite 3900
 San Francisco, California 94104...........
Diamond A Partners, L.P(5).................          501,000            7.5%
 One Sansome Street, Suite 3900
 San Francisco, California 94104
Diamond A Investors, L.P.(5)...............           77,900            1.2%
 One Sansome Street, Suite 3900
 San Francisco, California 94104
Private Management Group(6)................          675,000           10.0%
 20 Corporate Park, Suite 400
 Irvine, CA 92606
All directors and executive officers as a          2,283,473           34.0%
 Group (6 persons)(1)......................

- --------
(1) Mr. Cotter is the Chairman of Craig and REI, and a principal stockholder
    of Craig. Craig currently owns approximately 78% of the voting power of
    the outstanding capital stock of REI. Craig owns 666,000 shares of Common
    Stock. Reading owns directly 1,564,473 shares of Common Stock. These
    securities have been listed as beneficially owned by Mr. Cotter and Craig
    due to the relationships between Mr. Cotter, Craig and REI. Mr. Cotter
    disclaims beneficial ownership of all Citadel securities owned by Craig
    and/or Reading.
 
(2) Pursuant to the terms of his Employment Agreement, Citadel granted Mr.
    Wesson options to purchase 33,000 shares of Common Stock.
 
(3) Includes 10,000 shares of Common Stock which may be acquired through the
    exercise of stock options granted pursuant to the 1996 Stock Option Plan.
 
(4) 550 South Hope Street, Suite 1825, Los Angeles, California 90071
 
(5) According to filings made with the Securities and Exchange Commission,
    includes 501,100 shares which are owned by Diamond A Partners, L.P.,
    ("DAP") and 77,900 shares which are owned by Diamond A
 
                                       9

   Investors, L.P. ("DAI") but have shared voting and dispositive power with
   Lawndale Capital Management, LLC ("LCM") and Andrew E. Shapiro. According
   to Amendment No. 5 to the Report on Schedule 13D filed on October 29, 1996,
   LCM is the investment advisor to and general partner of DAP and DAI, which
   are investment limited partnership. Andrew E. Shapiro is the sole manager
   of LCM.
 
(6) Based upon Schedule 13-G filed February 28, 1997.
 
(7) Based on ownership assuming conversion of the stock options (53,000
    shares).
 
 * Represents less than one percent of the outstanding shares of Citadel
   Common Stock.
 
CERTAIN TRANSACTIONS
 
 Reading Investment Transaction
 
  In October 1996, Citadel and its wholly-owned subsidiary, Citadel
Acquisition Corp., Inc. ("CAC"), closed a transaction with Craig, REI and
Reading Company and certain affiliates thereof, in which CAC contributed cash
in the amount of $7 million to REI in exchange for (i) 70,000 shares of Series
A Preferred Stock of REI, (ii) the granting to Citadel of an option,
exercisable at any time until 30 days after REI files its Annual Report on
Form 10-K for the year ended December 31, 1999, to exchange all or
substantially all of its assets for shares of REI Common Stock, subject to
certain contractual limitations and (iii) the granting of certain demand and
piggy-back registration rights with respect to any REI Common Stock received
on the conversion of the Series A Preferred Stock or on such asset exchange.
Additionally, pursuant to the terms of such Exchange Agreement, REI issued (i)
125,098 shares of its Series B Preferred Stock and 563,210 shares of its
common stock to Craig in exchange for Craig's 50% interest in a motion picture
exhibition joint venture with a Reading Company affiliate and the 1,329,114
shares of Citadel Series A 3% Cumulative Voting Convertible Preferred Stock,
par value $.01 per share (collectively with any successor securities, the
"Citadel Preferred Stock") owned by Craig and (ii) 424,902 shares of its
Series B Preferred Stock and 1,912,980 shares of its common stock to a Craig
affiliate in exchange for 693,650 shares of stock of Stater Bros. Holdings,
Inc. owned by such affiliates. On December 20, 1996, Citadel redeemed the
Preferred Stock from Reading pursuant to the exercise of its redemption
rights. The redemption price amounted to $6.19 million.
 
 Transactions with Craig Corporation and Reading Entertainment, Inc.
 
  Commencing August 1995, Citadel began renting corporate office space from
Craig on a month-to-month basis and engaged Craig to provide Citadel with
certain administrative services. During fiscal 1996, $96,000 was paid to Craig
for such rent and services. In additional, Citadel provided real estate
consulting services to Reading Company during fiscal 1996, for which Citadel
was paid $169,000.
 
 Proposed Transaction to Purchase Agricultural Property
 
  During the third quarter of 1997, the Company formed a new subsidiary,
Citadel Agriculture, Inc., to engage in the business of owning and farming
agricultural land. The new company's first transaction is expected to be the
acquisition of partnership interests representing an approximately 80%
interest in three partnerships newly formed to acquire from The Prudential
Insurance Company of America approximately 1,580 acres of agricultural
 
                                      10

land located in Kern County, California and commonly known as the Big 4 Ranch.
The remaining approximately 20% interest in these partnerships is being
acquired by a company controlled by James J. Cotter, the Company's Chairman,
and owned by Mr. Cotter and members of his family. The Company and Mr. Cotter
will contribute to the capital of the partnerships and share in the allocation
of profits and losses and in any distribution from the partnerships on the
same 80/20 basis. In addition, Cecelia Packing Corporation, a company owned by
Mr. Cotter, is expected to provide certain senior management and accounting
services.
 
          CITADEL'S RELATIONSHIP WITH INDEPENDENT PUBLIC ACCOUNTANTS
 
  Deloitte & Touche have been the independent certified public accountants for
Citadel since 1983 and have been selected by Citadel to continue to serve as
the accountants for Citadel for the remainder of 1997 Representatives of
Deloitte & Touche will attend the Annual Meeting with an opportunity to make a
statement if they desire to do so and will be available to respond to
questions.
 
                       AVAILABILITY OF CERTAIN DOCUMENTS
 
  A copy of Citadel's Annual Report on Form 10K for its fiscal year ended
December 31, 1996 and Quarterly Report on Form 10Q for the three and nine
month periods ending September 30, 1997 are enclosed.
 
                            STOCKHOLDERS' PROPOSALS
 
  Any stockholder of Citadel wishing to submit a proposal for inclusion in the
Proxy Statement relating to the Company's 1998 Annual Meeting of stockholders
must deliver such proposal to the Company at its principal office on or before
July 7, 1998. The Board of Directors will review any proposals from eligible
stockholders which it receives by that date and will determine whether any
such proposal will be included in its 1998 proxy solicitation materials. An
eligible stockholder is one who is the record or beneficial owner of at least
1% or $1,000 in market value of securities entitled to be voted at the 1998
annual meeting of stockholders, who has held such securities for at least one
year, and who shall continue to own such securities through the date on which
the meeting is held.
 
                                 OTHER MATTERS
 
  At the time of preparation of this Proxy Statement, the Board of Directors
of Citadel was not aware of any other matters to be brought before the Annual
Meeting. However, if any other matters are properly presented for action, it
is the intention of the persons named in the enclosed form of proxy to vote,
or refrain from voting, in accordance with their respective best judgment on
such matters.
 
                                          By order of the Board of Directors,
 
                                          /s/ S. CRAIG TOMPKINS

                                          S. Craig Tompkins
                                          Corporate Secretary
 
Los Angeles, California
November 24, 1997
 
  PLEASE MARK, SIGN, DATE AND RETURN THE ENCLOSED PROXY CARD PROMPTLY. NO
POSTAGE IS REQUIRED IF MAILED IN THE UNITED STATES.
 
  If your shares are held in the name of a brokerage firm, bank nominee or
other institution, only it can vote your shares. Accordingly, please contact
the person responsible for your account and give instructions for your shares
to be voted.
 
  IF YOU HAVE ANY QUESTIONS, OR HAVE ANY DIFFICULTY VOTING YOUR SHARES, PLEASE
CONTACT CORPORATE INVESTOR COMMUNICATIONS, INC. BY CALLING (201) 896-1900.
 
                                      11

        THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS OF
                          CITADEL HOLDING CORPORATION
 
             FOR ANNUAL MEETING OF STOCKHOLDERS--DECEMBER 15, 1997
P
          The undersigned stockholder of Citadel Holding Corporation, a Delaware
R    corporation (the "Company"), acknowledges receipt of the Notice of the
     Annual Meeting of Stockholders of the Company and the accompanying Proxy
O    Statement, each dated November 24, and the undersigned hereby revokes all
     prior proxies and hereby constitutes and appoints James J. Cotter, Steve
X    Wesson and S. Craig Tompkins, and each of them (each with full power of
     substitution and with full power to act without the others and, if two or
Y    more of them act hereunder, by action of a majority of them), the proxies
     of the undersigned, to represent the undersigned and to vote all the
     shares of voting stock of the Company that the undersigned would be
     entitled to vote at the Annual Meeting of Stockholders of the Company to
     be held December 15, 1997 at 9:00 a.m. (Los Angeles time) at the Regal
     Biltmore Hotel, 506 S. Grand Avenue, Los Angeles, California, and at any
     adjournment or postponement thereof.

                          (Continued on reverse side)

                             FOLD AND DETACH HERE

- -------------------------------------------------------------------------------
 
                                                           Please mark
                                                           your votes as  [X]
                                                           indicated in
                                                           this example
 
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR PROPOSAL 1:
 
                                                      WITHHELD
                                       FOR            FOR ALL
1.   ELECTION OF DIRECTORS.            [_]              [_]
     James J. Cotter
     S. Craig Tompkins
     Ronald I. Simon
     Alfred Villasenor, Jr.

2.   IN THE PROXIES' DISCRETION TO VOTE UPON ANY OTHER MATTER AS MAY PROPERLY
COME BEFORE THE MEETING OR ANY ADJOURNMENT OR POSTPONEMENT THEREOF. MANAGEMENT
IS NOT AWARE OF ANY OTHER MATTER THAT WILL BE PRESENTED FOR ACTION AT THE
MEETING.

WITHHELD FOR: (Write that nominee's name in the space provided below).
- -------------------------------------------------------------------------------

     THIS PROXY WILL BE VOTED AS DIRECTED BY THE UNDERSIGNED BELOW; WHERE NO
CHOICE IS SPECIFIED, IT WILL BE VOTED FOR PROPOSAL 1 AND IN THE DISCRETION OF
THE PROXIES IN THE MATTERS DESCRIBED IN PROPOSAL 2.

                                       COMMENTS: (Change of address)

                                       _________________________________________

                                       _________________________________________

                                       _________________________________________

Signature(s) ________________________________  Dated: ___________________ , 1997
Please sign exactly as name appears hereon. If the stock is registered in the
name of two or more persons, each should sign. When signing as an executor,
administrator, trustee, guardian, attorney, or corporate officer, please add
your full title as such.

(PLEASE MARK, SIGN AND DATE THIS PROXY AND RETURN IT IN THE ENCLOSED ENVELOPE.)

                             FOLD AND DETACH HERE