<PAGE>

                                UNITED STATES
                      SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, DC 20549

                                  FORM 10-QSB

(MARK ONE)
[X]        QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
                               EXCHANGE ACT OF 1934.

               For the Quarterly period ended December 31, 1997

[   ]      Transition report under section 13 or 15(d) of the Securities
           Exchange Act of 1934 for the transition


                        Commission File Number 0-25252

                       CinemaStar Luxury Theaters, Inc.
            (Exact Name of Registrant as specified in its charter)

        CALIFORNIA                                      33-0451054
(State or other jurisdiction of             (IRS Employer Identification No.)
incorporation or organization)

431 COLLEGE BLVD., OCEANSIDE, CA                        92057-5435
(Address of principal executive offices)                (Zip Code)


                                (760) 630-2011
             (Registrant's telephone number, including area code)

(Former name, former address and formal fiscal year, if changed since last
report)

Check whether the issuer (1) has filed all reports required to be filed by
section 13 or 15 (d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.

                        YES   [ X ]      NO   [   ]

Common stock, no par value:  25,703,648 shares outstanding as of February 14,
1998.

Transitional Small Business Disclosure Format. (check one):

                        YES   [   ]      NO    [ X ]


<PAGE>

                       CINEMASTAR LUXURY THEATERS, INC.

                                TABLE OF CONTENTS

                                                                       PAGE NO.
PART I.  Financial Information:                                             3

Item 1.  Financial Statements                                               3

         Condensed Consolidated Balance Sheet as of December 31, 1997       3

         Condensed Consolidated Statements of Operations for the three
         and nine months ended December, 1997 and 1996                      4

         Condensed Consolidated Statements of Cash Flows for the
         nine months ended December 31, 1997 and 1996                       5

         Notes to Condensed Consolidated Financial Statements               6

Item 2.  Management's Discussion and Analysis of Financial Condition
         and Results of Operations.                                         7

PART II. Other Information                                                 15

Item 1.  Legal Proceedings                                                 15

Item 2.  Changes in Securities                                             15

Item 4.  Submission of Matters to a Vote of Securities Holders             15

Item 5.  Other Information                                                 15

Item 6.  Exhibits and Reports on Form 8-K                                  15

         Signatures                                                        16

                                       2


<PAGE>

PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
               CINEMASTAR LUXURY THEATERS, INC. AND SUBSIDIARIES
                      CONDENSED CONSOLIDATED BALANCE SHEET
                                  (UNAUDITED)
                                                  December 31, 1997
                                                  -----------------
<S>                                                  <C>
ASSETS
CURRENT ASSETS
Cash                                                 $  4,697,608
Commissions and other receivables                         102,147
Prepaid expenses                                          202,298
Other current assets                                      126,169
                                                     ------------
Total current assets                                    5,128,222

Property and equipment, net                            13,747,840
Deposits and other assets                                 400,542
                                                     ------------
TOTAL ASSETS                                          $19,276,604
                                                     ------------
                                                     ------------

LIABILITIES AND STOCKHOLDERS' EQUITY

CURRENT LIABILITIES
Current portion of long-term debt and capital lease
obligations                                              $481,285
Accounts payable                                        1,907,526
Accrued expenses                                          979,839
Deferred revenue                                          256,764
Advances from stockholders                                 93,006
                                                     ------------
Total current liabilities                               3,718,420
Long-term debt and capital lease obligations, net of
current portion                                         1,930,903
Deferred rent liability                                 2,922,326
                                                     ------------


TOTAL LIABILITIES                                       8,571,649
                                                     ------------

STOCKHOLDERS' EQUITY
Common stock, no par value; 60,000,000 shares
authorized; 25,703,648 shares issued and outstanding   22,926,545
Additional paid-in capital                              3,328,376
Accumulated deficit                                  (15,549,966)
                                                     ------------

TOTAL STOCKHOLDERS' EQUITY                             10,704,955

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY            $19,276,604
                                                     ------------
                                                     ------------
</TABLE>
     See accompanying notes to condensed consolidated financial statements

                                       3

<PAGE>

                               CINEMASTAR LUXURY THEATERS, INC. AND SUBSIDIARIES
                                CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
                                                   (UNAUDITED)
<TABLE>
<CAPTION>
                                                 Three Months Ended December 31     Nine Months Ended December 31
                                                 ------------------------------     -----------------------------
                                                           1997          1996           1997            1996
                                                           ----          ----           ----            ----
<S>                                                  <C>            <C>           <C>             <C>
REVENUES
Admissions                                           $  4,512,741   $  3,272,867  $  13,104,417   $  9,729,781
Concessions                                             1,668,318      1,404,929      5,457,313      4,060,912
Other operating revenues                                  121,471        107,767        379,487        302,221
                                                     ------------   ------------  -------------   -------------
TOTAL REVENUES                                          6,302,530      4,785,563     18,941,217     14,092,914
                                                     ------------   ------------  -------------   -------------

COSTS AND EXPENSES:
Film rental and booking costs                           2,495,583      1,916,322      7,432,200      5,483,841
Cost of concession supplies                               639,889        428,390      1,975,661      1,270,283
Theater operating expenses                              2,887,241      1,896,180      7,850,350      5,004,474
Termination fee - concession
    lease agreement                                    (1,859,352)            --     (1,859,352)            --
General & administrative expense                        1,395,909        599,681      3,182,021      1,822,195
Depreciation & amortization                               473,750        535,336      1,460,105      1,092,405
                                                     ------------   ------------  -------------   -------------
TOTAL COSTS AND EXPENSES                                9,751,724      5,375,909     23,759,689     14,673,198
                                                     ------------   ------------  -------------   -------------
OPERATING INCOME (LOSS)                                (3,449,194)      (590,346)    (4,818,472)      (580,284)
                                                     -------------  ------------  -------------   -------------
OTHER INCOME (EXPENSE)
Interest income                                            14,098          1,936         23,580         17,094
Interest expense                                         (324,803)      (166,492)      (693,451)      (469,357)
Non-cash interest expense                                (221,750)            --       (328,750)    (2,048,997)
                                                     ------------   ------------  -------------   -------------

TOTAL OTHER (EXPENSE)                                    (532,455)      (164,556)      (998,621)    (2,501,260)
                                                     ------------   ------------  -------------   -------------
LOSS BEFORE PROVISION FOR
INCOME TAXES                                           (3,981,649)      (754,902)    (5,817,093)    (3,081,544)

PROVISION FOR INCOME TAXES                                     --           (800)        (1,600)        (2,400)
                                                     ------------   -------------  -------------   ------------

NET LOSS                                             $ (3,981,649)  $   (755,702)  $ (5,818,693)  $ (3,083,944)
                                                     ------------   -------------  -------------  -------------

BASIC AND DILUTED NET LOSS PER SHARE                 $      (0.36)  $      (0.11)  $      (0.65)  $      (0.47)
                                                     ------------   -------------  -------------  -------------
                                                     ------------   -------------  -------------  -------------

SHARES USED IN CALCULATION                             11,094,741      6,860,986      8,962,687      6,520,851
</TABLE>

    See accompanying notes to condensed consolidated financial statements

                                      -4- 

<PAGE>

              CINEMASTAR LUXURY THEATERS, INC. AND SUBSIDIARIES
               CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                                (UNAUDITED)

<TABLE>
<CAPTION>

                                                          NINE MONTHS ENDED DECEMBER 31,
                                                               1997           1996
                                                          -------------    -------------
<S>                                                       <C>              <C>
Cash flows from operating activities:
Net Loss                                                  $ (5,818,693)    $ (3,083,944)

Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:

Depreciation and amortization                                1,460,105        1,092,405
Deferred rent liability                                        635,980          577,512
Non-cash interest expense                                      328,750        2,048,997
Increase (decrease) from changes in:
Commission and other receivables                               (71,466)          (1,788)
Prepaid expenses and other current assets                       87,480         (302,267)
Accounts payable                                              (822,284)       1,974,250 
Accrued expenses and other liabilities                         831,683          (96,625)
Deposits and other assets                                      (19,301)        (177,430)
                                                          -------------    -------------
Cash provided by (used in) operating activities             (3,387,746)       2,031,110
                                                          -------------    -------------
Cash flows from investing activities:

Purchases of property and equipment                         (4,167,753)      (5,529,627)
Refundable construction deposit                                      -          600,000
                                                          -------------    -------------
Cash used in investing activities                           (4,167,753)      (4,929,627)

Cash flows from financing activities:
Principal payments on long term debt and capital
 lease obligations                                          (7,935,080)        (489,146)
Proceeds from issuance of  debt                              5,637,104        1,000,000
Proceeds from issuance of convertible debentures                     -        3,000,000
Proceeds from issuance of common stock, net                 13,680,333                -
Proceeds from issuance of common stock warrants, net           212,094                -
Advances from stockholders-net                                  57,010           60,000
Proceeds from warrant redemptions                                    -          572,112
Payment of debt issuance costs                                       -         (504,359)
Repayment of advances from stockholder                               -         (359,000)
                                                          -------------    -------------
Cash provided by financing activities                       11,651,461        3,279,607
                                                          -------------    -------------
Net increase in cash                                         4,095,962          381,090
Cash, beginning of period                                      601,646          458,550
                                                          -------------    -------------
Cash, end of period                                          4,697,608          839,640
                                                          -------------    -------------
</TABLE>

    See accompanying notes to condensed consolidated financial statements

                                      -5-

<PAGE>

                       CINEMASTAR LUXURY THEATERS, INC.
             NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                               DECEMBER 31, 1997
                                  (UNAUDITED)

NOTE 1 

The accompanying unaudited condensed consolidated financial statements have 
been prepared in accordance with generally accepted accounting principles for 
interim financial information and the instructions to Form 10-QSB. 
Accordingly, they do not include all of the information and footnotes 
required by generally accepted accounting principles for complete financial 
statements. In the opinion of management, all adjustments (consisting of 
normal recurring accruals) considered necessary for a fair presentation have 
been included. For further information, refer to the audited financial 
statements for the year ended March 31, 1997, and footnotes thereto, included 
in the Company's Annual Report on Form 10-KSB which was filed with the 
Securities and Exchange Commission. Operating results for the three and nine 
month periods ended December 31, 1997 are not necessarily indicative of the 
results of operations that may be expected for the year ending March 31, 
1998. 

NOTE 2 

On April 23, 1997, the Company amended its Concession Lease Agreement with 
Pacific Concessions Inc. ("PCI") in exchange for a $2,000,000 loan at an 
interest rate of prime plus two percent. The loan was for a period of two 
years with monthly interest payments and $1,000,000 principal payments due at 
the end of twelve and twenty-four months. This loan was repaid in full with 
interest on December 15, 1997. In connection with this financing transaction, 
PCI received warrants to purchase 150,000 shares of common stock at an 
exercise price per share of $0.848202. As a result of the amended agreements 
PCI now supplies concessions to all of the Company's current domestic theater 
locations in exchange for specified commissions. On August 29, 1997, an 
additional $500,000 was borrowed from PCI as a short-term loan. Such loan was 
paid in full with interest on September 24, 1997. In connection with this 
loan PCI was issued warrants to purchase 400,000 shares of common stock at an 
exercise price per share of $0.848202. In accordance with the terms of the 
Concession Lease Agreement, the Company issued notice of termination to PCI 
on December 15, 1997 and incurred early termination fees of $1,859,352. After 
the expiration of notice periods of five or six months for various theaters, 
the Company will no longer be obligated to use PCI for its concession 
business. 

NOTE 3 

On September 23, 1997 the Company signed a definitive agreement for 
CinemaStar Acquisition Partners, L.L.C. ("CAP") to acquire a majority equity 
interest in the Company through a $15,000,000 purchase of newly issued shares 
of the Company's common stock. This transaction was completed on December 15, 
1997. Concurrent with the signing of the Stock Purchase Agreement, the 
Company received a $3,000,000 bridge loan from Reel Partners, L.L.C. to 
complete existing projects and to pay off certain indebtedness.  The bridge 
loan was convertible into 3,000,000 shares of common stock of the Company at 
$1.00 per share. In connection with the bridge loan, the Company issued to 
Reel Partners, L.L.C. warrants to purchase 4,500,000 shares of common stock 
at an exercise price of $0.848202. 1,500,000 of such warrants were canceled 
upon completion of the equity financing transaction with CAP. The bridge loan 
was paid in full, without conversion and with interest on December 15, 1997.

The net proceeds of the equity financing have been used by the Company to 
retire debt, including the bridge loan, to complete certain capital projects 
and for general working capital purposes. The bridge loan proceeds were used 
to complete existing projects and for general working capital purposes.

In connection with the signing of the definitive agreement CAP received a 
warrant to purchase 1,000,000 shares of common stock at an exercise price of 
$0.848202. At closing of the equity financing transaction CAP received a 
warrant to purchase 1,630,624 shares of common stock at the same exercise 
price. Additionally, pursuant to an agreement between the The Watley Group, 
LLC ("Watley") and the Company, Watley received upon closing of the equity 
financing a cash fee of $962,250 and simultaneously purchased for cash, for a 
purchase price of $0.12 per warrant, warrants to purchase 1,768,446 shares of 
Common Stock at an exercise price per share equal to $0.848202. The Company 
has been informed that Watley has paid $150,000 of its cash fee to members of 
the Investor Group to reimburse such members for legal expenses and other 
costs incurred in connection with the negotiation and closing of the equity 
financing and bridge loan. The Company has also been informed that all but 
750,000 of the warrants issued to Watley have been transferred by Watley as 
directed by SCP Private Equity Partners, L.P., the controlling member of CAP 
("SCP"). Further, 75,000 shares have been issued to members of the investment 
group as partial reimbursement of expenses incurred by such parties in 
connection with the transactions.

NOTE 4 

Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive 
Income" ("SFAS No. 130") issued by the FASB is effective for financial 
statements with fiscal years beginning after December 15, 1997. Earlier 
application is permitted. SFAS No. 130 establishes standards for reporting 
and display of comprehensive income and its components in a full set of 
general-purpose financial statements. The Company has not determined the 
effect on its financial position or results of operations from the adoption 
of this statement. 

Statement of Financial Accounting Standards No. 131 "Disclosures about 
Segments of an Enterprise and Related Information" ("SFAS No. 131") issued by 
the FASB is effective for financial statements with fiscal years beginning 
after December 15, 1997. The new standard requires that public business 
enterprises report certain information about operating segments in complete 
sets of financial statements of the enterprise and in condensed financial 
statements of interim periods issued to shareholders. It also requires that 
public business enterprises report certain information about their products 
and services, the geographic areas in which they operate and their major 
customers. The Company does not expect adoption of SFAS 131 to have a 
material effect on its results of operations. 

NOTE 5 

Certain reclassifications have been made to the December, 1996 financial 
statements to conform to the December, 1997 presentation.

NOTE 6

Pursuant to the terms of the stock purchase agreements, the Company may be 
obligated to issue additional shares of common stock to CAP with respect to 
certain expenses, liabilities and operating losses of the Company arising or 
disclosed after August 31, 1997 or arising prior to August 31, 1997 and not 
disclosed or quantified before August 31, 1997.

                                      -6-
<PAGE>



ITEM 2.

          MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
                            AND RESULTS OF OPERATIONS

GENERAL

RESULTS OF OPERATIONS

The following discussion and analysis should be read in conjunction with the 
Company's Condensed Consolidated Financial Statements and notes thereto 
included elsewhere in this Form 10-QSB. Except for the historical information 
contained herein, the discussion in this Form 10-QSB contains certain forward 
looking statements that involve risks and uncertainties, such as statements 
of the Company's plans, objectives, expectations and intentions. The 
cautionary statements made in this Form 10-QSB should be read as being 
applicable to all related forward-looking statements wherever they appear in 
this Form 10-QSB. Where possible, the Company uses words like "believes", 
"anticipates", "expects", "plans" and similar expressions to identify such 
forward looking statements. The Company's actual results could differ 
materially from those discussed here. Factors, risks and uncertainties that 
could cause or contribute to such differences include the availability of 
marketable motion pictures, the increase of revenues to meet long-term lease 
obligations and rent increases, risks inherent in the construction of new 
theaters, the ability to secure new locations on favorable terms, intense 
competition in the industry, dependence on concession sales and suppliers, 
earthquakes and other natural disasters and costs associated with potential 
changes in management and disputes related thereto.

At December 31, 1996 the Company had seven theater locations with a total of 
64 screens. During the twelve months ended December 31, 1997, the Company 
added in July 1997 five additional screens to an existing location and in 
November 1997 added an additional ten screen location. Thus at December 31, 
1997 the Company had 8 locations and 79 screens. These additions during the 
past twelve months resulted in an increase in revenues and expenses for the 
three and nine months ended December 31, 1997 compared to December 31, 1996. 

THREE MONTHS ENDED DECEMBER 31, 1997 COMPARED TO THREE MONTHS ENDED 
DECEMBER 31, 1996. 

Total revenues for the three months ended December 31, 1997 increased 31.7% 
to $6,302,530 from $4,785,563 for the three months ended December 31, 1996. 
The increase consisted of a $1,239,874, or 37.9%, increase in admission 
revenues and a $277,093, or 18.3%, increase in concession revenues and other 
operating revenues. The increases in admission revenue and concession and 
other operating revenue were due primarily to the increase in the number of 
theaters and screens and, to a lesser extent, an increase in revenues at 
certain theaters in existence for both 1996 and 1997, due to greater 
attendance. 

Film rental and booking costs for the three months ended December 31, 1997 
increased 30.2% to $2,495,583 from $ 1,916,322 for the three months ended 
December 31, 1996. The increase was due to the greater revenue generated from 
more screens and additional revenue at the existing theaters. As a percentage 
of admissions revenues, film rental and booking costs decreased to 55.3% from 
58.6% in the three months ended December 31, 1997 compared to the comparable 
prior year period, in part due to lower film rental cost in the Company's new 
location in Tijuana, Mexico.

Cost of concession supplies for the three months ended December 31, 1997 
increased 49.4% to $ 639,889 from $428,390 for the three months ended 
December 31, 1996. The dollar increase was due in part to increased 
concession costs associated with increased 

                                      -7-
<PAGE>

concession revenues and was also the result of an amendment to the concession 
agreement with the Company's primary concession vendor resulting in higher 
concession costs. 

Theater operating expenses for the three months ended December 31, 1997 
increased 52.3% to $2,887,241 from $1,896,180 for the three months ended 
December 31, 1996. The dollar increase in theater operating costs was 
primarily due to the increased costs attributable to the addition of new 
theaters. Costs also increased due to the increase in minimum wages. As a 
percentage of total revenues, theater operating expenses increased to 45.8% 
from 39.6% during the applicable periods. The Company is currently conducting 
a detailed review of theater operating expenses to identify on-going cost 
reduction opportunities, but there can be no assurance such opportunities 
exist or will be identified in such review.

Termination fee -- concession lease agreement comprises penalty payments for 
notice of early termination of agreements with respect to concession supplies 
at the Company's seven domestic locations. Such notice was given on December 
15, 1997 and, under the terms of the agreement, will become effective on 
either five of six months hence for specific locations. At that time the 
Company will not be bound to the existing supplier. While the Company 
anticipates that in can achieve an increase in the profitability of its 
concession business with a new supplier, no assurance can be given that a new 
supplier can be obtained or will provide terms more favorable than those 
provided by the existing supplier.

General and administrative expenses for the three months ended December 31, 
1997 increased 132.8% to $1,395,909 from $599,681 for the three months ended 
December 31, 1996. The increase was primarily due to costs associated with 
expansion in Mexico, costs incurred for professional and consulting fees 
related to expansion and financing plans and other costs associated with the 
expansion of corporate operations. As a percentage of total revenues, general 
and administrative expenses increased to 22.1% from 12.5 % during the three 
months ended December 31, 1997 compared with the prior comparable period. The 
Company is currently conducting a detailed review of general and 
administrative expenses to identify on-going expense reduction opportunities, 
but there can be no assurance such opportunities exist or will be identified 
in such review.

Depreciation and amortization for the three months ended December 31, 1997 
decreased 11.5 % to $473,750 from $535,336 for the three months ended 
December 31, 1996. The decrease was primarily the result of reduced 
amortization of pre-opening costs during the three months ended December 31, 
1997 partially offset by increased depreciation on additional equipment 
associated with the opening of the new theaters . 

Interest expense for the three months ended December 31, 1997 increased to 
$324,803 from $166,492 for the three months ended December 31, 1996.  This 
increase was primarily due to the increased debt incurred by the Company in 
its expansion and borrowing of funds for working capital during 1997. The 
majority of the Company's debt has been repaid from the proceeds of the 
equity financing consummated December 15, 1997.

Non-cash interest expense of $221,750 for the three months ended December 31, 
1997 related to debt with detachable warrants, associated with loans from 
Reel Partners, L.L.C. ("Reel") and Pacific Concessions, Inc. ("PCI") All such 
loans have been paid in full with interest prior to December 31, 1997.

Interest income for the three months ended December 31, 1997 increased to 
$14,098 from $1,936 for the three months ended December 31, 1996. This 
increase is attributable to higher cash balances in the latter part of the 
three months ended December 31, 1997 due to the completion of the Equity 
Financing transaction on December 15, 1997.

As a result of the factors discussed above, the net loss for the three months 
ended December 31, 1997 was $3,981,649 or $ .36 per common share, compared to 
a net loss of $755,702, or $.11 per common share, for the three months ended 
December 31, 1996. 

NINE MONTHS ENDED DECEMBER 31, 1997 COMPARED TO NINE MONTHS ENDED 
DECEMBER 31, 1996. 

Total revenues for the nine months ended December 31, 1997 increased 34.4% to 
$18,941,217 from $14,092,914 for the nine months ended December 31, 1996. The 
increase consisted of a $3,374,636, or 34.7%, increase in admission revenues 
and a $1,473,667, or 33.8%, increase in concession and other operating 
revenues. The admission revenue and concession and other operating revenue 
increase was due to both the increase in the number of theaters and screens 
and an increase in attendance. 

Film rental and booking costs for the nine months ended December 31, 1997 
increased 35.5% to $7,432,200 from $5,483,841 for the nine months ended 
December 31, 1996. As a percentage of admissions revenues, film rental and 
booking costs increased modestly to 56.7% for the nine months ended December 
31, 1997 compared to 56.4% for the comparable prior year period. The increase 
was due to higher film rental and booking costs paid on increased admission 
revenues resulting from the addition of new screens and increased attendance 
at existing theaters, partially offset by lower film rental and booking costs 
as a percentage of admissions at the Company's newly opened ten screen 
theater in Tijuana, Mexico.

                                      -8-
<PAGE>

Cost of concession supplies for the nine months ended December 31, 1997 
increased 55.5% to $1,975,661 from $1,270,283 for the nine months ended 
December 31, 1996. The dollar increase was due to increased concession costs 
associated with higher concession revenues as well as a change in concession 
agreements with one of the Company's primary concession vendors resulting in 
higher concession costs. As a percentage of concession revenues, concession 
costs for the nine months ended December 31, 1997 and December 31, 1996 
increased to 36.2% from 31.3%. The increase was primarily due to the higher 
concession costs associated with an amendment to the concession agreement 
with the Company's primary concession vendor. 

Theater operating expenses for the nine months ended December 31, 1997 
increased 56.9% to $7,850,350 from $5,004,474 for the nine months ended 
December 31, 1996. As a percentage of total revenues, theater operating 
expenses increased to 41.4% from 35.5%. The dollar increase was primarily 
attributable to the operating costs associated with the new theaters. Costs 
also increased due to the increase in minimum wage. The Company is currently 
conducting a detailed review of theater operating expenses to identify 
on-going cost reduction opportunities, but there can be no assurance such 
opportunities exist or will be identified in such review.

Termination fee -- concession lease agreement comprises penalty payments for 
notice of early termination of agreements with respect to concession supplies 
at the Company's seven domestic locations. Such notice was given on December 
15, 1997 and, under the terms of the agreement, will become effective on 
either five of six months hence for specific locations. At that time the 
Company will not be bound to the existing supplier. While the Company 
anticipates that in can achieve an increase in the profitability of its 
concession business with a new supplier, no assurance can be given that a new 
supplier can be obtained or will provide terms more favorable than those 
provided by the existing supplier.

General and administrative expenses for the nine months ended December 31, 
1997 increased 74.6% to $3,182,021 from $1,822,195 for the nine months ended 
December 31, 1996. The increase was primarily due to costs associated with 
expansion in Mexico, costs incurred for consulting fees related to expansion 
and financing plans and other costs associated with the expansion of 
corporate operations. As a percentage of total revenues, general and 
administrative costs increased to 16.8% from 12.9% during the period. The 
Company is currently conducting a detailed review of general and 
administrative expenses to identify on-going expense reduction opportunities, 
but there can be no assurance such opportunities exist or will be identified 
in such review.

Depreciation and amortization for the nine months ended December 31, 1997 
increased 33.7% to 1,460,105 from $1,092,405 for the nine months ended 
December 31, 1996. The increase was primarily the result of depreciation on 
additional equipment associated with the opening of the new theaters, and 
amortization of pre-opening expenses in the first six months of the period. 

Interest expense for the nine months ended December 31, 1997 increased to 
$693,451 from $469,357 for the nine months ended December 31, 1996. This 
increase was due to the increased debt incurred by the Company in its 
expansion and borrowing of funds for working capital.

Non-cash interest expense of $2,048,997 for the nine months ended December 
31, 1996 result from issuing debentures which were convertible at a discount 
from the market price of the common stock. The non-cash interest recorded on 
the convertible debentures was amortized over the periods which the 
debentures first became convertible and had no effect on stockholders' equity 
and operating income. Non-cash interest expense of $328,750 for the nine 
months ended December 31, 1997 related to debt with detachable warrants 
associated with loans from Reel Partners, L.L.C. and Pacific Concessions, 
Inc. All such loans have been paid in full with interest prior to 
December 31, 1997.

Interest income for the nine months ended December 31, 1997 increased to 
$23,580 from $17,094 for the nine months ended December 31, 1996. This 
increase is attributable to changes in cash balances due to Bridge loan 
proceeds and the completion of the Equity Financing transaction on December 
15, 1997.

As a result of the factors discussed above, the net loss for the nine months 
ended December 31, 1997 increased to $5,818,693 or $ .65 per common share, 
from $3,083,944, or $ .47 per common share, for the nine months ended 
December 31, 1996.

                                      -9-
<PAGE>


LIQUIDITY AND CAPITAL RESOURCES


The Company's revenues are collected in cash, principally through box office 
admissions and concession sales. Because its revenues are received in cash 
prior to the payment of related expenses, the Company has an operating 
"float" which partially finances its operations.

The Company's capital requirements arise principally in connection with new 
theater openings and acquisitions of existing theaters. In the past new 
theater openings have typically been financed with internally generated cash 
flow and long-term debt financing arrangements for facilities and equipment. 
The Company discovered that it lacked the ability to finance its current 
capital obligations through internally generated funds and sought additional 
capital. On September 23, 1997, the Company signed a definitive agreement for 
CinemaStar Acquisition Partners, L.L.C. ("CAP")  to acquire a majority equity 
interest in the Company through a $15 million purchase of newly issued shares 
of the Company's common stock. Following stockholder approval, the equity 
financing transaction was completed on December 15, 1997.

                                      10

<PAGE>

Pursuant to the Stock Purchase Agreement, CAP purchased 17,684,464 shares of 
common stock for a purchase price of $0.848202 per share. CAP also received 
at closing warrants to purchase 1,630,624 shares of common stock at an 
exercise price equal to $0.848202 per share.

Upon execution of the Stock Purchase Agreement, CAP received an additional 
warrant to purchase one million shares of common stock at an exercise price 
of $0.848202.  Additionally, pursuant to an agreement between the The Watley 
Group, LLC ("Watley") and the Company, Watley received upon closing of the 
Equity Financing a cash fee of $962,250 and simultaneously purchased for 
cash, for a purchase price of $0.12 per warrant, warrants to purchase 
1,768,446 shares of Common Stock at an exercise price per share equal to 
$0.848202. The Company has been informed that Watley has paid $150,000 of its 
cash fee to members of the Investor Group to reimburse such members for legal 
expenses and other costs incurred in connection with the negotiation and 
closing of the equity financing and bridge loan. The Company has also been 
informed that all but 750,000 of the warrants issued to Watley have been 
transferred by Watley as directed by SCP. Further, 75,000 shares have been 
issued to members of the investment group as partial reimbursement of 
expenses incurred by such parties in connection with the transactions.

Pursuant to the terms of the Stock Purchase Agreement, the Company may be 
obligated to issue additional shares of common stock to CAP with respect to 
certain expenses, liabilities and operating losses of the Company arising or 
disclosed after August 31, 1997 or arising prior to August 31, 1997 and not 
disclosed or quantified before August 31, 1997.

Concurrent with the signing of the Stock Purchase Agreement the Company 
received a $3 million bridge loan from Reel to complete existing projects and 
to pay off certain indebtedness. The bridge loan was convertible into three 
million shares of common stock of the Company at $1.00 per share. In 
connection with the bridge loan, the Company issued to Reel warrants to 
purchase 4,500,000 shares of Common Stock at an exercise price of $0.848202. 
1,500,000 of such warrants were cancelled upon completion of the equity 
financing with CAP. The bridge loan was paid back in full, without 
conversion and with interest with the proceeds of the equity financing.

On April 23, 1997, the Company amended its Concession Lease Agreement with 
Pacific Concessions Inc. (PCI) in exchange for a $2,000,000 loan at an 
interest rate of prime plus two percent. The loan was for a period of two 
years with monthly interest payments and $1,000,000 principal payments due at 
the end of twelve and twenty-four months. This loan was repaid in full with 
interest on December 15, 1997. In connection with this financing transaction, 
PCI received warrants to purchase 150,000 shares of common stock at an 
exercise price per share of $0.848202. As a result of the amended agreements, 
PCI now supplies concessions to all of the Company's current domestic theater 
locations in exchange for specified commissions. On August 29, 1997, an 
additional $500,000 was borrowed from PCI as a short term loan. Such loan was 
paid in full with interest on September 24, 1997. In connection with this loan
PCI was issued warrants to purchase 400,000 shares of common stock at an 
exercise price per share of $0.848202. In accordance with the terms of the 
Concession Lease Agreement, the Company issued notice of termination to PCI on
December 15, 1997 and incurred early termination fees of $1,859,352. After the
expiration of notice periods of five and six months for various theaters 
respectively, the Company will no longer be obligated to use PCI for its 
concession business. 

                                      11

<PAGE>

The Company leases seven theater properties and various equipment under 
noncancelable operating lease agreements which expire through 2021 and 
require various minimum annual rentals. At December 31, 1997, the aggregate 
future minimum lease payments due under noncancelable operating leases was 
approximately $83,800,000. The Company has also signed a lease agreement for 
one additional theater location. The additional lease will require expected 
minimum rental payments aggregating approximately $40,700,000 over the 
life of the lease. Accordingly, existing minimum lease commitments as of 
December 31, 1997 plus those expected minimum commitments for the proposed 
theater locations would aggregate minimum lease commitments of approximately 
$124,500,000.

During the nine months ended December 31, 1997, the Company used cash of 
$3,387,746 from operating activities, as compared to generating $2,031,110 
cash from operating activities for the nine months ended December 31, 1996. 
The change is due to factors discussed in "Results of Operations" above, 
including increased theater operating expenses resulting from the opening of 
new theaters and the expansion of an existing theater, increased general and 
administrative expenses as a result of expansion including international 
expansion, costs associated with the equity investment and other financing 
efforts and cost of penalties related to notice of early termination of 
concession lease agreements.

During the nine months ended December 31, 1997, the Company used cash in 
investing activities of $4,167,753, as compared to $4,929,627 for the nine 
months ended December 31, 1996. The decrease is due to lower purchases of 
fixed assets during the nine months ended December 31, 1997 compared with the 
prior comparable period.

During the nine months ended December 31, 1997, the Company provided net cash 
of $11,651,461 from financing activities, as compared to providing $3,279,607 
for the nine months ended December 31, 1996. The cash generated for the nine 
months ended December 31, 1997 came primarily from the completion of an 
equity financing on December 15, 1997 as well as loans from PCI and Reel, 
partially offset by payment in full of all outstanding loans from PCI, Reel 
and First National Bank.

The Company, at December 31, 1997, had a working capital surplus of $1,409,802.

The Company's plans for expansion are dependent upon its ability to raise 
capital through outside sources. In this regard, the Company has entered into 
lease and other binding commitments with respect to the development of 30 
additional screens at two locations. Regarding the first location, the Company 
has completed and opened a 10 screen theater in Tijuana, Mexico on November 
15, 1997. The Company has paid for the equipment at this theater and its 
subsidiary, CinemaStar Luxury Theaters, S.A. de C.V. will either purchase or 
lease this equipment from the Company. Pursuant to terms of the operating 
lease for the premises, CinemaStar Luxury Theaters, S.A. de C.V. was to 
obtain a Fianza or bond to secure the payment of rent. Such bond was not able 
to be obtained and the landlord, Inmobiliaria Lumar S.A. de C. V., ("Lumar"), 
has agreed to accept a pledge of certain of the theater equipment as 
collateral to satisfy the lease requirement. This pledge of collateral will 
be done through a Trust Agreement with the bank designated by Lumar. The 
Company is presently in the process of fulfiling the requirements of Lumar.

Regarding the second location, the Company on December 20, 1996 entered into 
a long-term lease for the development of a 20 screen theater in San 
Bernardino, California. The estimated cost to equip this theater is between 
$2,000,000 and $2,500,000. On November 7, 1997, MDA-San Bernardino 
Associates, LLC ("MDA"), the landlord of the Company's San Bernardino 
location, filed an action for Unlawful Detainer in the Municipal Court of the 
State of California for the County of San Bernardino, Case No. 184164. The 
action sought to remove the Company as tenant. The action was filed because 
MDA believed the Company had not satisfied certain financial conditions under 
the lease pursuant to which the Company is leasing the property. The Company 
filed a response to this action and has subsequently entered into a 
Stipulation for Entry of Judgement with MDA. The Company believes it is in a 
position to comply with all requirements of such Stipulation  for Entry of 
Judgement, but unanticipated circumstances could have an adverse effect on 
its ability to so comply.

                                      12

<PAGE>

The Company has had significant net losses in each fiscal year of its 
operations, including net losses of $509,336, $1,551,002, $2,086,418, 
$638,585 and $4,304,370 in the fiscal years ended March 31, 1993, 1994, 1995, 
1996 and 1997, respectively. There can be no assurance as to when the Company 
will be profitable, if at all.

As of March 31, 1997, the Company had net operating loss carryforwards 
("NOLs") of approximately $4,175,000 and $2,080,000 for Federal and 
California income tax purposes, respectively. The Federal NOLs are available 
to offset future years taxable income and expire in 2006 through 2012, while 
the California NOLs are available to offset future years taxable income and 
expire in 1998 through 2002. The utilization of these NOLs could be limited 
due to restrictions imposed under the Federal and state laws upon a change in 
ownership.

At December 31, 1997, the Company has total net deferred income tax assets in 
excess of $2,000,000. Such potential income tax benefits, a significant 
portion of which relates to the NOLs discussed above, have been subjected to 
a 100% valuation allowance since realization of such assets is not more 
likely than not in light of the Company's recurring losses from operations.


                                      13

<PAGE>

On November 7, 1997, the Company received notice that The Nasdaq Stock 
Market, Inc. ("NASDAQ") had decided to delist the Company's securities from 
trading on the Nasdaq SmallCap Market due to a failure of the Company to meet 
applicable listing standards and the Company's failure to demonstrate an 
adequate plan of compliance with such listing standards in the future. On 
November 12, 1997, the Company appealed this decision and attended a hearing 
before a Listing Panel. Such appeal was successful and on January 13, 1998 
the Company was informed by Nasdaq that it was in compliance with the listing 
standards and would remain listed assuming continued compliance.

With the completion of the equity financing with CAP, the Company anticipates 
that it will not need additional financing during the next twelve months. If 
financing requirements do arise, however, there can be no assurance that the 
Company will be able to obtain such financing on acceptable terms. Failure to 
obtain required financing could have a material adverse effect on the 
financial condition and results of operations of the Company.

Upon completion of the equity financing transaction on December 15, 1997, the 
Company paid  in full with interest all outstanding loan obligations to First 
National Bank, PCI and Reel. Prior thereto the Company had been in violation 
of certain loan covenants with respect to its banking facility. Such 
violations were cured with the repayment of the Company's obligations. In 
addition all arrearages with respect to the Company's lease obligations were 
made current as of December 15, 1997.

Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive 
Income" ("SFAS No. 130") issued by the FASB is effective for financial 
statements with fiscal years beginning after December 15, 1997. Earlier 
application is permitted. SFAS No. 130 establishes standards for reporting 
and display of comprehensive income and its components in a full set of 
general-purpose financial statements. The Company has not determined the 
effect on its financial position or results of operations from the adoption 
of this statement.

Statement of Financial Accounting Standards No. 131 "Disclosures about 
Segments of an Enterprise and Related Information" ("SFAS No. 131") issued by 
the FASB is effective for financial statements beginning after December 15, 
1997. The new standard requires that public business enterprises report 
certain information about operating segments in complete sets of financial 
statements of the enterprise and in condensed financial statements of interim 
periods issued to shareholders. It also requires that public business 
enterprises report certain information about their products and services, the 
geographic areas in which they operate and their major customers. The Company 
does not expect adoption of SFAS 131 to have a material effect on its results 
of operations.


                                      14


<PAGE>


PART II -- OTHER INFORMATION

ITEM 1 -- LEGAL PROCEEDINGS

On November 7, 1997, MDA-San Bernardino Associates, LLC ("MDA"), the landlord of
the Company's San Bernardino location, filed an action for Unlawful Detainer in
the Municipal Court of the State of California for the County of San Bernardino,
Case No. 184164. The action sought to remove the Company as tenant. The action
was filed because MDA believed the Company had not satisfied certain financial
conditions under the lease pursuant to which the Company is leasing the
property. The Company filed a response to this action and has subsequently
entered into a Stipulation for Entry of Judgement with MDA. The Company believes
it is in a position to comply with all requirements of such Stipulation  for
Entry of Judgement, but unanticipated circumstances could have an adverse 
effect on its ability to so comply.

ITEM 2 -- CHANGES IN SECURITIES
ANTI-DILUTION ADJUSTMENTS TO PUBLIC WARRANTS

The terms of the Company's publicly traded Redeemable Warrants and Class B 
Redeemable Warrants contain anti-dilution provisions that provide for 
adjustments in the exercise price and number of shares issuable upon exercise 
of such warrants in the event of issuance of Common Stock (or securities 
convertible into Common Stock) at a price per share below the exercise price 
of such warrants. Pursuant to such anti-dilution provisions, by September 1, 
1997, the exercise price of the Redeemable Warrants and Class B Redeemable 
Warrants had been reduced to $5.32 and $5.90, respectively, and the number of 
shares of Common Stock issuable upon exercise of each Redeemable Warrant and 
Class B Redeemable Warrant had increased to 1.1657318 and 1.1016967 shares of 
Common Stock, respectively. As a result of the signing of the September 23, 
1997 Stock Purchase Agreement with CAP and the concurrent completion of the 
$3,000,000 bridge financing with an affiliate of CAP, the exercise price of 
the Company's Redeemable Warrants was reduced from the $5.32 price in effect 
immediately prior to such transactions to $3.70 per share. Concurrently, the 
number of shares of Common Stock issuable upon exercise of each Redeemable 
Warrant was increased from 1.1657318 to 1.6216216 shares of Common Stock. 
Similarly, the exercise price of the Class B Redeemable Warrant was 
automatically reduced to $4.06 from a pre-Bridge Financing exercise price of 
$5.90 and the number of shares of Common Stock issuable upon exercise of each 
Class B Redeemable Warrant was increased from 1.1016967 to 1.6009852 shares 
of Common Stock.

Upon Closing and the repayment of the $3,000,000 bridge loan from an 
affiliate of CAP, the as adjusted exercise price of the Redeemable Warrants 
and Class B Redeemable Warrants was automatically adjusted to $2.56 and 
$2.78, respectively. Concurrently, the number of shares of Common Stock 
issuable upon exercise of each Redeemable Warrant and Class B Redeemable 
Warrant was adjusted to 2.34375 and 2.3381295 shares, respectively.

ITEM 4 -- SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS

The Registrant held a special meeting of Stockholders on December 10, 1997. A
Unified Financing Proposal, (more fully described below) was approved (4,413,468
for; 84,305 against, 13,320 abstain)

(a) Approval of an equity financing transaction (the "Equity Financing") 
pursuant to which the Company will issue and sell (i) 17,684,464 shares of 
Common Stock (subject to adjustment in certain circumstances) for an 
aggregate purchase price of $15,000,000, and (ii) warrants to purchase an 
additional 1,630,624 shares of Common Stock at an exercise price of not more 
than $0.848202 per share, in accordance with the terms of a Stock Purchase 
Agreement, dated as of September 23, 1997, by and among the Company, Reel 
Partners, L.L.C. ("Reel Partners"), and CinemaStar Acquisition Partners, 
L.L.C.;

(b) Ratification of a bridge financing transaction (the "Bridge Financing") 
pursuant to which the Company received $3,000,000 in bridge financing from 
Reel Partners and issued and sold (i) a $3,000,000 Convertible Secured 
Promissory Note in favor of Reel Partners, that is convertible, at the option 
of Reel Partners, into 3,000,000 shares of Company Common Stock (subject to 
adjustment in certain circumstances), (ii) warrants to purchase 3,000,000 
shares of Company Common Stock at an exercise price of $0.848202 per share, 
and (iii) an additional warrant to purchase 1,500,000 shares of Company 
Common Stock at an exercise price of $0.848202, which warrant will be 
canceled upon consummation of the Equity Financing; 

(c) Approval of an amendment and restatement of the Articles of Incorporation 
of the Company (the "Amended Articles") which will (i) increase the 
authorized number of shares of Company Common Stock from 15,000,000 to 
60,000,000 shares, and (ii) eliminate the authorized shares of Company 
Preferred Stock, none of which is currently outstanding.; and

(d) Election of the following Director designees: Winston J. Churchill, Jack R.
Crosby, Thomas G. Rebar and Wayne B. Weisman.

ITEM 5 --  OTHER INFORMATION

           None

ITEM 6 --  EXHIBITS AND REPORTS ON FORM 8-K

       (a) Exhibits

           Item 27. Financial Data Schedule

       (b) Reports on Form 8-K

           The Company filed one Report on Form 8-K during the quarter  
           ended December 31, 1997. It was filed on December 24, 1997 and 
           reported the completion of an equity financing transaction and 
           resultant change in control of the Registrant.

                                      15

<PAGE>

                                  SIGNATURES

In accordance with the requirements of the Exchange Act, the Registrant 
caused this report to be signed on its behalf by the undersigned, thereunto 
duly authorized.

Dated: February 17, 1998

                           CinemaStar Luxury Theaters, Inc.

                           by: /s/ JAMES VILLANUEVA
                              -------------------------------
                               James Villanueva
                               Executive Vice President
                               (principal executive officer)

                           by: /s/ NORMAN DOWLING
                              --------------------------------
                               Norman Dowling
                               Vice President and Chief
                               Financial Officer (principal
                               financial officer and principal
                               accounting officer)



                                       16