<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 September 30, 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: 8,019,182 shares outstanding as of 
November 14, 1997.

Transitional Small Business Disclosure Format. (check one):

YES 
    -----
NO    X

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                       CINEMASTAR LUXURY THEATERS, INC.

                              TABLE OF CONTENTS

                                                                        PAGE NO.
PART I.  Financial Information:

Item 1.  Financial Statements

         Condensed Consolidated Balance Sheet as of September 30, 1997      3

         Condensed Consolidated Statements of Operations for the three
         and six months ended September  30, 1997 and 1996                  4

         Condensed Consolidated Statements of Cash Flows for the
         six months ended September 30, 1997 and 1996                       5

         Notes to Condensed Consolidated Financial Statements             6-7

Item 2.  Management's Discussion and Analysis of Financial Condition     7-24
         and Results of Operations.

PART II. Other Information

Item 3.  Default of Senior Securities                                      24

Item 5.  Other Information                                                 24

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

         Signatures                                                        25

                                       2
<PAGE>

PART I. Financial Information
ITEM 1. Financial Statements

                       CinemaStar Luxury Theaters, Inc. 
                              and Subsidiaries 
                     Condensed Consolidated Balance Sheet 

                                  (Unaudited) 

                                                          September 30, 1997
                                                          ------------------
ASSETS 
CURRENT ASSETS
Cash                                                        $   1,067,822 
Commissions and other receivables                                 193,080 
Prepaid expenses                                                  226,517 
Other current assets                                              597,808 
                                                            ------------- 
Total current assets                                            2,085,227 

Property and equipment, net                                    13,572,913 
Preopening costs, net                                               4,494 
Deposits and other assets                                         606,685 
                                                            ------------- 

TOTAL ASSETS                                                $  16,269,319 
                                                            ------------- 
                                                            ------------- 

LIABILITIES AND STOCKHOLDERS' EQUITY

CURRENT LIABILITIES
Current portion of long-term debt and capital lease
obligations                                                 $   8,508,785 
Accounts payable                                                2,632,560 
Accrued expenses                                                  281,887 
Deferred revenue                                                  133,638 
Advances from stockholders                                         94,863 
                                                            -------------
Total current liabilities                                      11,651,733 
Long-term debt and capital lease obligations, net of 
 current portion                                                  220,683 
Deferred rent liability                                         2,731,575 
                                                            -------------
TOTAL LIABILITIES                                              14,603,991 
                                                            -------------

STOCKHOLDERS' EQUITY
Preferred stock, no par value; 100,000 shares
 authorized; Series A redeemable preferred
 stock, no par value, 25,000 shares designated;
 no shares issued or outstanding                                        0
Common stock, no par value; 15,000,000 shares
 authorized; 8,019,182  shares issued and outstanding           9,474,618 

Additional paid-in capital                                      3,759,027 
Accumulated deficit                                           (11,568,317)
                                                            ------------- 

TOTAL STOCKHOLDERS' EQUITY                                      1,665,328 

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY                  $  16,269,319 
                                                            ------------- 
                                                            ------------- 


     See accompanying notes to condensed consolidated financial statements

                                       3
<PAGE>

                           CinemaStar Luxury Theaters, Inc. and Subsidiaries
                            Condensed Consolidated Statements of Operations
                                              (Unaudited)

<TABLE>
<CAPTION>
                                        Three Months Ended September 30   Six Months Ended September 30 
                                        -------------------------------   -----------------------------
                                               1997           1996            1997           1996
                                           -----------    -----------      -----------   -----------
<S>                                     <C>               <C>              <C>           <C>
REVENUES
Admissions                                 $ 4,676,618    $ 3,493,385      $ 8,591,676   $ 6,456,914 
Concessions                                  2,069,989      1,453,061        3,788,995     2,655,983 
Other operating revenues                       139,347        100,502          258,016       194,454 
                                           -----------    -----------      -----------   ----------- 

TOTAL REVENUES                               6,885,954      5,046,948       12,638,687     9,307,351 
                                           -----------    -----------      -----------   ----------- 

Costs and expenses:
Film rental and booking costs                2,688,093      1,963,790        4,936,617     3,567,519 
Cost of concession supplies                    742,578        482,909        1,335,772       841,893 
Theater operating expenses                   2,682,543      1,702,860        4,963,109     3,109,202 
General & administrative expense               911,680        687,799        1,786,112     1,221,606 
Depreciation & amortization                    531,757        331,428          986,355       557,069 
                                           -----------    -----------      -----------   ----------- 

TOTAL COSTS AND EXPENSES                     7,556,651      5,168,786       14,007,965     9,297,289 
                                           -----------    -----------      -----------   ----------- 

OPERATING INCOME (LOSS)                       (670,697)      (121,838)      (1,369,278)       10,062 
                                           -----------    -----------      -----------   ----------- 

OTHER INCOME (EXPENSE)
Interest Income                                  2,929         12,514            9,482        15,158 
Interest Expense                              (288,779)      (152,204)        (475,648)     (302,865)
Non-cash interest expense
 related to convertible debentures                   -     (1,071,429)               -    (2,048,997)
                                           -----------    -----------      -----------   -----------

TOTAL OTHER (EXPENSE)                         (285,850)    (1,211,119)        (466,166)   (2,336,704)
                                           -----------    -----------      -----------   -----------

LOSS BEFORE PROVISION FOR INCOME TAXES        (956,547)    (1,332,957)      (1,835,444)   (2,326,642)
PROVISION FOR INCOME TAXES                      (1,600)        (1,600)          (1,600)       (1,600)
                                           -----------    -----------      -----------   -----------

NET LOSS                                      (958,147)    (1,334,557)      (1,837,044)   (2,328,242)
                                           -----------    -----------      -----------   -----------
                                           -----------    -----------      -----------   -----------

NET LOSS PER COMMON SHARE                        (0.12)         (0.21)           (0.23)        (0.37)
                                           -----------    -----------      -----------   -----------
                                           -----------    -----------      -----------   -----------

WEIGHTED AVERAGE NUMBER OF COMMON SHARES 
 AND SHARE EQUIVALENTS OUTSTANDING           7,993,633      6,441,512        7,891,902     6,348,514 
                                           -----------    -----------      -----------   -----------
                                           -----------    -----------      -----------   -----------
</TABLE>

     See accompanying notes to condensed consolidated financial statements

                                       4
<PAGE>

                                 Cash Flow 10Q

                CINEMASTAR LUXURY THEATERS, INC. AND SUBSIDIARIES

                 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                                   (UNAUDITED)

                                                  Six Months Ended September 30,
                                                         1997          1996
Cash flows from operating activities:
Net loss                                           $  (1,837,044) $(2,328,242)

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

Depreciation and amortization                            986,355      557,069 
Deferred rent liability                                  445,229      413,031 
Non-cash interest expense                                107,000    2,048,997
Increase (decrease) from changes in:
  Commission and other receivables                      (162,399)     (40,760)
  Prepaid expenses and other current assets              141,622     (271,131)
  Accounts payable                                       (97,250)     578,022 
  Accrued expenses and other liabilities                 (28,796)    (240,048)
  Deposits and other assets                                  -        (63,705)
  Preopening costs                                       105,852      (97,014)
                                                   -------------   ----------
Cash provided by (used in) operating activities         (339,431)     556,219 
                                                   -------------   ----------

Cash flows from investing activities:

Purchases of property and equipment                   (3,629,422)  (3,448,531)
Refundable construction deposit                              -        600,000 
                                                   -------------   ----------
Cash used in investing activities                     (3,629,422)  (2,848,531)
                                                   -------------   ----------

Cash flows from financing activities:
Principal payments on long term debt and capital        (898,394)    (321,899)
  lease obligations
Proceeds from issuance of long term debt               5,500,000      500,000 
Proceeds from issuance of convertible debentures             -      3,000,000 
Advances from stockholders-net                            67,863       60,000 
Repayment of advances from stockholder                       -       (320,000)
Payment of debt issuance costs                          (234,440)    (474,813)
                                                   -------------   ----------
Cash provided by financing activities                  4,443,029    2,443,288 
                                                   -------------   ----------

Net increase in cash                                     466,176      150,976 
Cash, beginning of period                                601,646      458,550 
                                                   -------------   ----------
Cash, end of period                                $   1,067,822   $  609,526 
                                                   -------------   ----------
                                                   -------------   ----------

                                       5
<PAGE>

                     CINEMASTAR LUXURY THEATERS, INC.
           NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                            SEPTEMBER 30, 1997
                               (UNAUDITED)

NOTE 1

The interim 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 six month periods ended September 30, 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 is 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. In connection with this financing 
transaction PCI received warrants to purchase 150,000 shares of common stock. 
As a result of the amended agreements PCI now supplies concessions to all of 
the current theaters in exchange for specified commissions. On August 29, 
1997 an additional $500,000 was borrowed from PCI as a short term loan and 
was paid back with interest on September 24, 1997. In respect to this loan 
PCI was issued warrants to purchase 400,000 shares of stock.

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 Million purchase of newly issued shares 
of the Company's common stock, and concurrent with the signing of the Stock 
Purchase Agreement, the Company received a $3 million Bridge Loan from an 
affiliate of CAP to complete existing projects and to pay off certain 
indebtedness.  The bridge loan is 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 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 will be canceled in the event that the equity financing 
transaction with CAP is completed. The Company issued a Convertible Secured 
Promissory Note evidencing the bridge loan and the bridge loan is secured by 
a security interest in the Company's assets at the Mission Grove 14 theater 
complex and the Mission Marketplace 13 theater complex as well as the 
Company's grant of leasehold deeds of trust with respect to the leases of 
these two theater complexes.

In connection with the signing of the definitive agreement CAP received a 
warrant to purchase 1,000,000 shares of common stock at the same conversion 
price. At closing of the equity financing transaction CAP will receive a 
warrant to purchase 1,630,624 shares of common stock at an exercise price of 
the lessor of $0.848202 or the average closing price of the Company's common 
stock for the five trading days prior to the date of closing.

NOTE 4 

In March 1997, the FASB issued Statement of Financial Accounting Standards 
No. 128, "Earnings Per Share" ("SFAS No. 128"). This pronouncement provides a 
different method of calculating earnings per share than is currently used in 
accordance with APB Opinion 15, "Earnings Per Share." FAS 128 provides for 
the calculation of Basic and Diluted earnings per share. Basic earnings per 
share includes no dilution and is computed by dividing income available to 
common shareholders by the weighted average number of common shares 
outstanding for the period. Diluted earnings per share reflects the potential 
dilution of securities that could share in the

                                       6
<PAGE>

earnings of an entity, similar to fully diluted earnings per share. This 
pronouncement is effective for fiscal years and interim periods ending after 
December 15, 1997; early adoption is not permitted. The Company does not 
believe that the adoption of this pronouncement will have a material impact 
on the net loss per share presented in the accompanying statements of 
operations. 

Statement of Financial Accounting Standards No. 129 "Disclosure of 
Information about Capital Structure" ("SFAS No. 129") issued by the FASB is 
effective for financial statements ending after December 15, 1997. The new 
standard reinstates various securities disclosure requirements previously in 
effect under Accounting Principles Board Opinion No. 15, which has been 
superseded by SFAS No. 128. The Company does not expect adoption of SFAS No. 
129 to have a material effect on its financial position or results of 
operations. 

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. 

NOTE 5 

Certain reclassifications have been made to the September 30, 1996 financial 
statements to conform to the September, 1997 presentation. 

ITEM 2.

                   MANAGEMENT'S DISCUSSION AND ANALYSIS

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-

                                       7
<PAGE>

looking statements wherever they appear in this Form 10-QSB. The Company's 
actual results could differ materially from those discussed here. Factors 
that could cause or contribute to such differences include those discussed in 
"Risk Factors," as well as those discussed elsewhere herein.

At September 30, 1996 the company was comprised of six theater locations with 
a total of 54 screens. During the twelve months ended September 30, 1997, the 
company added in November 1996 one location with an additional 10 screens and 
added in July 1997 an additional five screens to another location. Thus at 
September 30, 1997 the Company is comprised of 7 locations and 69 screens. 
This addition during the past twelve months resulted in an increase in 
revenues and expenses for the three and six months ended September 30, 1997
compared to September 30, 1996.

Three months ended September 30, 1997 compared to three months ended 
September 30, 1996.

Total revenues for the three months ended September 30, 1997 increased 36.4% 
to $6,885,954 from $5,046,948 for the three months ended September 30, 1996. 
The increase consisted of a $1,183,233, or 33.9%, increase in admission 
revenues and a $655,773, or 42.2%, 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 September 30, 1997 
increased 36.9% to $2,688,093 from $ 1,963,790 for the three months ended 
September 30, 1996. The increase was due to the greater revenue generated from 
more screens and additional revenue at the existing theaters.

Cost of concession supplies for the three months ended September 30, 1997 
increased 53.7% to $ 742,271 from $482,909 for the three months ended 
September 30, 1996. The dollar increase was due to increased concession costs 
associated with increased 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 September 30, 1997 
increased 57.5% to $2,682,199 from $1,702,860 for the three months ended 
September 30, 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 39.0% 
from 33.7% during the applicable periods.

General and administrative expenses for the three months ended September 30, 
1997 increased 32.6% to $911,680 from $687,799 for the three months ended 
September 30, 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 expenses decreased to 13.2% from 13.6% during the three months 
ended September 30, 1997.

Depreciation and amortization for the three months ended September 30, 1997 
increased 60.4% to $531,757 from 331,428 for the three months ended September 
30, 1996. The increase was primarily the result of depreciation on additional 
equipment associated with the opening of the new theaters and the 
amortization of preopening costs during the three months ended September 30, 
1997.

                                       8
<PAGE>

Interest expense for the three months ended September 30, 1997 increased to 
$288,779 from $152,204 for the three months ended September 30, 1996. This 
increase was primarily due to the increased debt incurred by the Company in 
its expansion and borrowing of funds for working capital.

Non-cash interest expense of $1,071,429 for the three months ended September 
30, 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.

Interest income for the three months ended September 30, 1996 decreased to 
$2,929 from $12,514 for the three months ended September 30, 1996. This 
decrease is attributable to lower cash balances as the Company used its funds 
for expansion and working capital.

As a result of the factors discussed above, the net loss for the three months 
ended September 30, 1997 was $958,147 or $ .12 per common share, compared to 
a net loss of $1,334,557, or $.21 per common share, for the three months 
ended September 30, 1996.

Six months ended September 30, 1997 compared to six months ended September 
30, 1996.

Total revenues for the six months ended September 30, 1997 increased 35.8% to 
$12,638,687 from $9,307,351 for the six months ended September 30, 1996. The 
increase consisted of a 2,134,762, or 33.1%, increase in admission revenues 
and a $1,196,574, or 41.9%, 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 six months ended September 30, 1997 
increased 38.4% to $4,936,617 from $3,567,519 for the six months ended 
September 30, 1996. The increase was due to higher film rental and booking 
costs paid on increased admission revenues, resulting from the addition of 
new theaters and increased attendance at existing theaters.

Cost of concession supplies for the six months ended September 30, 1997 
increased 58.7% to $1,335,772 from $841,893 for the six months ended 
September 30, 1996. The dollar increase was due to increased concession costs 
associated with higher concession revenues as well as a change in concession 
agreeements with one of the Company's primary concession vendors resulting in 
higher concesson costs. As a percentage of concession revenues, concession 
costs for the six months ended September 30, 1997 and September 30, 1996 
increased to 35.3% from 31.7%. 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 six months ended September 30, 1997 
increased 59.6% to $4,963,109 from $3,109,202 for the six months ended 
September 30, 1996. As a percentage of total revenues, theater operating 
expenses increased to 39.3% from 33.4%. 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.

General and administrative expenses for the six months ended September 30, 
1997 increased 46.2% to $1,786,112 from $1,221,606 for the six months ended 
September 30, 1996. The increase was primarily due to costs associated with 
expansion in Mexico, costs incurred for consulting fees

                                       9
<PAGE>

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 13.9% from 13.1% during the 
period.

Depreciation and amortization for the six months ended September 30, 1997 
increased 77.1% to 986,355 from $557,069 for the six months ended September 
30, 1996. The increase was primarily the result of depreciation on additional 
equipment associated with the opening of the new theaters.

Interest expense for the six months ended September 30, 1997 increased to 
$475,648 from $302,865 for the six months ended September 30, 1996. This 
increase is primarily attributable to the increased debt incurred by the 
Company for its expansion and working capital.

Non-cash interest expense of $2,048,997 for the six months ended September 
30, 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.

Interest income for the six months ended September 30, 1997 decreased to 
$9,482 from $15,158 for the six months ended September 30, 1996. This 
decrease is attributable to lower interest earning balances as the Company 
used funds for expansion and working capital.

As a result of the factors discussed above, the net loss for the six months 
ended September 30, 1997 decreased to $1,837,044, or $ .23 per common share, 
from $2,328,242, or $.37 per common share, for the six months ended September 
30, 1996.

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 lacks the ability to finance its current capital obligations 
through internally generated funds and is seeking additional capital. On June 
24, 1997, the Company signed a non-binding letter of intent to sell $15 
million of newly issued common stock to Rust Capital, Ltd. The letter of 
intent was subject to various conditions and approval by the Company's 
current shareholders. Upon completion of the transaction, Rust Capital, Ltd. 
would own no less than 51% of the Company's common stock on a fully diluted 
basis. With the additional $15 million, the Company would have enough funds 
to complete current capital obligations, pay off a portion of long-term debt, 
and have working capital sufficient to continue its expansion plans. On July 
25 and July 29, 1997 the Company granted extensions to Rust Capital, Ltd. for 
continued due diligence and preparation of a definitive agreement. As of 
August 5, 1997, the letter of intent expired without further extension. 
However, the Company and Rust Capital, Ltd. continued actively to discuss a 
possible transaction and on September 23, 1997 the continued discussions 
resulted in the signing of a definitive agreement for CinemaStar Acquisition 
Partners, L.L.C. ("CAP") an affiliate of Rust Capital, Ltd., to acquire a 
majority equity interest in the Company through a $15 million purchase of 
newly issued shares of the Company's common stock. Concurrently with the 
signing of the Stock Purchase Agreement, the Company received a $3 million 
Bridge Loan from Reel Partners, L.L.C., an affiliate of CAP, to complete 
existing projects and to pay off certain indebtedness.

                                       10
<PAGE>

Pursuant to the Stock Purchase Agreement, CAP will purchase 17,684,464 shares 
of common stock for a purchase price of $0.848202 per share. CAP will also 
receive at closing warrants to purchase 1,630,624 shares of common stock at 
an exercise price equal to $0.848202 per share, or the previous five day 
trading price of the Company's common stock.

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 the lower of $0.848202.

Pursuant to the terms 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.

The Company's board of directors will be reconstituted to reflect the 
majority interest of CAP.

Completion of the transaction is subject to a number of conditions including 
the continued listing of the Company's Common Stock on the Nasdaq SmallCap 
Market, as well as shareholder approval of an amendment to the Company's 
Articles of Incorporation. A special shareholder meeting has been scheduled 
for this purpose.

Failure of the Company to consummate this transaction would have a material 
adverse effect on the Company's business, results of operations, and/or 
liquidity, and raises substantial doubt about the Company's ability to 
continue as a going concern.

In the event that the closing of the equity financing transaction with CAP 
does not occur for reasons other than as a result of a breach of the Stock 
Purchase Agreement by CAP or Reel Partners, L.L.C., the Company will be 
required to pay a termination fee (the "Break Fee") equal to $600,000. In the 
event that (i) the Stock Purchase Agreement is terminated prior to closing as 
a result of the Company's breach of the non-solicitation provisions of the 
Stock Purchase Agreement or (ii) prior to September 23, 1998, the Company 
consummates a merger, consolidation, sale of assets, sale of capital stock, 
financing transaction (other than financing in the ordinary course of 
business, consistent with past practices, not to exceed $100,000 in the 
aggregate and not involving securities convertible into capital stock of the 
Company), or any similar transaction, arising out of any proposal received 
during the non-solicitation period, then the Break Fee shall equal $800,000.

Pursuant to the terms of an Agreement, dated September 15, 1996 and amended 
May 15, 1997 and further amended as of October 24, 1997, between the Company 
and The Watley Group, LLC ("Watley"), upon a closing of the pending equity 
financing, Watley will receive a cash fee equal to $962,250. In addition, 
Watley shall purchase for cash at closing, for a purchase price of $0.12 per 
warrant, warrants to purchase 10% of the total number of shares issued to CAP 
at such closing at an exercise price per share equal to $0.848202. Assuming 
that there are no adjustments to the number of shares issued to CAP, Watley 
would purchase at closing warrants to purchase 1,768,446 shares of Common 
Stock. The terms and conditions of the warrant to be purchased by and issued 
to Watley will be substantially identical to those contained in the warrants 
granted to CAP at closing. The Company has been informed that Watley has 
agreed to pay $150,000 of its cash fee to CAP or other 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 financing 
transactions. In addition, the Company has been informed that all but 750,000 
of the warrants to be issued to Watley at closing will be transferred by 
Watley as directed by CAP.

Concurrent with the signing of the Stock Purchase Agreement the Company 
received a $3 million bridge loan from Reel Partners, L.L.C., an affiliate of 
CAP, to complete existing projects and to pay off certain indebtedness. The 
bridge loan is 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 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 
will be canceled in the event that the equity financing transaction with CAP 
is completed. The Company issued a Convertible Secured Promissory Note 
evidencing the bridge loan and the bridge loan is secured by a security 
interest in the Company's assets at the Mission Grove 14 theater complex and 
the Mission Marketplace 13 theater complex as well as the Company's grant of 
leasehold deeds of trust with respect to the leases of these two theater 
complexes.

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 is 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. As a result of the amended 
agreements PCI now supplies concessions to all of the current theaters in 
exchange for specified commissions which will result in a reduction in the 
profitability of concession sales by the Company. On August 29, 1997 the 
Company borrowed an additional $500,000 to be used for working capital and 
the loan was repaid with interest on September 24, 1997.

The Company's current credit agreements with its bank contain certain 
financial covenants which the Company is required to meet. At September 30, 
1997 the Company was not in compliance with certain covenants. The bank has 
agreed to forbear any adverse action through December 31, 1997

                                       11
<PAGE>

pending the outcome of the proposed CAP transaction. If the CAP transaction 
is consummated by December 31, 1997, it is expected the bank will waive the 
related covenants. If the transaction is not consummated the Company will 
continue to be out of compliance with the bank credit agreements and there 
can be no assurance that the bank will not declare the credit agreement in 
default and require immediate payment of the outstanding balance. At 
September 30, 1997, the outstanding balance due was $1,232,150.

The Company also is in violation of certain covenants in several other 
financing agreements; these covenants prohibit the Company from incurring 
other indebtedness or further encumbering property, and/or require security 
interests to be of first priority. No event of default has been declared to 
date. The financiers could terminate equipment leases, accelerate loans, 
foreclose the Chula Vista 6 property and take other remedial actions. In such 
an event the Company would be unable to continue some or all of its 
operations, and its business, results of operations and/or liquidity would be 
materially and adversely affected. The Company is attempting to obtain 
waivers of these violations, although no assurance can be given that it will 
obtain any or all of these waivers. 

The Company leases six theater properties and various equipment under 
noncancelable operating lease agreements which expire through 2021 and 
require various minimum annual rentals. At September 30, 1997, the aggregate 
future minimum lease payments due under noncancelable operating leases was 
approximately $75,400,000. The Company has also signed lease agreements for 
two additional theater locations. The Company had signed a third lease with 
the City of San Marcos. The Company had determined that it will not oppose 
the City of San Marcos' termination of the ground lease entered into in June 
1996. It is not anticipated that there will be any material expense 
associated with the termination of this lease. The two leases will require 
expected minimum rental payments aggregating approximately $50,000,000 over 
the life of the leases. Accordingly, existing minimum lease commitments as of 
September 30, 1997 plus those expected minimum commitments for the proposed 
theater locations would aggregate minimum lease commitments of approximately 
$125,400,000. 

During the six months ended September 30, 1997, the Company used cash of 
$449,778 from operating activities, as compared to generating $556,219 cash 
from operating activities for the six months ended September 30, 1996. 

During the six months ended September 30, 1997, the Company used cash in 
investing activities of $3,753,515, as compared to $2,848,531 for the six 
months ended September 30, 1996. Purchases of equipment, deposits on 
equipment and construction of leasehold improvements account for the increase 
in use of cash in investing activities. 

During the six months ended September 30, 1997, the Company provided net cash 
of $4,669,469 from financing activities, as compared to providing $2,443,288 
for the six months ended September 30, 1996. The cash generated for the six 
months ended September 30, 1997 came primarily from loans from Pacific 
Concessions Inc., and Reel Partners, L.L.C. partially offset by debt 
repayment. 

The Company, at September 30, 1997, had a working capital deficit of 
$9,566,506. 

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 one location, the Company 
has completed and will open 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 Associates, the Landlord, 
filed an action for Unlawful Detainer which sought to remove the Company as 
Tenant. This action was filed because the Landlord believed the Company has 
not satisfied certain financial conditions under the Lease. The Company is 
filing an answer to the action. The Landlord has indicated that the suit will 
be dismissed if sufficient financing can be obtained in early December, 1997.

In order to meet its obligations under the San Bernardino lease, the Company 
will need to raise substantial amounts of new financing, in the form of 
additional equity or loan financing, during fiscal 1998. The Company believes 
the proceeds from the closing of the equity financing transaction with CAP 
would be sufficient to enable the Company to meet its obligations under the 
San Bernardino lease. However, there can be no 

                                       12
<PAGE>

assurance that the Company will be able to obtain such additional financing 
on terms that are acceptable to the Company and at the time required by the 
Company, or at all. If the Company is unable to obtain such additional equity 
or loan financing, the Company's financial condition, results of operations 
and/or liquidity will be materially adversely affected. Moreover, the 
Company's estimate of its cash requirements to develop and operate such 
theaters and service any debts incurred in connection with the development of 
such theaters are based upon certain assumptions, including certain 
assumptions as to the Company's revenues, earnings and other factors, and 
there can be no assurance that such assumptions will prove to be accurate or 
that unbudgeted costs will not be incurred. Future events, including the 
problems, delays, expenses and difficulties frequently encountered by 
similarly situated companies, as well as changes in economic, regulatory or 
competitive conditions, may lead to cost increases that could have a material 
adverse effect on the Company and its expansion and development plans. The 
Company used a substantial portion of its available cash to purchase the 
Chula Vista 6 in August 1995 but obtained mortgage financing in January 1996 
for part of the purchase price of such complex. If the Company is not 
successful in obtaining loans or equity financing for future developments, it 
is unlikely that the Company will have sufficient cash to open additional 
theaters. 

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. Continuing losses would have a material 
adverse effect on the liquidity and operations of the Company. In addition, 
the Company may encounter difficulties in obtaining the necessary debt and/or 
equity financing and complying with the conditions and covenants of its loan 
and other agreements. These factors, among others, raise substantial doubt 
about the Company's ability to continue as a going concern. 

The Company is not current in its payments due to the contractor and 
subcontractors for improvements at one of its theaters. Failure to pay these 
parties within a reasonable period of time may result in these parties 
placing liens on the Company's theater which would likely have a material 
adverse effect on the Company's business, results of operations, and/or 
liquidity. 

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 September 30, 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. 

Because of the Company's present financial condition, normal sources of 
external financing may not be available to the Company in the future, 
including additional private placements of convertible debentures. The 
Company has identified potential sources of financing other than CAP., 
however if the CAP financing is not consummated there can be no assurance 
that the other potential sources will consummate any proposed financing and 
therefore it is uncertain whether any additional financing will be available 
to the Company in the future. 

                                       13
<PAGE>

As a result of its operating losses, the Company requires an immediate 
infusion of cash in order to meet its current obligations and continue 
operations. The Company believes that negative consequences will result with 
its creditors if additional cash is not obtained in the very near future. The 
Company's failure to obtain sufficient additional financing within the 
requisite time frame could make it impossible for the Company to continue 
operations, force the Company to seek protection under Federal bankruptcy 
law, and/or result in a delisting of the Company's securities on the Nasdaq 
SmallCap Market. On November 7, 1979, the Company received notice that The 
Nasdaq Stock Market, Inc. 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 such decision and has been informed 
that its securities will continue to trade on the Nasdaq SmallCap Market 
until such appeal has been resolved. See "Risk Factors -- No Assurance of 
Continued Nasdaq Inclusion; Risk to Low Priced Securities" below. 

If the equity financing transaction with CAP is completed, the Company 
anticipates that it will not need additional financing during the next twelve 
months. If the equity financing transaction with CAP is not completed the 
Company anticipates it will need approximately $6,500,000 of additional 
financing during the next twelve months. This estimate is based on a number 
of assumptions, including the assumption that the Company is able to achieve 
its current revenue and expense projections for the third quarter of fiscal 
1998 and succeeding quarters, without material variance. There can be no 
assurance, however, that these assumptions will prove correct or that changes 
affecting the Company's operating expenses, capital expenditures, business 
strategy, supplier credit arrangements, and other matters will not result in 
the expenditure of any available resources before the end of such twelve 
month period. Thereafter, the Company may require additional equity and/or 
debt financing from third party sources. Moreover, the Company's cash 
requirements may vary materially from those now planned because of changes in 
the Company's business or capital expenditure plans, or acquisitions or 
dispositions of businesses or assets and/or other factors. 

As a consequence of its recent operating losses and its financial condition, 
the Company is currently in violation of loan covenants in its banking 
facility. The Company is in ongoing discussions with its bank regarding what 
actions are to be taken as a result of the covenant violations. The bank has 
temporarily waived the violations, but in the future could accelerate the 
indebtedness or take certain other actions in order to protect its interests. 

In March 1997, the FASB issued Statement of Financial Accounting Standards 
No. 128, "Earnings Per Share" ("SFAS No. 128"). This pronouncement provides a 
different method of calculating earnings per share than is currently used in 
accordance with APB Opinion 15, "Earnings Per Share." FAS 128 provides for 
the calculation of Basic and Diluted earnings per share. Basic earnings per 
share includes no dilution and is computed by dividing income available to 
common shareholders by the weighted average number of common shares 
outstanding for the period. Diluted earnings per share reflects the potential 
dilution of securities that could share in the earnings of an entity, similar 
to fully diluted earnings per share. This pronouncement is effective for 
fiscal years and interim periods ending after December 15, 1997; early 
adoption is not permitted. The Company does not believe that the adoption of 
this pronouncement will have a material impact on the net loss per share 
presented in the accompanying statements of operations. 

Statement of Financial Accounting Standards No. 129 "Disclosure of 
Information about Capital Structure" (SFAS No. 129) issued by the FASB is 
effective for financial statements ending after

                                       14
<PAGE>

December 15, 1997. The new standard reinstates various securities disclosure 
requirements previously in effect under Accounting Principles Board Opinion 
No. 15, which has been superseded by SFAS No. 128. The Company does not 
expect adoption of SFAS No. 129 to have a material effect on its financial 
position or results of operations. 

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. 

RISK FACTORS 

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 
the Form 10-QSB should be read as being applicable in all related forward 
looking statements wherever they appear in this Form 10-QSB. The Company's 
actual results could differ materially from those discussed here. Factors 
that could cause or contribute to such differences include those discussed 
below, as well as those discussed elsewhere herein, and in the Company's most 
recently filed Annual Report on Form 10-KSB. 

HISTORY OF LOSSES; DOUBT ABOUT ABILITY TO CONTINUE AS A GOING CONCERN. The 
Company was founded in April 1989. Operations began with the completion of 
construction of the Company's first theater in November 1991. The Company has 
had significant net losses in each fiscal year of its operations, including 
net losses of $4,304,370 and $638,585 in the fiscal years ended March 31, 
1997, and 1996, and net losses of $878,897 and $993,685 in the six months 
ended September 30, 1997 and 1996, respectively. The Company's independent 
certified public accountants have highlighted the uncertainty related to 
substantial doubt about the Company's ability to continue as a going concern 
in their independent auditors' report on the Company's consolidated financial 
statements for the years ended March 31, 1997 and 1996. The Company requires 
an immediate infusion of cash in order to meet its current obligations and 
continue operations. The Company's failure to complete the pending financing 
transaction with CAP or any other failure by the Company to obtain sufficient 
additional financing within the requisite time frame could make it impossible 
for the Company to continue operations, force the Company to seek protection 
under federal bankruptcy law, and/or affect the Company's listing on the 
Nasdaq SmallCap Market. 

                                       15
<PAGE>

NEED FOR ADDITIONAL FINANCING; USE OF CASH. The Company has had aggressive 
expansion plans. 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 during fiscal 1998. The capital requirements necessary for 
the Company to complete its development plans is estimated to be between 
$2,000,000 and $2,500,000 which would be satisfied in the event that the CAP 
financing transaction is completed. In the event that the CAP financing 
transaction is not completed, such developments will require the Company to 
raise substantial amounts of new financing, in the form of additional equity 
investments or loan financing, during fiscal 1998. There can be no assurance 
that the CAP financing transaction can be completed or that the Company will 
be able to obtain such additional financing on terms that are acceptable to 
the Company and at the time required by the Company, or at all. If the 
Company is unable to obtain such additional equity or loan financing, the 
Company's financial condition, results of operations, and/or liquidity will 
be materially and adversely affected. 

NO ASSURANCE OF CONTINUED NASDAQ INCLUSION; RISK OF LOW-PRICED SECURITIES.
In connection with the signing of the definitive agreement CAP received a 
warrant to purchase 1,000,000 shares of common stock at the same conversion 
price. At closing of the equity financing transaction CAP will receive a 
warrant to purchase 1,630,624 shares of common stock at an exercise price of 
the lessor of $0.848202 or the average closing price of the Company's common 
stock for the five trading days prior to the date of closing.

On August 5, 1997, the Company received notice from The Nasdaq Stock Market, 
Inc. ("Nasdaq") stating that unless (i) the Company's capital surplus equaled 
$2,000,000 or more and the market value of the public float of the Company's 
Common Stock equaled $1,000,000 or more for ten consecutive trading days, or 
(ii) the bid price of the Company's Common Stock exceeded $1.00 for a period 
of ten consecutive trading days, prior to November 5, 1997, and, if such 
tests are not met prior to such date, the Company is unable to submit (prior 
to November 5, 1997) a proposal for achieving compliance acceptable to 
Nasdaq, the Company's securities would be delisted from trading on the Nasdaq 
SmallCap Market. Subsequent to receipt of such letter, the Company submitted 
information to Nasdaq regarding the Financing Proposal and expressed the 
Company's belief that the closing of the Equity Financing would enable the 
Company to meet the Nasdaq SmallCap Market continued listing requirements.

On November 7, 1997, the Company received notice that Nasdaq had not accepted 
the Company's plan of compliance with the Nasdaq SmallCap Market listing 
requirements due primarily to the fact that there could be no assurance that 
the Equity Financing would occur and that no alternative plan of compliance 
was offered by the Company. In addition, Nasdaq indicated that its 
determination that the Company had failed to demonstrate compliance with the 
continued listing requirements of The Nasdaq SmallCap Market on a short or 
long-term basis was based, in part, upon Nasdaq's belief that the Company's 
long-term capital needs were in excess of the funds raised as a result of the 
Equity Financing, its limited working capital and history of losses, as well 
as its failure to comply with the covenants in its bank credit lines.

On November 11, 1997, the Company submitted an appeal of the decision of 
Nasdaq and was informed that, pending resolution of the appeal, the Company's 
securities would continue to be listed on the Nasdaq SmallCap Market. As of 
November 14, 1997, the Company had not been notified of the date of the 
appeal hearing. However, based on conversation with representatives of 
Nasdaq, the Company believes that the appeal hearing will be scheduled for 
mid-December 1997.

The continued listing of the Company's Common Stock on the Nasdaq SmallCap 
Market is a condition to the closing of the pending equity financing with 
CAP. In the event that the Company is not able to maintain its Nasdaq 
SmallCap Market listing, there can be no assurance that the equity financing 
with CAP will occur. Although the Company believes that upon completion of 
such financing the Company will meet the requirements for its securities to 
continue to be listed on the Nasdaq SmallCap Market, there can be no 
assurance that Nasdaq appeal procedures will result in a favorable decision 
for the Company. Moreover, in the event that the CAP equity financing is not 
completed and the Company is unable to immediately locate alternate sources 
of equity capital, it is likely that the Company's securities will be 
delisted from the Nasdaq SmallCap Market. Any such delisting would have a 
material adverse effect on price, liquidity and trading market for the 
Company's Common Stock and on the Company's reputation and standing in the 
motion picture theater industry. Subsequent to any such delisting, there can 
be no assurance that the securities would be traded in any market.

If the Company is unable to satisfy the maintenance requirements for 
quotation on NASDAQ, of which there can be no assurance, it is anticipated 
that the Company's Common Stock, Redeemable Warrants and Class B Redeemable 
Warrants (collectively, the "Securities") would be quoted in the 
over-the-counter market National Quotation Bureau ("NQB") "pink sheets" or on 
the NASD OTC Electronic Bulletin Board. As a result, an investor may find it 
more difficult to dispose of, or obtain accurate quotations as to the market 
price of, the Securities, which may materially adversely affect the liquidity 
of the market for the Securities. In addition, if the Securities are delisted 
from NASDAQ, they might be subject to the low-priced security or so-called 
"penny stock" rules that impose additional sales practice requirements on 
broker-dealers who sell such securities. For any transaction involving a 
penny stock, the rules require, among other things, the delivery, prior to 
the transaction, of a disclosure schedule required by the Securities and 
Exchange Commission (the "Commission") relating to the penny stock market. 
The broker-dealer also must disclose the commissions payable to both the 
broker-dealer and the registered representative and current quotations for 
the securities. Finally, monthly statements must be sent disclosing recent 
price information for the penny stocks held in the customer's account. 

Although the Company believes that the Securities are not defined as a penny 
stock due to their continued listing on NASDAQ, in the event the Securities 
subsequently become characterized as a penny stock, the market liquidity for 
the Securities could be severely affected. In such an event, the regulations 
relating to penny stocks could limit the ability of broker-dealers to sell 
the Securities. 

POTENTIAL DILUTION. The Company recently has financed certain expansion 
activities through the private placement of debt instruments convertible into 
shares of its common stock. In order to induce parties to purchase such 
securities, the instruments were convertible into common stock of the Company 
at a conversion price that was significantly lower than the price at which 
the Company's common stock was trading. The Company believes that because of 
its history of operating losses, limited equity, and rapid growth plans, it 
has limited options in acquiring the additional debt and/or equity. The 
Company believes that any equity financing would likely result in substantial 
dilution of current shareholders. The Company has entered into a definitive 
agreement for $15 million of equity financing that will, if completed, result 
in significant dilution of current shareholders. 

DEPENDENCE ON FILMS. The ability of the Company to operate successfully 
depends upon a number of factors, the most important of which is the 
availability of marketable motion pictures. Poor relationships with film 
distributors, a disruption in the production of motion pictures or poor 
commercial success of motion pictures would have a material adverse effect 
upon the Company's business, results of operations, and/or liquidity. 

LONG-TERM LEASE OBLIGATIONS; PERIODIC RENT INCREASES. The Company operates 
most of its current theaters pursuant to long-term leases which provide for 
large monthly minimum rental payments which increase periodically over the 
terms of the leases. The Chula Vista 6 is owned by the Company and not 
subject to such lease payments. The Company will be dependent upon increases 
in box office and other revenues to meet these long-term lease obligations. 
In the event that box office and other revenues decrease or do not 
significantly increase, the Company will likely not have sufficient revenues 
to meet its lease obligations, which would have a material adverse effect on 
the Company's business, results of operations, and/or liquidity. 

POSSIBLE DELAY IN THEATER DEVELOPMENT AND OTHER CONSTRUCTION RISKS. In 
connection with the development of its theaters, the Company typically 
receives a construction allowance from the property owner and oversees the 
design, construction and completion of the theater site. The Company is 
generally responsible for construction costs in excess of the negotiated 
construction allowance. As a result, the Company is subject to many of the 
risks inherent in the development of real estate, many of which are beyond 
its control. Such risks include governmental restrictions or changes in 
Federal, state or local laws or regulations, strikes, adverse weather, 
material shortages and increases in the costs of labor and materials. There 
can be no assurance that the Company will be able to successfully complete 
any theater development in a timely manner or within its proposed 
construction allowance. The Company has experienced costs materially in 
excess of its allowances in two theaters and delays in connection with the 

                                       16
<PAGE>

development of one of its existing theaters and no assurance can be given 
that such overruns and delays will not occur with respect to any future 
theater developments. Failure of the Company to develop its theaters within 
the construction allowance allocated to it will likely have a material 
adverse effect on the Company's business, results of operations, and/or 
liquidity. 

In addition, the Company will be dependent upon unaffiliated contractors and 
project managers to complete the construction of its theaters. Although the 
Company believes that it will be able to secure commitments from contractors, 
project managers and other personnel needed to design and construct its 
theaters, the inability to consummate a contract for the development of a 
theater or any subsequent failure of any contractor or supplier to comply 
with the terms of its agreement with the Company might have a material 
adverse effect on the Company's business, results of operations, and/or 
liquidity. 

DEPENDENCE ON ABILITY TO SECURE FAVORABLE LOCATIONS AND LEASE TERMS. The 
success of the Company's operations is dependent on its ability to secure 
favorable locations and lease terms for each of its theaters. There can be no 
assurance that the Company will be able to locate suitable locations for its 
theaters, and even if the Company can locate suitable locations to lease, its 
current financial condition may prevent it from obtaining favorable lease 
terms. The failure of the Company to secure favorable locations for its 
theaters or to lease such locations on favorable terms would have a material 
adverse effect on the Company's business, results of operations, and/or 
liquidity. 

COMPETITION. The motion picture exhibition industry is highly competitive, 
particularly with respect to licensing films, attracting patrons and finding 
new theater sites. There are a number of well-established competitors with 
substantially greater financial and other resources than the Company that 
operate in Southern California. Many of the Company's competitors, including 
Pacific Theaters and Mann Theaters, each of which operates one or more 
theaters in the same geographic vicinity as the Company's current theaters, 
have been in existence significantly longer than the Company and are both 
better established in the markets where the Company's theaters are or may be 
located and better capitalized than the Company. Competition can also come 
from other sources such as television, cable television, pay television, 
direct satellite television and video cassettes. 

Many of the Company's competitors have established, long-term relationships 
with the major motion picture distributors (Paramount, Disney/Touchstone, 
Warner Brothers, Columbia/Tri-Star, Universal and 20th Century Fox), who 
distribute a large percentage of successful films. Although the Company 
attempts to identify film licensing zones in which there is no substantial 
current competition, there can be no assurance that the Company's competitors 
will not develop theaters in the same film zone as the Company's theaters. To 
the extent that the Company directly competes with other theater operators 
for patrons or for the licensing of first-run films, the Company may be at a 
competitive disadvantage. The Company presently has relationships with all 
major distributors and exhibits their films in all of its existing theaters.

Although the Company attempts to develop theaters in geographic areas that it 
believes have the potential to generate sufficient current and future box 
office attendance and revenues, adverse economic or demographic developments, 
over which the Company has no control, could have a material adverse effect 
on box office revenues and attendance at the Company's theaters. In addition, 
there can be no assurance that new theaters will not be developed near the 
Company's theaters, which development might alter existing film zones and 
might have a material adverse effect on the Company's revenues and earnings. 
In addition, future advancements in motion picture 

                                       17
<PAGE>

exhibition technology and equipment may result in the development of costly 
state-of-the-art theaters by the Company's competitors which may make the 
Company's current theaters obsolete. There can be no assurance that the 
Company will be financially able to pay for or able to incorporate such new 
technology or equipment, if any, into its existing or future theaters. 

In recent years, alternative motion picture exhibition delivery systems have 
been developed for the exhibition of filmed entertainment, including cable 
television, direct satellite delivery, video cassettes and pay-per-view. An 
expansion of such delivery systems could have a material adverse effect on 
motion picture attendance in general and upon the Company's business, results 
of operations, and/or liquidity. 

GEOGRAPHIC CONCENTRATION. Each of the Company's current theaters is located 
in San Diego or Riverside Counties, California and the proposed theaters are 
all in Southern California or Mexico. As a result, negative economic or 
demographic changes in these areas will have a disproportionately large and 
adverse effect on the success of the Company's operations as compared to 
those of its competitors having a wider geographic distribution of theaters. 

DEPENDENCE ON CONCESSION SALES. Concession sales accounted for 29.9% and 
28.5% of the Company's total revenues in the six months ended September 30, 
1997 and 1996, respectively. Therefore, the financial success of the Company 
depends, to a significant extent, on its ability to successfully generate 
concession sales in the future. The Company currently depends upon Pacific 
Concessions, Inc. ("Pacific Concessions"), a creditor of the Company, to 
operate and supply the lobby concession stands located in all of the 
Company's theaters. The Company's long-term concession agreements with 
Pacific Concessions may be terminated by the Company prior to the expiration 
of their respective terms only upon payment of a substantial early 
termination fee. 

RELATIONSHIP WITH PACIFIC CONCESSIONS. The Company utilizes loans from 
Pacific Concessions to fund a portion of its operations. In the Company's 
loan agreements with Pacific Concessions, an event of default is defined to 
include, among other things, any failure by the Company to make timely 
payments on its loans from Pacific Concessions. In the event that an event of 
default occurs under such loan agreements, Pacific Concessions has certain 
remedies against the Company in addition to those afforded to it under 
applicable law, including, but not limited to, requiring the Company to 
immediately pay all loan amounts due to Pacific Concessions and requiring the 
Company to sell, liquidate or transfer any of its theaters and related 
property to third parties in order to make timely payments on its loans. If 
the Company were to default under any of its agreements with Pacific 
Concessions, and if Pacific Concessions enforced its rights thereunder, the 
Company would be materially adversely affected. 

CONTROL OF THE COMPANY. At September 30, 1997 the current officers and 
directors of the Company own approximately 27.3% of the Common Stock (17.1% 
assuming exercise in full of the redeemable warrants). In addition, in the 
event that the pending financing transaction with CAP is completed, CAP will 
own a substantial majority of the outstanding Common Stock of the Company and 
will have the right to acquire additional shares upon exercise of warrants. 
As a result, these individuals are or may be in a position to materially 
influence, if not control, the outcome of all matters requiring shareholder 
approval, including the election of directors. Certain officers and directors 
in the past have obtained loans secured by their shareholdings and the sale 
of shares from margin calls may from time to time have adversely affected, 
and may in the future adversely affect, the market price of the Company's 
securities. 

                                       18
<PAGE>

EXPANSION; MANAGEMENT OF GROWTH. The Company's plan of operation calls for 
the addition of new theaters and screens. The Company's ability to expand 
will depend on a number of factors, including the selection and availability 
of suitable locations, the hiring and training of sufficiently skilled 
management and personnel and other factors, such as general economic and 
demographic conditions, which are beyond the control of the Company. Such 
growth, if it occurs, could place a significant strain on the Company's 
management and operations. To manage such growth, the Company will be 
required to increase the depth of its financial, administrative, and theater 
management staffs. There can be no assurance, however, that the Company will 
be able to identify and hire additional qualified personnel or take such 
other steps as are necessary to manage its growth, if any, effectively. Given 
the Company's recent performance and financial condition, hiring qualified 
executives and professional staff is difficult. In addition, there is no 
assurance that the Company will be able to open any new theaters or that, if 
opened, those theaters can be operated profitably. 

RISKS OF INTERNATIONAL EXPANSION. Construction has been completed on a leased 
10 screen theater in Tijuana, Mexico through CinemaStar Luxury Theaters, S.A. 
de C.V., a Mexican corporation in which the Company has a 75% ownership 
interest. The long-term lease is guaranteed by the Company. Under this lease 
rent is paid in U.S. dollars. Completion of this theater in Mexico, or the 
development of theaters in other foreign countries, will subject the Company 
to the attendant risks of doing business abroad, including adverse 
fluctuations in currency exchange rates, increases in foreign taxes, changes 
in foreign regulations, political turmoil, deterioration in international 
economic conditions and deterioration in diplomatic relations between the 
United States and such foreign country. Recently the value of the Mexican 
Peso has fallen in relation to the U.S. Dollar and Mexico is experiencing 
substantial inflation. 

FLUCTUATIONS IN QUARTERLY RESULTS OF OPERATIONS. The Company's revenues have 
been seasonal, coinciding with the timing of major releases of motion 
pictures by the major distributors. Generally, the most marketable motion 
pictures have been released during the summer and the Thanksgiving through 
year-end holiday season. The unexpected emergence of a hit film during other 
periods can alter the traditional trend. The timing of such releases can have 
a significant effect on the Company's results of operations, and the results 
of one quarter are not necessarily indicative of results for subsequent 
quarters. 

                                       19
<PAGE>

POTENTIAL BUSINESS INTERRUPTION DUE TO EARTHQUAKE. All of the Company's 
current and proposed theaters are or will be located in seismically active 
areas of Southern California and Mexico. In the event of an earthquake of 
significant magnitude, damage to any of the Company's theaters or to 
surrounding areas could cause a significant interruption or even a cessation 
of the Company's business, which interruption or cessation would have a 
material adverse effect on the Company, its operations and any proposed 
theater development. Although the Company maintains business interruption 
insurance, such insurance does not protect against business interruptions due 
to earthquakes. 

CONFLICTS OF INTEREST. Several possible conflicts of interest may exist 
between the Company and its officers and directors. In particular, certain 
officers and directors have directly or indirectly advanced funds or 
guaranteed loans or other obligations of the Company. As a result, a conflict 
of interest may exist between these officers and directors and the Company 
with respect to the determination of which obligations will be paid out of 
the Company's operating cash flow and when such payments will be made. 

COMPENSATION OF EXECUTIVE OFFICERS. Effective August 1994 and amended in 
December 1996, or April 1997 the Company has employment agreements through 
December 2001, or April 2002 with each of John Ellison, Jr., Alan Grossberg 
Jerry Willits and Jon Meloan, pursuant to which their annual salaries are 
$197,106, $197,860 $94,380 and $90,000, respectively, some of which are 
subject to annual increases of between 10% and 12%. Mr. Grossberg's 
employment agreement has been amended to increase his salary by $52,000 to 
reflect compensation previously paid to him for film booking services. In 
addition, Messrs. Ellison, Grossberg and Willits will be entitled to receive 
substantial bonuses based on a percentage of net income in the event that the 
Company's net income for a given year exceeds $2 million and additional 
bonuses in the event that the Company has net income in excess of $7 million 
in a given year. Each of Messrs. Ellison, Grossberg and Willits will also 
receive an automobile allowance of up to $650 per month and certain insurance 
and other benefits. Moreover, in the event that Mr. Ellison, Mr. Grossberg, 
Mr. Willits or Mr. Meloan is terminated or is not reelected or appointed as a 
director or executive officer of the Company for any reason other than for an 
uncured breach of his obligations under his employment agreement or his 
conviction of a felony involving moral turpitude, he shall have the right to 
receive his annual salary and bonuses for the remainder of the original 
five-year term of the contract. See "Executive Compensation --Employment and 
Consulting Agreements." The employment agreements described above require 
that the Company pay substantial salaries during each year of the five year 
terms thereof to each of Messrs. Ellison, Grossberg, Willits, and Meloan 
regardless of the Company's financial condition or performance. As a result, 
the agreements could have a material adverse effect on the Company's 
financial performance and condition.

                                       20
<PAGE>


RISK OF LIMITATION OF USE OF NET OPERATING LOSS CARRYFORWARDS. As of March 
31, 1997, the Company had net operating loss carryforwards of approximately 
$4,175,000 for federal income tax purposes, which may be utilized through 
2006 to 2012, and approximately $2,080,000 for state income tax purposes, 
which may be utilized through 1998 to 2002 (subject to certain limitations). 
The initial public offering and certain other equity transactions resulted or 
may have resulted in an "ownership change" as defined in Section 382 of the 
Internal Revenue Code of 1986, as amended (the "Code"). As a result, the 
Company's use of its net operating loss carryforwards to offset taxable 
income in any post-change period may be subject to certain specified annual 
limitations. If there has been an ownership change for purposes of the Code, 
there can be no assurance as to the specific amount of net operating loss 
carryforwards, if any, available in any post-change year since the 
calculation is based upon fact-dependent formula. 


                                       21
<PAGE>

POSSIBLE VOLATILITY OF COMMON STOCK. The trading prices of the Company's 
securities may respond to quarterly variations in operating results and other 
events or factors, including, but not limited to, the sale or attempted sale 
of a large amount of the securities into the market. In addition, the stock 
market has experienced extreme price and volume fluctuations in recent years, 
particularly in the securities of smaller companies. These fluctuations have 
had a substantial effect on the market prices of many companies, often 
unrelated to the operating performance of the specific companies, and similar 
events in the future may adversely affect the market prices of the 
Securities. 

CURRENT PROSPECTUS AND STATE REGISTRATION REQUIRED TO EXERCISE REDEEMABLE 
WARRANTS AND CLASS B REDEEMABLE WARRANTS. The Redeemable Warrants and Class B 
Redeemable Warrants are not exercisable unless, at the time of the exercise, 
the Company has a current prospectus covering the shares of Common Stock upon 
exercise of the Redeemable Warrants and Class B Redeemable Warrants and such 
shares have been registered, qualified or deemed to be exempt under the 
securities or "blue sky" laws of the state of residence of the exercising 
holder of the Redeemable Warrants and Class B Redeemable Warrants. Although 
the Company has undertaken to use its best efforts to have all of the shares 
of Common Stock issuable upon exercise of the Redeemable Warrants and Class B 
Redeemable Warrants registered or qualified on or before the exercise date 
and to maintain a current prospectus relating thereto until the expiration of 
the Redeemable Warrants and Class B Redeemable Warrants, there is no 
assurance that it will be able to do so. The value of the Redeemable Warrants 
and Class B Redeemable Warrants may be greatly reduced if a current 
prospectus covering the Common Stock issuable upon the exercise of the 
Redeemable Warrants or Class B Redeemable Warrants is not kept effective or 
if such Common Stock is not qualified or exempt from qualification in the 
states in which the holders of the Redeemable Warrants or Class B Redeemable 
Warrants then reside. 

Investors may purchase the Redeemable Warrants and Class B Redeemable 
Warrants in the secondary market or may move to jurisdictions in which the 
shares underlying the Redeemable Warrants or Class B Redeemable Warrants are 
not registered or qualified during the period that the Redeemable Warrants 
and Class B Redeemable Warrants are exercisable. In such event, the Company 
will be unable to issue shares to those persons desiring to exercise their 
Redeemable Warrants or Class B Redeemable Warrants unless and until the 
shares are qualified for sale in jurisdictions in which such purchasers 
reside, or an exemption from such qualification exists in such jurisdictions, 
and holders of the Redeemable Warrants and Class B Redeemable Warrants would 
have no choice but to attempt to sell the Redeemable Warrants and Class B 
Redeemable Warrants in a jurisdiction where such sale is permissible or allow 
them to expire unexercised. 

SPECULATIVE NATURE OF REDEEMABLE WARRANTS AND CLASS B REDEEMABLE WARRANTS; 
ADVERSE EFFECT OF POSSIBLE REDEMPTION OF REDEEMABLE WARRANTS OR CLASS B 
REDEEMABLE WARRANTS. The Redeemable Warrants and Class B Redeemable Warrants 
do not confer any rights of Common Stock ownership on the holders thereof, 
such as voting rights or the right to receive dividends, but rather merely 
represent the right to acquire shares of Common Stock at a fixed price for a 
limited period of time. Specifically, holders of the Redeemable Warrants may 
exercise their right to acquire Common Stock and pay an exercise price of 
$6.00 per share, subject to adjustment in the event of certain dilutive 
events, on or prior to February 6, 2000, after which date any unexercised 
Redeemable Warrants will expire and have no further value. Specifically, 
holders of the Class B Redeemable Warrants may exercise their right to 
acquire Common Stock and pay an exercise price of $6.50 per share, subject 
to adjustment in the event of certain dilutive events, on or prior to 
September 15, 

                                       22
<PAGE>

2001, after which date any unexercised Class B Redeemable Warrants will 
expire and have no further value. There can be no assurance that the market 
price of the Common Stock will ever equal or exceed the exercise prices of 
the Redeemable Warrants or Class B Redeemable Warrants, and consequently, 
whether it will ever be profitable for holders of the Redeemable Warrants or 
Class B Redeemable Warrants to exercise them. 

The Redeemable Warrants and Class B Redeemable Warrants are subject to 
redemption by the Company, at any time on 30 days prior written notice, at a 
price of $0.25 per Redeemable Warrant or Class B Redeemable Warrant if the 
average closing bid price for the Common Stock equals or exceeds $7.00 per 
share for any 20 trading days within a period of 30 consecutive trading days 
ending on the fifth trading day prior to the date of the notice of 
redemption. Redemption of the Redeemable Warrants or Class B Redeemable 
Warrants could force the holders thereof to exercise them and pay the 
exercise price at a time when it may be disadvantageous for such holders to 
do so, to sell the Redeemable Warrants and Class B Redeemable Warrants at the 
current market price when they might otherwise wish to hold them , or to 
accept the redemption price, which may be substantially less than the market 
value of the Redeemable Warrants and Class B Redeemable Warrants at the time 
of redemption. The holders of the Redeemable Warrants and Class B Redeemable 
Warrants will automatically forfeit their rights to purchase shares of Common 
Stock if they are redeemed before being exercised. 

NO DIVIDENDS. The Company has not paid any dividends on its Common Stock and 
does not intend to pay any dividends in the foreseeable future. Earnings, if 
any, are expected to be retained for use in expanding the Company's business. 

SHARES ELIGIBLE FOR FUTURE SALE. Sales of substantial amounts of Securities 
in the public market or the perception that such sales could occur may 
adversely affect prevailing market prices of the Securities. The Redeemable 
Warrants and the Redeemable Warrants being registered for the account of the 
Selling Security Holders entitle the holders of such Redeemable Warrants to 
purchase up to an aggregate of 4,500,000 shares of Common Stock at any time 
through February 6, 2000. Class B Redeemable Warrants entitle the holder to 
purchase up to an aggregate of 226,438 shares of common stock at any time 
through September 15, 2001. In connection with the initial public offering, 
the Company issued to A.S. Goldmen & Co., Inc. Underwriter's Warrants to 
purchase up to 150,000 shares of Common Stock and/or Redeemable Warrants to 
purchase up to an additional 150,000 shares of Common Stock. In connection 
with the pending financing transactions with CAP, the Company has or is 
expected to issue to CAP and Reel Partners L.L.C., approximately 17.7 million 
shares of Common Stock and warrants to purchase an additional 5.7 million 
shares of Common Stock. Pursuant to the terms of the financing transactions 
the Company will be required to register all such shares for resale. Sales of 
either the Redeemable Warrants, the underlying shares of Common Stock or the 
shares of Common Stock issued to or purchasable by CAP or its affiliates, or 
even the existence of the Redeemable Warrants or the CAP shares or warrants, 
may depress the price of the Common Stock or the Redeemable Warrants in the 
market for such Securities. In addition, in the event that any holder of 
Redeemable Warrants, Class B Redeemable Warrants or warrants issued to CAP or 
its affiliates exercises his warrants, the percentage ownership of the 
Common Stock by current shareholders would be diluted. Finally, the Company 
has reserved 587,500 shares of Common Stock for issuance to key employees and 
officers pursuant to the Company's Stock Option Plan. Fully-vested options to 
purchase 400,805 shares of Common Stock have been granted pursuant to such 
Stock Option Plan. In the event that these or any other stock options granted 
pursuant to such Stock Option Plan are exercised, dilution of the percentage 
ownership of 

                                       23
<PAGE>

Common Stock owned by the public investors will occur. Moreover, the mere 
existence of such options may depress the price of the Common Stock. 

CAUTIONARY STATEMENT 

This 10-QSB contains forward looking statements, within the meaning of the 
Private Securities Litigation Reform Act of 1995, with respect to the 
financial condition, results of operations, and business of the Company and 
its subsidiary (collectively, unless the context otherwise requires). Such 
statements are subject to certain risks and uncertainties that could cause 
actual results to differ materially and adversely from those set forth in the 
forward-looking statements, including without limitation the risks and 
uncertainties described from time to time in the Company's public 
announcements and SEC filings, including without limitation the 10-QSB and 
10-KSB, respectively. The Company does not undertake to update any written or 
oral forward-looking statement that may be made from time to time by or on 
behalf of the Company. 

PART II -- OTHER INFORMATION
ITEM 3 -- DEFAULTS UPON SENIOR SECURITIES 

The Company is currently in material default under two of its existing 
financing arrangements, each of which prohibit the Company from incurring 
additional indebtedness or granting additional security interests in its 
assets without the prior consent of the applicable lender. As a result of 
these prohibitions, the Company is currently in default under its Business 
Loan Agreement with and related Promissory Notes (collectively, the "FNB 
Loans") issued in favor of First National Bank ("FNB") as the result of 
borrowing additional monies and granting additional security interests 
pursuant to one of its existing Loan Agreements with Pacific Concessions, 
Inc. ("PCI") after the date of the FNB Loans. Similarly, the Company is 
currently in default under each of its existing Loan Agreements, as amended, 
with PCI (the "PCI Loan Agreements") as a result of the making of the FNB 
Loans and the granting of security interests in favor of FNB. As of September 
30, 1997, the outstanding principal balance of the FNB Loans was $1,232,150 
and the outstanding aggregate principal balance owed to PCI under the PCI 
Loan Agreements was $2,692,167.

The Company has not defaulted in the payment of principal, interest or any 
other obligation under any of the FNB Loans or under either of the PCI Loan 
Agreements, and neither FNB nor PCI has declared any event of default or 
attempted to accelerate the due date of any payment obligation of the Company 
thereunder. 

ITEM 5 -- OTHER INFORMATION
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. 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.

Additional adjustments will occur in the event that the equity financing 
transaction with CAP is completed. In particular, upon Closing and assuming 
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 will be approximately $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 will be adjusted to 2.34375 
and 2.3381295 shares, respectively.

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 September 30, 1997. It was filed on September 26, 1997 
                and reported the execution of the September 23, 1997 Stock 
                Purchase Agreement with CAP and Reel Partners, L.L.C. and the 
                $3,000,000 bridge loan from Reel Partners, L.L.C. to the 
                Company.

                                       24
<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: November 14, 1997

                                       CinemaStar Luxury Theaters, Inc.

                                       by: /s/ JOHN ELLISON, JR.    
                                           ------------------------------------
                                           John Ellison, Jr.
                                           President, Chief Executive Officer
                                           (principal executive officer)

                                       by: /s/ ALAN GROSSBERG  
                                           ------------------------------------
                                           Senior Vice President and Chief 
                                           Operating Officer (principal 
                                           financial officer and principal 
                                           accounting officer)



                                       25
<PAGE>

                                  EXHIBIT INDEX

EXHIBIT NUMBER                                               DESCRIPTION
--------------                                               -----------
     27                                                Financial Data Schedule




                                       26