<PAGE>

                                    UNITED STATES
                          SECURITIES AND EXCHANGE COMMISSION
                                 WASHINGTON, DC 20549


                                    FORM 10-QSB/A
                                   AMENDMENT NO. 1


(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 0R 15 (d) OF THE SECURITIES
                                EXCHANGE ACT 0F 1934.

                  For the Quarterly period ended September 30, 1996

[ ] 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)

                                    (619) 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:6,759,944 shares outstanding as of November 12, 1996.

Transitional Small Business Disclosure Format. (check one):

YES
    -----

NO   X
   -----
<PAGE>

                           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, 1996       3

         Condensed Consolidated Statements of Operations for the three
         and six months ended September 30, 1996 and 1995                    4

         Condensed Consolidated Statements of Cash Flows for the
         six months ended September 30, 1996 and 1995                        5

         Notes to Condensed Consolidated Financial Statements                6

Item 2.  Management's Discussion and Analysis of Financial Condition      7-18
         and Results of Operations.


PART II. Other Information

Item 6.  Exhibits                                                           19
         Signatures                                                         20



                                          2

<PAGE>

PART I. Financial Information
ITEM 1. Financial Statements

                           CINEMASTAR LUXURY THEATERS, INC.
                                   AND SUBSIDIARIES
                         CONDENSED CONSOLIDATED BALANCE SHEET
                                     (UNAUDITED)


                                                                September 30,
                                                                     1996
                                                                -------------
ASSETS
CURRENT ASSETS
Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $     609,526
Commissions and  other receivables. . . . . . . . . . . . . . .       128,365
Prepaid expenses. . . . . . . . . . . . . . . . . . . . . . . .       391,014
Other current assets. . . . . . . . . . . . . . . . . . . . . .       139,625
                                                                -------------
Total current assets. . . . . . . . . . . . . . . . . . . . . .     1,268,530

Property and equipment, net . . . . . . . . . . . . . . . . . .     9,852,821
Preopening costs, net . . . . . . . . . . . . . . . . . . . . .       235,115
Deposits and other assets . . . . . . . . . . . . . . . . . . .       810,450
                                                                -------------

TOTAL ASSETS. . . . . . . . . . . . . . . . . . . . . . . . . . $  12,166,916
                                                                -------------
                                                                -------------

LIABILITIES AND STOCKHOLDERS' EQUITY

CURRENT LIABILITIES
Current portion of long-term debt and capital lease obligations $     691,800
Accounts payable. . . . . . . . . . . . . . . . . . . . . . . .     1,416,162
Accrued expenses. . . . . . . . . . . . . . . . . . . . . . . .       149,511
Deferred revenue. . . . . . . . . . . . . . . . . . . . . . . .        53,245
Advances from stockholders. . . . . . . . . . . . . . . . . . .        60,000
                                                                -------------
Total current liabilities . . . . . . . . . . . . . . . . . . .     2,370,718
Long-term debt and capital lease obligations, net of current
    portion. . . . . . . . . . . . . . . . . . . . . . . . . . .    3,792,402
Convertible debentures . . . . . . . . . . . . . . . . . . . . .    2,000,000
Deferred rent liability. . . . . . . . . . . . . . . . . . . . .    1,914,804
                                                                -------------
TOTAL LIABILITIES. . . . . . . . . . . . . . . . . . . . . . . .   10,077,924
                                                                -------------

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;
  6,445,367 shares issued and outstanding. . . . . . . . . . . .    7,285,110
Additional paid-in capital . . . . . . . . . . . . . . . . . . .    2,559,027
Accumulated deficit. . . . . . . . . . . . . . . . . . . . . . .   (7,755,145)
                                                                -------------


TOTAL STOCKHOLDER'S EQUITY . . . . . . . . . . . . . . . . . . .    2,088,992
                                                                -------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY . . . . . . . . . . .$  12,166,916
                                                                -------------
                                                                -------------



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,
                                                1996                1995                1996                1995
                                            -----------       ------------          ------------        ------------
<S>                                         <C>               <C>                   <C>                 <C>
REVENUES:
Admissions. . . . . . . . . . . . . . . . . $ 3,493,385       $  2,293,693          $  6,456,914        $  4,176,216
Concessions . . . . . . . . . . . . . . . .   1,453,061            862,413             2,655,983           1,628,296
Other operating revenues. . . . . . . . . .     100,502             63,227               194,454              94,322
                                            -----------       ------------          ------------        ------------

TOTAL REVENUES. . . . . . . . . . . . . . .   5,046,948          3,219,333             9,307,351           5,898,834
                                            -----------       ------------          ------------        ------------

Costs and expenses:
Film rental & booking costs . . . . . . . .   1,963,790          1,259,818             3,567,519           2,317,486
Cost of concession supplies . . . . . . . .     482,909            334,811               841,893             641,164
Theater operating expenses. . . . . . . . .   1,526,949            811,894             2,802,458           1,657,475
General & administrative expenses . . . . .     863,710            526,574             1,528,350           1,048,035
Depreciation & amortization . . . . . . . .     331,428            157,508               557,069             274,739
                                            -----------       ------------          ------------        ------------

TOTAL COSTS AND EXPENSES. . . . . . . . . .   5,168,786          3,090,605             9,297,289           5,938,899
                                            -----------       ------------          ------------        ------------

OPERATING INCOME (LOSS) . . . . . . . . . .    (121,838)           128,728                10,062             (40,065)
                                            -----------       ------------          ------------        ------------

OTHER INCOME (EXPENSE):
Interest income . . . . . . . . . . . . . .      12,514             31,572                15,158              87,001
Interest expense. . . . . . . . . . . . . .    (152,204)          (102,204)             (302,865)           (205,725)
Non-cash interest expense related to
  convertible debentures. . . . . . . . . .  (1,071,429)                --            (2,048,997)                 --
                                            -----------       ------------          ------------        ------------

TOTAL OTHER INCOME (EXPENSE). . . . . . . .  (1,211,119)           (70,632)           (2,336,704)           (118,724)
                                            -----------       ------------          ------------        ------------

INCOME (LOSS) BEFORE INCOME TAXES . . . . .  (1,332,957)            58,096            (2,326,642)           (158,789)

PROVISION FOR INCOME TAXES. . . . . . . . .      (1,600)                 0                (1,600)             (1,600)
                                            -----------       ------------          ------------        ------------

NET INCOME (LOSS) . . . . . . . . . . . . . ($1,334,557)      $     58,096           ($2,328,242)          ($160,389)
                                            -----------       ------------          ------------        ------------
                                            -----------       ------------          ------------        ------------

Net income (loss) per common share. . . . .       (.21)                .01                  (.37)               (.03)
                                            -----------       ------------          ------------        ------------
                                            -----------       ------------          ------------        ------------

Weighted average number of common
shares and share equivalents outstanding. .   6,441,512          6,200,000             6,348,514           6,200,000
                                            -----------       ------------          ------------        ------------
                                            -----------       ------------          ------------        ------------
</TABLE>



See accompanying notes to condensed consolidated financial statements.


                                          4

<PAGE>

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

                                                 SIX MONTHS ENDED SEPTEMBER 30,
                                                 ------------------------------
                                                     1996              1995
                                                 -------------     ------------

Cash flows from operating activities;
Net loss. . . . . . . . . . . . . . . . . . . . . ($2,328,242)       ($160,389)

Adjustments to reconcile net loss to net cash
provided by operating activities:

Depreciation and amortization . . . . . . . . . .     557,069          274,739
Deferred rent liability . . . . . . . . . . . . .     413,031          127,878
Non-cash interest expense . . . . . . . . . . . .   2,048,997                -
Increase (decrease) from changes in:
  Commission and other receivables. . . . . . . .     (40,760)          (8,645)
  Prepaid expenses and other current assets . . .    (271,131)         311,000
  Accounts payable. . . . . . . . . . . . . . . .     578,022          152,694
  Accrued expenses and other liabilities. . . . .    (240,048)        (141,789)
  Deposits and other assets . . . . . . . . . . .     (63,705)           1,500
  Preopening costs. . . . . . . . . . . . . . . .     (97,014)               0
                                                  -----------        ---------

Cash provided by operating activities . . . . . .     556,219          556,988
                                                  -----------        ---------

Cash flows from investing activities:
Refund of construction deposit. . . . . . . . . .     600,000                0
Purchases of property and equipment . . . . . . .  (3,448,531)      (3,504,968)
                                                  -----------        ---------

Cash used in investing activities . . . . . . . .  (2,848,531)      (3,504,968)
                                                  -----------        ---------

Cash flows from financing activities:
Proceeds from issuance of long-term debt. . . . .     500,000                0
Principal payments on long term-debt and capital
  lease obligation. . . . . . . . . . . . . . . .    (321,899)        (214,830)
Proceeds from issuance of convertible debentures.   3,000,000                0
Payment of debt issuance costs. . . . . . . . . .    (474,813)               0
Advances from stockholders. . . . . . . . . . . .      60,000                0
Repayment of advances from stockholders . . . . .    (320,000)         (19,500)
                                                  -----------        ---------

Cash provided by (used in) financing activities .   2,443,288         (234,330)
                                                  -----------        ---------

Net increase (decrease) in cash . . . . . . . . .     150,976       (3,182,310)
Cash, beginning of period . . . . . . . . . . . .     458,550        4,091,885
                                                  -----------        ---------

Cash, end of period . . . . . . . . . . . . . . .  $  609,526        $ 909,575
                                                  -----------        ---------
                                                  -----------        ---------



See accompanying notes to condensed consolidated financial statements.


                                          5

<PAGE>

                           CINEMASTAR LUXURY THEATERS, INC.
                 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                  SEPTEMBER 30, 1996
                                     (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/A.
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, 1996, 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, 1996 are not necessarily indicative of the results of operations
that may be expected for the year ending March 31, 1997.

NOTE 2

This Quarterly Report on Form 10-QSB/A is filed to restate the Company's
financial statements for the three and six months ended September 30, 1996.  The
Company has since determined that the recognition of non-cash interest expense
should be reported for the three and six months ended September 30, 1996
relating to convertible debentures convertible at a discount to market.

As described in the minutes to March 13, 1997 meeting of the Emerging Issues 
Task Force, an SEC Observer addressed issues relating to convertible debt 
instruments which are convertible at a discount to the market.  The SEC staff 
believes that the discount should be accounted for as additional interest 
expense.  The Company conformed to those views and computed the amount of the 
discounts based on the difference between the conversion price and the fair 
value of the underlying common stock on the date the respective debentures 
were issued.  The Company recorded an aggregate of $2,048,997 of additional 
paid-in-capital for the discounts related to the embedded interest in the 
convertible debentures described in Notes 3 and 4 below.  The discounts have 
been amortized to interest expense over the period that the respective 
debentures are first convertible using the effective interest rate method.  
The entire amount ($977,568) related to the debentures described in Note 3 
were amortized during the three months ended June 30, 1996 while the entire 
amount ($1,071,429) relating to the debentures described in Note 4 were 
amortized during the three months ended September 30, 1996.  The related 
amounts are included in the caption "Non-cash interest expense related to 
convertible debentures" in the accompanying statements of operations for the 
three and six months ended September 30, 1996.  As the discounts have been 
fully amortized at September 30, 1996, there is no net effect on 
stockholders' equity.

The aggregate affect of such adjustments in the three month and six months ended
September 30, 1996 is summarized below:


<TABLE>
<CAPTION>

                             Three Months Ended September 30, 1996           Six Months Ended September 30, 1996
                             -------------------------------------           -----------------------------------
                            (Before Restatement)(After Restatement)        (Before Restatement) (After Restatement)
                            ---------------------------------------        -------------------- -------------------
<S>                            <C>                  <C>                       <C>                   <C>
Operating Income (Loss)        $ (121,838)          $   (121,838)             $   10,062            $     10,062
Net Loss                       $ (263,128)          $ (1,334,557)             $ (279,245)           $ (2,328,242)
Net Loss Per Share             $     (.04)          $       (.21)             $     (.04)           $       (.37)

</TABLE>



NOTE 3


     On each of April 11, 1996 and May 21, 1996, the Company issued a 
convertible debenture in the principal amount of $500,000. The debentures 
bear interest at 4% per annum and are due three years after issuance. The 
debentures are convertible after 40 days into shares of common stock at a 
conversion price of $3.95 and $4.25 per share, respectively. On May 22, 1996, 
the April 1996 debenture and accrued interest was converted into 127,152 
shares of common stock. On July 3, 1996, the May 1996 debenture and accrued 
interest was converted into 118,215 shares of common stock.


NOTE 4


     On August 6, 1996, the Company issued a Convertible Debenture in the 
principal amount of $1,000,000 to Wales Securities Limited, a Guernsey 
corporation ("Wales"), and a second Convertible Debenture in the principal 
amount of $1,000,000 to Villandry Investments Ltd., a Guernsey corporation 
("Villandry"), in separate transactions pursuant to Regulation S as 
promulgated by the Securities and Exchange Commission under the Securities 
Act of 1933, as amended. Each Convertible Debenture is convertible into 
shares of Common Stock of the Company at a conversion price per share equal 
to the lesser of (x) $3.50, or (y) 85% of the average closing bid price of 
the Common Stock for the three consecutive trading days immediately preceding 
the date of conversion.

     The purchasers have agreed that from the date of issuance until after 
the forty-fifth day after such date (the "Restricted Period"), any offer, 
sale or transfer of the Convertible Debentures or the shares of Common Stock 
issuable upon conversion of the Convertible Debentures (including any 
interests therein), shall be subject to various restrictions in accordance 
with Regulation S.

     The Convertible Debentures bear interest at the rate of four percent 
(4%) per annum, payable quarterly. If not sooner converted, the principal 
amount of the Convertible Debentures is due and payable on the second 
anniversary of issuance.

     On October 1, 1996 $900,000 worth of debentures were converted to 
257,143 shares of common stock and on October 16, 1996 $200,000 worth of 
debentures were converted to 57,143 shares of stock and 291 shares of stock 
were issued for the payment of interest.

     In connection with the issuance of the Convertible Debentures, the 
Company issued to Wales a five year warrant to purchase 17,142 shares of 
common stock of the Company at an exercise price of $7.00 per share. A 
warrant containing identical terms also was issued to Villandry.

                                          6

<PAGE>

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/A. Except for the historical 
information contained herein, the discussion in this Form 10-QSB/A 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/A should be 
read as being applicable to all related forward-looking statements wherever 
they appear in this Form 10-QSB/A. 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. 


     Three months ended September 30, 1996 compared to three months ended 
September 30, 1995.

     At September 30, 1995 the company was comprised of four theater 
locations with a total of 30 screens. During the twelve months ended 
September 30, 1996, the company added two locations with an additional 24 
screens. Thus at September 30, 1996 the company is comprised of 6 locations 
and 54 screens. The addition of the two theaters resulted in an increase in 
revenues and expenses for the six months ended September 30, 1996 compared to 
September 30, 1995.

     Total revenues for the three months ended September 30, 1996 increased 
56.8% to $5,046,948 from $3,219,333 for the three months ended September 30, 
1995. The increase consisted of a $1,199,692, or 52.3%, increase in admission 
revenues and a $627,923, or 67.8%, increase in concession revenues and other 
operating revenues. The admission revenue and concession and other operating 
revenue increase for the comparative quarter was due to the increase in the 
number of theaters and screens. Total revenues for the existing theaters 
owned by the company for the full quarter ended September 30, 1996 compared 
to September 30, 1995 declined from $2,181,950 to $1,969,920, a reduction of 
$212,030 or 9.7%. This reduction in revenues can be attributed to lower 
theater attendance in the months of August and September. Management believes 
the reduction was attributed in part to competition from the summer Olympic 
games held in Atlanta, Georgia, and the pennant race of the San Diego Padres, 
combined with weaker than normal late summer film product.

     The revenues from the three months ending September 30, 1996 include 
$109,000 one time non-recurring recognition of deferred revenue from prior 
periods advanced ticket sales.

     Film rental and booking costs for the three months ended September 30, 
1996 increased 55.9 % to $1,963,790 from $ 1,259,818 for the three months 
ended September 30, 1995. The increase was due to the addition of new 
theaters and increases in higher booking costs paid to distributors for 
higher grossing early summer movies, such as Twister, The Rock, Eraser, 
Hunchback of Notre Dame, and Independence Day.

     Cost of concession supplies for the three months ended September 30, 
1996 increased 44.2 % to $482,909 from $334,811 for the three months ended 
September 30, 1995. The dollar increase was primarily due to increased 
concession costs associated with increased concession revenues. As a 
percentage of concession revenues, costs of concession supplies for the three 
months ended September 30, 1996 and September 30, 1995 decreased to 33.2 % 
from 38.8 %. The decrease is attributable to the Company purchasing its own 
concessions for new theaters, instead of having its concessions being 
subcontracted though a concession vendor.

                                          7

<PAGE>

     Theater operating expenses for the three months ended September 30, 1996 
increased 88.1 % to $1,526,949 from $811,894 for the three months ended 
September 30, 1995. The dollar increase in theater operating costs is 
primarily due to the increased costs attributable to the costs associated 
with the start up of new theaters. As a percentage of total revenues, theater 
operating expenses increased to 30.3% from 25.2 % during the applicable 
periods.

     General and administrative expenses for the three months ended September 
30, 1996 increased 64.0 % to $863,710 from $526,574 for the three months 
ended September 30, 1995. The increase is primarily due to additional 
advertising and insurance associated with the opening of new theaters as well 
as consulting fees and other costs associated with the expansion of corporate 
operations. As a percentage of total revenues, general and administrative 
expenses increased to 17.1 % from 16.4 % during the three months ended 
September 30, 1995.

     Depreciation and amortization for the three months ended September 30, 
1996 increased 110.4 % to $331,428 from $157,508 for the three months ended 
September 30, 1995. The increase is 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, 
1996.

     Interest expense for the three months ended September 30, 1996 increased 
to $152,204 from $102,204 for the three months ended September 30, 1995. This 
increase is primarily attributable to the increased debt incurred by the 
Company in its expansion.

     Interest income for the three months ended September 30, 1996 decreased 
to $12,514 from $31,572 for the three months ended September 30, 1995. This 
decrease is attributable to lower interest earning balances as the Company 
used its funds for expansion. In the prior year, the Company had more 
interest earning funds remaining from its initial public offering.


     Non-cash interest expense, which was $1,071,429 for the three months 
ended September 30, 1996, results from issuing debentures which are 
convertible at a discount  from the quoted market price of the common stock.  
The non-cash interest recorded on the convertible debentures is amortized 
over the period which the debentures are first convertible and have no effect 
on stockholders' equity.  (See Note 2 of Notes to Condensed Consolidated 
Financial Statements).

     As a result of the factors discussed above, the net loss for the three 
months ended September 30, 1996 was $1,334,557 or $ .21 per common share, 
compared to a net profit of $58,096, or $.01 per common share, for the three 
months ended September 30, 1995.



     Six months ended September 30, 1996 compared to six months ended 
September 30, 1995.

     At September 30, 1995 the Company operated four theater locations with a 
total of 30 screens. During the twelve months ended September 30, 1996, the 
company added two locations with an additional 24 screens. Thus at September 
30, 1996 the Company operated 6 locations with 54 screens. The addition of 
the two theaters resulted in an increase in revenues and expenses for the six 
months ended September 30, 1996 compared to September 30, 1995.

     Total revenues for the six months ended September 30, 1996 increased 
57.8% to $9,307,351 from $5,898,834 for the six months ended September 30, 
1995. The increase consisted of a $2,280,698, or 54.6%, increase in admission 
revenues and a $1,127,819, or 65.4 %, increase in concession and other 
operating revenues. The increase in total revenues was due to the opening of 
new theaters. Total revenues from existing theaters for the six months ended 
September 30, 1996 decreased by $183,349, or 5.3%, compared to revenues in 
1995.

     Film rental and booking costs for the six months ended September 30, 
1996 increased 53.9% to $3,567,519 from $2,317,486 for the six months ended 
September 30, 1995. The increase was due to higher film rental and booking 
costs paid on increased admission revenues, resulting from the addition of 
new theaters.

     Cost of concession supplies for the six months ended September 30, 1996 
increased 31.3% to $841,893 from $641,164 for the six months ended September 
30, 1995. The dollar increase is due to increased

                                          8

<PAGE>

concession costs associated with higher concession revenues. As a percentage of
concession revenues, concession costs for the six months ended September 30,
1996 and September 30, 1995 decreased to 31.7% from 39.4%. The decrease is due
to lower concession costs experienced at the new theaters. A contract with
Pacific Concessions, Inc. ("PCI") for the Company's first three theaters
requires that PCI provide concession supplies in exchange for 40 % of concession
revenues. The Company provides its own concession supplies at the other
theaters.

     Theater operating expenses for the six months ended September 30, 1996 
increased 69.1% to $2,802,458 from $1,657,475 for the six months ended 
September 30, 1995. As a percentage of total revenues, theater operating 
expenses increased to 30.1% from 28.1% during the applicable periods. The 
dollar increase is primarily attributable to the costs associated with the 
new theaters.

     General and administrative expenses for the six months ended September 
30, 1996 increased 45.8% to $1,528,350 from $1,048,035 for the six months 
ended September 30, 1995. The increase is primarily due to additional 
advertising and insurance associated with the opening of new theaters, 
bonuses and consulting fees and other costs associated with the expansion of 
corporate operations. As a percentage of total revenues, general and 
administrative costs decreased to 16.4% from 17.8% during the applicable 
periods.

     Depreciation and amortization for the six months ended September 30, 
1996 increased 102.8 % to $557,069 from $274,739 for the six months ended 
September 30, 1995. The increase is 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, 1996 increased 
to $302,865 from $205,725 for the six months ended September 30, 1995. This 
increase is primarily attributable to the increased debt incurred by the 
Company in its expansion.

     Interest income for the six months ended September 30, 1996 decreased to 
$15,158 from $87,001 for the six months ended September 30, 1995.  This 
decrease is attributable to lower interest earning balances as the Company 
used funds for expansion.  In the prior year, the Company had more interest 
earning funds remaining from its initial public offering.


     Non-cash interest expense, which was $2,048,997 for the six months ended 
September 30, 1996, results from issuing debentures which are convertible at 
a discount from the quoted market price of the common stock.  The non-cash 
interest recorded on the convertible debentures is amortized over the period 
which the debentures are first convertible and have no effect on 
stockholders' equity.  (See Note 2 of Notes to Condensed Consolidated 
Financial Statements).

     As a result of the factors discussed above, the net loss for the six 
months ended September 30, 1996 increased to $2,328,242, or $ .37 per common 
share, from $160,389, or $.03 per common share, for the six months ended 
September 30, 1995. 


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. New theater 
openings typically are financed with internally generated cash flow and 
long-term debt financing arrangements for facilities and equipment. The 
Company plans to construct additional theater complexes; however, no 
assurances can be given that any additional theaters will be constructed, or, 
if constructed, that they will be operated profitably.

     The Company leases five theater properties and various equipment under 
noncancelable operating lease agreements which expire through 2021 and 
require various minimum annual rentals. At September 30, 1996, the aggregate 
future minimum lease payments due under noncancelable operating leases was 
approximately $53,734,930. As of September 30, 1996 the Company had also 
signed lease agreements for four additional theater locations. The new leases 
will require expected minimum rental payments aggregating approximately 
$85,090,300 over the life of the leases. Accordingly, existing minimum lease

                                          9

<PAGE>

commitments as of September 30, 1996 plus those expected minimum commitments for
the proposed theater locations would aggregate minimum lease commitments of
approximately $138,825,230.

     During the six months ended September 30, 1996, the Company generated 
cash of $556,217 from operating activities, as compared to generating 
$556,988 in cash from operating activities for the six months ended September 
30, 1995.

     During the six months ended September 30, 1996, the Company used cash in 
investing activities of $2,848,531 as compared to $3,504,968 for the six 
months ended September 30, 1995. Purchase of equipment for new theaters net 
of construction deposit refunds, accounts for the use of cash in investing 
activities.

     During the six months ended September 30, 1996, the Company provided net 
cash of $2,443,290 from financing activities, as compared to using $234,330 
for the six months ended September 30, 1995. The cash generated for the six 
months ended September 30, 1996 came from four convertible debentures 
totaling $3,000,000 and a bank loan for $500,000, partially offset by debt 
repayments and costs for the acquisition of the capital. As of September 30, 
1996, the Company was in compliance with or had obtained waivers for, all 
bank loan covenants.

     The Company, at September 30, 1996, had a working capital deficit of 
$1,211,188.

     On April 11, 1996, the Company issued a $500,000 convertible debenture. 
On May 21, 1996, the Company issued a second $500,000 convertible debenture. 
On May 22, 1996, the April 1996 debenture and accrued interest was converted 
into 127,152 shares of common stock. On July 3, 1996, the May 1996 debenture 
and accrued interest was converted into 118,215 shares of common stock.

     On August 6, 1996, the Company issued a Convertible Debenture in the 
principal amount of $1,000,000 to Wales Securities Limited, a Guernsey 
corporation ("Wales"), and a second Convertible Debenture in the principal 
amount of $1,000,000 to Villandry Investments Ltd., a Guernsey corporation 
("Villandry"), in separate transactions pursuant to Regulation S as 
promulgated by the Securities and Exchange Commission under the Securities 
Act of 1933, as amended. Each Convertible Debenture is convertible into 
shares of Common Stock of the Company at a conversion price per share equal 
to the lesser of (x) $3.50, or (y) 85% of the average closing bid price of 
the Common Stock for the three consecutive trading days immediately 
proceeding the date of conversion.

     The purchasers have agreed that from the date of issuance until after 
the forty-fifth day after such date (the "Restricted Period"), any offer, 
sale or transfer of the Convertible Debentures or the shares of common stock 
issuable upon conversion of the Convertible Debentures (including any 
interests therein), shall be subject to various restrictions in accordance 
with Regulation S.

     The Convertible Debentures bear interest at the rate of four percent 
(4%) per annum, payable quarterly. If not sooner converted, the principal 
amount of the Convertible Debentures is due and payable on the second 
anniversary of issuance.

     On October 1, 1996 $900,000 worth of debentures were converted to 
257,143 shares of common stock and on October 16, 1996 $200,000 worth of 
debentures were converted to 57,143 shares of stock and 291 shares of stock 
were issued for the payment of interest.

     In connection with the issuance of the Convertible Debentures, the 
Company issued to Wales a five year warrant to purchase 17,142 shares of 
common stock of the Company at an exercise price of $7.00 per share. A 
warrant containing identical terms also was issued to Villandry.

     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

                                          10

<PAGE>

lead to cost increases that could make the funds anticipated to be generated
from the Company's operations together with anticipated additional debt and/or
equity, insufficient to fund the Company's expansion for the next 12 months.
Management may also determine that it is in the best interest of the Company to
expand more rapidly than currently intended, in which case additional financing
will be required.  Additional financing is required, and there can be no
assurances that the Company will be able to obtain such additional financing on
terms acceptable to the Company and at the times required by the Company, or at
all.

     The Company has plans for significant expansion. In this regard, the 
Company has entered into leases with respect to the development of 55 
additional screens at six locations. The capital requirements necessary for 
the Company to complete its 1997 fiscal development plans is estimated to be 
at least $12,400,000 in fiscal 1997. Such developments will require the 
Company to raise substantial amounts of new financing, in the form of 
additional equity or loan financing, during fiscal 1997. The Company's 
minimum contractual obligations for the proposed development plans is 
approximately $6,000,000, in fiscal 1997 with the balance of the proposed 
plans subject to termination by the Company without material adverse 
consequences to the Company. The Company believes it can obtain adequate 
capital and/or financing resources to sustain operations through the year 
ending March 31, 1997.

     However, the Company has not obtained any commitments for such financing 
and there can be no assurance that the Company will be able to obtain 
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 
and results of operations will be materially adversely affected. Moreover, 
the Company's estimates 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.. 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, or to perform its obligations under certain 
existing leases for theaters under development.

     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 are convertible into common stock of the Company at a conversion 
price that is significantly lower than the price at which the Company's 
common stock is trading. Because of its history of operating losses, limited 
equity, and rapid growth plans, the Company has limited options in acquiring 
the additional debt and/or equity, and may issue debt and/or equity 
securities, or securities convertible into its equity securities, on terms 
that could result in substantial dilution to its existing shareholders. The 
Company believes that in order to raise needed capital, it may be required to 
issue debt or equity securities convertible into common stock at conversion 
prices that are significantly lower than the current market price of the 
Company's common stock. In addition, certain potential investors have 
indicated that they will require that the conversion price adjust based on 
the current market price of the Company's common stock. In the event of a 
significant decline in the market price for the Company's common stock, such 
a conversion feature could result in significant dilution to the Company's 
existing shareholders. In addition, the Company has issued securities in 
offshore transactions pursuant to Regulation S, promulgated by the Securities 
and Exchange Commission, and may do so in the future. Because the purchasers 
of such securities are free to sell the securities after holding them for a 
minimum of 40 days pursuant to Regulation S, sales of securities by such 
holders may adversely impact the market price of the Company's common stock.

     The Company has had significant net losses in each fiscal year of its 
operations. There can be no

                                          11

<PAGE>

assurance as to when the Company will be profitable, if at all. Continuing
losses would have a material detrimental effect on the liquidity and operations
of the Company.

     The Company has net operating loss ("NOL") carryforwards of 
approximately $3,500,000 and $1,700,000 for Federal and California income tax 
purposes, respectively. The Federal NOLs are available to offset future years 
taxable income and expire in 2006 through 2011, while the California NOLs are 
available to offset future years taxable income and expire in 1998 through 
2001. 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, 1996, the Company's total net deferred income tax 
assets, a significant portion of which relates to NOLs discussed above, have 
been subjected to a 100% valuation allowance since it has been determined 
that realization of such assets is not more likely than not in light of the 
Company's recurring losses from 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. 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 $2,086,418 and $638,585 in the 
fiscal years ended March 31, 1995 and 1996, respectively.

     Need for Additional Financing; Use of Cash. The Company has aggressive 
expansion plans. In this regard, the Company has entered into lease and other 
binding commitments with respect to the development of 55 additional screens 
at six locations during fiscal 1997. The capital requirements necessary for 
the Company to complete its development plans is estimated to be at least 
$12,400,000. 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 1997. The Companies contractual obligation for 
the proposed developmental plans is approximately $6,000,000, with the 
balance of the proposed plans subject to termination without adverse or 
material consequences to the Company. There can be no 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 and results of operations will be 
materially adversely affected, and it is likely the company would be in 
default under various leases and other obligations to which it is a party.

     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 are convertible into common stock of the Company 
at a conversion price that is significantly lower than the price at which the 
Company's common stock is 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 
may issue debt and/or equity securities, or securities convertible into its 
equity securities, on terms that could result in substantial dilution to its 
existing shareholders. The Company believes that in order to raise needed 
capital, it may be required to issue debt or equity securities convertible 
into common stock at conversion prices that are significantly lower than the 
current market price of the Company's common stock. In

                                          12

<PAGE>

addition, certain potential investors have indicated that they will require that
the conversion price adjust based on the current market price of the Company's
common stock. In the event of a significant decline in the market price for the
Company's common stock, such a conversion feature could result in significant
dilution to the Company's existing shareholders. In addition, the Company has
issued securities in offshore transactions pursuant to Regulation S, promulgated
by the Securities and Exchange Commission, and may do so in the future. Because
the purchasers of such securities are free to sell the securities after holding
them for a minimum of 40 days pursuant to Regulation S, sales of securities by
such holders may adversely impact the market price of the Company's common
stock.

     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 and results of operations.

     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 and its results of operations.

     Possible Delay in Theater Development and Other Construction Risks. In 
connection with the development of its theaters, the Company typically 
receives a construction budget 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 budget. 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 budget. The Company has 
experienced cost overruns and delays in connection with the 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.  
The Company in the course of such development activities has also become 
involved in certain disputes with property owners, resulting in delays in 
reimbursement of Construction Expenses. Failure of the Company to develop its 
theaters within the construction budget allocated to it will likely have a 
material adverse effect on the Company.

     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.

     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 or lease such locations on terms favorable to it. 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.

                                          13

<PAGE>

     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 United Artists Theaters, 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 tapes.

     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.

     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 
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 and results of operations.

     Geographic Concentration. Each of the Company's current theaters are 
located in San Diego or Riverside Counties, California and the proposed 
theaters are all in Southern California, Hawaii or Mexico. As a result, 
negative economic or demographic changes in Southern California 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 29.4% and 
27.9% of the Company's total revenues in the fiscal years ended March 31, 
1995 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 concession stands located in certain of the Company's 
theaters. The Company's concession agreements with Pacific Concessions may be 
terminated by the Company prior to the expiration of their respective terms 
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,

                                          14

<PAGE>

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. As of September 30, 1996, the current officers 
and directors of the Company own approximately 50.4% of the Common Stock 
(27.5% assuming exercise in full of the Redeemable Warrants and conversion of 
debentures). As a result, these individuals are in a position to materially 
influence, if not control, the outcome of all matters requiring shareholder 
approval, including the election of directors.

     Dependence on Management. The Company is significantly dependent upon 
the continued availability of John Ellison, Jr., Alan Grossberg and Jerry 
Willits, its President and Chief Executive Officer, Senior Vice President and 
Chief Financial Officer, and Vice President, respectively. The loss or 
unavailability of any one of these officers to the Company for an extended 
period of time could have a material adverse effect on the Company's business 
operations and prospects. To the extent that the services of these officers 
are unavailable to the Company for any reason, the Company will be required 
to procure other personnel to manage and operate the Company and develop its 
theaters. There can be no assurance that the Company will be able to locate 
or employ such qualified personnel on acceptable terms. The Company has 
entered into five-year employment agreements with each of Messrs. Ellison, 
Grossberg and Willits. The Company maintains "key man" life insurance in the 
amount of $1,250,000 on the lives of each of John Ellison, Jr., Alan 
Grossberg and Russell Seheult (the Chairman of the Company's Board of 
Directors), with respect to which the Company is the sole beneficiary.

     Expansion; Management of Growth. The Company's plan of operation calls 
for the rapid 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 effectively, the Company 
will be required to increase the depth of its financial, administrative and 
theater management staffs. The Company has been able to identify and hire 
qualified personnel available to satisfy its growth requirements. 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. 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. The Company has signed agreements to 
lease a 12 screen theater in Guadalajara, Mexico and a 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. These theaters 
are presently under construction and are expected to open in the Spring of 
1997.To the extent that the Company elects to develop theaters in Mexico or 
any other country, the Company will be subject 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

                                          15

<PAGE>

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.

     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, the Company 
entered into five-year employment agreements with each of John Ellison, Jr., 
Alan Grossberg and Jerry Willits, pursuant to which their annual salaries are 
$197,106, $145,860 and $94,380, respectively, subject to annual increases of 
between 10% and 12%. Mr. Grossberg's employment agreement is being 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 or Mr. Grossberg 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. 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 and 
Willits, 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.

     No Assurance of Continued NASDAQ Inclusion; Risk of Low-Priced 
Securities. In order to qualify for continued listing on NASDAQ, a company, 
among other things, must have $2,000,000 in total assets, $1,000,000 in 
capital and surplus and a minimum bid price of $1.00 per share. 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 
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

                                          16

<PAGE>

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.

     Risk of Limitation of Use of Net Operating Loss Carryforwards. The 
Company has net operating loss carryforwards of approximately $3,500,000 for 
federal income tax purposes, which may be utilized through 2006 to 2011, and 
approximately $1,700,000 for state income tax purposes, which may be utilized 
through 1998 to 2001 (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.

     Possible Volatility of Common Stock and Redeemable Warrant Prices. The 
trading prices of the 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. The 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 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. 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 registered or qualified on or before the 
exercise date and to maintain a current prospectus relating thereto until the 
expiration of the Redeemable Warrants, there is no assurance that it will be 
able to do so. The value of the Redeemable Warrants may be greatly reduced if 
a current prospectus covering the Common Stock issuable upon the exercise of 
the 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 then reside.

     Investors may purchase the Redeemable Warrants in the secondary market 
or may move to jurisdictions in which the shares underlying the Redeemable 
Warrants are not registered or qualified during the period that the 
Redeemable Warrants are exercisable. In such event, the Company will be 
unable to issue shares to those persons desiring to exercise their 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 would 
have no choice but to attempt to sell the Redeemable Warrants in a 
jurisdiction where such sale is permissible or allow them to expire 
unexercised.

     Speculative Nature of Redeemable Warrants; Adverse Effect of Possible 
Redemption of Redeemable Warrants. The 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. There can be no assurance that the market 
price of the Common Stock will ever equal or exceed the exercise price of the 
Redeemable Warrants, and consequently, whether it will ever be profitable for 
holders of the

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<PAGE>

Redeemable Warrants to exercise the Redeemable Warrants.

     The 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 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 could force 
the holders thereof to exercise the Redeemable Warrants and pay the exercise 
price at a time when it may be disadvantageous for such holders to do so, to 
sell the Redeemable Warrants at the current market price when they might 
otherwise wish to hold the Redeemable Warrants, or to accept the redemption 
price, which may be substantially less than the market value of the 
Redeemable Warrants at the time of redemption. The holders of the Redeemable 
Warrants will automatically forfeit their rights to purchase shares of Common 
Stock issuable upon exercise of the Redeemable Warrants unless the Redeemable 
Warrants are exercised before they are redeemed.

     On or about October 25, 1996, a registration statement filed with the 
Securities and Exchange Commission became effective in connection with a 
temporary reduction in the exercise price of its Redeemable Warrants and the 
issuance of certain new warrants to holders of Redeemable Warrants who choose 
to exercise the Redeemable Warrants. 

     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 being offered by the Company 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 7, 2000. 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. Sales of either the Redeemable Warrants or 
the underlying shares of Common Stock, or even the existence of the 
Redeemable 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 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 385,302 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 Common Stock owned by the 
public investors will occur. Moreover, the mere existence of such options may 
depress the price of the Common Stock.

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<PAGE>

PART II  OTHER INFORMATION - OMITTED


ITEM 6 - Exhibits

         (a)  Exhibits

              Item 27.1  Amended Financial Data Schedule



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<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: July 15, 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 Financial
                                  Officer (principal financial officer and
                                  principal accounting officer)


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