<PAGE>   1
                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                              WASHINGTON, DC 20549

                                   FORM 10-QSB

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

                For the Quarterly period ended December 31, 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: 7,064,194 shares outstanding as of February 13, 
1997.

Transitional Small Business Disclosure Format. (check one):

YES ________

NO   X
<PAGE>   2
                        CINEMASTAR LUXURY THEATERS, INC.

                                TABLE OF CONTENTS
     
<TABLE>
<CAPTION>
                                                                                              Page No.
PART I.       Financial Information:
<S>                                                                                               <C>
Item 1.       Financial Statements

              Condensed Consolidated Balance Sheet as of December 31, 1996                        3

              Condensed Consolidated Statements of Operations for the three
              and nine months ended December 31, 1996 and 1995                                    4

              Condensed Consolidated Statements of Cash Flows for the
              nine months ended December 31, 1996 and 1995                                        5

              Notes to Condensed Consolidated Financial Statements                                6

Item 2.       Management's Discussion and Analysis of Financial Condition                         7-19
              and Results of Operations.

PART II.      Other Information                                                                   20


Item 6.       Exhibits and Reports on Form 8-K                                                    20

              Signatures                                                                          21
</TABLE>



                                        2


<PAGE>   3
PART I. Financial Information
ITEM 1. Financial Statements

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


<TABLE>
<CAPTION>
                                                                     December 31, 1996
                                                                     -----------------
<S>                                                                   <C>         
ASSETS
CURRENT ASSETS
Cash                                                                  $    839,640
Commissions and other receivables                                           89,393
Prepaid expenses                                                           326,651
Other current assets                                                       235,124
                                                                      ------------
Total current assets                                                     1,490,808

Property and equipment, net                                             11,498,267
Preopening costs, net                                                      245,289
Deposits and other assets                                                  415,964
                                                                      ------------

TOTAL ASSETS                                                          $ 13,650,328
                                                                      ============

LIABILITIES AND STOCKHOLDERS' EQUITY

CURRENT LIABILITIES
Current portion of long-term debt and capital lease obligations            783,747
Accounts payable                                                         2,812,392
Accrued expenses                                                           225,795
Deferred revenue                                                           120,385
Advances from stockholders                                                  21,000
                                                                      ------------
Total current liabilities                                                3,963,319
Long-term debt and capital obligations, net of current portion           4,033,208
Convertible debentures                                                     850,000
Deferred rent liability                                                  2,079,285
                                                                      ------------
TOTAL LIABILITIES                                                       10,925,812
                                                                      ============

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; 7,002,481
 shares issued and outstanding                                           8,676,336
Additional paid-in capital                                                 510,030
Accumulated deficit                                                     (6,461,850)
                                                                      ------------

TOTAL STOCKHOLDER'S EQUITY                                               2,724,516
                                                                      ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY                              13,650,328
                                                                      ============
</TABLE>



     See accompanying notes to condensed consolidated financial statements.



                                        3


<PAGE>   4
                CINEMASTAR LUXURY THEATERS, INC. AND SUBSIDIARIES
                 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
                                   (UNAUDITED)



<TABLE>
<CAPTION>
                                             THREE MONTHS ENDED DECEMBER 31,   NINE MONTHS ENDED DECEMBER 31,
                                             ------------------------------    -----------------------------
                                                  1996             1995            1996            1995
                                             --------------    ------------    ------------    -------------
<S>                                            <C>             <C>             <C>             <C>         
REVENUES
Admissions                                     $  3,272,867    $  2,067,386    $  9,729,781    $  6,243,602
Concessions                                       1,404,929         857,373       4,060,912       2,485,669
Other operating revenues                            107,767          68,131         302,221         162,453
                                               ------------    ------------    ------------    ------------

TOTAL REVENUES                                    4,785,563       2,992,890      14,092,914       8,891,724
                                               ------------    ------------    ------------    ------------

Costs and expenses:
Film rental and booking costs                     1,916,322       1,109,762       5,483,841       3,427,248
Cost of concession supplies                         428,390         322,574       1,270,283         963,738
Theater operating                                 1,775,127         855,218       4,577,585       2,512,693
General and administrative                          720,734         428,771       2,249,084       1,476,806
Depreciation and amortization                       535,336         120,831       1,092,405         395,570
                                               ------------    ------------    ------------    ------------

TOTAL COSTS AND EXPENSES                          5,375,909       2,837,156      14,673,198       8,776,055
                                               ------------    ------------    ------------    ------------

OPERATING INCOME (LOSS)                            (590,346)        155,734        (580,284)        115,669
                                               ------------    ------------    ------------    ------------


OTHER INCOME (EXPENSE)
Interest income                                       1,936           5,985          17,094          92,986
Interest expense                                   (166,492)        (96,905)       (469,357)       (302,630)
                                               ------------    ------------    ------------    ------------

TOTAL OTHER INCOME (EXPENSE)                       (164,556)        (90,920)       (452,263)       (209,644)
                                               ------------    ------------    ------------    ------------

INCOME (LOSS) BEFORE INCOME TAXES                  (754,902)         64,814      (1,032,547)        (93,975)
PROVISION FOR INCOME TAXES                             (800)              0          (2,400)
                                               ------------    ------------    ------------    ------------

NET INCOME (LOSS)                                 ($755,702)   $     64,814     ($1,034,947)       ($93,975)
                                               ============    ============    ============    ============

Net income (loss) per common share                    (0.11)           0.01           (0.16)          (0.02)
                                               ============    ============    ============    ============

Weighted average number of common shares and
share equivalents outstanding                     6,860,986       6,200,000       6,520,851       6,200,000
</TABLE>






     See accompanying notes to condensed consolidated financial statements.


                                        4


<PAGE>   5
                CINEMASTAR LUXURY THEATERS, INC. AND SUBSIDIARIES
                 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                                   (UNAUDITED)


<TABLE>
<CAPTION>
                                                 Nine Months Ended December 31,
                                                 -----------------------------
                                                       1996          1995
                                                 -------------    ------------
<S>                                                <C>                <C>     
Cash flows from Operating Activities
Net loss                                           $(1,034,947)       (95,575)

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

Depreciation and amortization                        1,092,405        395,570
Deferred rent liability                                577,512        191,817
Increase (decrease) from changes in:
  Commission and other receivables                      (1,788)      (219,678)
  Prepaid expenses and other current assets           (302,267)       199,230
  Accounts payable                                   1,974,250        239,232
  Accrued expenses and other liabilities               (96,625)      (144,516)
  Deposits and other assets                             29,444            -
  Preopening costs                                    (206,874)           -
                                                   -----------    -----------

Cash provided by operating activities                2,031,110        566,080
                                                   -----------    -----------

Cash flows from investing activities:

Refund of construction deposit                         600,000            -
Purchases of property and equipment                 (5,529,627)    (3,757,661)
Deposits and other assets                                  -            1,500
                                                                  -----------

Cash used in investing activities                   (4,929,627)    (3,756,161)

Cash flows from financing activities:
Principal payments on long term debt and capital      (489,146)      (343,027)
  lease obligations
Proceeds from issuance of long term debt             1,000,000            -
Proceeds from issuance of convertible debentures     3,000,000            -
Advances from stockholder                               60,000            -
Amounts due from officer                                   -          (17,500)
Net proceeds from warrant redemptions                  572,112            -
Repayment of advances from stockholder                (359,000)           -
Cost of issuing convertible debentures                (504,359)           -
                                                   -----------    -----------

Cash provided by (used in) financing activities      3,279,607       (360,527)

Net increase (decrease) in cash                        381,090     (3,550,608)
Cash, beginning of period                              458,550      4,091,885
Cash, end of period                                $   839,640    $   541,277
                                                   ===========    ===========
</TABLE>




     See accompanying notes to condensed consolidated financial statements.


                                        5


<PAGE>   6
                        CINEMASTAR LUXURY THEATERS, INC.
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 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.
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 nine month periods ended
December 31, 1996 are not necessarily indicative of the results of operations
that may be expected for the year ending March 31, 1997.

NOTE 2

  On April 11, 1996 and May 21, 1996, the Company issued Convertible Debentures
in the principal amount of $500,000, aggregating $1,000,000. 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 3

  On August 6, 1996, the Company issued two Convertible Debentures in the
principal amount of $1,000,000 (aggregating $2,000,000) 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, 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, on December 2, 1996 $50,000 worth of debentures and
interest were converted to 16,099 shares of common stock, on January 8, 1997
$50,000 worth of debentures and interest were converted to 20,194 shares of
common stock, and on January 21, 1997 $100,000 worth of debentures and interest
were converted to 41,519 shares of common stock.

  In connection with the issuance of the Convertible Debentures, the Company
issued five year warrants to purchase 34,284 shares of common stock of the
Company at an exercise price of $7.00 per share.



                                       6
<PAGE>   7
                      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-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.

  Three months ended December 31, 1996 compared to three months ended December
31, 1995.

  At December 31 1995 the Company operated four theater locations with a total
of 30 screens. During the nine months ended December 31, 1996, the Company added
three locations with an additional 34 screens. At December 31, 1996 the Company
operated 7 locations and 64 screens. The addition of the three theaters resulted
in an increase in revenues and expenses for the nine months ended December 31,
1996 compared to December 31, 1995. Of the three new theater locations, one of
these locations has not met the Company's expectations regarding attendance and
revenue. The Company is continually evaluating the situation and attempting to
develop means with which to increase attendance and revenue at that location.

  Total revenues for the three months ended December 31, 1996 increased 59.9%
to $4,785,563 from $2,992,890 for the three months ended December 31 1995. The
increase consisted of a $1,205,481 or 58.3%, increase in admission revenues
and a $587,192 or 63.4%, 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 operated by the
Company for the full quarter ended December 31 1996 compared to December 31,
1995 declined from $2,992,890 to $2,896,289 a reduction of $96,601 or 3.2%. This
reduction in revenues can be attributed to reduced paid admissions during the
quarter.

  Film rental and booking costs for the three months ended December 31, 1996
increased 72.7% to $1,916,322 from $1,109,762 for the three months ended
December 31, 1995. The increase is primarily due to the addition of new
theaters.

  Cost of concession supplies for the three months ended December 31, 1996
increased 32.8% to $428,390 from $322,574 for the three months ended December
31, 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 December 31,
1996 and December 31, 1995 decreased to 30.5% from 37.6%. The decrease is due
to lower concession costs experienced at the new theaters. A concession
contract for the Company's first three theaters requires concession supplies be
purchased in exchange for 40% of concession revenues. The Company provides its
own concession supplies at the other theaters.

  Theater operating expenses for the three months ended December 31, 1996
increased 107.5% to $1,775,127 from $855,218 for the three months ended
December 31, 1995. The dollar increase in theater operating costs is primarily
due to the increased costs attributable to the start up and operation of new
theaters. As a percentage of total revenues, theater operating expenses
increased to 



                                       7
<PAGE>   8
37.1% from 28.6% during the applicable periods.

  General and administrative expenses for the three months ended December 31,
1996 increased 68.1% to $720,734 from $428,771 for the three months ended
December 31, 1995. The increase is primarily due to expenses of opening new
theaters, and the continuing costs associated with corporate growth. As a
percentage of total revenues, general and administrative expenses increased to
15.1% from 14.3% during the three months ended December 31, 1995.

  Depreciation and amortization for the three months ended December 31, 1996
increased 343.0% to $535,336 from $120,831 for the three months ended December
31, 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 December 31,1996.


  Interest expense for the three months ended December 31, 1996 increased to
$166,492 from $96,905 for the three months ended December 31, 1995. This
increase is primarily attributable to the increased debt incurred by the Company
in its expansion.

  Interest income for the three months ended December 31, 1996 decreased to
$1,936 from $5,985 for the three months ended December 31, 1995. This decrease
is attributable to lower interest earning balances as the Company used its funds
for expansion.

  As a result of the factors discussed above, the net loss for the three months
ended December 31, 1996 was $755,702 or $0.11 per common share, compared to a
net profit of $64,814, or $.01 per common share, for the three months ended
December 31, 1995.

  Nine months ended December 31, 1996 compared to nine months ended December 31,
1995.

  At December 31, 1995 the Company operated four theater locations with a total
of 30 screens. During the twelve months ended December 31, 1996, the company
added three locations with an additional 34 screens. At December 31, 1996 the
Company operated 7 locations with 64 screens. The addition of the three theaters
resulted in an increase in revenues and expenses for the nine months ended
December 31, 1996 compared to December 31, 1995.

  Total revenues for the nine months ended December 31, 1996 increased 58.5% to
$14,092,914 from $8,891,724 for the nine months ended December 31, 1995. The
increase consisted of a $3,486,179 or 55.8%, increase in admission revenues and
a $1,715,011, or 64.8%, increase in concession and other operating revenues.
The increase in total revenues was primarily due to the opening of new theaters.
Total revenues from existing theaters for the nine months ended December 31,
1996 increased by $242,280 ,or 2.7%, compared to revenues in the 1995 period.

  Film rental and booking costs for the nine months ended December 31, 1996
increased 60.0% to $5,483,841 from $3,427,248 for the nine months ended
December 31, 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 nine months ended December 31, 1996
increased 31.8% to $1,270,283 from $963,738 for the nine months ended December
31, 1995. The dollar increase is due to increased concession costs associated
with higher concession revenues. As a percentage of concession revenues,
concession costs for the nine months ended December 31, 1996 and December 31,
1995 decreased to 31.3% from 38.8%. The decrease is due to lower concession
costs experienced at the new theaters. A concession contract for the Company's
first three theaters requires concession supplies be purchased in exchange for
40% of concession revenues. The Company provides its own concession supplies at
the other theaters.




                                       8
<PAGE>   9
  Theater operating expenses for the nine months ended December 31, 1996
increased 82.2% to $4,577,056 from $2,512,693 for the nine months ended
December 31, 1995. As a percentage of total revenues, theater operating expenses
increased to 32.5% from 28.3% during the applicable periods. The dollar
increase is primarily attributable to the costs associated with the new
theaters.

  General and administrative expenses for the nine months ended December 31,
1996 increased 52.3% to $2,249,084 from $1,476,806 for the nine months ended
December 31, 1995. The increase is primarily due to additional costs 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 16.0% from 16.6% during
the applicable periods.

  Depreciation and amortization for the nine months ended December 31 1996
increased 166.8% to $1,092,405 from $395,570 for the nine months ended December
31, 1995. The increase is primarily the result of depreciation on additional
equipment and amortization of preopening costs associated with the opening of
the new theaters.

  Interest expense for the nine months ended December 31, 1996 increased to
$469,357 from $302,630 for the nine months ended December 31, 1995. This
increase is primarily attributable to the increased debt incurred by the Company
in its expansion.

  Interest income for the nine months ended December 31, 1996 decreased to
$17,094 from $92,986 for the nine months ended December 31, 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.

  As a result of the factors discussed above, the net loss for the nine months
ended December 31, 1996 increased to $1,034,947, or $0.16 per common share, from
$93,975, or $.02 per common share, for the nine months ended December 31, 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 continues actively to seek debt or equity capital for future
expansion. No binding commitment for such funding has been obtained and there
can be no assurance it will be obtained. In the event additional capital for
future expansion is not obtained, the Company will not have sufficient cash for
it's expansion plans, and this could have a material adverse effect on the
Company. 

  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 December 31, 1996, the aggregate future
minimum lease payments due under noncancelable operating leases was
approximately $53,190,000. As of December 31, 1996 the Company had also signed
lease agreements for five additional theater locations. The new leases will
require expected minimum rental payments aggregating approximately $109,200,000
over the life of the leases. Accordingly, existing minimum lease commitments as
of December 31, 1996 plus those expected minimum commitments for the proposed
theater locations would aggregate minimum lease commitments of approximately
$162,390,000.




                                       9
<PAGE>   10
  During the nine months ended December 31, 1996, the Company generated cash of
$2,031,110 from operating activities, as compared to generating $566,080 in
cash from operating activities for the nine months ended December 31, 1995.

  During the nine months ended December 31, 1996, the Company used cash in
investing activities of $4,929,627 as compared to $3,756,161 for the nine months
ended December 31, 1995. Purchase of equipment for new theaters, net of
construction deposit refunds, accounts for the use of cash in investing
activities.

  During the nine months ended December 31, 1996, the Company provided net cash
of $ 3,279,607 from financing activities, as compared to using $360,527 for the
nine months ended December 31, 1995. The cash generated for the nine months
ended December 31, 1996 came primarily from four convertible debentures totaling
$3,000,000 and bank loans for $1,000,000, partially offset by debt repayments
and costs for the acquisition of the capital. As of December 31, 1996, the
Company was in compliance with, or had obtained waivers for, all bank loan
covenants.

  The Company, at December 31, 1996, had a working capital deficit of
$2,475,211. 

  On April 11, 1996 and May 21, 1996, the Company issued Convertible Debentures
in the principal amount of $500,000, aggregating $1,000,000. The Reg S
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.

  On August 6, 1996, the Company issued Convertible Debentures in the principal
amount of $1,000,000 (aggregating $2,000,000) 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, 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, on December 2, 1996 $50,000 worth of debentures and
interest were converted to 16,099 shares of common stock, on January 8, 1997
$50,000 worth of debentures and interest were converted to 20,194 shares of
common stock, and on January 21, 1997 $100,000 worth of debentures and interest
were converted to 41,519 shares of common stock.

  In connection with the issuance of the Convertible Debentures, the Company
issued a five year warrant to purchase 34,284 shares of common stock of the
Company at an exercise price of $7.00 per share.


  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>   11

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.

   During the quarter ended December 31, 1996 the Company opened a 10 screen
theater in Riverside, California and the Company has plans for significant
expansion. In this regard, the Company has entered into leases with respect to
the development of 65 additional screens at six locations. The capital
requirements necessary for the development of these locations is estimated to be
at least $12,400,000. The Company does not presently have assets or cash flow
sufficient to fund such future commitments. Accordingly, such developments will
require the Company to raise substantial amounts of new financing, in the form
of additional equity or loan financing during the next six months. 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, results of
operations and liquidity 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 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.





                                       11
<PAGE>   12
  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 December 31, 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 65 additional screens at
six locations. 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. 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 and
liquidity 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 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




                                       12
<PAGE>   13
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 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 allowance. 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 allowance
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.

  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 and are expanding in Southern California. Many of the Company's
competitors, including United Artists Theaters, Pacific 



                                       13
<PAGE>   14
Theaters, Mann Theaters, and Edwards Theatres 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, 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 




                                       14
<PAGE>   15
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 December 31, 1996, the current officers and
directors of the Company own approximately 49.4% of the Common Stock (27.0%
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. In December of 1996 the Company amended the
five-year employment agreements with each of Messrs. Ellison, Grossberg and
Willits. The amendments provide for each employment agreement to expire in
December of 2001. 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.

  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.

  Potential Business Interruption Due to Earthquake. All of the Company's
current and proposed 




                                       15
<PAGE>   16
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 of 1996, 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
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 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 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.





                                       16
<PAGE>   17
   Risk of Limitation of Use of Net Operating Loss Carryforwards. As of March
31, 1996 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 200 (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, Redeemable Warrant, and Class B
Redeemable Warrant Prices. 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.

  On or about November 15, 1996, the Warrant Reduction Offer expired. Each of
226,438 Redeemable Warrants had been converted to one share of common stock and
one Class B Redeemable warrant. Under the terms of the Warrant Reduction Offer,
$3.50 was received by the Company for each warrant converted to common stock and
a Class B Redeemable Warrant. Thus $792,533 of additional capital before
expenses was acquired.

   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, and Class B Redeemable Warrant. The Redeemable Warrants and Class B
Redeemable Warrant 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 Warrant 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 Warrant 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 




                                       17
<PAGE>   18
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, 2001, 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
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 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. Class B Redeemable Warrants entitle the
holder to purchase up to an aggregate of 246,438 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. 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 or Class B 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





                                       18
<PAGE>   19
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>   20
PART II-   OTHER INFORMATION
ITEM 6 -   Exhibits and Reports on Form 8-K

           (a)  Exhibits
                10.1 Amendment to Alan Grossberg Employment Agreement
                10.2 Amendment to Russell Seheult Consulting Agreement
                10.3 Amendment to John Ellison, Jr. Employment Agreement
                10.4 Amendment to Jerry Willits Employment Agreement
                10.5 Pacific Oceanside Holdings, L.P. Lease Agreement
                10.6 MDA-San Bernardino Associates, L.L.C. Lease Agreement

                Item 27.  Financial Data Schedule

           (b)  Reports on Form 8-K

                No Reports on Form 8-K were filed in the reporting period
for which this report is filed.



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<PAGE>   21

                                   SIGNATURES

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


Dated: February 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 Financial Officer
                                       (principal financial officer and
                                       principal accounting officer)





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<PAGE>   22
                                  EXHIBIT INDEX

   EXHIBIT NUMBER                       Description
   --------------                       -----------
       10.1            Amendment to Alan Grossberg Employment Agreement
       10.2            Amendment to Russell Seheult Consulting Agreement
       10.3            Amendment to John Ellison, Jr. Employment Agreement
       10.4            Amendment to Jerry Willits Employment Agreement
       10.5            Pacific Oceanside Holdings, L.P. Lease Agreement
       10.6            MDA-San Bernardino Associates, L.L.C. Lease Agreement
         27            Financial Data Schedule






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