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

                                   FORM 10-QSB

(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
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                        CINEMASTAR LUXURY THEATERS, INC.

                                TABLE OF CONTENTS


<TABLE>
<CAPTION>
                                                                               Page No.
<S>       <C>                                                                   <C>
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                   6-7

Item 2.   Management's Discussion and Analysis of Financial Condition           8-27
            and Results of Operations.

PART II.  Other Information

Item 4.   Submission of Matters to a Vote of Security Holders                     28

Item 6.   Exhibits and Reports on Form 8-K                                     28-29

          Signatures                                                              30
</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>
                                                                            September 30,
                                                                            1996
                                                                            ------------
<S>                                                                         <C>
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                                                       510,030
Accumulated deficit                                                           (5,706,148)
                                                                            ------------

TOTAL STOCKHOLDER'S EQUITY                                                     2,088,992

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY                                  $ 12,166,916
                                                                            ============
</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 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)
                                                 -----------         -----------         -----------         -----------

TOTAL OTHER INCOME (EXPENSE)                        (139,690)            (70,632)           (287,707)           (118,724)
                                                 -----------         -----------         -----------         -----------

INCOME (LOSS) BEFORE INCOME                         (261,528)             58,096            (277,645)           (158,789)
TAXES
PROVISION FOR INCOME TAXES                            (1,600)                  0              (1,600)             (1,600)
                                                 -----------         -----------         -----------         -----------

NET INCOME (LOSS)                                ($  263,128)        $    58,096         ($  279,245)        ($  160,389)
                                                 ===========         ===========         ===========         ===========

Net income (loss) per common share                    (. 04)                 .01                (.04)               (.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>   5
                CINEMASTAR LUXURY THEATERS, INC. AND SUBSIDIARIES
                 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                                   (UNAUDITED)



<TABLE>
<CAPTION>
                                                          Six Months Ended September 30,
                                                         --------------------------------
                                                             1996               1995
                                                         ------------        ------------
<S>                                                      <C>                 <C>
Cash flows from operating activities;
Net loss                                                 ($  279,245)        ($  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
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 obligations                                         (321,899)           (214,830)
Proceeds from issuance of convertible debentures           3,000,000                   0
Payment of debt issuance costs                              (474,813)                  0
Advances from stockholder                                     60,000                   0
Repayment of advances from stockholder                      (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
                                                         ===========         ===========
</TABLE>

     See accompanying notes to condensed consolidated financial statements.

                                       5
<PAGE>   6
                        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.
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

  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 3

  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

                                       6
<PAGE>   7
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.

                                       7
<PAGE>   8
Item 2.

                      MANAGEMENT'S DISCUSSION AND ANALYSIS

GENERAL

RESULTS OF OPERATIONS

  The following discussion and analysis should be read in conjunction with the
Company's Condensed Consolidated Financial Statements and notes thereto included
elsewhere in this Form 10-QSB. Except for the historical information contained
herein, the discussion in this Form 10-QSB contains certain forward looking
statements that involve risks and uncertainties, such as statements of the
Company's plans, objectives, expectations and intentions. The cautionary
statements made in this Form 10-QSB should be read as being applicable to all
related forward-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 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.

                                       8
<PAGE>   9
         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.

         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.

                                       9
<PAGE>   10
         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.

         As a result of the factors discussed above, the net loss for the three
months ended September 30, 1996 was $263,128 or $ .04 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

                                       10
<PAGE>   11
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 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.

                                       11
<PAGE>   12
         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.

         As a result of the factors discussed above, the net loss for the six
months ended September 30, 1996 increased to $279,245, or $ .04 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.

                                       12
<PAGE>   13
  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 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

                                       13
<PAGE>   14
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 lead to cost

                                       14
<PAGE>   15
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.

                                       15
<PAGE>   16
  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.

  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.

                                       16
<PAGE>   17
  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

                                       17
<PAGE>   18
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.

  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

                                       18
<PAGE>   19
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.

  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.

                                       19
<PAGE>   20
  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.

                                       20
<PAGE>   21
  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 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

                                       21
<PAGE>   22
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.

                                       22
<PAGE>   23
  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 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

                                       23
<PAGE>   24
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.

                                       24
<PAGE>   25
  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.

                                       25
<PAGE>   26
  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
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.

                                       26
<PAGE>   27
  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.

                                       27
<PAGE>   28
PART II -         OTHER INFORMATION
ITEM 4 -          Submission of Matters to a vote of Security Holders

         The Annual Meeting of shareholders of the Company was held on August
14, 1996 in Perris, California, for the purpose of electing a board of
directors, and approving the appointment of auditors. Proxies for the meeting
were solicited pursuant to Section 14 (a) of the Securities Exchange Act of 1934
and there was no solicitation in opposition to management's solicitation.

         All of management's nominees for directors as listed in the proxy
statement were elected with the following vote:

<TABLE>
<CAPTION>
Name                               Votes For
----
<S>                                 <C>
Russell Seheult                     6,313,852
John Ellison, Jr.                   6,313,852
Alan Grossberg                      6,313,852
Jerry Willits                       6,313,852
Wally Schlotter                     6,313,852
Andrew Friedenberg                  6,313,852
Jon Meloan                          6,313,852
</TABLE>


         The appointment of BDO Seidman as independent auditors was approved by
the following vote:

<TABLE>
<CAPTION>
<S>                         <C>
Votes For:                  6,301,322
Votes Against:                  7,900
Abstentions:                   11,400
</TABLE>

ITEM 6 -          Exhibits and Reports on Form 8-K

                  (a)      Exhibits

                            Item 27. Financial Data Schedule

                                       28
<PAGE>   29
                  (b)      Reports on Form 8-K
                           No Reports on Form 8-K were filed in the reporting 
period for which this report is filed.

                                       29
<PAGE>   30
                                   SIGNATURES

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




Dated: November 14, 1996


                                  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)

                                       30
<PAGE>   31
                                  EXHIBIT INDEX

<TABLE>
<CAPTION>
EXHIBIT NUMBER             DESCRIPTION                                                           
--------------             -----------                                                           
<S>                        <C>                     
27                         Financial Data Schedule
</TABLE>

                                       31