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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-QSB/A
AMENDMENT NO. 1

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

FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1996

/ / TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT
OF 1934 FOR THE TRANSITION PERIOD FROM TO

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 (I.R.S. EMPLOYER ID 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
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Common stock, no par value: 6,445,367 shares outstanding as of August 12,
1996.

Transitional Small Business Disclosure Format (check one): YES
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NO X
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CINEMASTAR LUXURY THEATERS, INC.

TABLE OF CONTENTS

Page No.
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PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

Condensed Consolidated Balance Sheet as of June 30, 1996..... 1

Condensed Consolidated Statements of Operations for the
three months ended June 30, 1996 and 1995.................... 2

Condensed Consolidated Statements of Cash Flows for the
three months ended June 30, 1996 and 1995.................... 3

Notes to Condensed Consolidated Financial Statements......... 4

Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.................................... 5-14

PART II. OTHER INFORMATION

Item 6. Exhibits..................................................... 15

Signatures................................................... 16

PART I -- FINANCIAL INFORMATION

ITEM 1 -- FINANCIAL STATEMENTS

CINEMASTAR LUXURY THEATERS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEET
(UNAUDITED)

June 30, 1996
-------------

ASSETS
CURRENT ASSETS
Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,142,297
Commission and other receivables. . . . . . . . . . . . . . . . . . . . . . . . 110,799
Prepaid expenses. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 298,935
Other current assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 82,638
-----------
Total current assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,634,669
Property and equipment, net . . . . . . . . . . . . . . . . . . . . . . . . . . 8,000,663
Preopening costs. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 175,850
Deposits and other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . 669,860
-----------
TOTAL ASSETS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $10,481,042
-----------
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LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Current portion of long-term debt and capital lease obligations . . . . . . . . $ 674,985
Accounts payable. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,330,914
Accrued expenses. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 108,806
Deferred revenue. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 155,086
Advances from stockholder . . . . . . . . . . . . . . . . . . . . . . . . . . . 60,000
-----------
Total current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,329,791
Long-term debt and capital lease obligations, net of current portion. . . . . . 3,973,774
Convertible debenture . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 500,000
Deferred rent liability . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,738,607
-----------
TOTAL LIABILITIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,542,172
-----------
COMMITMENTS AND CONTINGENCIES
Subsequent Event

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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . --
Common stock, no par value; 15,000,000 shares authorized; 6,327,152 shares
issued and outstanding . . . . . . . . . . . . . . . . . . . . . . . . . . 6,871,860
Additional paid-in capital. . . . . . . . . . . . . . . . . . . . . . . . . . . 1,487,598
Accumulated deficit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (6,420,588)
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TOTAL STOCKHOLDERS' EQUITY. . . . . . . . . . . . . . . . . . . . . . . . . . . 1,938,870
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TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY. . . . . . . . . . . . . . . . . . . $10,481,042
-----------
-----------

See accompanying notes to condensed consolidated financial statements.

CINEMASTAR LUXURY THEATERS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)

Three Months Ended June 30,
---------------------------
1996 1995
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REVENUES:
Admissions. . . . . . . . . . . . . . . . . . . $2,963,529 $1,882,523
Concessions . . . . . . . . . . . . . . . . . . 1,202,922 765,883
Other operating revenues. . . . . . . . . . . . 93,952 31,095
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TOTAL REVENUES. . . . . . . . . . . . . . . . . 4,260,403 2,679,501
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Cost and expenses:
Film rental and booking costs . . . . . . . . . 1,603,729 1,057,668
Cost of concession supplies . . . . . . . . . . 358,984 306,353
Theater operating expenses. . . . . . . . . . . 1,275,509 845,581
General and administrative expenses . . . . . . 664,640 523,061
Depreciation and amortization . . . . . . . . . 225,641 117,231
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TOTAL COSTS AND EXPENSES. . . . . . . . . . . . 4,128,503 2,849,894
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OPERATING INCOME (LOSS) . . . . . . . . . . . . 131,900 (170,393)
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OTHER INCOME (EXPENSE):
Interest income . . . . . . . . . . . . . . . 2,644 55,429
Interest expense. . . . . . . . . . . . . . . (150,661) (103,521)
Non-cash interest expense related to
convertible debentures . . . . . . . . . . . (977,568) --
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TOTAL OTHER INCOME (EXPENSE). . . . . . . . . . (1,125,585) (48,092)
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LOSS BEFORE PROVISION FOR INCOME TAXES. . . . . (993,685) (218,485)
PROVISION FOR INCOME TAXES. . . . . . . . . . . --
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NET LOSS. . . . . . . . . . . . . . . . . . . . $ (993,685) $(218,485)
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NET LOSS PER COMMON SHARE . . . . . . . . . . . $ (.16) $ (.04)
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WEIGHTED AVERAGE NUMBER OF COMMON SHARES
AND SHARE EQUIVALENTS OUTSTANDING. . . . . . . 6,254,000 6,200,000
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See accompanying notes to condensed consolidated financial statements.

CINEMASTAR LUXURY THEATERS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)

INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS

Three Months Ended June 30,
-------------------------
1996 1995
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss. . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (993,685) $ (218,485)
Adjustments to reconcile net loss to net cash provided by
operating activities:
Depreciation and amortization . . . . . . . . . . . . . . . . 259,749 117,231
Deferred rent liability . . . . . . . . . . . . . . . . . . . 236,834 73,287
Non-cash interest expense . . . . . . . . . . . . . . . . . . 977,568 --
Increase (decrease) from changes in:
Commission and other receivables . . . . . . . . . . . . . (23,194) (23,736)
Prepaid expenses and other current assets. . . . . . . . . (122,065) 48,000
Deposits and other assets. . . . . . . . . . . . . . . . . (138,406) 274,500
Accounts payable . . . . . . . . . . . . . . . . . . . . . 492,774 236,628
Accrued expenses and other liabilities . . . . . . . . . . (178,912) (57,338)
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Cash provided by operating activities . . . . . . . . . . . . . 510,663 450,087
---------- ----------

CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment . . . . . . . . . . . . . . (1,336,802) (172,470)
Refundable construction deposit . . . . . . . . . . . . . . . . 600,000 --
---------- ----------
Cash used in investing activities . . . . . . . . . . . . . . . (736,802) (172,470)
---------- ----------

CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of long-term debt. . . . . . . . . . . . 500,000 --
Principal payments on long-term debt and capital lease. . . . .
obligations . . . . . . . . . . . . . . . . . . . . . . . . . (157,342) (101,257)
Proceeds from issuance of convertible debentures. . . . . . . . 1,000,000 --
Advances from stockholder . . . . . . . . . . . . . . . . . . . 60,000 20,000
Repayment of advances from stockholder. . . . . . . . . . . . . (320,000)
Payment of debt issuance costs. . . . . . . . . . . . . . . . . (172,772) --
---------- ----------
Cash provided by (used in) financing activities . . . . . . . . 909,886 (81,257)
---------- ----------
Net increase in cash and cash equivalents . . . . . . . . . . . 683,747 196,360
Cash and cash equivalents, beginning of period. . . . . . . . . 458,550 4,091,885
---------- ----------
Cash and cash equivalents, end of period. . . . . . . . . . . . $ 1,142,297 $4,288,245
---------- ----------
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See accompanying notes to condensed consolidated financial statements.

CINEMASTAR LUXURY THEATERS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1996
(UNAUDITED)

NOTE 1

The interim accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with generally accepted accounting principles
for interim financial information and the instructions to Form 10-QSB/A.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements.
In the opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been included. For
further information, refer to the audited financial statements for the year
ended March 31, 1996, and footnotes thereto, included in the Company's Annual
Report on Form 10-KSB which was filed with the Securities and Exchange
Commission. Operating results for the three month period ended June 30, 1996 are
not necessarily indicative of the results of operations that may be expected for
the year ending March 31, 1997.

NOTE 2

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

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

The aggregate affect of such adjustments in the three months ended June 30,
1996 is summarized below:

THREE MONTHS ENDED JUNE 30, 1996
(BEFORE RESTATEMENT) (AFTER STATEMENT)
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Operating Income $ 131,900 $ 131,900

Net Loss $ (16,117) $(993,685)

Net Loss Per Share $ - $ (.16)

NOTE 3

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

NOTE 4

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

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

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

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.

ITEM 2 -- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS

GENERAL

RESULTS OF OPERATIONS

The following discussion and analysis should be read in conjunction with the
Company's Condensed Consolidated Financial Statements and notes thereto included
elsewhere in this Form 10-QSB/A. Except for the historical information contained
herein, the discussion in this Form 10-QSB/A contains certain forward looking
statements that involve risks and uncertainties, such as statements of the
Company's plans, objectives, expectations and intentions. The cautionary
statements made in this Form 10-QSB/A should be read as being applicable to all
related forward-looking statements wherever they appear in this Form 10-QSB/A.
The Company's actual results could differ materially from those discussed here.
Factors that could cause or contribute to such differences include those
discussed in "Risk Factors," as well as those discussed elsewhere herein.

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

Chula Vista 6 was purchased August 17, 1995. The Ultraplex 14 at Mission Grove
is leased by the Company and began operating March 28, 1996. Results from these
two operations were not part of the quarter ended June 30, 1995, and are
referred to as new theaters in the analysis that follows.

Total revenues for the three months ended June 30, 1996 increased 59.0% to
$4,260,403 from $2,679,501 for the three months ended June 30, 1995. The
increase consisted of a $1,081,006 or 57.4 %, increase in admission revenues, a
$437,039, or 57.1%, increase in concession revenues, and a $62,857, or 202.1%,
increase in other operating revenues. New theaters had admission revenues of
$1,102,922, concession sales of $487,698, and other operating revenues of
$37,962 making total revenues from new theaters $1,628,582. There was a decrease
in total revenues from continuing theaters of $47,680, or 1.8%. Management
believes the decrease in revenues at continuing theaters reflects lower movie
attendance based on less successful film releases.

Film rental and booking costs for the three months ended June 30, 1996
increased 51.6% to $1,603,729 from $1,057,668 for the three months ended June
30, 1995. The increase was due to additional film rental and booking costs paid
on increased admission revenues. New theaters had film rental and booking costs
of $594,404. As a percentage of admission revenues, film rental and booking
costs for the three months ended June 30, 1996 decreased to 54.1% from 56.2% for
the three months ended June 30, 1995.

Cost of concession supplies for the three months ended June 30, 1996 increased
17.2% to $358,984 from $306,353 for the three months ended June 30, 1995. The
dollar increase is primarily due to additional concession costs associated with
increased concession sales. New theaters had concession costs of $68,547. As a
percentage of concession revenues, concession costs for the three months ended
June 30, 1996 decreased to 29.8% from 40.0% for the three months ended June 30,
1995. Excluding the new theaters, the excess concession cost is 40% by contract
with Pacific Concessions, Inc. ("PCI"). The new theaters operate concessions
internally and experience a lower cost than the fixed concession costs at
theaters utilizing PCI. The contract with PCI is tied to loans PCI has made to
the Company and there is a substantial penalty to ending the contract earlier
than its negotiated terms.

Theater operating expenses for the three months ended June 30, 1996 increased
50.8% to $1,275,509 from $845,581 for the three months ended June 30, 1995. As a
percentage of total revenues, theater operating expenses decreased to 29.9% from
31.6% during the applicable periods. New theaters had operating expenses of
$486,118 which accounted for the increase, offset by a small reduction in
operating expenses at the other theaters.

General and administrative expenses for the three months ended June 30, 1996
increased 27.1% to $664,640 from $523,061 for the three months ended June 30,
1995. As a percentage of total revenues, general and administrative costs
decreased to 15.6% from 19.5% during the applicable periods.

Depreciation and amortization for the three months ended June 30, 1996
increased 92.5% to $225,641 from $117,231 for the three months ended June 30,
1995. The increase is a result of additional purchases of equipment and the
costs associated with the new theaters aggregating $89,178.

Interest expense for the three months ended June 30, 1996 increased to
$150,661 from $103,521 for the three months ended June 30, 1995. This is
attributable to new debt used to finance new theater development.

Interest income for the three months ended June 30, 1996 decreased to $2,644
from $55,429 for the three months ended June 30, 1995. Lower bank cash balances
account for the lower interest income.

Non-cash interest expense, which was $977,568 for the three months ended
June 30, 1996, results from issuing debentures which are convertible at a
discount from the quoted market price of the common stock. The non-cash
interest recorded on the convertible debentures is amortized over the period
which the debentures are first convertible and have no effect on
stockholder's equity. (See Note 2 of Notes to Condensed Consolidated
Statements).

As a result of the factors discussed above, the net loss for the three months
ended June 30, 1996 increased to $993,685 or $.16 per common share, from
$218,485, or $.04 per common share, for the three months ended June 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 has entered
into lease agreements requiring it to develop 80 screens. The Company plans to
construct additional theater complexes; however, no assurances can be given that
any additional theaters will be constructed, or, if constructed, that they will
be operated profitably.

The Company leases four theater properties and various equipment under
noncancelable operating lease agreements which expire through 2021 and require
various minimum annual rentals. At March 31, 1996, the aggregate future minimum
lease payments due under noncancelable operating leases was

approximately $41,838,000. As of August 1, 1996 the Company had also signed
lease agreements for eight additional theater locations. The new leases will
require expected minimum rental payments aggregating approximately $115,531,000
over the life of the leases. Accordingly, existing minimum lease commitments as
of March 31, 1996 plus those expected minimum commitments for the proposed
theater locations would aggregate minimum lease commitments of approximately
$157,369,000.

During the three months ended June 30, 1996, the Company generated cash of
$510,663 from operating activities, as compared to generating $450,087 in cash
from operating activities for the three months ended June 30, 1995.

During the three months ended June 30, 1996, the Company used cash in
investing activities of $736,802, as compared to $172,470 for the three months
ended June 30, 1995. Purchase of equipment for new theaters accounts for the
increase in use of cash in investing activities.

During the three months ended June 30, 1996, the Company provided net cash of
$909,886 from financing activities, as compared to using $81,257 for the three
months ended June 30, 1995. The cash generated for the three months ended June
30, 1996 came from two debentures totaling $1,000,000 and a bank loan for
$500,000, partially offset by debt repayments. As of June 30, 1996, the Company
was in compliance with or had obtained waivers for, all bank loan covenants.

The Company, at June 30, 1996, had a working capital deficit of $695,122.

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

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

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

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 make the funds anticipated to be generated from the Company's operations
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. If any additional financing is
required, 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 lease with respect to the development of 80 additional screens
at eight locations. The capital requirements necessary for the Company to
complete its development plans is estimated to be at least $10,000,000 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 believes it has, or can obtain, adequate capital and/or
financing resources to sustain operations through the year ending March 31,
1997.

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. The Company used a substantial portion of its
available cash to purchase the Chula Vista 6 in August 1995 but obtained
mortgage financing in January 1996 for part of the purchase price of such
complex. If the Company is not successful in obtaining loans or equity financing
for future developments, it is unlikely that the Company will have sufficient
cash to open additional theaters.

The Company 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 the Company believes that 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 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.

At June 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 realization of such assets is not
more likely than not in light of the Company's recurring losses from operations.

RISK FACTORS

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 80 additional screens at
eight locations during fiscal 1997. The capital requirements necessary for the
Company to complete its development plans is estimated to be at least
$10,000,000. 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. 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.

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 offshore transactions pursuant to Regulation S,
promulgated by the Securities and Exchange Commission, and may do so in the
future. Because the purchasers of such securities are free to sell the
securities after holding them for a minimum of 40 days pursuant to Regulation S,
sales of securities by such holders may adversely impact the market price of the
Company's common stock.

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

LONG-TERM LEASE OBLIGATIONS; PERIODIC RENT INCREASES. The Company operates
most of its current theaters pursuant to long-term leases which provide for
large monthly minimum rental payments which increase periodically over the terms
of the leases. The Chula Vista 6 is owned by the Company and not

subject to such lease payments. The Company will be dependent upon increases in
box office and other revenues to meet these long-term lease obligations. In the
event that box office and other revenues decrease or do not significantly
increase, the Company will likely not have sufficient revenues to meet its lease
obligations, which would have a material adverse effect on the Company and its
results of operations.

POSSIBLE DELAY IN THEATER DEVELOPMENT AND OTHER CONSTRUCTION RISKS. In
connection with the development of its theaters, the Company typically receives
a construction budget from the property owner and oversees the design,
construction and completion of the theater site. The Company is generally
responsible for construction costs in excess of the negotiated construction
budget. As a result, the Company is subject to many of the risks inherent in the
development of real estate, many of which are beyond its control. Such risks
include governmental restrictions or changes in Federal, state or local laws or
regulations, strikes, adverse weather, material shortages and increases in the
costs of labor and materials. There can be no assurance that the Company will be
able to successfully complete any theater development in a timely manner or
within its proposed budget. The Company has experienced cost overruns and delays
in connection with the development of one of its existing theaters and no
assurance can be given that such overruns and delays will not occur with respect
to any future theater developments. 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.

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 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 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 June 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, Executive Vice President and Chief
Financial Officer, and Vice President, respectively. The loss or unavailability
of any one of these officers to the Company for an extended period of time could
have a material adverse effect on the Company's business operations and
prospects. To the extent that the services of these officers are unavailable to
the Company for any reason, the Company will be required to procure other
personnel to manage and operate the Company and develop its theaters. There can
be no assurance that the Company will be able to locate or employ such qualified
personnel on acceptable terms.

The Company has entered into five-year employment agreements with each of
Messrs. Ellison, Grossberg and Willits. The Company maintains "key man" life
insurance in the amount of $1,250,000 on the lives of each of John Ellison, Jr.,
Alan Grossberg and Russell Seheult (the Chairman of the Company's Board of
Directors), with respect to which the Company is the sole beneficiary.

EXPANSION; MANAGEMENT OF GROWTH. The Company's plan of operation calls for
the rapid addition of new theaters and screens. The Company's ability to expand
will depend on a number of factors, including the selection and availability of
suitable locations, the hiring and training of sufficiently skilled management
and personnel and other factors, such as general economic and demographic
conditions, which are beyond the control of the Company. Such growth, if it
occurs, could place a significant strain on the Company's management and
operations. To manage such growth effectively, the Company will be required to
increase the depth of its financial, administrative and theater management
staffs. The Company has not conducted any efforts to determine the feasibility
of expanding its staff, but in the past 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. To the extent that the
Company elects to develop theaters in Mexico or any other country, the Company
will be subject to the attendant risks of doing business abroad, including
adverse fluctuations in currency exchange rates, increases in foreign taxes,
changes in foreign regulations, political turmoil, deterioration in
international economic conditions and deterioration in diplomatic relations
between the United States and such foreign country. Recently the value of the
Mexican Peso has fallen in relation to the U.S. Dollar and Mexico is

experiencing substantial inflation.

FLUCTUATIONS IN QUARTERLY RESULTS OF OPERATIONS. The Company's revenues have
been seasonal, coinciding with the timing of major releases of motion pictures
by the major distributors. Generally, the most marketable motion pictures have
been released during the summer and the Thanksgiving through year-end holiday
season. The unexpected emergence of a hit film during other periods can alter
the 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.

OFFICER'S OTHER BUSINESS ACTIVITIES. Alan Grossberg, the Company's Executive
Vice President and Chief Financial Officer, devotes a portion of his time and
activities to the operation of a motion picture booking business. Pursuant to
the terms of his employment agreement, Mr. Grossberg will not be required to
devote a specific amount of time to his duties to the Company, but will be
required to devote only such time and attention as may be reasonably necessary
to perform and carry out such duties. It is anticipated that Mr. Grossberg will
devote approximately eight to 12 hours per week to his motion picture booking
business and 28 to 32 or more hours per week to the Company's affairs. It is
expected that a substantial portion of the booking services to be rendered by
Mr. Grossberg will be provided to the Company. To the extent that Mr.
Grossberg's film booking activities prevent him from devoting his complete time
and attention to the business of the Company, its operations and future
potential expansion could be materially

adversely affected.

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. Another potential
conflict of interest may exist between Alan Grossberg and the Company with
respect to the amount of time devoted by Mr. Grossberg to the Company's affairs.
Pursuant to the terms of his employment agreement with the Company, Mr.
Grossberg is permitted to conduct film booking services for entities other than
the Company (so long as such services are not rendered to theaters owned or
operated in a film licensing zone in which the Company owns, operates or has a
commitment to lease or develop a theater). As a result, a conflict may result
between the demands placed on Mr. Grossberg by the Company and by his film
booking business. In addition, a conflict of interest between the Company and
Mr. Grossberg existed in connection with the negotiation of the terms of Mr.
Grossberg's film booking agreement with the Company. In order to reduce the
potential conflicts of interest between the Company and its officers and
directors, prior to entering into any transaction in which a potential material
conflict exists, the Company's policy has been and will continue to be to obtain
the approval of a majority of the disinterested members of the Company's Board
of Directors or the approval of holders of a majority of the shares of the
Company's Common Stock (excluding the shares owned by the interested party).
However, there can be no assurance that conflicts will be resolved in a manner
favorable to the Company.

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 (or an entity controlled by him) receives an
additional $52,000 per year in exchange 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.

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.

ISSUANCE OF PREFERRED STOCK. The Board of Directors of the Company has the
authority to issue up to 100,000 shares of preferred stock, without par value,
in one or more series and to fix the number of shares constituting any such
series, the voting powers, designation, preferences and relative, participating,
optional or other special rights and the qualifications, limitations or
restrictions thereof, including the dividend rights and dividend rate, terms of
redemption (including sinking fund provisions), redemption price or prices,
conversion rights and liquidation preferences of the shares constituting any
series, without any further vote or action by the shareholders. The issuance of
preferred stock by the Board of Directors could adversely affect the rights of
the holders of Common Stock. For example, such issuance could result in a class
of securities outstanding that would have preferences with respect to voting
rights and dividends and in liquidation over the Common Stock, and could (upon
conversion or otherwise) enjoy all of the rights appurtenant to the Common
Stock.

The authority possessed by the Board of Directors to issue preferred stock
could potentially be used to discourage attempts by others to obtain control of
the Company through a merger, tender offer, proxy contest or otherwise by making
such attempts more difficult to achieve or more costly. The Board has designated
25,000 shares of preferred stock as Series A Preferred Stock. There are no
issued and outstanding shares of preferred stock and, there are no agreements or
understandings regarding the issuance of preferred stock.

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 issuable upon exercise of the Redeemable Warrants and such shares have
been registered, qualified or deemed to be exempt under the securities or "blue
sky" laws of the state of residence of the exercising holder of the Redeemable
Warrants. Although the Company has undertaken to use its best efforts to have
all of the shares of Common Stock issuable upon exercise of the Redeemable
Warrants registered or qualified on or before the exercise date and to maintain
a current prospectus relating thereto until the expiration of the Redeemable
Warrants, there is no assurance that it

will be able to do so. The value of the Redeemable Warrants may be greatly
reduced if a current prospectus covering the Common Stock issuable upon the
exercise of the Redeemable Warrants is not kept effective or if such Common
Stock is not qualified or exempt from qualification in the states in which the
holders of the Redeemable Warrants then reside.

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

SPECULATIVE NATURE OF REDEEMABLE WARRANTS; ADVERSE EFFECT OF POSSIBLE
REDEMPTION OF REDEEMABLE WARRANTS. The Redeemable Warrants do not confer any
rights of Common Stock ownership on the holders thereof, such as voting rights
or the right to receive dividends, but rather merely represent the right to
acquire shares of Common Stock at a fixed price for a limited period of time.
Specifically, holders of the Redeemable Warrants may exercise their right to
acquire Common Stock and pay an exercise price of $6.00 per share, subject to
adjustment in the event of certain dilutive events, on or prior to February 6,
2000, after which date any unexercised Redeemable Warrants will expire and have
no further value. There can be no assurance that the market price of the Common
Stock will ever equal or exceed the exercise price of the Redeemable Warrants,
and consequently, whether it will ever be profitable for holders of the
Redeemable Warrants to exercise the Redeemable Warrants.

The Redeemable Warrants are subject to redemption by the Company, at any time
on 30 days prior written notice, at a price of $0.25 per Redeemable Warrant if
the average closing bid price for the

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

On May 3, 1996, the Company filed a registration statement and other related
documents with the Securities and Exchange Commission in connection with a
potential 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. The registration statement is
pending and no final decision has been made by the Company to proceed with the
proposed transaction. In the event the Company elects to proceed with the
transaction, the market value of the Company's Common Stock and Redeemable
Warrants could be materially and adversely affected.

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.

PART II -- OTHER INFORMATION
ITEM 6 -- EXHIBITS

(a) Exhibits

27.1 Amended Financial Data Schedule

SIGNATURES

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

Dated: July 15, 1997

CinemaStar Luxury Theaters, Inc.

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

By: /s/ ALAN GROSSBERG
--------------------------------
Executive Vice President and Chief
Financial Officer (principal
financial officer and principal
accounting officer)

EXHIBIT INDEX

Exhibit
Number Description
- ------ -----------
27.1 Amended Financial Data Schedule