<PAGE>
 
                      SECURITIES AND EXCHANGE COMMISSION
                            Washington, D.C. 20549
                                        
                                  FORM 10-KSB
(Mark One)

   [X]     ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) SECURITIES EXCHANGE
         ACT OF 1934

For the fiscal year ended July 31, 1996

   [_]     TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES
         EXCHANGE ACT OF 1943

     For the transition period from ________________ to _________________
      Commission file number: 000-20759

                       AMERICAN ARTISTS FILM CORPORATION
       (Exact Name of Small Business Issuer as Specified in its Charter)

             MISSOURI                                       43-1717111
    (State or jurisdiction of                             (I.R.S. employer
    incorporation or organization)                        identification No.)

1245 FOWLER ST., N.W. ATLANTA, GEORGIA                         30318
 (Address Principal Executive Offices)                      (Zip code)

Issuers telephone number, including area code (404) 876-7373

Securities registered under to Section 12(b) of the Exchange Act:

                                     NONE

Securities registered under Section 12 (g) of the Exchange Act:

                CLASS A COMMON STOCK, $.001 PAR VALUE PER SHARE

     Check whether the issuer (1) 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___
                                                                      ---

     Check if there is no disclosure of delinquent filers in response to Item 
405 of Regulation S-B is not contained in this form, and no disclosure will be 
contained, to the best of registrant's knowledge, in definitive proxy or 
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendments to this Form 10-KSB.[_]

     State issuer's revenues for its most recent fiscal year: $1,711,639

     The aggregate market value of the voting stock held by non-affiliates of
the Registrant amounted to $3,970,010 at the close of business on December 1,
1996: Class A Common Stock, .001 par value, $3,970,010. There is no established
market for Class B Common Stock, $.001 par value.

     State the number of shares outstanding of each of the issuer's classes of
common equity: 732,620 shares of Class A Common Stock, $.001 par value per
share, and 5,502,277 shares of Class B Common Stock, $.001 par value per share,
were outstanding at December 1, 1996.

Documents incorporated by reference:    NONE
<PAGE>
 
                       AMERICAN ARTISTS FILM CORPORATION
                                  FORM 10-KSB
                               TABLE OF CONTENTS

 
PART I                                                                     Page
                                                                          -----
 
     Item 1.      Business................................................  1
     Item 2.      Properties..............................................  6
     Item 3.      Legal Proceedings.......................................  6
     Item 4.      Submission of Matters to a Vote of
                   Security Holders.......................................  7

PART II

     Item 5.      Market for the Company's Common Equity
                   and Related Stockholder Matters........................  7
     Item 6.      Management's Discussion and Analysis or
                   Plan of Operation......................................  7
     Item 7.      Financial Statements.................................... 11
     Item 8.      Changes in and Disagreements With
                   Accountants on Accounting and Financial
                   Disclosures............................................ 11

PART III

     Item 9.      Directors, Executive Officers, Promoters and
                   Control Persons of the Registrant; Compliance
                   with Section 16(a) of the Exchange Act of 1934......... 12
     Item 10.     Executive Compensation.................................. 14
     Item 11.     Security Ownership of Certain Beneficial
                   Owners and Management.................................. 16
     Item 12.     Certain Relationships and Related
                   Transactions........................................... 17

PART IV

     Item 13.     Exhibits, Financial Statement Schedules
                   and Reports on Form 8-K................................ 19

SIGNATURES................................................................ 21

INDEX TO FINANCIAL STATEMENTS.............................................F-1
<PAGE>
 
                                     PART I

ITEM 1. BUSINESS

INTRODUCTION

   The Company was incorporated as Setab Alpha, Inc. ("Setab Alpha") in July
1995 under the laws of the State of Missouri for the purpose of engaging in a
merger or other business combination with a then unidentified operating company.
In May 1996 Setab Alpha entered into an agreement ("Merger Agreement") with
American Artists Film Corporation ("Old American Artists") for the merger ("the
Merger") of Setab Alpha and Old American Artists on the terms described below.
The Merger was consummated on October 7, 1996 (the "Merger Date"), at which time
the name of the Company was changed to American Artists Film Corporation.

   Old American Artists, a Georgia corporation, was formed in July 1991. Old
American Artists and its subsidiaries were engaged in the production of
television commercials, the development and production of television specials
and related properties, and the development of feature-length motion picture
screenplays and other media products for possible future production or license.
In August 1993 Old American Artists acquired all of the outstanding capital
stock of First Light Entertainment Corporation ("First Light") from its founder
and sole shareholder Vivian Jones. In June 1994 Old American Artists subscribed
for 49% of the outstanding capital stock of Diversity Filmworks, Inc.
("Diversity"), formerly First Light Diversity, Inc., which was organized and is
51%-owned by Tyrone C. Johnson.  See Item 12. - " Certain Relationships and
Related Transactions."

   On October 7, 1996, Setab Alpha completed a public offering (the "Public
Offering") of 700,000 shares of its Class A common stock, par value $.001 per
share (the "Class A Common Stock"). The net proceeds of its Public Offering were
$15,477, which Setab Alpha used to pay existing liabilities.

   Unless the context otherwise requires, the Company is referred to herein as
"the Company" or "American Artists," and the Company, together with its
subsidiaries, is referred to as "AAFC Group."  Old American Artists is deemed to
be the predecessor of the Company, and, unless the context otherwise requires,
discussion of the business or operations of the Company and AAFC Group include
those of the Old American Artists.

   The Company's executive offices are located at 1245 Fowler Street, N.W.,
Atlanta, Georgia 30318, and its telephone number is 404-876-7373.

THE MERGER

   By reason of the Merger, the stockholders of Old American Artists became
shareholders of the surviving corporation, the separate existence of Old
American Artists ceased and the business and management of Old American Artists
became the business and management of the Company. Each of the 9,407,837
outstanding shares of Old American Artists common stock became 0.5862 share of
the capital stock of the Company, of which the first 100 shares issued to each
Old American Artists shareholder was issued as Class A Common Stock (the "Class
A Common Stock") and the remainder as Class B common stock, $0.001 par value per
share (the "Class B Common Stock"), and outstanding options and warrants to
purchase an aggregate of 3,840,328 shares of common stock of Old American
Artists became options and warrants to purchase an aggregate of 2,251,200 shares
of Class B Common Stock.

   As a result of the consummation of the Merger, the Old American Artists
shareholders held, immediately following the Merger Date, 88.7% of the
outstanding capital stock of the Company (including all of the outstanding
shares of Class B Common Stock), and the pre-Merger shareholders of Setab Alpha
(including those persons who purchased Class A Common Stock in the Public
Offering) held the remaining 11.3% of the capital stock of the Company. Each
share of Class B Common Stock is convertible at any time at the election of the
holder into one share of Class A Common Stock. The Class A Common Stock and the
Class B Common Stock are identical in all respects and the holders thereof will
have equal rights and privileges, except with respect to the election of
directors. With respect to the election of directors, holders of Class B Common
Stock, voting as a separate class, are entitled to elect a number of directors
equal to the greater of (i) the number (rounded to the 

                                      -1-
<PAGE>
 
nearest whole number) that bears to the total number of directors of the Company
the same ratio that the number of outstanding shares of Class B Common Stock
bears to the aggregate number of outstanding shares of Class A and Class B
Common Stock, or (ii) the smallest number of directors that constitutes a
majority of the Board of Directors. Holders of Class A Common Stock voting as a
separate class will be entitled to elect all of the other members of the Board
of Directors.

   Pursuant to the Merger Agreement, for a period of 365 days after the Merger
Date, none of the shares of Class A or Class B Common Stock received in the
Merger, the shares of Class B Common Stock issued upon exercise of options and
warrants outstanding at the Merger Date, or shares of Class A Common Stock
issued upon conversion of Class B Common Stock issued in the Merger, may be
sold, transferred or otherwise disposed of without the prior written consent of
the Company.

BUSINESS OF AMERICAN ARTISTS

   Since its organization by Steven D. Brown and Rex Hauck in July 1991,
American Artists' activities have consisted primarily of producing network
television specials, developing other television specials for possible future
production, developing various feature-film screenplays and treatments for
possible future production, and seeking to arrange financing for production and
exploitation of one or more of its feature-film properties.

   Angels.  In 1994 AAFC Group produced with Greystone Communications, Inc.
   ------                                                                  
("Greystone"), two 2-hour prime time specials for the NBC television network:
"Angels:  The Mysterious Messengers," hosted by Patty Duke, and "Angels II:
Beyond the Light," hosted by Stephanie Powers. Both programs were initially
licensed to NBC, which aired the first program twice and the second program
once. NBC's rights to further airings expired in November, 1996.

   AAFC Group also entered a 3-year agreement in July 1994 with Alfred Haber
Distribution, Inc. for foreign distribution of the Angels programs.  Under that
agreement AAFC Group and Greystone receive 75% of any license fees, less
expenses, obtained from licensing the Angels programs outside the United States.
License fees have now been received for television, cable and satellite
broadcasts of the programs in more than 55 countries.

   Under a May, 1994 agreement, Calling Card Company, Inc. ("CCC") marketed home
videos of the Angels programs through advertising during the NBC network
broadcast, providing royalties, which were shared by NBC, American Artists and
Greystone, of $223,000 through July 31, 1996.  In addition, a video edition of
the first Angels program has been separately marketed by Time-Life Video under
an August 1994 agreement which granted Time-Life exclusive home-video rights to
the program in the United States and Canada for a five-year term.  The agreement
provided for $100,000 in non-refundable advance royalties and guaranteed minimum
royalties of $10,000 per year for the duration of the agreement after recoupment
of the advanced royalties.  Royalties under the agreement are shared among NBC,
American Artists, and Greystone.

    In June 1996 AAFC Group entered a three-year license agreement authorizing
Turner Original Productions, Inc. ("Turner") to broadcast re-edited versions of 
two programs previously co-produced on the subject of "Angels" on TBS
Superstation for a total license fee of $100,000. Turner is permitted to air
each of the Angels programs 18 times over the three year period. AAFC Group
bears any obligation for residuals and must refrain from licensing the programs
to any other broadcaster in the United States during the term of the license.
Turner began airing the programs in October 1996.

   Another short treatment of the Angels theme was developed and produced for
CCC at a cost to AAFC Group of approximately $30,000.  Payments to AAFC Group
are based on revenues generated by CCC through use of the treatment as a sales
aid.  In fiscal 1996, AAFC Group determined that because of the low current
level of sales experienced by CCC, revenues due to AAFC Group from CCC for this
project are likely to be insufficient to cover the associated costs to AAFC
Group.

   AAFC Group also developed a book entitled Angels: The Mysterious Messengers,
edited for American Artists by Mr. Hauck and published by Ballantine Books, Inc.
The book has also been published in German, Italian, French and Spanish
editions.  Advance royalties for the book amounted to $250,000.

                                      -2-
<PAGE>
 
   The agreement among American Artists, Greystone and NBC provided for (i) the
payment of license fees by NBC to American Artists and Greystone and (ii) the
payment to NBC of 50% of the royalties from videos sold during the NBC
broadcasts and 20% of the royalties from videos sold by Time-Life Videos.  Under
an agreement dated May 1994 AAFC Group and Greystone agreed to divide equally
all revenues from the two television specials and certain derivative properties.
The scope of that agreement and the definition of allowable expenses have become
the subject of dispute between the parties and are the subject of a pending
arbitration proceeding in Los Angeles, California.  See " - Intellectual
Property" and Item 3. - "Legal Proceedings."

   AAFC Group financed development of the initial Angels program primarily
through the private placement of $128,000 of its Revenue Participating Joint
Venture Investment Units with eight accredited investors.  The private placement
was completed in February 1994.  Investors receive 100% of AAFC Group's revenues
from the first television special and ancillary rights until their initial
investment has been returned, 50% thereafter until an equal additional amount
has been received, and 25% of any further revenues.  The investors also receive
5% of AAFC Group's revenues from the second television special.  Through July
1996 the investors had received $1.30 for each dollar of their investment.
Additional distributions may be made later depending on future revenues of the
Angels programs.

   Other Television Projects. Turner Original Productions, Inc., has exercised
   -------------------------                                                  
its option pursuant to a development agreement ("Development Agreement") with
AAFC dated June 14, 1996, to fund the production of a one-hour show currently
titled Target Earth to be completed and delivered to Turner on or before
February 16, 1997. The budgeted cost of Target Earth is approximately $350,000
inclusive of development monies previously paid under the Development Agreement.
Turner has exclusive rights to Target Earth in the United States while AAFC
retains a limited participation interest in any foreign revenues.

   Since 1995 AAFC Group has been developing, under Mr. Hauck's supervision, the
concept for a related group of television specials and other media properties
pertaining to the forthcoming end of the second millennium of the modern era.
The development work has included historical and scientific research,
development of themes and preparation of story treatments.

   AAFC Group has presented its "millennium" concept and certain treatments to
several over-the-air and cable television networks.  Several networks have
indicated interest in the properties but AAFC Group is unable to state whether
the interest will continue or whether the parties will reach a mutually
satisfactory agreement through negotiation.  AAFC Group's goal is also to derive
related video and book properties from any television program that might be
produced.

   In October 1994 AAFC Group organized Millennium Group, L.L.C. ("MG"), as a
Georgia limited liability company with itself as Manager, for the purpose of
producing and exploiting an initial one-hour television special on the subject
of the millennium.  MG has financed certain research and development of the
millennium materials through a private placement of $50,000 of limited liability
company interests with three accredited investors.  If MG is able to obtain
network or other funding for producing the program, the investors are entitled
to recover 100% of MG's net income from the program until their initial
investment has been returned, 50% thereafter until an equal additional amount
has been received, and 10% of any further net income.  All other net income
would be paid to AAFC Group as management fees.

   Feature Films.  In April 1996 AAFC Group organized Death and Taxes Film
   -------------                                                          
Company, L.L.C. ("D&T"), as a Georgia limited liability company with itself as
Manager, for the purpose of producing a feature-length motion picture based on a
screenplay written by Mr. Hauck currently titled "I.R.S., Death and Taxes."
AAFC Group has begun its efforts to finance D&T's production and distribution
costs for the film through a private placement of up to $4,000,000 of limited
liability company interests in an offering limited to "accredited investors."
After providing for costs associated with production of the film, the investors
would receive all available funds of D&T up to 110% of their initial investment.
Thereafter, all revenues would be divided equally between AAFC Group (as license
fees for the film property) and the investors.

                                      -3-
<PAGE>
 
   If the full amount of the $4,000,000 sought is obtained, AAFC Group believes
that "I.R.S., Death and Taxes" could be produced with that financing.  In the
event the offering raises the minimum of $2,000,000, it is anticipated that the
remaining production budget could be financed through one or both of the
proceeds from other equity offerings or fees from the pre-production sale of
certain distribution rights.  There can be no assurance that D&T will be able to
complete the private placement or finance the proposed film in an alternative
way, nor that the film would provide a profit to AAFC Group if produced.

   AAFC Group also has several other film properties (screenplay or treatment)
in various stages of development, and holds an option to acquire one film
property.  No commitments have been obtained for financing production of any of
those properties.

   In addition, AAFC Group is also negotiating with potential advertisers,
investors and other parties for erecting at the Underground Atlanta area in
Atlanta, Georgia, a large screen video display for news and advertising similar
to the one at Times Square in New York. This project is in the development stage
and is subject to a variety of conditions, including sufficient commitments by
advertisers, the availability of financing, governmental approval and compliance
with applicable regulatory requirements.  There is no assurance that the project
can be brought to fruition or would be profitable for AAFC Group if completed.

   Under a February 1992 agreement, AAFC Group issued 250,000 shares of its
common stock to Icon International, Inc. ("Icon"), in exchange for $500,000 in
credits for certain media advertising.  The availability of the media credits
expires December 31, 1997, but up to one-half of any credits not used by that
date may be returned to Icon in exchange for a portion of the shares previously
issued (calculated at the rate of $2.00 of unused media credits for each share
of stock).  AAFC Group anticipates using the credits, at least in part, for
promoting its film and video properties.

   FIRST LIGHT ENTERTAINMENT CORPORATION AND DIVERSITY FILMWORKS, INC.

   First Light and Diversity (collectively, the "Commercials Companies") produce
television commercials on a contract basis for advertisers and their agencies.
They typically enter short-term agreements for the production of the
commercials, whose scripts or story outlines ("story boards") are provided by
the client.  The Commercials Companies then typically arrange all production
aspects of the commercials, including casting, location selection and
contractual arrangements with the director and other production personnel.  The
Commercials Companies use on a regular basis, the services of approximately
eight independent directors, some of whom direct only commercials by the
Commercials Companies.  These directors are paid on a fixed fee basis determined
by mutual agreement during the commercial production budgeting process, although
other compensation arrangements may be used from time to time, including
director participation in the gross profits of commercials.

   The Commercials Companies produce their commercials on a "firm bid" basis as
opposed to a "cost plus fixed fee" basis. If a commercial is produced within the
framework of "firm bid," the production company is responsible for costs in
excess of the budget, unless approved by the client.  If the commercial is
filmed under "cost plus fixed fee" arrangement, the Commercials Companies
receive a predetermined fee for their work and approved production costs are
charged to the client as incurred.  Despite the differences in the structure of
the two forms of bids, the risk of costs overage to the Commercials Companies
are not substantially greater for "firm bid" because the Commercials Companies
are also responsible for unapproved costs overages that exceed the budget for a
"cost plus fixed fee" bid. Production company personnel in tandem with the
advertising agency responsible for the commercial, must carefully monitor costs
throughout the filming process, whether a "firm bid" or "cost plus fixed fee"
arrangement is operating.  The agreed upon bid might be altered because the
agency, client and director agree upon a new creative option or because of
unexpected occurrences such as inclement weather or unavailability of location.
In most circumstances, the Commercials Companies bill the advertising agency for
50% of the entire budget as stated in the bid, to be paid in advance of, or on
the first day of, principal photography.  The remainder of the bid price is
generally paid in one or more installments by the agency within 30 to 120 days
after completion of principal photography.

                                      -4-
<PAGE>
 
   In marketing their services the Commercials Companies emphasize the talents
of the directors with whom they work, their skills in cost control and timely
production, and the advantages of Atlanta as a production center.  In its work,
Diversity especially emphasizes use of directors and other production staff from
diverse cultural and ethnic backgrounds. Although most of the commercials
produced by the Commercials Companies are filmed in Atlanta, they are
experienced at producing commercials throughout North America.

   In fiscal 1996 the Commercials Companies produced 41 commercials for net
revenues of $2,467,000, compared to 95 commercials and $3,057,000 in net
revenues for fiscal 1995.  Based on the volume of story boards presently being
submitted to it for bids or cost estimates, management of AAFC Group anticipates
an improvement in revenue levels of the Commercials Companies during fiscal
1997.  For fiscal 1996, three of the Commercial Companies' customers accounted
for fees equal to 18.5%, 12.5% and 10.3% of consolidated revenues.  The
Commerical Companies obtain their revenues from discrete project assignments
obtained from various clients.  Accordingly, while the fees from one or more
clients may, in any year, be significant as the result of the size of a project
undertaken for that cleint, the Commmerical Companies are not dependent on any
one client for a material amount of their revenues.

   COMPETITION

   The industries in which AAFC Group operates are extremely competitive,
including extreme price competition in the television commercial industry. Many
of the competitors are major corporations with substantially greater resources
than AAFC Group.  Although the demand for low-cost quality media products has
expanded dramatically with the growth of cable, video and foreign markets, the
production of television specials and feature films remains dominated by major
studios and distributors.  Some major distributors such as Walt Disney, Turner
Broadcasting and Fox Broadcasting have acquired or developed their own
production companies.  In this environment AAFC Group competes on the basis of
the artistic creativity of its projects and its commitment to low-cost quality
production.

   The production of television commercials is highly fragmented and AAFC Group
competes in that field with numerous national and regional companies, no one of
which has a major share. AAFC Group competes primarily on the basis of the
skills of its executive producers, directors and production staff, and the
advantages of Atlanta as a production center.

   INTELLECTUAL PROPERTY

   AAFC Group's success and ability to compete will be dependent in part upon
its ability to obtain and maintain protection for its current and future
literary properties, to defend its intellectual property rights and to operate
without infringing on the proprietary rights of others. While AAFC Group relies
on a combination of copyrights and trademarks to establish and protect its
intellectual property rights, the management of AAFC Group believes that factors
such as the technical and creative skills of its personnel are more essential to
its success and ability to compete. There can be no assurance that any
intellectual property rights of AAFC Group will provide competitive advantages
or will not be challenged, invalidated or circumvented by competitors. There can
be no assurance that disputes will not arise concerning the ownership of
intellectual property.  Furthermore, there can be no assurance that intellectual
properties will not become known or be independently developed by competitors or
that AAFC Group will be able to maintain the confidentiality of information
relating to its literary properties.

   EMPLOYEES

   In its production activities AAFC Group relies primarily upon independent
third parties for production facilities and personnel.  AAFC Group currently has
ten full-time employees.  A portion of the salaries payable to AAFC Group's
employees is paid, from time to time, directly from the production budgets of
the projects on which the individuals are working.  AAFC Group hires additional
personnel for projects on a contract basis as needed.

                                      -5-
<PAGE>
 
Such individuals are generally paid directly from the budget of the projects on
which they are working. AAFC Group is a Signatory of The Writers Guild of
America and is subject to its industry-wide collective bargaining agreement.
AAFC Group is not a party to any other collective bargaining agreement. However,
it is possible that some of AAFC Group's business activities may be affected  by
the existence of collective bargaining agreements since many of the performing
artists and technical personnel, such as cameramen and film editors that it
employs from time to time on specific projects are members of unions.  The
extent to which collective bargaining agreements may affect AAFC Group is
difficult to estimate and strikes related to collective bargaining or other
collective action by union members could, in the future, delay or disrupt
activities.

ITEM 2. PROPERTIES

   AAFC Group leases as its headquarters a facility of approximately 8,000
square feet located at 1245 Fowler St., N.W., in Atlanta, Georgia. Rent under
the lease, which expires in November 1997, is $3,300 per month.  AAFC Group does
not own sound stages and related production facilities (generally referred to as
a "studio") and, accordingly, does not have the fixed payroll, general,
administrative and other expenses  resulting from ownership and operation of a
studio.  Studio facilities are generally available for rental as needed.

ITEM 3. LEGAL PROCEEDINGS

   On or about May 1, 1995, Greystone Communications, Inc. (Greystone"), AAFC
Group's co-producer of the Angels television specials, commenced an arbitration
proceeding against Old American Artists before the American Arbitration
Association Commercial Arbitration Tribunal ("AAA") in Los Angeles, California,
concerning relations under their 1994 co-production agreement.  Greystone's
principal issues relate to certain costs claimed by AAFC Group and to
Greystone's contention that it is entitled to participate in revenues from the
book Angels:  The Mysterious Messengers. AAFC Group, in its counterclaim,
alleges that Greystone has received excess revenue distributions based upon
overstatement of its expenses. Greystone is seeking compensatory and punitive
damages, attorney's fees, costs and interest. In December 1995, the arbitrator
issued an order excluding certain claims by Greystone. The remaining claims of
the parties have been scheduled for hearing by the AAA on January 28, 1997.
While it is unable to predict the results of the arbitration proceedings,
management believes that the possibility is remote that any recovery by
Greystone would exceed $150,000.

   A law suit filed by a former employee in the Superior Court of Fulton County,
Georgia, against both Old American Artists and its chief executive officer for
alleged damages arising from circumstances relating to termination of his
employment and for alleged unpaid compensation was dismissed September 19, 1996,
on motion of the plaintiff.

   There has been substantial litigation in the entertainment industry with
respect to literary properties.  AAFC Group has no formal procedure for
monitoring the possible infringement of its literary properties by others or for
confirming that its literary properties do not infringe the rights of others,
but AAFC Group does address specific issues as they are brought to its attention
from time to time. In 1992 AAFC Group received approximately $350,000 in
settlement of its claim that a certain motion picture then in production
infringed upon a literary property of AAFC Group.

   In 1996 counsel for MovieAmerica Corporation expressed to AAFC Group
"concerns" that the four feature film properties transferred by Messrs. Steven
D. Brown and Rex Hauck to Old American Artists at the time of its organization
in 1991 were or should have been properties of MovieAmerica Corporation by
reason of Mr. Brown's duties while he was an employee of MovieAmerica
Corporation. See Item 9 - "Directors, Executive Officers, Promoters, and Control
Persons of the Registrant." Messrs. Brown and Hauck have assured AAFC Group that
MovieAmerica Corporation has no ownership interest in the four literary
properties. No legal opinion on this issue has been sought by AAFC Group.

                                      -6-
<PAGE>
 
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
        None

                                    PART II

ITEM 5. MARKETS FOR THE COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

   The Class A Common Stock was approved by the National Association of Security
Dealers (NASD) for an unpriced quotation on the Over-the-Counter (OTC)
Electronic Bulletin Board under the symbol "AAFC" on November 15, 1996. As of
the Decemeber 1, 1996, there were 732,620 shares of Class A Common Stock
outstanding and 199 record holders of such shares. The Class B Common Stock is
not traded on any established public market.  As of the December 1, 1996, there
were 5,502,277 shares of Class B Common Stock outstanding and 126 record holders
of such shares. The Company has not declared or paid any cash dividends on its
Class A or Class B Common Stock since its formation, and the board of directors
currently intends to retain all of its earnings, if any, for its business. The
declaration and payment of cash dividends will be at the discretion of the board
of directors. As of December 1, 1996, there were options and warrants
outstanding to purchase an aggregate of 2,286,074 shares of Class B Common
Stock.

ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION

   GENERAL

   As discussed elsewhere herein, on  October 7, 1996, Old American Artists and
Setab Alpha merged in a transaction in which each of the 9,407,837 shares of Old
American Artists common stock became .5862 shares of Common Stock of the
Company, and the Company succeeded to the business of Old American Artists.

   Old American Artists is considered the predecessor to the Company, and prior
to and at the completion of the Merger, the Company, then Setab Alpha, had no
material assets, liabilities or operations.  Additionally, for accounting
purposes, the Merger is being accounted for as a recapitalization of Old
American Artists, with the operating results of Old American Artists prior to
the Merger becoming the operating results of the Company for that period.

   Accordingly, the following discussion of financial condition and results of
operations focuses on the financial condition and results of operations of Old
American Artists.

   AAFC Group is engaged in two lines of business; the development and
production of television, cable and feature films, including documentaries, and
in the contract production of films, generally television commercials.

   Revenues from the license or sale of films produced by American Artists are
generally recognized when the film is exhibited or is available for distribution
in the applicable market.  In general, the majority of the revenue to be derived
from a film will be earned during the two to three years following its initial
release.  Accordingly, film revenues will fluctuate dependent on the timing of
AAFC Group's production and release of films.

   Additionally, in some instances the level of revenues generated by a film in
the periods immediately following its release may not be directly related to the
film's success.  As described below, AAFC Group might sell certain distribution
rights, in advance of production, for fixed amounts as a means of financing
production costs.  In those instances, the film's success might not affect
revenues initially, but could generate revenues later as the result of
distribution in secondary markets or the sale of ancillary products.

   AAFC Group capitalizes the costs incurred to develop, produce and print
films, as well as advertising and other costs that benefit future periods.
Capitalized film costs are amortized, using the individual film forecast method,
under which capitalized costs are amortized based on total projected gross
revenues.

                                      -7-
<PAGE>
 
   Several factors can affect the relationship that amortized film costs bear to
film revenues.  AAFC Group has in the past exchanged, and may in the future,
exchange interest in the revenues from certain or all distribution for
contributions towards the costs of production.  Capitalized costs, and the
related amortization, are reduced by such contributions, while revenues are
reduced for outside interests.  Accordingly, the terms of the arrangements,
which can vary from film to film, in addition to the total costs of the film,
will affect the relationship of film costs to film revenues.

   AAFC Group engages in the commercial production business through its wholly-
owned subsidiary, First Light, and through American Artists' 49% ownership of
Diversity (First Light and Diversity, together, being referred to as the
"Commercials Companies"). AAFC Group's commercial production services are
performed by the Commercials Companies under short-term (typically less than two
months) agreements. The Commercials Companies generally use fixed fee
agreements. Revenues and costs will therefore vary based on the number of
production assignments obtained and completed in any particular period, and the
profitability of the individual assignments.  The number of production
assignments obtained in any particular period will be influenced by both the
overall level of commercial production activity in the markets in which the
Commercials Companies operate, and their success in competitive biddings, and
can therefore fluctuate significantly.  Overall commercial production activities
are influenced by, among other things, the general economic trends that effect
the advertising plans and expenditures of commercial and not-for-profit
industries and enterprises in the Commercials Companies' geographic markets.
Such general economic trends and conditions can neither be controlled, nor
predicted by AAFC Group. The Commercials Companies' success in competitive
biddings will depend on the potential customer's assessment, relative to other
bidders, of the production, talent and capabilities offered by AAFC Group and
the quoted fee.

   The consolidated financial statements of Old American Artists included
elsewhere herein reflect the investment in Diversity accounted for using the
equity method of accounting, under which American Artists' interest in
Diversity's operating results is presented as a single, separate line item in
the consolidated statement of operations, and American Artists' net investment
in and advances to Diversity are presented as a single item in the consolidated
balance sheet. Revenues, as reflected in the consolidated statement of
operations, do not include the revenues of Diversity. Financial information for
Diversity is presented separately in Note 1 of Notes to Old American Artists'
Consolidated Financial Statements. However, in anticipation of the Merger, in
September 1996, Old American Artists and the other stockholder of Diversity
entered into an agreement concerning the size and composition of Diversity's
board of directors.  See "Item 12 - Certain Relationships and Related
Transactions."  As a result, effective August 1, 1996, American Artists will
consolidate the accounts of Diversity in its consolidated financial statements,
as a result of which the consolidated financial statements in fiscal 1997 will
lack comparability in certain respects to those for the earlier periods.

   RISK FACTORS

   Certain statements in the following discussion of financial condition and the
results of operations, or elsewhere in this report, represent "forward-looking"
statements as defined in the Private Securities Litigation Reform Act of 1996.
Such statements involve matters that are subject to certain risks and
uncertainties, as a result of which actual future results or events many differ
materially depending on a variety of factors.

   The future results of the Company's production of feature films and
television specials are subject to a substantial degree of risk.  Each project
is an individual artistic work, and its commercial success is primarily
determined by the reactions of distributors and the general public, each of
which is unpredictable.  Historically, many feature films do not generate a net
profit or a return on investment, and there is a substantial degree of risk that
the production and exploitation of a film by AAFC Group would not allow a
recovery of the costs incurred by AAFC Group in its production.  Additionally,
as discussed elsewhere herein, AAFC Group will be required to raise significant
capital to pursue the production of the films it is presently developing, either
through the sale of revenue interests in the films, the pre-production sale of
distribution rights, or the sale of equity or debt securities by the Company.
There can be no assurance that the Company will be able to raise the necessary
funds to pursue the production of these films, which creates an additional
uncertainty.

                                      -8-
<PAGE>
 
   In the commercial production of commercials and other properties by the
Commercials Companies, AAFC Group competes in an industry that is highly
fragmented, and the result of the operations of the Commercials Companies will
vary depending on the number of production assignments obtained.  The number of
production assignments the Commercials Companies obtain is affected by various
factors discussed above.

   RESULTS OF OPERATIONS

        YEAR ENDED JULY 31, 1996 COMPARED TO YEAR ENDED JULY 31, 1995

   Revenues for the year ended July 31, 1996 ("fiscal 1996") were $1,711,639
which represented a $1,990,082 or 53.8% decline from revenues of $3,701,721 for
the year ended July 31, 1995.  However, revenues for Diversity, which is
accounted for on the equity method and therefore not included in consolidated
revenues, increased 327% from $237,810 for the year ended July 31, 1995 to
$777,309 for fiscal 1996.  A decline in American Artists' film revenues, from
$882,331 for the year ended July 31, 1995 to $21,995 for fiscal 1996, was the
cause for $860,336 of the decline in revenues.  As previously discussed, the
majority of the revenues from a film will be earned during the two to three
years following its initial release.  The last film released by American
Artists, Angels II, was released in October 1994, and the decline in revenues is
consistent with the absence of more recently released films.

   First Light's revenues from commercial production declined by $1,129,746 or
40.0% from the year ended July 31, 1995 to fiscal 1996, due to a decline in the
volume of assignments obtained.  On a combined basis with Diversity, commercial
production revenues declined by 19.4%.  Commercial production revenue declined
for the first nine months of fiscal 1996 as a result of both an overall decline
of commercial production activity in the Commercials Companies' markets and a
decline in their rate of success in competitive bids. The increase experienced
by Diversity resulted from the fact that fiscal 1995 represented its first year
of operations, and therefore during the 1995 period Diversity was still in its
start-up phase.  During the fourth quarter of fiscal 1996 the Commercials
Companies had revenues of $769,740, representing an increase of $409,235 over
their revenues for the fourth quarter of fiscal 1995. The increase in the
revenues in the fourth quarter of fiscal 1996 reflected increases experienced by
the Commercials Companies in both the number of requests for production
proposals they received, and their rate of success in competitive bidding
situations.  On the basis of that experience, management believes that the
decline in revenues experienced in the first nine months of fiscal 1996 was not
necessarily indicative of permanent developments, and believes that commercial
production revenues will increase in fiscal 1997.

   Film cost amortization was $15,963 for fiscal 1996, compared to $639,236 for
the year ended July 31, 1995. The decline was due to the decline in film
revenues. First Light's commercial production costs, as a percentage of related
revenues, were 78.8% for the year ended July 31, 1996 as compared to 77.9% for
fiscal 1995.  Resulting gross profits for commercial production were $359,040
and $622,674 for the years ended July 31, 1996 and 1995, respectively.

   Selling, general and administrative expenses increased $550,121 to $1,351,227
for the year ended July 31, 1996 from $801,106 for fiscal 1995. An increase in
marketing related expenses of approximately $60,000 was a cause of the increase
in SG&A expenses. That increase resulted from increased marketing efforts being
undertaken by the Commercials Companies in an effort to reverse the decline in
their revenues. Also, contributing to the increase in SG&A were costs of $90,000
incurred in pursuing financing for the production of "I.R.S., Death and Taxes,"
and other projects, and legal fees of $60,000 related to the Greystone
arbitration. The remaining increase in SG&A expenses reflect increases in
essentially all categories of SG&A expenses, including an increase of
approximately $226,000 in salaries from the addition of personnel, resulting
from the increase in pre-production activity for "I.R.S., Death and Taxes" and
the Millennium related projects and the Company's change to a public reporting
company.

   Interest expense declined from $12,810 in fiscal 1995 to $6,777 for fiscal
1996 due to a decline in outstanding debt.

                                      -9-
<PAGE>
 
   American Artists recognized losses of $194,006 and $59,646 in fiscal 1996 and
1995, respectively, from its investment in Diversity.  See Note 1 of Notes to
Old American Artists' Consolidated Financial Statements.

   As a result of the foregoing factors (principally the decline in film
revenues, the decline in commercial production revenues, and the increase in
SG&A expenses), AAFC Group incurred a net loss of $1,186,938 for fiscal 1996,
compared to a net loss of $7,793 for the year ended July 31, 1995.

   LIQUIDITY AND CAPITAL RESOURCES

   AAFC Group's strategy is to finance its operating (i.e. selling, general and
administrative) expenses from the gross profits generated by both its film and
commercial production operations while utilizing equity financing, pre-
production license revenues, and co-producer contributions to finance the
production of its films.  Using this strategy, AAFC hopes to insulate itself
from the risks of significant operating losses and negative cash flows, while
retaining the potential for significant profits and positive cash flows from
highly successful films. The success of such a strategy is, however, dependent
on AAFC Group's ability to obtain sufficient, and sufficiently profitable,
commercial production contracts and its ability to produce profitable film
projects.

   Operating cash flows were $19,958 in fiscal 1995 and a negative $1,074,135 in
fiscal 1996. These operating cash flows were supplemented by the proceeds from
the issuance of shares of common stock.

   Operating cash flows include as a cash outflow expenditures capitalized to
develop and produce motion pictures.  Such expenditures were $76,119 and
$714,486 for fiscal 1996 and 1995 respectively. These amounts exclude
development and production costs financed by outside investors which
approximated $347,000 in fiscal 1995.  AAFC Group will continue to depend on
financing provided by outside investors, the pre-production sale of distribution
rights, or the proceeds from the sale of its equity securities, to finance the
production of motion pictures.  Accordingly, the timing of the production of
motion pictures will depend on the availability of such financing.

   AAFC Group is currently planning to film "I.R.S., Death and Taxes," in fiscal
1997, and is currently offering interests of up to $4,000,000 in Death and Taxes
Film Company, L.L.C. ("D&T"), a Georgia limited liability company of which AAFC
Group will be the manager, to obtain production financing.  If the full amount
of the $4,000,000 sought is obtained, AAFC Group believes that "I.R.S., Death
and Taxes" could be produced with that financing.  In the event the offering
raises the minimum of $2,000,000, it is anticipated that the remaining
production budget could be financed through one or both of the proceeds from
other equity offerings or fees from the pre-production sale of certain
distribution rights.  The amounts raised from the sale of interests in D&T will
be used to reduce AAFC Group's investment in the production of the film.
Assuming that financing is obtained on the basis presently proposed, investors
will be entitled to receive, from the revenue interests retained by AAFC Group
(as opposed to granted to other co-producers), all of the revenue up to 110% of
the amount invested, and thereafter 50% of the revenue. The precise effect that
the formation of D&T will have on AAFC Group's future result of operations and
financial condition will depend on the amount raised, and the costs and revenues
from the film, and, therefore, cannot be predicted at this time. There can be no
assurance that AAFC Group will be able to complete the private placement of
interests in D&T, or finance the proposed film in an alternative way, nor that
the film would provide a profit to AAFC Group if produced.

   AAFC Group has also been developing a concept for a related group of
television specials and other media preparations pertaining to the forthcoming
end of the second millennium of the modern era.  In October 1994 AAFC Group
organized Millennium Group, L.L.C. ("MG"), as a Georgia limited liability
company with itself as Manager, for the purpose of producing and exploiting an
initial one-hour television special on the subject of the millennium.  MG has
financed certain research and development of the millennium materials through a
private placement of $50,000 of limited liability company interests with three
accredited investors.  AAFC Group has presented its "millennium" concept and
certain treatments to several over-the-air and cable television networks.

                                      -10-
<PAGE>
 
Several networks have indicated interest in the properties but AAFC Group is
unable to state whether the interest will continue or whether the parties will
reach a mutually satisfactory agreement through negotiation.  AAFC Group's goal
is also to derive related video and book properties from any television program
that might be produced.  If MG is able to obtain network or other funding for
producing the program, which is currently projected to have a production budget
ranging from $30,000 to $100,000, the investors are entitled to recover 100% of
MG's net income from the program until their initial investment has been
returned, 50% thereafter until an equal additional amount has been received, and
10% of any further net income.  All other net income would be paid to AAFC Group
as management fees.  Accordingly, the timing of the production of this program,
or the source of the production financing cannot be predicted.

   AAFC Group's negative operating cash flows, which include the funding of
Diversity's losses ($194,006 and $59,646 in fiscal 1996 and 1995, respectively)
have, as previously stated, generally been caused by a shortfall in the coverage
of SG&A by film and commercial production profits. Such shortfalls in the
coverage of SG&A by film and commercial production profits will cause AAFC
Group's liquidity to be constrained until film and commercial production
revenues, and the resulting profits, increase. During fiscal 1996, AAFC Group
again financed this shortfall principally by issuing equity securities, and
management anticipates the same will occur in the first half of fiscal 1997. The
use of equity or debt financing will continue to be necessary until film and
commercial production profits are sufficient to cover SG&A expenses, which 
cannot be assured. In November 1996 the Company commenced a private placement
offering under Regulation D of the Securities Act of 1933 of an aggregate of
100,000 shares of its Class A Common Stock together with warrants for the
purchase of 33,330 shares of its Class A Common Stock exercisable at a price of
$3.00 per share through June 30, 2000. As of December 9, 1996, the Company had
received $50,000 from the sale of 20,000 shares together with 6,666 warrants.
The Company has also had discussions concerning other private placements of its
debt or equity securities, and as a result thereof believes that there will be
available sufficient capital to finance its business plans for fiscal 1997.
However, except for the capital that the Company has raised to date, there can
be no assurance that any such debt or equity financing will be available to AAFC
Group, or if available, that such financing would be available on terms
considered acceptable to AAFC Group. The inability to obtain such equity or debt
financing as needed would require AAFC Group to have to reduce the scope of its
operations.

   OTHER

   In March 1995, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standard ("SFAS") No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of."
AAFC Group will adopt SFAS No. 121 as of August 1, 1996 and its implementation
is not expected to have a material effect on AAFC Group's consolidated financial
statements.

   In October 1995, the FASB issued SFAS No. 123, "Accounting for Stock-Based
Compensation."  SFAS No. 123 is effective December 15, 1995, and requires either
the application of an option pricing model measurement for stock compensation,
or, if a company elects to continue to measure stock compensation based on the
difference between the market price of the company's common stock and the
exercise price of the employer stock option, disclosure of what the effects of
the application of option pricing model measurement would have been.  AAFC Group
will initially apply SFAS No. 123 in fiscal 1997, and will elect to disclose the
effect that the application of option pricing model measurement would have had
for options granted from August 1, 1995.  The adoption of SFAS 123 will not
impact AAFC Group's consolidated results of operations, financial position, or
cash flows.

ITEM 7.  FINANCIAL STATEMENTS

         See index to financial statements on page F-1.

ITEM 8.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
         FINANCIAL DISCLOSURE

         Not Applicable

                                      -11-
<PAGE>
 
                                   PART III

ITEM 9.  DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS OF THE
         REGISTRANT; COMPLIANCE WITH 16(A) OF THE EXCHANGE ACT.
 
          The officers and directors of the Company are as follows:

<TABLE> 
<CAPTION> 
          NAME                     AGE                           POSITION
          ----                     ---                           --------
         <S>                       <C>                           <C>  
         Steven D. Brown (1) (2)   50                            Director, Co-Chairman of the Board, Chief Executive Officer
                                                                 
         Rex Hauck (2)             45                            Director, Co-Chairman of the Board, Co-President
 
         Vivian W. Jones (1)       44                            Director, Co-President
 
         Robert A. Martinez        33                            Vice President - Finance, Treasurer
 
         J. Eric Van Atta          32                            Vice President, Secretary
 
         John Boyd                 59                            Director
 
         V. Robert Colton          66                            Director
 
         Malcolm C.
          Davenport, V             44                            Director
 
         Ron L. Loveless           53                            Director
 
         Glen C. Warren (1)        65                            Director
 
         Dan W. Holloway           74                            Director
 
         Norman J. Hoskin          62                            Director
</TABLE>

____________________________
(1)  Member of the Executive Committee of the board of directors
(2)  Member of the Compensation Committee of the board of directors

   All of the directors and executive officers of the Company assumed these
positions upon completion of the Merger in October 1996, prior to which they
each held those same positions in Old American Artists.

   STEVEN D. BROWN. Mr. Brown founded Old American Artists in July 1991 with Mr.
Hauck and served as Co-Chairman of the Board and Chief Executive Officer from
that date until completion of the Merger.

   REX HAUCK.  Mr. Hauck founded Old American Artists in July 1991 with Mr.
Brown. He served as Executive Vice President from the inception of Old American
Artists until July 1994, when he was elected Co-Chairman and Co-President of Old
American Artists.  He held those positions until completion of the Merger.

   VIVIAN W. JONES.  Ms. Jones, who has been involved in the film industry for
19 years, founded First Light Entertainment Corporation ("First Light"),
originally Current Corporation, in 1993 to purchase certain assets of Jayan
House, Ltd., a commercial production company, where she had been employed as
General Manager and Executive Producer since 1990. She has been president of
First Light since its founding and, after First Light's acquisition by Old
American Artists in 1993, co-president of Old American Artists as well. She held
those positions until completion of the Merger.

                                      -12-
<PAGE>
 
   ROBERT A. MARTINEZ.  Mr. Martinez joined Old American Artists in December
1995 after nine years as an accountant with BDO Seidman, LLP. Mr. Martinez
became Vice President-Finance and Treasurer of Old American Artists in April
1996 and held those positions until completion of the Merger.

   J. ERIC VAN ATTA.  Mr. Van Atta served as Vice President and Secretary of Old
American Artists at its inception in July 1991 and held those positions until
completion of the Merger.

   JOHN BOYD, a private investor, was a physician on the staff of Southwest
Regional Medical Center from 1969 to January 1996 and President of Boyd Medical
Center in McComb, Mississippi, from 1965 to December 1995. Dr. Boyd became a
director of Old American Artists at its inception in July 1991.

   V. ROBERT COLTON, a private investor, has been a consultant and advisor to
various businesses in the United States and abroad for more than the past five
years. He serves as a director of Air Sensors, Inc., an auto emissions
technology company. Dr. Colton became a director of Old American Artists at its
inception in July 1991.

   MALCOLM C. DAVENPORT, V, has practiced law in West Point, Georgia, since
October 1993, originally as a sole practitioner and since 1996 as a partner in
the firm of Coulter & Davenport. Mr. Davenport previously practiced law in
Dalton, Georgia, as a sole practitioner from 1984 to 1991 and as a partner in
Ponder & Davenport, P.C., from 1991 to 1993.  He is a former director of ITC
Holding Company, a communications holding company, and Spintek Gaming
Technologies, Inc., a gaming equipment manufacturer and licensor. Mr. Davenport
became a director of Old American Artists in July 1994.

   RON L. LOVELESS, a private investor and business consultant from 1986 to 1995
and Senior Vice President-Marketing for Member Services, Inc., since October
1995, was previously Senior Vice President and General Manager of Sam's
Wholesale Club, a division of Wal-Mart Stores, Inc. Mr. Loveless became a
director of Old American Artists in July 1994.

   GLEN C. WARREN has served as Chairman of the Board of River Oaks Hospital in
Jackson, Mississippi, since 1988, President of Mississippi Diagnostic Imaging
Center, Ltd., since 1986 and a clinical professor of neurological surgery at the
University of Mississippi School of Medicine since 1972. Dr. Warren became a
director of Old American Artists in July 1994.

   DAN W. HOLLOWAY is a physician in private practice in Las Vegas, Nevada,
affiliated with Desert Springs Hospital, where he is presently Chairman of the
Department of Family Practice.  Dr. Holloway became a director of Old American
Artists in September 1996.

   NORMAN J. HOSKIN has been Chairman of the Board of Directors of Atlantic
International Capital, Inc. since July 1994. He was previously Chairman of
Atlantic Capital Group, Ltd., a venture capital advisory service, from 1986. Mr.
Hoskin is a director of Aquacare Systems, Inc., a producer of water purification
equipment, Consolidated Technologies Corp., a diversified manufacturing company,
Concept Technologies Group, Inc., which specializes in high-tech 3-D technology,
Trans Global Services, Inc., a telephone and internet communications company and
Sequential Information Systems, Inc., a high-tech aircraft equipment company.
Mr. Hoskin became a director of Old American Artists in September 1996.

   Each of the Company's directors is elected at the annual meeting of
stockholders and serves until the next annual meeting or until his successor has
been elected and qualified. Holders of Class A Common Stock and Class B Common
Stock respectfully, can elect a number of members of the board of directors
proportionate to the percentage which shares of the respective classes
constitute of the total outstanding shares of both classes, except that holders
of Class B shares in any event elect at least a majority of the directors.
Vacancies in the board of directors are filled by a majority vote of the
remaining members of the board of directors who were elected by the same class
of shareholders. Currently, there are no standing compensation arrangements for
non-executive board of director members.

                                      -13-
<PAGE>
 
   Executive officers of the Company are elected by and serve at the discretion
of the board of directors.

COMPLIANCE WITH SECTION 16(A) OF THE SECURITIES EXCHANGE ACT OF 1934

   Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
officers, directors, and persons who own more than 10% of the registered class
of the Company's equity securities to file reports of ownership with the
Securities and Exchange Commission. Officers, directors and greater than 10%
stockholders are required by the regulations of the Securities and Exchange
Commission to furnish the Company with copies of all Section 16(a) forms they
file.

   Based solely on a review of the Forms 3 and 4 furnished to the Company, the
Company believes that all filing requirements applicable to its officers,
directors and greater than 10% beneficial owners were complied with, except that
Australian Advisors Corporation may not have filed a Form 3 Report with respect
to its 300,000 shares of Class A Common Stock of the Company (comprising 4.8% of
the Company's voting stock and 41% of its Class A Common Stock).

   Form 5 is not required to be filed if there are not previously unreported
transactions or holdings to report.  Nevertheless, the Company is required to
disclose the name of directors, executive officers and 10% shareholders who did
not file a Form 5, unless the Company has obtained a written statement that no
filing is due.  The Company has been advised by those required to file Form 5
that no filings were due.

ITEM 10. EXECUTIVE COMPENSATION

EXECUTIVE COMPENSATION

   The following table furnishes compensation information for the year ended
July 31, 1996, for the chief executive officer and the other most highly
compensated executive officers who during such year earned more than $100,000 in
base salary for services rendered in all capacities. During fiscal 1996 none of
such named executive officers received, and as of July 31, 1996, none of them
held, any stock options or SARs which have been granted in connection with their
service to American Artists in any capacity.

                           SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
                                                 ANNUAL COMPENSATION
                                            -----------------------------
   NAME AND                                                       OTHER ANNUAL
   PRINCIPAL POSITION            YEAR       SALARY    BONUS       COMPENSATION
   ------------------            ----       ------    -----       ------------  
   <S>                           <C>       <C>        <C>         <C>
   Steven D. Brown               1996      $104,040    -0-           -0-
   Co-Chairman of the Board      1995        94,500    -0-           -0-
   Chief Executive Officer       1994        64,000    -0-           -0-
 
   Rex Hauck                     1996      $104,040    -0-           -0-
   Co-Chairman of the Board of   1995        72,000    -0-           -0-
   Directors and Co-President    1994        66,000    -0-           -0-
 
   Vivian W. Jones               1996      $104,040    -0-           -0-
   Co-President and Director     1995        72,000    -0-           -0-
   President of First Light      1994        50,000    -0-           -0-
</TABLE>

                                      -14-
<PAGE>
 
STOCK OPTION PLAN

   In May 1996 the Company adopted its 1996 Stock Option Plan (the "Stock Option
Plan"). The purpose of the Stock Option Plan is to encourage growth in
shareholder value by providing financial incentives to selected members of its
board of directors, employees, consultants and advisors who are in positions to
make significant contributions toward that success. The aggregate number of
shares reserved for issuance under the Stock Option Plan is 2,500,000 shares.
Options granted under the Stock Option Plan can be either (i) options intended
to qualify as "incentive stock options" under Section 422 of the Internal
Revenue Code of 1986, as amended (the "Code"), or (ii) non-qualified stock
options. The Stock Option Plan permits the grant of stock appreciation rights in
connection with the grant of stock options. The Stock Option Plan is
administered by a compensation committee of the board of directors, consisting
of Messrs. Brown and Hauck. The compensation committee has the authority to
determine exercise prices applicable to the options, the eligible directors,
employees, consultants and advisers to whom options may be granted, the number
of shares and class of common stock subject to each option, and the extent to
which options may be exercisable. The compensation committee is empowered to
interpret the Stock Option Plan and to prescribe, amend and rescind the rules
and regulations pertaining to the Stock Option Plan. No option is transferable
by the optionee other than by will or the laws of descent and distribution, and
each option is exercisable during the lifetime of the optionee only by such
optionee.

   No incentive stock option granted under the Stock Option Plan may be granted
at a price less than the fair market value of the underlying common stock on the
date of grant (or less than 110% of fair market value in the case of holders of
10% or more of the total combined voting power of all classes of stock). Non-
qualified stock options may be granted at the exercise price established by the
compensation committee, which may not be less than the fair market value of the
common stock on the date of grant.

   Each option granted under the Stock Option Plan is exercisable for a period
not to exceed ten years from the date of grant (or five years in the case of a
holder of more than 10% of the total combined power of all classes of stock) and
shall lapse upon expiration of such period, or earlier upon termination of the
recipient's employment with the Company or as determined by the compensation
committee.

   Pursuant to the Merger Agreement, options to purchase 2,251,200 shares of the
Company's Class B Common Stock were issued under the Stock Option Plan to
replace options previously granted by Old American Artists (under a comparable
stock option plan) and then outstanding, to purchase 3,840,328 shares of Old
American Artists' common stock. No shares of common stock have been issued upon
exercise of options granted under the Stock Option Plan.

                                      -15-
<PAGE>
 
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

   The following table shows beneficial ownership of capital stock of the
Company at December 1, 1996, for the directors and officers of the Company, and
for each beneficial owner of 5% or more of either class of the Company's common
stock.

<TABLE>
<CAPTION>
                                       SHARES OF CLASS A           SHARES OF CLASS B
                                          COMMON STOCK               COMMON STOCK
   NAME                                     NUMBER     % *            NUMBER          %*
   -------                                  ------    -----           -------        ----  
<S>                                    <C>            <C>          <C>               <C>      
Steven D. Brown (1)(6)                      100        -              1,256,127      22.8%
 
Rex Hauck (1)(2)(6)                         300        -              1,311,029      23.8%
 
Vivian W. Jones (1)(3)(6)                   600        -              1,318,350      20.4%
 
Robert A. Martinez (1)(4)                     -        -                 11,724         -
 
J. Eric Van Atta (1)(5)                   2,767        -                125,346       2.2%
 
John W. Boyd (1)                            400        -                341,941       6.2%
 
Glen W. Warren (1)(6)(7)                    200        -                320,635       5.8%
 
Ron L. Loveless (1)                      10,100      1.4%                50,469         -
 
V. Robert Colton (1)                        100        -                  5,762         -
  
Malcolm C.
 Davenport, V(1)(8)                         200        -                131,006       2.4%
 
Norman J. Hoskin (1)                          -        -                      -         -
 
Dan Holloway (1)                          2,667        -                      -         -
 
Douglas J. Bates                        117,020     16.0%                     -         -
 244 B Greenwood Drive
 Ballwin, Missouri 63011
 
Alan G. Johnson                         125,720     17.2%                     -         -
 325 Highway DD
 Defiance, Missouri 63341
 
Austrialian Advisors Corp.              300,000     41.0%                     -         -
 Bay & Deveaux St. 2nd Fl.
 P.O. Box N-1000
 Nassau, Bahamas
 
All Officers and Directors as a
Group (12 persons)(2)(3)(4)(5)(7)(8)     17,434      2.4%             4,872,389      75.2%
------------------------------------
</TABLE>

    *   Any percentages under one percent (1%) are not shown.

   (1) The address for the officers and directors is the corporate office of the
Company located at 1245 Fowler St., N.W., Atlanta, Georgia 30318.

                                      -16-
<PAGE>
 
   (2) Includes 11,524 shares of Class B Common Stock and 200 shares of Class A
Common Stock owned by Mr. Hauck's minor children, as to which Mr. Hauck
disclaims beneficial ownership.

   (3) Includes 879,300 shares of Class B Common Stock subject to purchase under
currently exercisable options. Also includes 14,555 shares of Class B Common
Stock and 100 shares of Class A Common Stock owned by Ms. Jones' minor son, as
to which Ms. Jones disclaims beneficial ownership, and 72,875 shares of Class B
Common Stock and 400 shares of Class A Common Stock transferred by Ms. Jones to
other relatives, which shares continue to be subject of the voting agreement
between Messrs. Brown, Hauck, Warren and Ms. Jones. See Note (6) below.

   (4) Includes 11,724 shares of Class B Common Stock subject to purchase under
currently exercisable options.

   (5) Includes 87,343 shares of Class B Common Stock subject to purchase under
currently exercisable options.

   (6) Under an agreement (the "Voting Agreement") dated April 1996 Messrs.
Brown, Hauck and Warren and Ms. Jones agreed to vote all their shares of Common
Stock of the Company ("Committed Shares") as a block in accordance with the
majority vote (by shares) among themselves. The Voting Agreement will remain in
effect for five years from the date of signing, unless sooner terminated by a
written agreement executed by shareholders holding of record a majority of the
Committed Shares then subject to the Agreement.

   (7) Includes 12,315 shares of Class B Common Stock and 100 shares of Class A
Common Stock owned by Mr. Warren's spouse, as to which Mr. Warren disclaims
beneficial ownership.

   (8) Includes 87,830 shares of Class B Common Stock and 100 shares of Class A
Common Stock, held by Mr. Davenport as trustee of a family trust.

ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

   Pursuant to an agreement dated August 31, 1993, and restructured November 3,
1995, AAFC Group acquired all of the outstanding stock of Current Corporation
(later renamed First Light Entertainment Corporation) from Ms. Jones in exchange
for 750,000 shares of common stock of Old American Artists and an option to
purchase up to 1,500,000 additional shares on or before September 1, 2003, at a
price of $0.50 per share.  Ms. Jones' options became exercisable in three annual
increments of 500,000 shares each, the last of which vested September 1, 1996.
Current Corporation, organized by Ms. Jones in August 1993, had acquired certain
assets of Jayan House, Ltd., a commercial production business with which she had
been employed, in exchange for its 4.37% note, $100,000 principal amount,
payable in 20 equal quarterly installments of principal and interest commencing
November 1993.

   From December 1993 through the Merger Date, Dr. Warren purchased 147,060
shares of common stock of Old American Artists at an aggregate price of $125,000
($0.85 per share). In connection with certain of these purchases, Dr. Warren
also received warrants for the purchase of 44,118 shares of Old American Artists
common stock at a price, to be determined by the related agreement, between
$1.50 and $2.00. These warrants are exercisable through June 1998. In November
1995, Old American Artists granted Dr. Warren an option under its 1995 Stock
Option Plan to purchase 200,000 shares of Old American Artists common stock at
$0.85 per share. The option, which by reason of the Merger now relates to
117,240 shares of Class B Common Stock purchasable at $1.45 per share, expires
in June 1998.

   Effective July 1995, Old American Artists agreed with Dr. Warren and Mr. Boyd
to cancel February, 1993 transactions in which the two individuals each
purchased, by delivery of their respective non-recourse promissory notes,
111,111 shares of Old American Artists common stock at an aggregate price of
$100,000 ($0.90 per share).

                                      -17-
<PAGE>
 
   In July 1993, Dr. Glen Warren and Dr. John Boyd opened a $100,000 revolving
bank line of credit with Deposit Guaranty National Bank for the benefit of Old
American Artists. In September 1994, the revolving line of credit was replaced
by a note which the Company is repaying in monthly installments. At July 31,
1996, the principal balance was $29,280.

   In May 1996, Old American Artists agreed with Dr. Glen Warren to issue to Dr.
Warren options for the purchase, at $1.00 per share, of 48,120 shares of common
stock of Old American Artists in return for, and at such time as, Dr. Warren
arranged or made available to Old American Artists, a three month $75,000 line
of credit.  The line of credit was arranged in July 1996 at which time Old
American Artists issued the options to Dr. Warren. The line of credit was
converted (at its expiration) into a six month unsecured note with a per annum
interest rate of 8.75%. Dr. Warren is the co-signer of the note.

   In June 1994, Old American Artists purchased a 49% interest in Diversity
Filmworks, Inc., a newly incorporated corporation, consisting of 490 shares of
common stock, for a purchase price of $245. The owner of the other 51% is Tyrone
C. Johnson. In September 1996, Old American Artists and Mr. Johnson entered into
a stockholder agreement pursuant to which the size of Diversity's board of
directors was set at five, of which three will be individuals designated by Old
American Artists.

   In April 1996 Messrs. Brown, Hauck and Warren and Ms. Jones entered an
agreement under which they agreed to vote all their shares of stock of Old
American Artists as a block in accordance with the majority vote (by shares)
among themselves. Those shares of Old American Artists common stock were
exchanged, in the Merger, for shares of Class A common Stock and Class B common
stock of the Company, which shares are subject to the voting agreement. By
reason of their corporate offices, share ownership and voting agreements they
may be deemed "controlling persons" of the Company.

   From December 1993 to August 1995, Old American Artists made five loans
totaling $53,730 to Steven D. Brown, each of which was represented by an
unsecured promissory note due December 1998, with accumulated interest of 7% per
annum. Old American Artists also made advances to Mr. Brown, without interest, 
in the amount of $12,303, which are due on demand.

   In December 1993 and May 1995, Old American Artists made two loans totaling
$50,000 to Vivian Jones, each of which was represented by an unsecured
promissory note due December 1998, with accumulated interest at 7% per annum.
Old American Artists also made advances to Ms. Jones, without interest, in the
amount of $34,500, which Ms. Jones paid $23,000 in October 1996. The remaining
$11,500 is due on demand.

   Old American Artists' agreement dated May 16, 1995, as amended, with Atlantic
International Capital, Ltd., ("AIC"), of which Norman Hoskins is an officer and
stockholder, was terminated by mutual consent on September 27, 1996. Old
American Artists then entered a new agreement retaining AIC, effective October
1, 1996, (i) to advise and counsel Old American Artists concerning
communications and relations with investors and with market makers in the common
stock of Old American Artists, and (ii) to provide Old American Artists other
business advice and counsel. The new advisory agreement will remain in effect
(unless terminated upon 90 days' prior written notice by either party) until
September 31, 1997. The Company replaced Old American Artists under this
agreement upon the completion of is Merger. The Company will pay AIC $3,000 per
month for such services.

   In October 1996,  Glen C. Warren and Malcolm C. Davenport, V each loaned
$25,000 to the Company for use as working capital and to fund operating losses.
The loans are due August 1, 1997, or sooner upon demand by the respective
holders, and bear interest at the prime rate plus one percentage point. As
additional consideration, the Company issued each of the lenders an option to
purchase up to 9,403 of Class B Common Stock at $1.71 per share at any time
through June 30, 2000.

   In November 1996, Ron L. Loveless purchased 10,000 shares of the Company's
Class A Common Stock for an aggregate price of $25,000 ($2.50 per share) and for
no additional consideration received a warrant to purchase an additional 3,333
shares of Class A Common Stock at a price of $3.00 per share, exercisable
through June 30, 2000.

                                      -18-
<PAGE>
 
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K

(A)  EXHIBIT LIST


EXHIBIT NUMBER                     DESCRIPTION
--------------                     -----------

 2.1*    Agreement and Plan of Merger dated as of May 1, 1996 with American
         Artists Film Corporation
 3.1*    Articles of Incorporation of the Registrant
 3.2*    Amended and Restated Bylaws of the Registrant
 3.3*    Amendment to Articles of Incorporation of the Registrant adopted May 1,
         1996
 3.4*    Articles of Incorporation of American Artists
 3.5*    Bylaws of American Artists
 10.1*   Form of Indemnification Agreement
 10.2*   Consulting Agreement with Douglas J. Bates
 10.3*   Consulting Agreement with Alan G. Johnson
 10.4*   Promissory Note with Douglas J. Bates
 10.5*   Promissory Note with Alan G. Johnson
 10.6*   Common Stock Investment Agreement, dated February 24, 1992, and the
         Agreement dated February 24, 1992, between American Artists and Icon
         International, Inc., as extended by letter dated August 21, 1995
 10.7*   Asset Purchase Agreement, dated August 1, 1993, between Current
         Corporation and First Light Entertainment Corporation
 10.8*   Lease Agreement, dated August 5, 1993, between Kee Joint Venture and
         Current Corporation, as renewed June 15, 1995 between Kee Joint Venture
         and First Light Entertainment Corporation
 10.9*   Share Purchase Agreement, dated August 31, 1993, and Amendment
         Agreement, dated November 3, 1995, between American Artists and Vivian
         Walker Jones, with respect to shares of First Light Entertainment
         Corporation
 10.10*  Agreement, dated April ___, 1994, between NBC Entertainment and
         Greystone Communications, Inc., as supplemented by letter agreement
         dated April 7, 1994, regarding Angels I
 10.11*  License Agreement, dated April 13, 1994, between Calling Card Company,
         Inc. and American Artists, as supplemented by letter agreement dated
         July 28, 1994
 10.12*  Letter Agreement, dated May 13, 1994, between Calling Card Company,
         Inc. and American Artists
 10.13*  Joint Venture Agreement, dated May 20, 1994, between Greystone
         Communications, Inc. and American Artists
 10.14*  Subscription Agreement, dated June 29, 1994, between American Artists
         and First Light Diversity, Inc.
 10.15*  Agreement, dated July 26, 1994, between NBC Entertainment and Greystone
         Communications, Inc., as supplemented by agreement dated July 26, 1994,
         regarding Angels II
 10.16*  Distribution Agreement, dated July 26, 1994, as revised October 10,
         1994, between Alfred Haber Distribution, Inc. and American Artists
 10.17*  Agreement, dated August 3, 1994, between American Artists and
         Ballantine Books
 10.18*  License Agreement, dated as of August 8, 1994, between Time-Life Video
         and American Artists
 10.19*  Promissory Note, dated September 13, 1994, made by John W. Boyd and
         Glen C. Warren, to be paid to the order of Deposit Guaranty National
         Bank

                                      -19-
<PAGE>
 
 10.20*  Financial Consulting Agreement, dated May 6, 1995, between Atlantic
         International Capital, Ltd. and American Artists, as amended by letter
         agreement dated May 1, 1996
 10.21*  American Artists 1995 Stock Option Plan, approved December 1, 1995
 10.22*  Voting Agreement, dated april 29, 1996, among Rex Hauck, Steve Brown,
         Dr. Glen Warren, and Vivian Jones
 10.23*  License Agreement, dated as of April 30, 1996, between American Artists
         and Turner Original Productions, Inc., regarding Angels I and Angels II
 10.24*  Development Agreement, dated June 14, 1996, between American Artists
         and Turner Original Productions, Inc.
 10.25*  Articles of Incorporation of Millennium Group, L.L.C.
 10.26*  Operating Agreement of Millennium Group, L.L.C.
 10.27*  Articles of Organization of Death and Taxes Film Company, L.L.C.
 10.28*  Form of Operating Agreement of Death and Taxes Film Company, L.L.C.
 10.29*  Articles of Incorporation of First Light Entertainment Corporation
 10.30*  Bylaws of First Light Entertainment Corporation
 10.31*  Articles of Incorporation of Diversity Film Works, Inc.
 10.32*  Bylaws of Diversity Film Works, Inc.
 10.33*  Unsecured Promissory Note dated July 17, 1996 issued to Deposit
         Guaranty National Bank
 10.34*  Agreement with Liberty Transfer Co.
 10.35** Voting Agreement between American Artists Film Corporation and Tyrone
         C. Johnson
 10.36   Lease Agreement, dated August 15, 1996, between Kee Joint Venture and
         First Light Entertainment Corporation
 10.37   Promissory Note, dated November 21, 1996, made by American Artists Film
         Corporation and co-signed by Glen C. Warren, to be paid to the order of
         Deposit Guaranty National Bank
 10.38   Financial Consulting Agreement, dated May 16, 1995, between Atlantic
         International Capital, Ltd. and American Artists, as amended by letter
         agreements dated May 1, 1996 and September 27, 1996
 10.39   Overhead Allocation Agreement between American Artists Film Corporation
         and Diversity Filmworks, Inc. , dated July 31, 1996
 10.40   Production Agreement, dated October 11, 1996, between American Artists
         and Turner Original Productions, Inc.
 10.41   Common Stock Investment Agreement, dated February 24, 1992, and the
         Agreement dated February 24, 1992, between American Artists and Icon
         International, Inc., as extended by letter agreements dated August 21,
         1995 and December 10, 1996
 27.1    Setab Alpha Financial Data Schedule
 27.2    American Artists Financial Data Schedule

__________________

*  Registration Statement on Form SB-2 (File No. 33-97196C) of Setab Alpha,
   Inc., filed on September 16, 1996.

** Registration Statement on Form S-4 (File No. 333-4159) of Setab Alpha, Inc.,
   filed September 16, 1996.

(B)  REPORTS ON FORM 8-K.

   No reports on form 8-K have been filed by the Company during the quarter
                             ended July 31, 1996.

                                      -20-
<PAGE>
 
                                  SIGNATURES

   In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.

Date:  December 19, 1996
                                  AMERICAN ARTISTS FILM CORPORATION



                                  By : /s/ Steven D. Brown
                                       -----------------------------------------
                                       Steven D. Brown
                                       Chief Executive Officer


   In accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicate.

<TABLE>
<S>                           <C>                                  <C> 
/s/ Rex Hauck                 Director, Co-Chairman of the Board,  December 19, 1996
---------------------------
Rex Hauck                     and Co-President
 
/s/ Vivian Jones              Director, Co-President               December 19, 1996
---------------------------
Vivian Jones
 
/s/ Robert A. Martinez        Vice President/Finance, Treasurer    December 19, 1996
---------------------------
Robert A. Martinez
 
/s/ V. Robert Colton          Director                             December 19, 1996
---------------------------
V. Robert Colton
 
/s/ John W. Boyd              Director                             December 19, 1996
---------------------------
John W. Boyd
 
/s/ Malcolm C. Davenport, V   Director                             December 19, 1996
---------------------------
Malcolm C. Davenport, V
 
/s/ Ron L. Loveless           Director                             December 19, 1996
---------------------------
Ron L. Loveless
 
/s/ Glen Warren               Director                             December 19, 1996
---------------------------
Glen Warren
 
/s/ Dan Holloway              Director                             December 19, 1996
---------------------------
Dan Holloway
 
/s/ Norman Hoskin             Director                             December 19, 1996
---------------------------
Norman Hoskin
</TABLE>

                                      -21-
<PAGE>
 
                       AMERICAN ARTISTS FILM CORPORATION

                         INDEX TO FINANCIAL STATEMENTS

<TABLE> 
<CAPTION> 
          Setab Alpha, Inc. ("Setab Alpha")                             Page
          ---------------------------------                             ----
          <S>                                                           <C> 
          REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS             F-2
 
          Balance sheet                                                  F-3
          Statement of operations                                        F-4
          Statement of stockholders' deficit                             F-5
          Statement of cash flows                                        F-6
          Summary of accounting policies                                 F-7
          Notes to financial statements                                  F-8
 
          American Artists Film Corporation ("Old American Artists")
          ----------------------------------------------------------
 
          REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS             F-9
 
          Consolidated balance sheets                                   F-10
          Consolidated statements of operations                         F-12
          Consolidated statements of stockholders' equity               F-13
          Consolidated statements of cash flows                         F-14
          Notes to consolidated financial statements                    F-15
 
          Pro Forma Financial Statements
          ------------------------------
 
          Introduction                                                  F-27
          Pro forma consolidated balance sheet                          F-29
</TABLE>

                                                                             F-1
<PAGE>
 
   REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS



   Board of Directors
   Setab Alpha, Inc.
   Ballwin, Missouri

   We have audited the balance sheet of Setab Alpha, Inc. (a development stage
   company) as of July 31, 1996, and the related statements of operations,
   stockholders' deficit and cash flows for the period from July 5, 1995 (date
   of inception) through July 31, 1996.  These financial statements are the
   responsibility of the Company's management.  Our responsibility is to express
   an opinion on these financial statements based on our audit.

   We conducted our audit in accordance with generally accepted auditing
   standards.  Those standards require that we plan and perform the audit to
   obtain reasonable assurance about whether the financial statements are free
   of material misstatement.  An audit includes examining, on a test basis,
   evidence supporting the amounts and disclosures in the financial statements.
   An audit also includes assessing the accounting principles used and
   significant estimates made by management, as well as evaluating the overall
   financial statement presentation.  We believe that our audit provides a
   reasonable basis for our opinion.

   In our opinion, the financial statements referred to above present fairly, in
   all material respects, the financial position of Setab Alpha, Inc. at July
   31, 1996 and the results of its operations and its cash flows for the period
   from July 5, 1995 (date of inception) through July 31, 1996 in conformity
   with generally accepted accounting principles.



                                                    BDO SEIDMAN, LLP



   St. Louis, Missouri
   December 5, 1996

                                                                             F-2
<PAGE>
 
                               SETAB ALPHA, INC.
                         (A DEVELOPMENT STAGE COMPANY)

                                 Balance Sheet
                                 July 31, 1996

<TABLE>
<S>                                                                   <C>
ASSETS
CURRENT
  Cash                                                                $     0.20
  Deferred offering costs (Note 2)                                     10,000.00
                                                                      ----------
                                        
                                                                      $10,000.20
                                                                      ==========
                                        
                                        
LIABILITIES AND STOCKHOLDERS' EQUITY    
                                        
CURRENT                                 
  Accounts payable  (Note 2)                                          $10,500.00
  Accrued interest                                                        164.95
  Note payable - related party (Note 2)                                 4,812.80
                                                                      ----------
                                        
TOTAL LIABILITIES                                                      15,477.75
                                                                      ----------
 
STOCKHOLDERS' DEFICIT (Note 2)
  Preferred stock, $0.001 par - shares authorized 10,000,000
    issued and outstanding, 0                                                  -
  Common stock, $0.001 par:          
    Class A - shares authorized, 20,000,000; issued                
     and outstanding, 20                                                    0.02 
    Class B - shares authorized, 20,000,000, issued 
     and outstanding, 0                                                        -             
  Additional paid-in capital                                                0.18
  Deficit accumulated during the development stage                     (5,477.75)
                                                                      ----------
                                     
TOTAL STOCKHOLDERS' DEFICIT                                            (5,477.55)
                                                                      ----------
 
                                                                      $10,000.20
                                                                      ==========
 
</TABLE> 
 
See accompanying summary of accounting policies and notes to financial 
statements.

                                                                             F-3
<PAGE>
 
                               SETAB ALPHA, INC.
                         (A DEVELOPMENT STAGE COMPANY)

                           Statement of Operations 
               For the Period July 5, 1995 (date of inception) 
                             through July 31, 1996

<TABLE>
<S>                                                          <C>
REVENUES                                                     $     0.00
                                        
EXPENSES                                                       5,477.75
                                                             ----------
                                        
NET LOSS                                                     $(5,477.75)
                                                             ==========
                                        
NET LOSS PER SHARE                                           $  (273.89)
                                                             ==========
                                        
WEIGHTED AVERAGE NET SHARES OUTSTANDING                              20
                                                             ==========
</TABLE> 
 
See accompanying summary of accounting policies and notes to financial
statements.

                                                                             F-4
<PAGE>
 
                               SETAB ALPHA, INC.
                         (A DEVELOPMENT STAGE COMPANY)

                      Statement of Stockholders' Deficit
               For the Period July 5, 1995 (date of inception) 
                             through July 31, 1996

<TABLE>
<CAPTION>
                                                                          Deficit
                                                                        accumulated
                                                         Additional      during the           Total
                                     Common Stock          paid-in       development       stockholders'
                                 -------------------
                                 Shares       Amount       capital           stage             equity
                                 ------       ------      ----------      ------------     --------------
<S>                              <C>          <C>         <C>             <C>              <C> 
Issuance of common stock                                                               
  on July 5, 1995 (date of                                                             
  inception) for cash                20        $0.02           $0.18       $     0.00         $     0.20
                                                                                       
Net loss                              0         0.00            0.00        (5,477.75)         (5,477.75)
                                     --        -----           -----       ----------         ----------
                                                                                       
Balance, July 31, 1996               20        $0.02           $0.18       $(5,477.75)        $(5,477.55)
                                     ==        =====           =====       ==========         ==========
</TABLE> 
 
See accompanying summary of accounting policies and notes to financial
statements.

                                                                             F-5
<PAGE>
 
                               SETAB ALPHA, INC.
                         (A DEVELOPMENT STAGE COMPANY)

                            Statement of Cash Flows
               For the Period July 5, 1995 (date of inception) 
                             through July 31, 1996

<TABLE>
<S>                                                                  <C> 
OPERATING ACTIVITIES
 Net loss                                                            $(5,477.75)
 Adjustments to reconcile net loss to net cash used in              
    operating activities:               
    Increase in accounts payable                                         500.00
                               
    Increase in accrued interest                                         164.95
                                                                     ----------
 
CASH USED IN OPERATING ACTIVITIES                                     (4,812.80)
                                                                     ----------
 
FINANCING ACTIVITIES
 Borrowings under note payable                                         4,812.80
 Proceeds from issuance of common stock                                    0.20
                                                                     ----------
 
CASH PROVIDED BY FINANCING ACTIVITIES                                  4,813.00
                                                                     ----------
 
INCREASE IN CASH                                                           0.20
                                  
CASH, beginning of period                                                  0.00
                                                                     ----------
                                  
CASH, end of period                                                  $     0.20
                                                                     ==========
</TABLE> 

See accompanying summary of accounting policies and notes to financial 
statements.

                                                                             F-6
<PAGE>
 
                               SETAB ALPHA, INC.
                         (A DEVELOPMENT STAGE COMPANY)

                        Summary of Accounting Policies

BUSINESS                     Setab Alpha, Inc. (the Company) was formed as a
                             Missouri corporation for the purpose of engaging
                             in a merger or other business combination with an
                             operating company.  On October 7, 1996, the
                             Company effected a merger ("the Merger") with
                             American Artists Film Corporation, a Georgia
                             corporation which is engaged in the independent
                             production of feature films, television/cable
                             programming and commercials.  The Merger resulted
                             in the issuance of previously authorized but
                             unissued shares of Class A and Class B common
                             stock, respectively, and a change in control of
                             the Company.  Since the planned principal
                             operations had not commenced during the period
                             presented, the Company is considered to be a
                             development stage company, as defined in Financial
                             Accounting Standards No. 7.
 
 
ORGANIZATION                 The Company was formed on July 5, 1995 under the
                             laws of the State of Missouri.  The Company has
                             adopted a fiscal year ending on July 31.
 
 
CASH EQUIVALENTS             The Company considers all highly liquid
                             instruments with an initial maturity of three
                             months or less to be cash equivalents.
 
 
ORGANIZATION COSTS           Organization costs are expensed as incurred.
 
 
FAIR VALUE OF                The fair values of financial instruments do not
FINANCIAL INSTRUMENTS        differ materially from their recorded amounts.
 
                                                                             F-7
<PAGE>
 
                               SETAB ALPHA, INC.
                         (A DEVELOPMENT STAGE COMPANY)

                         Notes to Financial Statements


1.  PUBLIC OFFERING          On October 7, 1996, the Company completed a public
                             offering of 700,000 shares of its Class A common
                             stock at an offering price of $0.05 per share,
                             resulting in gross proceeds of $35,000 and net
                             proceeds to the Company of $15,477.
 
 
2.  RELATED PARTY            In July 1995, the Company was incorporated in the
      TRANSACTIONS           State of Missouri with an authorized capital of
                             30,000,000 shares of common stock at a par value
                             of $.001 per share.  In connection with its
                             organization, the Company issued to Alan G.
                             Johnson and to Douglas J. Bates 10 shares of
                             common stock each, at a purchase price of $.01 per
                             share.  In May 1996, the Company's Articles of
                             Incorporation were amended to authorize 20,000,000
                             shares of Class A common stock, 20,000,000 shares
                             of Class B common stock and 10,000,000 shares of
                             Preferred Stock, each having a par value of $0.001
                             per share.  All outstanding shares of common stock
                             were converted into an equal number of shares of
                             Class A common stock.
 
                             At July 31, 1996, the Company was indebted to
                             Messrs. Bates and Johnson in the aggregate
                             principal amounts of $2,757.47 and $2,055.33,
                             respectively.  Such amounts were advanced to the
                             Company for the purpose of funding disbursements
                             relating to the organization of the Company.  The
                             indebtedness of the Company to Messrs. Bates and
                             Johnson is unsecured, bears interest at an annual
                             rate equal to the prime rate plus 2% and is
                             payable on the date a business combination is
                             effected.
 
                             Pursuant to separate letters of engagement dated
                             July 5, 1995, the Company has agreed to pay to
                             Alan G. Johnson and Douglas J. Bates the sum of
                             $5,000 each on the effective date of the
                             Registration Statement, as consideration for
                             services rendered by such persons in connection
                             with the formation and organization of the
                             Company.  These amounts are reflected on the
                             balance sheets as deferred offering costs and
                             accounts payable.
 
                                                                             F-8
<PAGE>
 
   REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS



   Board of Directors
   American Artists Film Corporation
   Atlanta, Georgia


   We have audited the accompanying consolidated balance sheets of American
   Artists Film Corporation and Subsidiaries as of July 31, 1996 and 1995, and
   the related consolidated statements of operations, stockholders' equity, and
   cash flows for each of the years then ended.  These financial statements are
   the responsibility of the Company's management.  Our responsibility is to
   express an opinion on these financial statements based on our audits.

   We conducted our audits in accordance with generally accepted auditing
   standards.  Those standards require that we plan and perform the audit to
   obtain reasonable assurance about whether the financial statements are free
   of material misstatement.  An audit includes examining, on a test basis,
   evidence supporting the amounts and disclosures in the financial statements.
   An audit also includes assessing the accounting principles used and
   significant estimates made by management, as well as evaluating the overall
   financial statement presentation.  We believe that our audits provide a
   reasonable basis for our opinion.

   In our opinion, the consolidated financial statements referred to above
   present fairly, in all material respects, the consolidated financial position
   of American Artists Film Corporation and Subsidiaries as of July 31, 1996 and
   1995, and the consolidated results of their operations and their cash flows
   for each of the years then ended, in conformity with generally accepted
   accounting principles.


                                                 BDO SEIDMAN, LLP



   Atlanta, Georgia
   December 5, 1996

                                                                             F-9
<PAGE>
 
                       AMERICAN ARTISTS FILM CORPORATION
                               AND SUBSIDIARIES

                          Consolidated Balance Sheets

<TABLE>
<CAPTION>
                                                            July 31,
                                               -------------------------------
                                                    1996               1995
                                               -------------       -----------
                                       
ASSETS                                 
<S>                                              <C>              <C>
CASH                                             $        -       $  122,197
                                                           
ACCOUNTS RECEIVABLE                                 107,457          186,793
                                                           
FILM COSTS, NET OF ACCUMULATED                             
  AMORTIZATION (Note 1)                             475,877          415,721
                                                           
PROPERTY AND EQUIPMENT, NET (Notes 1, 2              52,128           78,962
  and 3)                                                   
                                                           
GOODWILL, NET OF ACCUMULATED                               
 AMORTIZATION (Note 2)                              156,572          195,714
                                                           
DEFERRED OFFERING COSTS (Note 1)                    105,000          105,000
                                                           
ADVANCES TO OFFICERS (Note 1)                       217,247          156,178
                                                           
OTHER (Note 1)                                          112           27,297
                                                 ----------       ----------
                                                           
                                                 $1,114,393       $1,287,862
                                                 ==========       ==========
</TABLE> 
 
See accompanying notes to consolidated financial statements.

                                                                            F-10
<PAGE>
 
                       AMERICAN ARTISTS FILM CORPORATION
                               AND SUBSIDIARIES

                          Consolidated Balance Sheets


<TABLE> 
<CAPTION> 
                                                            July 31,
                                                  --------------------------
                                                        1996         1995
                                                  ------------    ----------
<S>                                               <C>             <C>    
LIABILITIES AND STOCKHOLDERS' EQUITY   

LIABILITIES                            
                                       
  Accounts payable                                  $   169,781   $  179,073
  Accrued expenses                                      112,115      106,561
  Accrued accounting and legal                          152,985      105,000
  Accrued payroll taxes                                 103,630            -
  Film revenue participations                                 -       41,910
  Deferred revenue                                       11,867       56,303
  Notes payable (Notes 2 and 3)                          76,976      130,739
                                                    -----------   ----------
                                       
TOTAL LIABILITIES                                       627,354      619,586
                                                    -----------   ----------
                                       
MINORITY INTEREST (Note 1)                               50,000            -
                                       
CONTINGENCIES (Note 6)                 
                                       
STOCKHOLDERS' EQUITY (Note 4)          
  Preferred stock, 10,000,000                     
   shares authorized, none issued                             -            -
                          
  Common stock, stated value $.05 per share,                
   30,000,000 shares authorized,                        470,392      418,411
   9,407,837 and 8,368,220 issued and outstanding                 
  Additional paid-in capital                          2,125,117    1,221,397
  Unamortized advertising credits (Note 1)             (122,618)    (122,618)
  Accumulated deficit                                (2,035,852)    (848,914)
                                                    -----------   ----------
                                       
TOTAL STOCKHOLDERS' EQUITY                              437,039      668,276
                                                    -----------   ----------
                                       
                                                    $ 1,114,393   $1,287,862
                                                    ===========   ==========
</TABLE> 

See accompanying notes to consolidated financial statements.

                                                                            F-11
<PAGE>
 
                       AMERICAN ARTISTS FILM CORPORATION
                               AND SUBSIDIARIES

                          Consolidated Balance Sheets

<TABLE>
<CAPTION>
                                                     Year ended July 31,
                                                 --------------------------
                                                     1996          1995
                                                 -----------    -----------
<S>                                              <C>            <C>
REVENUES (Note 1)
 Commercial production                           $ 1,689,644     $2,819,390
 Film revenues (Note 1)                               21,995        882,331
                                                 -----------     ----------

                                                   1,711,639      3,701,721
                                                 -----------     ----------

COSTS AND EXPENSES
 Cost of commercial production                     1,330,604      2,196,716
 Film cost amortization                               15,963        639,236
 Selling, general and                              1,351,227        801,106
  administrative                                 -----------     ----------

                                                   2,697,794      3,637,058
                                                 -----------     ----------

INCOME (LOSS) FROM OPERATIONS                       (986,155)        64,663

Interest expense                                       6,777         12,810
Equity in loss of Diversity Filmworks,               194,006         59,646
 Inc. (Note 1)                                   -----------     ----------

NET LOSS                                         $(1,186,938)    $   (7,793)
                                                 ===========     ==========

PRO FORMA NET LOSS PER SHARE (NOTE 1)            $      (.22)    $        -
                                                 ===========     ==========

PRO FORMA WEIGHTED AVERAGE COMMON
 SHARES AND EQUIVALENT SHARES
 OUTSTANDING (NOTE 1)                              5,305,652      4,841,348
                                                 ===========     ==========
</TABLE>

See accompanying notes to consolidated financial statements.

                                                                            F-12
<PAGE>
 
                       AMERICAN ARTISTS FILM CORPORATION
                               AND SUBSIDIARIES

                Consolidated Statements of Stockholders' Equity


<TABLE>
<CAPTION>
                                                              Additional   Unamortized                      Total
                                            Common Stock        Paid-In    Advertising   Accumulated   Stockholders'
                                       ---------------------
                                          Shares     Amount     Capital      Credits       Deficit         Equity
                                          ------     ------     -------      -------       -------         ------
<S>                                      <C>        <C>       <C>          <C>           <C>           <C>
BALANCE, July 31, 1993                   6,754,480  $337,724  $  275,834     $(122,618)  $  (374,554)     $   116,386
  Issuances of common stock:
   Cash                                    588,240    29,412     470,588             -             -          500,000
   Acquisition of First Light (Note 2)     750,000    37,500     337,500             -             -          375,000
  Net loss                                       -         -           -             -      (466,567)        (466,567)
                                         ---------  --------  ----------   -----------   -----------      -----------
 
BALANCE, July 31, 1994                   8,092,720   404,636   1,083,922      (122,618)     (841,121)         524,819
  Issuances of common stock:
   Cash                                    185,286     9,264     141,986             -             -          151,250
   Option conversion (Note 9(b))            90,214     4,511      (4,511)            -             -                -
  Net loss                                       -         -           -             -        (7,793)          (7,793)
                                         ---------  --------  ----------   -----------   -----------      -----------
 
BALANCE, July 31, 1995                   8,368,220   418,411   1,221,397      (122,618)     (848,914)         668,276
 
  Issuances of common stock for cash     1,039,617    51,981     903,720             -             -          955,701
  Net loss                                       -         -           -             -    (1,186,938)      (1,186,938)
                                         ---------  --------  ----------   -----------   -----------      -----------
                                                                                     -
BALANCE, July 31, 1996                   9,407,837  $470,392  $2,125,117     $(122,618)  $(2,035,852)     $   437,039
                                         =========  ========  ==========   ===========   ===========      ===========
</TABLE>

See accompanying notes to consolidated financial statements.

                                                                            F-13
<PAGE>
 
                       AMERICAN ARTISTS FILM CORPORATION
                               AND SUBSIDIARIES

                     Consolidated Statements of Cash Flows

<TABLE>
<CAPTION>
                                                       Year ended July 31,
                                                    -------------------------
                                                       1996           1995
                                                    ------------ ------------
 
 
OPERATING ACTIVITIES
<S>                                                 <C>              <C>
  Net loss                                          $(1,186,938)     $  (7,793)
  Adjustments to reconcile net loss to                          
   cash (used in)                           
       provided by operating activities:                        
       Film cost amortization                            15,963        575,980
       Depreciation and amortization                     63,354         67,134
       Loss on disposition of assets                      2,622              -
       Equity in loss of Diversity                      194,006         59,646
        Filmworks, Inc.                                         
       Changes in assets and liabilities                        
          Accounts receivable                            79,336         87,655
          Film costs additions                          (76,119)      (714,486)
          Other assets                                 (227,890)      (161,781)
          Accounts payable                               (9,292)       (11,468)
          Accrued expenses                              157,169         64,656
          Film revenue participations                   (41,910)         4,112
          Deferred revenues                             (44,436)        56,303
                                                    -----------      ---------
                                                                
Cash (used in) provided by operating                 (1,074,135)        19,958
 activities                                         -----------      ---------
                                                                
INVESTING ACTIVITY                                              
   Capital expenditures                                       -        (19,842)
                                                    -----------      ---------
                                                                
FINANCING ACTIVITIES                                            
   Repayment of notes payable                           (53,763)       (73,655)
   Issuances of common stock                            955,701        151,250
   Increase in deferred offering costs                        -       (105,000)
   Minority interest                                     50,000              -
                                                    -----------      ---------
                                                                
Cash provided by (used in) financing                    951,938        (27,405)
 activities                                         -----------      ---------
                                                                
NET DECREASE IN CASH                                   (122,197)       (27,289)
                                                                
CASH, beginning of year                                 122,197        149,486
                                                    -----------      ---------
                                                                
CASH, end of year                                   $  -             $ 122,197
                                                    ===========      =========
</TABLE> 

See accompanying notes to consolidated financial statements.

                                                                            F-14
<PAGE>
 
                       AMERICAN ARTISTS FILM CORPORATION
                                AND SUBSIDARIES

                  Notes to Consolidated Financial Statements




1.  SUMMARY OF SIGNIFICANT     NATURE OF BUSINESS                     
    ACCOUNTING POLICIES                                                        
                               American Artists Film Corporation ("American
                               Artists", and together with its subsidiaries
                               "AAFC Group"), directly and through its
                               subsidiaries, engages in the development,
                               production and exploitation of made-for-
                               television and feature length motion pictures,
                               and in the commercial contract productions of
                               film products, principally television
                               commercials. The Company classifies its
                               operations in two business segments: (i) film
                               development and production and (ii) contract
                               production. The Company's film development and
                               production operations involve the granting of
                               credit to film exhibitors and distributors. The
                               Company's contract production operations involve
                               the granting of credit to advertising agencies
                               that represent clients in various industries.

                               For fiscal 1996, three of the Company's customers
                               accounted for fees equal to 18.5%, 12.5% and
                               10.3% of consolidated revenues. The Company
                               obtains its revenues from discrete project
                               assignments obtained from various clients.
                               Accordingly, while the fees from one or more
                               clients may, in any year, be significant as the
                               result of the size of a project undertaken for
                               that client, the Company is not dependent on any
                               one client for a material amount of its revenues.

                               BASIS OF PRESENTATION                           
                                                                               
                               The consolidated financial statements include the
                               accounts of American Artists and First Light
                               Entertainment Corporation ("First Light"), a 100
                               percent-owned subsidiary and those of Millennium
                               Group, L.L.C. ("Millennium").

                               Millennium is a limited liability corporation in
                               which the Company exercises significant control
                               through its capacity as manager, which position
                               allows it to direct the operations of Millennium,
                               Millennium's purchase and sale of assets,
                               issuance of debt or equity securities, and
                               Millennium's execution of contracts and
                               agreements, without the approval of the other
                               stockholders. Millennium was formed to produce
                               and distribute a sixty minute video. American
                               Artists will be entitled to (i) 50 percent of net
                               income after the minority stockholders have
                               recovered their investment up to a point where
                               the minority stockholders have received a 200%
                               return and (ii) 90% thereafter. As of July 31,
                               1996, Millennium's activities have been limited
                               to organization and pre-production story
                               development. The minority interest at July 31,
                               1996 relates to Millennium.

                                                                            F-15
<PAGE>
 
                       AMERICAN ARTISTS FILM CORPORATION
                                AND SUBSIDARIES

                  Notes to Consolidated Financial Statements




                                        In accordance with Statement of
                                        Financial Accounting Standards No. 53
                                        "Financial Reporting by Producers and
                                        Distributors of Motion Picture Films"
                                        ("SFAS No. 53"), AAFC Group presents an
                                        unclassified balance sheet.
 
                                        Included in accounts payable at July 31,
                                        1996, is $5,378 representing checks
                                        issued against future deposits.
 
                                        The preparation of financial statements
                                        in conformity with generally accepted
                                        accounting principles requires
                                        management to make estimates and
                                        assumptions that affect the reported
                                        amounts of assets and liabilities and
                                        disclosure of contingent assets and
                                        liabilities at the date of the financial
                                        statements and the reported amounts of
                                        revenues and expenses during the
                                        reporting period. Actual results could
                                        differ from those estimates.
 
                                        Certain prior periods amounts have been
                                        reclassified for comparative purposes.
 
                                        INVESTMENT IN DIVERSITY FILMWORKS, INC.
 
                                        American Artists owns 49% of the
                                        outstanding common stock of Diversity
                                        Filmworks, Inc. ("Diversity"). Diversity
                                        was formed by American Artists and a
                                        qualified minority owner to engage in
                                        contract production as a qualified
                                        minority contractor. American Artists
                                        accounts for its investment in Diversity
                                        using the equity method of accounting.
 
                                        The following sets forth certain
                                        summarized financial information about
                                        Diversity:

                                        
<TABLE> 
<CAPTION> 
                                                                                               July 31,
                                                                                   ---------------------------------
                                                                                        1996               1995
                                                                                        ----               ----
                                        <S>                                             <C>                <C> 
                                        Current assets                                  $  31,999          $ 17,783
                                                                                        =========          ========
 
                                        Due to American Artists                           255,409            75,494
                                        Other current liabilities                          31,887             3,079
                                                                                        ---------          --------
                                        Total liabilities                                 287,296            78,573
 
                                        Stockholders' deficit                            (255,297)          (60,790)
                                                                                        ---------          --------   
 
                                                                                        $  31,999          $ 17,783
                                                                                        =========          ========
</TABLE>

                                                                            F-16
<PAGE>
 
                       AMERICAN ARTISTS FILM CORPORATION
                                AND SUBSIDARIES

                  Notes to Consolidated Financial Statements


<TABLE>
<CAPTION>
                                                                         July 31,
                                                               ------------------------
                                                                   1996         1995
                                                                   ----         ----
                                        <S>                      <C>            <C> 
                                        Sales                    $ 777,309      $ 237,810
                                        Costs of production
                                          and selling, general                    
                                          and administrative       
                                          expenses                 971,315        297,456            
                                                                 ---------      ---------

                                        Net loss                 $(194,006)     $ (59,646)
                                                                 =========      =========
</TABLE> 
 
                                        Diversity's net losses have been
                                        financed by American Artists, and
                                        accordingly, in fiscal 1996 and 1995
                                        American Artists recorded 100% of
                                        Diversity's losses. Effective July 31,
                                        1996, American Artists and Diversity
                                        executed an agreement that changed,
                                        retroactively to August 1, 1995, the
                                        manner in which certain of American
                                        Artists' operating expenses are
                                        allocated and charged to Diversity. As a
                                        result, expenses of $151,308 relating to
                                        the first three quarters of fiscal 1996
                                        were charged to Diversity in the fourth
                                        quarter of fiscal 1996. The change had
                                        no effect on the consolidated net loss
                                        as American Artists recorded 100% of
                                        Diversity's loss.
 
                                        American Artists' advances to and
                                        investment in Diversity, adjusted for
                                        the Diversity income or losses included
                                        in American Artists' net income, were
                                        $112 and $14,204 at July 31, 1996 and
                                        1995, respectively, and are included in
                                        other assets.
 
                                        FILM COSTS AND REVENUES
 
                                        Costs incurred to develop stories,
                                        acquire story rights, produce and print
                                        films, and advertising or other
                                        distribution costs which benefit future
                                        markets, are capitalized as film costs
                                        when incurred. All other advertising and
                                        distribution costs are expensed as
                                        incurred.
                                        
                                        AAFC Group finances certain of its
                                        projects by granting revenue
                                        participations to outside investors in
                                        exchange for investments in the
                                        production of the film. Capitalized film
                                        costs are reduced by the financing
                                        provided under these arrangements.
 
                                        Capitalized film cost are amortized
                                        using the individual film forecast
                                        method under which capitalized costs are
                                        amortized based on the relationship
                                        between the gross revenue realized and
                                        the estimate of the total gross revenues
                                        to be earned by the film over its life.
                                        Revenue estimates are reviewed
                                        periodically and, when appropriate, are
                                        revised. Where unamortized film costs
                                        exceed a revised estimate of total
                                        future gross revenues, film costs are
                                        written down to net realizable value.

                                                                            F-17
<PAGE>
 
                       AMERICAN ARTISTS FILM CORPORATION
                                AND SUBSIDARIES

                  Notes to Consolidated Financial Statements




                                        The components of capitalized film costs
                                        were as follows:
         
<TABLE> 
<CAPTION> 
                                                                       July 31,
                                                            ---------------------------------
                                                                 1996           1995
                                                                 ----           ----
                                        <S>                      <C>            <C> 
                                        Released                 $ 867,256      $ 888,517
                                        Accumulated               (812,429)      (796,466)
                                        amortization             ---------      ---------
                                                                    54,827         92,051
                                        In production              128,366         71,508
                                        In development             292,684        252,162
                                                                 ---------      ---------
                                                                                         
                                                                 $ 475,877      $ 415,721
                                                                 =========      ========= 
 
</TABLE> 

                                        The above amounts do not include any
                                        value for four developed scripts
                                        contributed to AAFC Group in 1991 by its
                                        founding stockholders in exchange for
                                        common stock. In accordance with
                                        generally accepted accounting
                                        principles, the scripts were recorded at
                                        zero, which, because no amounts had been
                                        expended for the development of scripts,
                                        represented the cost basis of the
                                        contributing stockholders, and the
                                        stated value of the common shares
                                        issued, $238,000, was charged against
                                        additional paid-in capital.
 
                                        In general, the majority of the revenue
                                        to be derived from a film will be earned
                                        during the two to three years following
                                        its release. On the basis of American
                                        Artists' current production projections,
                                        which could change in the future based
                                        on the availability of production
                                        funding, film demand and other factors,
                                        40% of the unamortized film costs will
                                        be amortized over the three years that
                                        will end July 31, 1999, and 60% will be
                                        amortized over the four year period that
                                        will end July 31, 2000.

                                        Film revenues are recognized, in
                                        accordance with SFAS No. 53, generally
                                        when the film has been accepted by the
                                        licensee, where applicable, collection
                                        of license fee is reasonably assured,
                                        and the film is exhibited or is
                                        available for distribution in the
                                        applicable market. Films are generally
                                        first exhibited in television markets,
                                        and then are distributed on videotape.
                                        Revenues from the foreign exhibition or
                                        sale of films are denominated in U. S.
                                        dollars. Minimum guaranteed amounts from
                                        video license agreements, and from book
                                        royalties, are recognized when the
                                        applicable license period begins and the
                                        film or book is available to the
                                        distributor; amounts in excess of the
                                        minimum guarantee are recognized when
                                        earned. Revenues are reduced for amounts
                                        payable on account of revenue
                                        participations, which are accrued on the
                                        same basis as film costs are amortized.
                                        The components of film revenues were as
                                        follows:


                                                                            F-18
<PAGE>
 
                       AMERICAN ARTISTS FILM CORPORATION
                                AND SUBSIDARIES

                  Notes to Consolidated Financial Statements







<TABLE>
<CAPTION>
 
                                                                               July 31,
                                                                 ----------------------------
                                                                    1996              1995
                                                                    ----              ----
                                        <S>                      <C>              <C> 
                                        Television               $      -         $451,250         
                                        Book royalties                  -          297,491          
                                        Foreign video              21,995           75,064          
                                        Domestic video                  -           58,526          
                                                                  -------         --------           
                                                                                     
                                                                  $21,995         $882,331           
                                                                  =======         ========            
</TABLE> 



                                        COMMERCIAL PRODUCTION
 
                                        AAFC Group produces film products,
                                        primarily television commercials, for
                                        customers under fixed fee arrangements,
                                        which typically are less than two months
                                        in duration. Revenues and costs
                                        attributable to these contracts are
                                        recognized over the life of the contract
                                        using percentage-of-completion of
                                        accounting. Under that method, revenue,
                                        and related costs, are recognized based
                                        on the percentage of the contract
                                        completed, which is estimated on the
                                        basis of the relationship of the costs
                                        incurred to total estimated costs,
                                        except that provision is made currently
                                        for the full amount of any anticipated
                                        losses on contracts in progress.
                                        Previously, as of July 31, 1995 AAFC
                                        Group was on the completed contract
                                        method which did not differ materially
                                        from the percentage of completion
                                        method.
 
                                        PROPERTY AND EQUIPMENT
 
                                        Property and equipment are stated at
                                        cost. Depreciation is provided using the
                                        straight-line method over the estimated
                                        life of the related asset. The
                                        components of property and equipment are
                                        as follows:


<TABLE> 
<CAPTION> 
                                                                Useful              July 31,
                                                                             ----------------------
                                                                Lives           1996       1995
                                                                                ----       ----  
                                        <S>                     <C>            <C>        <C> 
                                        Office                                               
                                         furniture                5-7          $ 80,015   $ 82,057  
                                         and fixtures                                         
                                        Leasehold                                            
                                         improvements             1              35,000     35,580  
                                        Production                5-7             7,498      7,498  
                                         equipment                             --------   --------  
                                                                                122,513    125,135  
                                        Less                                                 
                                        accumulated                                        
                                        depreciation                                         
                                        and                               
                                        amortization                             70,385     46,173            
                                                                               --------   --------
                                                                               $ 52,128   $ 78,962  
                                                                               ========   ========   
</TABLE> 
 
                                                                            F-19
<PAGE>
 
                       AMERICAN ARTISTS FILM CORPORATION
                               AND SUBSIDIARIES


                  Notes to Consolidated Financial Statements


                             ADVANCES TO OFFICERS
 
                             AAFC Group has, on certain occasions, made
                             cash advances to certain officers which
                             generally bear interest at 7% per annum.
                             Management anticipates that these advances
                             will be repaid through their offset against 
                             future compensation.
 
                             DEFERRED OFFERING COSTS
 
                             Deferred offering costs are comprised principally
                             of audit and other fees incurred in connection
                             with AAFC Group's proposed merger with Setab
                             Alpha, Inc. ("Setab Alpha").  Such costs will be
                             charged against stockholders' equity in the first
                             quarter of fiscal 1997 as a result of the October
                             7, 1996 completion of the merger.
 
                             UNAMORTIZED ADVERTISING COSTS
 
                             In fiscal 1992 AAFC Group issued 250,000 shares of
                             its common stock in exchange for advertising
                             credits that entitle AAFC Group to purchase media
                             advertising credits having an aggregate "standard
                             cost" value of $500,000.  The credits were
                             recorded on the basis of $0.50 per share, based on
                             per share prices in Issuances of shares of common
                             stock for cash during the same period.  The
                             unamoritzed advertising credits are presented as a
                             reduction of stockholders' equity reflecting the
                             acquisition of the credit for common stock.
                             The recoverability of the advertising credits is
                             assessed based on the current market price for
                             similar advertising and AAFC Group's ability to
                             utilize the credits.  The credits may be used by
                             AAFC Group through December 31, 1997.
 
                             INCOME TAXES
 
                             AAFC Group files a consolidated income tax return
                             and provides for income taxes under Statement of
                             Financial Accounting Standards No. 109 "Accounting
                             for Income Taxes."  Under that standard, deferred
                             income taxes are provided on the difference
                             between the financial reporting and tax bases of
                             assets and liabilities.
 
                             PRO FORMA EARNINGS PER SHARE
 
                             As described elsewhere herein, on October 7, 1996,
                             American Artists and Setab Alpha completed a
                             merger ("the Merger") under which Setab Alpha
                             acquired 100 percent of the outstanding common
                             stock of American Artists in exchange for the
                             issuance of 12,600 shares of Setab Alpha Class A
                             common stock and 5,502,277 shares of Setab Alpha
                             Class B common stock.  The 

                                                                            F-20
<PAGE>
 
                       AMERICAN ARTISTS FILM CORPORATION
                               AND SUBSIDIARIES


                  Notes to Consolidated Financial Statements


                             Merger is being accounted for as a recapitalization
                             of American Artists, as a result of which American
                             Artists will be deemed to have, on October 7, 1996,
                             (I) changed its capitalization to provide for two
                             classes of Common Stock (Class A and Class B), and
                             (ii) effected a recapitalization in which an
                             aggregate of 12,600 shares of Class A Common Stock
                             and 5,502,277 shares of Class B common stock are
                             exchanged for the outstanding shares of its common
                             stock (an exchange ratio of an aggregate of .5862
                             Class A or Class B shares for each presently
                             outstanding share). Pro forma earnings (loss) per
                             share, computed to reflect the effect of such a
                             reverse stock split on the historical shares
                             outstanding, is presented in lieu of historical
                             earnings (loss) per share as the pro forma
                             presentation is considered to be more relevant.
 
                             Pro forma earnings per share are computed on the
                             basis of the pro forma weighted average common
                             shares and dilutive common share equivalents
                             outstanding.  Common stock equivalents consist of
                             outstanding stock options and warrants.
 
                             CASH AND CASH EQUIVALENTS
 
                             Cash and cash equivalents are generally comprised
                             of demand deposits and time deposits or highly
                             liquid debt instruments with original maturities
                             of three months or less.  The Company's cash
                             balances do not involve any significant
                             concentrations of credit risk.
 
                             RECENT ACCOUNTING PRONOUNCEMENTS
 
                             In March 1995, the Financial Accounting Standards
                             Board ("FASB") issued Statement on Financial
                             Accounting Standards ("SFAS") No. 121, "Accounting
                             for the Impairment of Long-Lived Assets and for
                             Long-Lived Assets to be Disposed  of".  AAFC Group
                             will adopt SFAS No. 121 as of August 1, 1996 and
                             its implementation is not expected to have a
                             material effect on AAFC Group's consolidated
                             financial statements.
 
                             In October 1995, the FASB issued SFAS No. 123,
                             "Accounting for Stock Based Compensation".  SFAS
                             No. 123 is effective for transactions entered into
                             in fiscal years beginning after December 15, 1995,
                             and requires either the application of an option
                             pricing model measurement for stock compensation,
                             or, if a company elects to continue to measure
                             stock compensation based on the difference between
                             the market price of the company's common stock and
                             the exercise price of the employer stock option,
                             disclosure of what the effect of the application
                             of option pricing model measurement would have
                             been.  AAFC Group will initially apply SFAS No.
                             123 in the fiscal year beginning August 1, 1996,
                             and will elect to disclose the effect that the
                             application of option 

                                                                            F-21
<PAGE>
 
                       AMERICAN ARTISTS FILM CORPORATION
                               AND SUBSIDIARIES


                  Notes to Consolidated Financial Statements

                             pricing model measurement would have had for
                             options granted from August 1, 1996. The adoption
                             of SFAS 123 will not impact AAFC Group's
                             consolidated results of operations, financial
                             position, or cash flows.
 
 
2.  ACQUISITION              On August 31, 1993, American Artists acquired 100
                             percent of the outstanding common stock of First
                             Light in exchange for the issuance of 750,000
                             shares of its common stock and the assumption of
                             First Light's liabilities, which consisted
                             primarily of a $100,000 note payable secured by
                             First Light's property, equipment and tradename.
                             The acquisition was accounted for as a purchase;
                             accordingly, the purchase price, with the common
                             stock issued recorded at $.50 per share,
                             representing a discount deemed appropriate for
                             such a block of shares, was allocated to First
                             Light's tangible assets (comprised principally of
                             equipment, leasehold improvements, First Light's
                             tradename, and contracts in progress), with the
                             remainder allocated to goodwill, as follows:

<TABLE> 
                             <S>                                        <C> 
                             Contracts in progress                      $101,000
                             Furniture and fixtures                       55,000
                             Leasehold improvements                       35,000
                             Tradename                                    10,000
                             Goodwill                                    274,000
                                                                        --------
 
                                                                        $475,000
                                                                        ========
</TABLE> 

                             The goodwill is being amortized on a straight line
                             basis over seven years. Accumulated amortization
                             was $117,428 and $78,286 at July 31, 1996 and
                             1995.  AAFC Group annually assesses the
                             recoverability of unamortized goodwill by
                             comparison to projections of undiscounted cash
                             flows from First Light's operations over the
                             remaining amortization period.
 
                             In connection with the acquisition, the president
                             of First Light was granted stock options for the
                             purchase of 1.5 million shares of common stock,
                             which vest over three years and are exercisable at
                             a price of $.50 per share for ten years.

                                                                            F-22
<PAGE>
 
                       AMERICAN ARTISTS FILM CORPORATION
                               AND SUBSIDIARIES


                  Notes to Consolidated Financial Statements


3.  NOTES PAYABLE            Notes payable consisted of the following:

<TABLE>
<CAPTION> 
                                                            1995        1994
                                                            ----        ----
                             <S>                           <C>        <C>   
                             Unsecured installment note
                             payable to bank, interest
                             at 1% above the prime rate
                             (8.25% at July 31, 1996),
                             due in monthly installments             
                             through March 1997            $29,280    $ 68,153
                             
                             Secured installment note,
                             collateralized by property,             
                             equipment and tradename of
                             First Light, due with
                             interest at 4.37% per annum
                             in quarterly installments          
                             through July 1998              47,696      62,586
                                                           -------    --------
  
                                                           $76,976    $130,739
                                                           =======    ========
</TABLE> 

                             Aggregate maturities of notes payable at July 31,
                             1996 are as follows:
 
<TABLE> 
<CAPTION> 
                                                                       Amount
                                                                       ------
                                     <S>                             <C> 
                                     1997                            $ 49,902
                                     1998                              21,536
                                     1999                               5,538
                                                                     --------
 
                                                                     $ 76,976
                                                                     ========
</TABLE> 
 
4.  STOCKHOLDERS'            (a)  Stock Options
    EQUITY
                             AAFC Group adopted a stock option plan in 1991
                             which, as revised, permits the issuance of stock
                             options for the purchase of up to 4 million shares
                             of American Artists' common stock.  Stock options
                             may be granted to officers, directors, employees
                             and consultants and may be either "incentive stock
                             options" (as defined in the Internal Revenue Code)
                             or non-qualified stock options.  Stock options are
                             generally granted at an exercise price equal to
                             the grant date fair value of American Artists'
                             common stock, and vest at varying rates over
                             periods ranging from one to four years.
 
                             In December 1995, AAFC Group replaced its existing
                             stock option plan with the 1995 stock option plan
                             ("1995 Option Plan").  The 1995 Option Plan allows
                             for the issuance of up to 2.5 million options as
                             either incentive stock options or nonqualified
                             stock options, and stock appreciation rights.  The
                             method used in determining the grant price and
                             vesting period is similar to the method used under
                             the previous stock option plan.

                                                                            F-23
<PAGE>
 
                       AMERICAN ARTISTS FILM CORPORATION
                               AND SUBSIDIARIES


                  Notes to Consolidated Financial Statements

                             Stock options outstanding and vested as of July
                             31, 1996 are as follows:

<TABLE> 
<CAPTION> 
                               Exercise       Options      Options   Exercisable
                                 Price      Outstanding    Vested      Through
                                 -----     ------------    ------      -------
                               <S>         <C>           <C>         <C> 
                                 $ .05        140,000      100,000       2004
                                   .50      1,500,000    1,000,000       2003   
                                   .85      1,159,750      175,000       2005   
                                  1.00        250,620            -       2000   
                                  1.50        247,750            -       2005
</TABLE> 

                             (b) Common Stock Purchase Warrants
 
                             During fiscal 1995 and fiscal 1996, American
                             Artists undertook two private placements of units
                             comprised of shares of common stock and common
                             stock purchase warrants.  During fiscal 1995
                             American Artists issued, for $.85 per unit, two
                             units with each unit comprised of 29,412 shares of
                             common stock and 14,706 common stock purchase
                             warrants.  During fiscal 1996, American Artists
                             issued 15.7 additional such units.  This placement
                             in fiscal 1996 resulted in the issuance of 230,884
                             common stock purchase warrants.  The second
                             private placement, at $1.00 per unit, with each
                             unit comprised of 25,000 shares of common stock
                             and 12,500 common stock purchase warrants, was
                             commenced during fiscal 1996.  During fiscal 1996
                             American Artists issued 22.55 such units which
                             resulted in the issuance of 281,912 common stock
                             purchase warrants.
 
<TABLE> 
<CAPTION> 
                                                                       Shares
                                                                       ------
                             <S>                                       <C>  
                             Outstanding, August 1, 1994                    -
 
                                  Issued                               29,412
                                  Exercised                                 -
                                  Forfeited                                 -
                                                                      -------
 
                             Outstanding, July 31, 1995                29,412
                             
                                  Issued                              512,796
                                  Exercised                                 -
                                  Forfeited                                 -
                                                                      -------
 
                             Outstanding, July 31, 1996               542,208
                                                                      -------
</TABLE>

                                                                            F-24
<PAGE>
 
                       AMERICAN ARTISTS FILM CORPORATION
                               AND SUBSIDIARIES


                  Notes to Consolidated Financial Statements

                             Warrants outstanding at July 31 1996 are as 
                             follows:

<TABLE>
<CAPTION>
                                 Exercise         Warrants        Exercisable
                                  Price          Outstanding        Through
                                  -----          -----------        -------
                               <S>               <C>              <C>
                               $1.50-$2.00         542,208         June 1998
</TABLE> 
 
 
5.  INCOME TAXES             Deferred tax assets result from the following
                             temporary differences between book and tax bases
                             of assets:

<TABLE> 
<CAPTION> 
                             July 31,                      1996           1995
                                                           ----           ----
                             <S>                        <C>            <C> 
                             Deferred tax assets:
                              Investment in Diversity
                                Filmworks, Inc.         $  97,000      $  23,000
                              Net operating loss carry-
                                forward                   647,000        270,000
                              Valuation allowance        (744,000)      (293,000
                                                        ---------      ---------
 
                                                        $       -      $       -
                                                        =========      =========
</TABLE> 
 
                             AAFC Group has net operating loss carryforwards for
                             federal tax purposes amounting to approximately
                             $1,702,000 at July 31, 1996. These net operating
                             loss carryforwards expire principally in fiscal
                             years 2008 through 2011. As a result of such net
                             operating loss carryforwards and the related
                             valuation allowance, AAFC Group has not provided a
                             provision for income taxes for the years ended July
                             31, 1996 and 1995.

6.  CONTINGENCIES            American Artists is currently involved in an
                             arbitration with one of its co-producers concerning
                             the accounting for the costs incurred and revenues
                             received by each company relating to two co-
                             produced feature films. The probable outcome of the
                             arbitration is not presently determinable.
                             Management believes that it is reasonably possible
                             that the arbitration may result in a finding
                             against the Company ranging up to
                             $150,000.
 
7.  RELATED PARTY            (a)  In July 1996 a member of the board of 
    TRANSACTIONS             directors established a three month line of credit,
                             in favor of the Company, for borrowings not to
                             exceed $75,000. The initial terms of this line of
                             credit were agreed to in May 1996 in return for the
                             issuance of 48,120 stock options, with a exercise
                             price of $1.00. Subsequent to July 31, 1996, the
                             Company borrowed the maximum amount allowed under
                             the line of credit. In November 1996, the Company
                             converted this line of credit into a note which the
                             Company is paying in monthly installments.
 
                                                                            F-25
<PAGE>
 
                       AMERICAN ARTISTS FILM CORPORATION
                               AND SUBSIDIARIES

                  Notes To Consolidated Financial Statements


                             (b)  In September 1996, two members of the board of
                             directors loaned the Company $50,000. These notes
                             are non-interest bearing and are due on demand.
 
 
8.  SEGMENT INFORMATION      Financial information by business segment is as
                             follows:
 
<TABLE>
<CAPTION>
                                                                     Development
                                                                      and Film               Contract
                                                                     Production             Production          Consolidated
                                                                     ----------             ----------          ------------
                             <S>                                     <C>                    <C>                 <C>
                             1996
                             ----
                             Revenues                                   $ 21,995            $1,689,644            $1,711,639
                             Loss from
                               operations                                598,072               388,083               986,155
                             Identifiable assets                         491,982               247,924               739,906
                             Capital expenditures                              -                     -                     -
                             Depreciation and
                               amortization                               21,013                58,304                79,317


                             1995
                             ----

                             Revenues                                   $882,331            $2,819,390            $3,701,721
                             Income from
                               operations                                 26,770                37,893                64,663
                             Identifiable assets                         522,790               275,438               798,228
                             Capital  expenditures                        10,895                 8,947                19,842
                             Depreciation and
                               amortization                              578,312                64,802               643,114
</TABLE>
 
 
9.  SUPPLEMENTAL CASH
    FLOW INFORMATION 

<TABLE> 
<CAPTION> 
                                                                                                  1996                     1995
                                                                                                  ----                     ----     
                                                                                                                                    
                             <S>                                                            <C>                      <C>            
                             Cash paid for interest                                         $    6,777               $   10,009     
                             Cash paid for income taxes                                              -                    2,498

</TABLE> 
 
                             (a)  The Company acquired First Light, as described
                             in Note 2, in a non-cash transaction.
 
                             (b)  In September 1994, the American Artists
                             converted stock options, which would have allowed
                             for the purchase of 902,140 shares of common stock
                             at prices ranging from $1.25 to $2.25, into 90,214
                             shares of common stock. The transaction was
                             accounted for as an exchange of equity instruments,
                             with no gain or loss recognized.

                                                                            F-26
<PAGE>
 
                       AMERICAN ARTISTS FILM CORPORATION
                               AND SUBSIDIARIES


                        Pro Forma Financial Statements
                                  (Unaudited)


INTRODUCTION                 As discussed elsewhere herein, on October 7, 1996
                             Setab Alpha and Old American Artists completed a
                             merger ("the Merger") whereby, Setab Alpha, which
                             at that time constituted the Company acquired 100
                             percent of the outstanding common stock of Old
                             American Artists in exchange for the issuance of
                             12,600 shares of the Company's Class A common
                             stock and 5,502,277 shares of the Company's Class
                             B common stock.  The consummation of the Merger
                             was conditioned upon, among other things, Setab
                             Alpha's prior completion of its public offering,
                             with not fewer than 200 stockholders' and the
                             approval of the shareholders of Old American
                             Artists.  Setab Alpha completed its public
                             offering on October 7, 1996, and Old American
                             Artists obtained the approval of its shareholders
                             on September 28, 1996.  Upon the completion of the
                             Merger the name of Setab Alpha was changed to
                             American Artists Film Corporation ("American
                             Artists" or "the Company").
 
                             The accompanying unaudited pro forma consolidated
                             balance sheet is presented to illustrate the
                             effect on the financial statements of the Merger,
                             and assumes the merger, and the prerequisite
                             public offering, were completed on July 31, 1996.
                             The Merger resulted in the issuance of a
                             controlling interest in the Company to the
                             stockholders of Old American Artists.  Because of
                             this, and because Setab Alpha had not had any
                             material operations, the Merger is being accounted
                             for as a recapitalization of Old American Artists
                             in which (i) Old American Artists is deemed to
                             have, on October 7, 1996, (a) created a second
                             class of common stock, such that its authorized
                             capital consists of Class A and Class B common
                             stock, each with a par value of $.001, and (b)
                             exchanged for the outstanding shares of its common
                             stock, an aggregate of 12,600 shares of Class A
                             Common Stock, and 5,502,277 shares of Class B
                             Common Stock, and (ii) issued 700,020 shares of
                             Class A common stock, (representing the number of
                             shares of Setab Alpha common stock outstanding
                             upon the completion of its public offering) in
                             exchange for the net assets of Setab Alpha,
                             recorded at their historical cost.
 
                             Old American Artists will be the continuing entity
                             for accounting and financial reporting purposes,
                             and accordingly the results of operations to be
                             reported for periods prior to the Merger will be
                             those of Old American Artists.  Setab Alpha had no
                             material operations, and as a result the pro forma
                             results of operations would not differ materially
                             from Old American Artists' historical results of
                             operations.  Accordingly, pro forma statements of
                             operations are not presented.

                                                                            F-27
<PAGE>
 
                       AMERICAN ARTISTS FILM CORPORATION
                               AND SUBSIDIARIES


                        Pro Forma Financial Statements
                                  (Unaudited)


                             The following unaudited pro forma information may
                             not be indicative of future financial position.
                             The unaudited pro forma information should be read
                             in conjunction with the historical financial
                             statements of the Setab Alpha and Old American
                             Artists presented elsewhere herein.

                                                                            F-28
<PAGE>
 
                 SETAB ALPHA/AMERICAN ARTISTS FILM CORPORATION

                     Pro Forma Consolidated Balance Sheet
                                  (Unaudited)

<TABLE>
<CAPTION>
                                            American
                                          Artists Film
                                          Corporation    Setab Alpha
                                            July 31,      July 31,         Pro forma
                                              1996          1996          Adjustments      Pro forma
                                              ----          ----          -----------      ---------
<S>                                       <C>            <C>            <C>                <C>
ASSETS
   Cash                                    $         -              -   $                  $         -
   Accounts receivable                         107,457                                         107,457
   Film assets, net of
     accumulated amortization                  475,877              -                          475,877
   Property and equipment, net                  52,128              -                           52,128
   Goodwill, net of accumulated
     amortization                              156,572              -                          156,572
   Deferred offering cost                      105,000         10,000     (10,000)  (B)              -
                                                                         (105,000)  [D]
   Advances to officers                        217,247              -                          217,247
   Other                                           112              -                              112
                                           -----------       --------                      -----------

                                           $ 1,114,393       $ 10,000                      $ 1,009,393
                                           ===========       ========                      ===========

LIABILITIES AND STOCKHOLDERS' EQUITY

LIABILITIES
   Accounts payable                        $   246,188       $ 10,500   $ (10,500)  [B]    $   246,188
   Accrued expenses                            292,323            165        (165)  [B)        292,323
   Film revenue participation                        -              -                                -
   Deferred revenue                             11,867              -                           11,867
   Notes payable                                76,976          4,812      (4,812)  [B]         76,976
                                           -----------       --------                      -----------

Total liabilities                              627,354         15,477                          627,354

MINORITY INTEREST                               50,000              -                           50,000

STOCKHOLDERS' EQUITY
   Preferred stock                                   -              -                                -
   American Artists common stock               470,392                   (470,392)  [A]              -
   Class A common stock                                             -         700   [C]            713
                                                                               13   (A)
   Class B common stock                                                     5,502   [A]          5,502
   Additional paid-in capital                2,125,117              -     464,877   [A]      2,484,294
                                                                             (700)  [C]
                                                                         (105,000)  [D]
   Unamortized advertising credits            (122,618)             -                         (122,618)
   Deficit                                  (2,035,852)             -                       (2,035,852)
   Net assets of Setab Alpha                                   (5,477)      5,477   [B]              -
                                           -----------       --------                      -----------

Total stockholders' equity                     437,039         (5,477)                         332,039
                                           -----------       --------                      -----------

                                           $ 1,114,393       $ 10,000                      $ 1,009,393
                                           ===========       ========                      ===========
</TABLE>

See notes to pro forma consolidated balance sheet.

                                                                            F-29
<PAGE>
 
                 SETAB ALPHA/AMERICAN ARTISTS FILM CORPORATION

                     Pro Forma Consolidated Balance Sheet
                                  (Unaudited)

1.  BASIS OF PRESENTATION    Reference is made to the "Introduction" at page 
                             F-27.
 
 
2.  PRO FORMA ADJUSTMENTS    Adjustments to the pro forma consolidated balance
                             sheet are as follows:
 
                             (A) To reflect Old American Artists' deemed
                                 recapitalization in which it exchanged the
                                 shares of its outstanding common stock for an
                                 aggregate of 12,600 shares of Class A Common
                                 Stock and 5,502,277 shares of Class B Common
                                 Stock.
 
                             (B) To reflect Setab Alpha's receipt and
                                 application of the net proceeds of the Public
                                 Offering of 700,000 shares of Class A Common
                                 Stock at $0.05 per share.
 
                             (C) To record the Merger, accounted for as the
                                 issuance by Old American Artists of 700,020
                                 shares of Class A common stock (representing
                                 the number of shares of Setab Alpha common
                                 stock to be outstanding upon the completion of
                                 the offering) for the net assets of Setab
                                 Alpha.
 
                             (D) To charge deferred offering costs against the
                                 proceeds of the offering and the Merger.

                                                                            F-30