<PAGE>   1

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                     U. S SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549


                                   FORM 10-QSB

         [X] QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE
                  SECURITIES EXCHANGE ACT OF 1934

         For the quarterly period ended January 31, 1999              
                                        ----------------

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

         For the transition period from __________ to __________

              Commission file number 000-20759    
                                     ---------

                   AMERICAN ARTISTS ENTERTAINMENT CORPORATION
                  (FORMERLY AMERICAN ARTISTS FILM CORPORATION)
        (Exact name of small business issuer as specified in its charter)

         MISSOURI                                        58-1950450
  (State or other jurisdiction of                          (I.R.S.
  Employer incorporation or organization)             Identification No.)

                          6600 PEACHTREE DUNWOODY ROAD
                             BUILDING 600, SUITE 250
                             ATLANTA, GEORGIA 30328
                    (Address of principal executive offices)


                                 (770) 390-9180
                            Issuer's telephone number

         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
                                                                      ---   ---

         State the number of shares outstanding of each of the issuer's classes
of common equity: 3,319,745 shares of Class A Common Stock, $.001 par value per
share, and 3,225,516 shares of Class B Common Stock, $.001 par value per share,
were outstanding at March 9, 1999.

         Transitional Small Business Disclosure Format:  Yes     No   X 
                                                            ---      ---


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<PAGE>   2


                   AMERICAN ARTISTS ENTERTAINMENT CORPORATION
                                   FORM 10-QSB
                                    CONTENTS
<TABLE>

<S>      <C>                                                                          <C>

PART I - FINANCIAL INFORMATION


ITEM 1.  FINANCIAL STATEMENTS

Condensed Consolidated Financial Statements:

         Balance sheets at January 31, 1999 and July 31,
         1998..................................................................       F-1/F-2

         Statements of operations for the three months and six months ended
         January 31, 1999 and January 31, 1998..................................          F-3

         Statements of cash flows for the six months ended January 31, 1999 and
         January 31, 1998.......................................................          F-4

         Notes to Condensed Consolidated Financial
         Statements................................................. ..........       F-5/F-8

         ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF
         Operation.............................................................       F-9/F-12

PART II - OTHER INFORMATION

ITEM 2.  CHANGES IN SECURITIES..................................................          F-13

ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K......................................           F-13

SIGNATURES......................................................................          F-14

</TABLE>


<PAGE>   3



PART I - FINANCIAL INFORMATION

ITEM 1.  FINANCIAL STATEMENTS

                   AMERICAN ARTISTS ENTERTAINMENT CORPORATION
                                AND SUBSIDIARIES
                      CONDENSED CONSOLIDATED BALANCE SHEETS
                                   (UNAUDITED)
<TABLE>
<CAPTION>

                                                                       January 31,                 July 31,             
                                                                     ---------------           ---------------
                                                                           1999                     1998
                                                                     ---------------           --------------- 
<S>                                                                   <C>                       <C> 

ASSETS

CASH                                                                      $    8,999                $   35,568

ACCOUNTS RECEIVABLE                                                           34,939                    99,998

FILM COSTS, NET OF ACCUMULATED AMORTIZATION                                1,396,187                 1,230,231

PROPERTY AND EQUIPMENT, NET                                                   20,152                    28,221

ADVANCES TO OFFICERS                                                         235,760                   253,012

OTHER                                                                         11,000                        --
                                                                          ----------                ----------

                                                                          $1,707,037                $1,647,030
                                                                          ==========                ==========


</TABLE>

         See accompanying notes to condensed consolidated financial statements.


                                      F-1
<PAGE>   4


                   AMERICAN ARTISTS ENTERTAINMENT CORPORATION
                                AND SUBSIDIARIES
                CONDENSED CONSOLIDATED BALANCE SHEETS - CONTINUED
                                   (UNAUDITED)

<TABLE>
<CAPTION>

                                                                January 31,          July 31,
                                                              --------------     ---------------
                                                                   1999                1998
                                                              --------------     ---------------
<S>                                                           <C>                <C>

LIABILITIES
LINE OF CREDIT                                                   $        --         $    52,549
ACCOUNTS PAYABLE                                                     576,878             392,421
ACCRUED EXPENSES                                                      70,690              72,026
ACCRUED ACCOUNTING AND LEGAL                                         150,003             161,816
DEFERRED REVENUES                                                     39,347                  --
COMMON STOCK ISSUABLE                                                  5,000              45,313
NOTES PAYABLE                                                        436,631             406,426
NOTES PAYABLE/RELATED PARTIES                                        851,764             620,500
                                                                 -----------         -----------
TOTAL LIABILITIES                                                  2,130,313           1,751,051
                                                                 -----------         -----------

MINORITY INTERESTS                                                   701,848             545,610

CONTINGENCIES

CAPITAL DEFICIT
PREFERRED STOCK, $.001 PAR - SHARES AUTHORIZED 10,000,000
 NONE ISSUED                                                              --                  --
COMMON STOCK, $.001 PAR:
 CLASS A - SHARES AUTHORIZED 20,000,000; ISSUED AND
 OUTSTANDING 3,309,745 AND 3,157,789                                   3,310               3,158
 CLASS B - SHARES AUTHORIZED 20,000,000; ISSUED AND
  OUTSTANDING 3,225,516 AND 3,282,472                                  3,225               3,282
ADDITIONAL PAID-IN CAPITAL                                         3,997,151           3,916,933
ACCUMULATED DEFICIT                                               (5,128,810)         (4,573,004)
                                                                 -----------         -----------
TOTAL CAPITAL DEFICIT                                             (1,125,124)           (649,631)
                                                                 -----------         -----------

                                                                 $ 1,707,037         $ 1,647,030
                                                                 ===========         ===========
</TABLE>


        See accompanying notes to condensed consolidated financial statements.


                                      F-2
<PAGE>   5


                   AMERICAN ARTISTS ENTERTAINMENT CORPORATION
                                AND SUBSIDIARIES
                CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
                                  (UNAUDITED)

<TABLE>
<CAPTION>

                                         Three Months Ended January 31,    Six Months Ended January 31,
                                        -------------------------------   -----------------------------
                                            1999               1998          1999              1998
                                        -----------        ------------   -----------       -----------
<S>                                     <C>                <C>            <C>               <C> 

REVENUES
Commercial production                   $    16,000        $   401,461    $    22,000       $ 1,907,038
Film revenues                                    --                 --         25,000                --
                                        -----------        -----------    -----------       -----------

                                             16,000            401,461         47,000         1,907,038
                                        -----------        -----------    -----------       -----------

COSTS AND EXPENSES
Cost of commercial production                 6,989            299,171         11,279         1,338,139
Film cost amortization                           --                 --         23,035                --
Selling, general and administrative         211,203            434,505        499,239           795,520
                                        -----------        -----------    -----------       -----------

                                            218,192            733,676        533,553         2,133,659
                                        -----------        -----------    -----------       -----------

LOSS FROM OPERATIONS                       (202,192)          (332,215)      (486,553)         (226,621)

Interest expense                            (41,048)            (9,054)       (69,253)          (17,561)
                                        -----------        -----------    -----------       -----------

NET LOSS                                $  (243,240)       $  (341,269)   $  (555,806)      $  (244,182)
                                        ===========        ===========    ===========       ===========

NET LOSS PER SHARE - BASIC
AND DILUTED                             $      (.04)       $      (.05)   $      (.09)      $      (.04)
                                        ===========        ===========    ===========       ===========
WEIGHTED AVERAGE COMMON
SHARES                                    6,488,594          6,415,261      6,472,761         6,409,200
                                        ===========        ===========    ===========       ===========


</TABLE>

        See accompanying notes to condensed consolidated financial statements.


                                      F-3
<PAGE>   6


                   AMERICAN ARTISTS ENTERTAINMENT CORPORATION
                                AND SUBSIDIARIES
                CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                                  (UNAUDITED)

<TABLE>
<CAPTION>

                                                                   Six months ended January 31,
                                                                 -------------------------------
                                                                     1999                1998
                                                                 -----------         ----------- 
<S>                                                              <C>                 <C>    

OPERATING ACTIVITIES
  Net loss                                                       $  (555,806)        $  (244,182)
  Adjustments to reconcile net loss to cash used in
     operating activities:
     Film costs amortization                                          23,035                  --
     Depreciation and amortization                                     8,069              28,456
     Changes in assets and liabilities:
         Accounts receivable                                          65,059             372,213
         Film costs additions                                       (188,991)            (71,446)
         Other assets                                                  6,252             (28,248)
         Accounts payable                                            184,457            (110,797)
         Accrued expenses                                             (8,149)           (174,244)
         Deferred revenues                                            39,347                  --
                                                                 -----------         -----------
Cash used in operating activities                                   (426,727)           (228,248)

INVESTING ACTIVITIES
Capital expenditures                                                      --              (2,321)
                                                                 -----------         -----------

FINANCING ACTIVITIES
Repayments under line of credit                                      (52,549)                 --
Repayment of notes payable                                           (12,295)            (53,256)
Borrowings under notes payable                                       273,764              75,000
Issuance of minority interests                                       156,238             100,343
Issuance of common stock                                              35,000             100,000
                                                                 -----------         -----------
Cash provided by financing activities                                400,158             222,087

NET DECREASE IN CASH                                                 (26,569)             (8,482)

                                                                 -----------         -----------
CASH, beginning of period                                             35,568              31,379
                                                                 -----------         -----------
CASH, end of period                                              $     8,999         $    22,897
                                                                 ===========         ===========
</TABLE>

         See accompanying notes to condensed consolidated financial statements.


                                      F-4
<PAGE>   7


                   AMERICAN ARTISTS ENTERTAINMENT CORPORATION
                                AND SUBSIDIARIES
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                  (UNAUDITED)

NOTE 1 - BASIS OF PRESENTATION

         The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with generally accepted accounting principles
for interim financial information and with the instructions to Form 10-QSB and
Item 310(b) of Regulation S-B. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. The financial statements are unaudited, but
in the opinion of management, contain all adjustments, consisting of normal
recurring accruals, necessary to present fairly the financial position, results
of operations and cash flows for the periods presented. Results of operations
and cash flows for the interim three month and six month periods are not
necessarily indicative of what the results of operations and cash flows will be
for an entire fiscal year. The accompanying condensed consolidated financial
statements should be read in conjunction with the consolidated financial
statements and notes thereto included in the Company's Annual Report on Form
10-KSB for the year ended July 31, 1998.

NOTE 2 - FIRST LIGHT ENTERTAINMENT CORPORATION ("FIRST LIGHT")

         Through the end of fiscal 1998 the Company conducted its contract
commercial production operations through its First Light subsidiary. First
Light suffered a significant decline in revenues during the fourth quarter of
fiscal 1998, and as a result incurred an operating loss. In October 1998, the
Company decided to temporarily cease First Light's operations while it
evaluated the form and direction of its future contract commercial production
operations. That study is ongoing and the Company has not yet determined
whether it will renew these operations, and if so whether it will do so under
the First Light name, through American Artists Films, or through another
entity.

         Although the Company has temporarily ceased the operations of First
Light, it continues to consolidate its accounts. The Company is presently
deferring the payment of First Light's liabilities, which consist primarily of
its accounts payable which amounted to $113,778 at January 31, 1999 and March
9, 1999. First Light has no significant assets, with the exception of certain
property and equipment, which the Company can continue to use in its
operations.

         As a result of the Company's decision to temporarily cease First
Light's operations, Ms. Vivian Jones, the president of First Light and a
director and co-president of the Company, tendered her resignation in October
1998.

NOTE 3 - NOTES PAYABLE

         The Company had the following notes payable activity for the six
months ended January 31, 1999:

         (a)      The Company was unable to renew its $225,000 line of credit
         with the bank at July 31, 1998. The principal of $225,000 remained
         outstanding at January 31, 1999. The Company, its guarantors and the
         bank are currently exploring various alternatives means to renew this
         line of credit. The Company made the quarterly interest payment due on
         this line of credit in October 1998. As of March 1999, the Company had
         not made the quarterly interest payment due January 1999 on this line
         of credit.

         (b)      At January 31, 1999, the Company was in arrears the final two
         full quarterly installments, due May 1 and August 1, on its $11,126
         secured installment note.

         (c)      In September 1998 and January 1999, a shareholder extended
         loans to the Company in the amount of $42,500. These notes are
         secured, bear interest at the prime rate plus 1% and are due on demand
         but no later than September 1, 1999. The Company has pledged as
         security its interest in the ordinary LLC shares of False River, LLC
         to the extent that any principal and accrued interest remain unpaid at
         maturity under these note agreements.


                                      F-5
<PAGE>   8


         (d)      As of March 1999, the Company was in arrears for payment of
         principal and interest in the amount of $9,000 in relation to its
         $41,750 unsecured installment note payable to bank. The Company had
         also not received an extension of the November 1998 maturity date on
         this unsecured installment note.

NOTE 4 - NOTES PAYABLE/RELATED PARTIES

         The Company had the following notes payable/related parties activity
         for the six months ended January 31, 1999:

         (a)      During the period from August 1998 to October 1998, a member
         of the board of directors extended loans to the Company amounting to
         $68,000, in the aggregate. These amounts are unsecured, bear interest
         at the prime rate plus 1% and are due on demand but no later than
         September 1, 1999.

         (b)      In August 1998, an officer extended a loan to the Company in
         the amount of $26,264. This note is secured, bears interest at the
         prime rate plus 1% and is due on demand but no later than September 1,
         1999. The Company has pledged as security its interest in the ordinary
         LLC shares of False River, LLC to the extent that any principal and
         accrued interest remain unpaid at maturity under this note agreement.

         (c)      During the period from December 1998 to January 1999, a 
         member of the board of directors extended loans to the Company
         amounting to $137,000, in the aggregate. These amounts are unsecured,
         bear interest at the prime rate plus 1% and are due on demand.

NOTE 5 - FALSE RIVER, LLC

         During the period from August 1998 to January 1999, False River sold
additional shares of its preferred distribution LLC shares for proceeds
amounting to $156,238. An officer and certain members of the board of directors
purchased $126,238 of these preferred distribution LLC share interests.

NOTE 6 - STOCKHOLDERS' EQUITY

         (a)      Changes in the Company's Class A and Class B common stock 
         during the six months ended January 31, 1999 were as follows:

<TABLE>
<CAPTION>

                                                              ----------------------------------------------------------
                                                                         Class A          Class B           Additional
                                                              Shares   Common Stock     Common Stock    Paid-in Capital
                                                              ----------------------------------------------------------
          <S>                                                 <C>      <C>              <C>             <C> 

          Issuance of 25,000 shares of Class A common
          stock related to acquisition of Millennium
          LLC shares                                           25,000             25              --         $ 45,288
          Issuance of 70,000 shares of Class A common
          stock related to sale of 1.4 private
          placement units                                      70,000             70              --           34,930
          Conversions of Class B shares to Class A
          shares                                               56,956             57             (57)              --
                                                                     --------------------------------------------------
                                                                                 152             (57)        $ 80,218
                                                               --------------------------------------------------------

</TABLE>

         (b)      In October 1998, the Company commenced a private placement of
         units, at $25,000 per unit, comprised of 50,000 shares of the
         Company's Class A common stock. The units also includes a warrant to
         purchase 25,000 shares of Class A common stock at $1.30 per share,
         exercisable through December 2001.

         The Company received proceeds amounting to $40,000 from the sale of
         1.6 units during the six months ended January 31, 1999. The shares
         related to a sale of .2 units were not issued as of January 31, 1999
         and 


                                      F-6
<PAGE>   9


         the liability related to the contractual obligation to issue these
         shares is presented as a component of liabilities in the condensed
         consolidated balance sheet at January 31, 1999.

         (c)      In December 1998, the Company re-priced the exercise price of
         certain stock options that had been previously granted under its
         employee stock option plan. The Company re-priced these options as
         follows: 1) 52,345 stock options granted between November 21, 1995 and
         December 8, 1997 with exercise prices ranging from $1.45 to $3.75 were
         re-priced to an exercise price of $1.00, and 2) 272,844 stock options
         granted between November 21, 1995 and December 8, 1997 with exercise
         prices ranging from $1.45 to $3.75 were re-priced to an exercise price
         of $.50. Neither the Chief Executive Officer nor President of the
         Company had any stock options affected by this re-pricing.

NOTE 7 - EARNINGS PER SHARE

         The Company adopted the requirements of Statement of Financial
Accounting Standards No. 128, "Earnings Per Share," effective January 31, 1998,
and restated the earnings per share amounts for prior periods. The restatement
did not have any material affect on previously presented earnings per share
amounts.

         Basic and diluted earnings per share are computed on the basis of net
income or loss divided by the weighted average number of common shares (Class A
and Class B) outstanding during the relevant period. Diluted earnings per share
excludes the effects of stock options and warrants (and is therefore the same
as basic earnings per share) as their effects would be anti-dilutive due to the
net loss. There were 1,640,318 and 3,018,972 anti-dilutive common stock options
and common stock warrants outstanding at January 31, 1999 and 1998,
respectively.

NOTE 8 - CONSULTING AGREEMENT

         In December 1998, the Company entered into a consulting agreement
("Programming Agreement") with an individual who possesses a number of years of
experience in the television programming industry. The Programming Agreement
calls for the consultant to assist the Company in the creation, development,
packaging and production of certain television and feature film properties
("Properties"), including television series. As consideration for his services,
the consultant will receive, in addition to certain "on screen" credits,
thirty-three percent (33%) of all net profits, as defined (generally revenues
after the recovery of all production and distribution costs), generated from
Properties introduced to the Company under this Programming Agreement. The
Programming Agreement generally will relate to properties identified by the
consultant and exclude project ideas identified by the Company.

NOTE 9 - RELATED PARTY TRANSACTIONS

         In December 1998, the Company extended the due dates of all of its
notes issued in connection with certain advances to officers. The due dates
were extended from December 1998 to December 1999.

NOTE 10 - SUBSEQUENT EVENTS

         The Company completed the following transactions subsequent to January
         31, 1999:

         (a)      In February 1999, False River sold shares of its preferred
         distribution LLC shares for proceeds amounting to $38,626 to certain
         members of the board of directors.

         (b)      Subsequent to January 31, 1999, the Company received $80,000
         from the sale of 3.2 units in the private placement of the Company's
         Class A common stock. (See Note 6(b)).

         (c)      In February 1999, the Company issued a member of the board of
         directors a warrant to purchase 100,000 shares of the Company's Class
         A common stock as additional consideration for his commitment to
         invest $50,000 in False River, LLC. The warrant is exercisable at $.20
         per share, through January 2004.

         (d)      In February 1999, an officer extended a loan to the Company
         in the amount of $11,000. This note is secured, bears interest at the
         prime rate plus 1% and is due on demand but no later than September 1,
         1999.


                                      F-7
<PAGE>   10



         The Company has pledged as security its interest in the ordinary LLC
         shares of False River, LLC to the extent that any principal and
         accrued interest remain unpaid at maturity under this note agreement.

         (e)      In February 1999, a member of the board of directors extended
         a loan to the Company in the amount of $10,000. This loan is
         unsecured, bears interest at the prime rate plus 1% and is due on
         demand, but no later than September 1, 1999.

         (f)      In February 1999, the Company entered into two consulting
         agreements ("Consulting Agreements") with two entities for the
         performance of certain strategic financial planning services and
         consulting in the areas of filmed entertainment and LSVD operations.
         The Consulting Agreements call for these entities to provide these
         services over a period of six month in exchange for 1,200,000 shares
         of the Company's Class A common stock, in the aggregate. In March
         1999, the Company filed a Form S-8 to register the issuance of these
         shares.

         (g)       In February 1999, the Company legally effected a change in
         name from "American Artists Film Corporation" to "American Artists
         Entertainment Corporation." This name change had been previously
         approved by the shareholders of the Company in January 1998.


                                      F-8
<PAGE>   11


ITEM 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION

         RESULTS OF OPERATIONS

         SIX AND THREE MONTHS ENDED JANUARY 31, 1999 COMPARED TO THE SIX AND
THREE MONTHS ENDED JANUARY 31, 1998

         Revenues for the first six months of fiscal 1999 decreased as compared
to revenues for the first six months of fiscal 1998, as a result of a
significant decrease in the level commercial production revenues during the six
months ended January 31, 1999.

         Commercial production revenues were $22,000 for the first six months
of fiscal 1999, representing a decrease of $1,885,038 or 98.8% from commercial
production revenues of $1,907,038 for the first six months of fiscal 1998.
Commercial production revenues decreased by $385,461 to $16,000 for the three
months ended January 31, 1999 from $401,461 for the three months ended January
31, 1998.

         The decrease in commercial production revenues reflected the
suspension of commercial production activities in October 1998. Through the end
of fiscal 1998 the Company conducted its contract commercial production
operations through its First Light Entertainment Corporation ("First Light")
subsidiary. First Light suffered a significant decline in revenues during the
fourth quarter of fiscal 1998, and as a result incurred a significant operating
loss. In October 1998, the Company decided to temporarily cease First Light's
operations while it evaluated the form and direction of its future contract
commercial production operations. That study is ongoing and the Company has not
yet determined whether it will renew these operations, and if so whether it
will do so under the First Light name, through American Artists Films, or
through another entity.

         Commercial production costs, as a percentage of related revenues, were
51.3% for the six months ended January 31, 1999 as compared to 70.2% for the
six months ended January 31, 1998. Commercial production costs, as a percentage
of related revenues, were 43.7% for the three months ended January 31, 1999 as
compared to 74.5% for the three months ended January 31, 1998. These decreases
in commercial production costs, relative to revenues, in the first three and
six months of fiscal 1999 were primarily the result of the completion of
corporate/industrial video projects that yielded higher gross profit margins as
compared to larger scale television commercial projects completed during
similar periods in fiscal 1998.

         Gross profits for commercial production were $10,721 and $568,899 for
the six months ended January 31, 1999 and 1998, respectively. Gross profits for
commercial production were $9,011 and $102,290 for the three months ended
January 31, 1999 and 1998, respectively.

         Film revenues were $25,000 for the first six months of fiscal 1999 as
compared to no film revenues for the first six months of fiscal 1998. These
revenues were related to the release of a small film project during the first
quarter of fiscal 1999. There were no film revenues for the three months ended
January 31, 1999 and 1998, respectively. There was film cost amortization of
$23,035 during the six months ended January 31, 1999 that was related to the
recognition of film revenues during the same period.

         The Company has entered into a development agreement related to one
film project and has deferred film revenues amounting to $39,347 pending
completion of the project. These deferred revenues are reflected as a liability
on the condensed consolidated balance sheet at January 31, 1999.

         Selling, general and administrative ("SG&A") expenses decreased
$296,281 to $499,239 for the six months ended January 31, 1999 from $795,520
for the six months ended January 31, 1998 and decreased $223,302 to $211,203
for the three months ended January 31, 1999 from $434,505 for the three months
ended January 31, 1998. These decreases were primarily the result of a
cessation of operations at First Light, the departure of several employees from
the Company LSVD operations, the absence of several consulting agreements that
were in effect during fiscal 1998, and a reduction in the level of capital
formation activities, and related legal and travel costs.

         Interest expense increased to $69,253 for the first six months of
fiscal 1999 from $17,561 for the first six months of fiscal 1998 and increased
to $41,048 for the three months ended January 31, 1999 from $9,054 for the


                                      F-9
<PAGE>   12


three months ended January 31, 1998. These increases were the result of an
increase in outstanding debt during the first six months of fiscal 1999.

         As a result of the foregoing factors the Company incurred a net loss
$555,806 for the first six months of fiscal 1999 as compared to a net loss of
$224,182 for the first six months of fiscal 1998 and incurred a net loss of
$243,240 for the three months ended January 31, 1999 as compared to a net loss
of $341,269 for the three months ended January 31, 1998.

         LIQUIDITY AND CAPITAL RESOURCES

         The Company's strategic goal has been to finance its operating (i.e.
selling, general and administrative) expenses from the gross profits generated
by its television film, contract production operations and proposed LSVD
operations, while utilizing equity financing, pre-production license revenues,
and co-producer contributions to finance the production of feature films. Using
this strategy, the Company seeks to reduce or eliminate the burden of
significant operating losses and negative cash flows, while retaining the
potential for significant profits and positive cash flows from successful
feature films. The success of such a strategy is, however, dependent on the
Company's ability to control operating expenses, to obtain sufficient, and
sufficiently profitable, commercial production contracts and television film
projects, and to fully develop its LSVD operations.

         Operating cash flows were a negative $426,727 for the six months ended
January 31, 1999 and were primarily the result of the net loss caused by the
significant decline in the level of commercial production revenues and the
related gross profit, therefrom. The negative operating cash flows were less
than the net loss for the six months ended January 31, 1999 principally due to
an increase in accounts payable amounting to $184,457. This negative cash flow
was financed by the cash inflows from financing activities described below.

         The Company may experience negative operating cash flows in periods
when television film and commercial production revenues fail to cover SG&A
expenses. Cash flows may also be negative in periods of profitable operations
if growth in the Company's level of operations causes costs to rise in advance
of collections and the increase is not offset by increases in accounts payable
or accrued expenses. Negative operating cash flows, from either cause, will
constrain the Company's liquidity, and necessitate the use of debt or equity
financing.

         Cash provided by financing activities amounted to $400,158 for the six
months ended January 31, 1999. During the first six months of fiscal 1999, the
Company raised $273,764 (partially offset by $12,295 in repayments) in
borrowings under notes payable from a member of the board of directors, an
officer and a shareholder. Additionally, $156,238, obtained from the issuance
of minority interests in False River, LLC, was used fund additional film cost
additions of $188,991 for the feature film project False River.

         The Company's consolidated financial statements have been prepared on
the basis of the continuation of the Company as a going concern, which
contemplates the realization of assets and the settlement of liabilities in the
normal course of business. The consolidated financial statements do not reflect
any adjustments which might be necessary if the Company were to be unable to
continue as a going concern.

         Since its inception, the Company has experienced a history of
operating losses and constrained cash flows, and has been unable to fully
implement its business plan due to insufficient capital resources. In the first
six months of fiscal 1999, the Company incurred a net loss of $555,806, and
negative operating cash flows of $426,727, due to a lack of revenues in its
contract commercial production operations and the expenses incurred in pursuing
its film and LSVD projects. At January 31, 1999 the Company had a deficit in
stockholders' equity of $1,125,124 and a significant working capital deficit.
The Company was unable to meet certain debt service requirements both during
fiscal 1998 and in the first six months of fiscal 1999. A significant portion
of notes payable and notes payable to related parties, which amount to
$1,288,395, is due on demand or matures in fiscal 1999, and the Company is in
arrears on and has been unable to renew its $225,000 bank line of credit. Since
January 31, 1999 the Company has obtained $21,000 through additional loans,
principally from members of the board of directors, which for the most part
have been used to fund operations. As a result, at March 9, 1999 the Company's
total indebtedness under notes payable and notes payable to related parties,
net of debt repayments, has increased to $1,307,221, of which a substantial
portion is due on demand or matures in fiscal 1999.


                                     F-10
<PAGE>   13


         These conditions raise substantial doubt concerning the Company's
ability to continue as a going concern. To continue in operations and pursue
its business plan, the Company must over the short-term raise additional
capital and reduce expenditures so as to be able to fund its operations and the
payment of those items of indebtedness that cannot be restructured or deferred,
and over the longer term must raise the capital necessary to complete a portion
of its film and LSVD projects and generate profits and positive cash flows
therefrom.

         Management has developed a plan to address these requirements. The
elements of the short-term plan include the following:

         RAISE ADDITIONAL CAPITAL

         -         Private placement offering. In October 1998, the Company 
         commenced a $500,000 private placement offering of units comprised of
         the Company's Class A common stock and a common stock purchase
         warrant. The Company has raised $120,000 from the sale of 4.8 units
         through March 9, 1999.

         -         Pursue other sources of capital. Subsequent to year end, the
         Company engaged several firms to assist it in its capital raising
         efforts. To date these firms have introduced the Company to a number
         of potential capital sources, and on the basis of initial meetings the
         Company is cautiously optimistic that these efforts will provide the
         Company with new equity financing opportunities.

         -         Borrowings from directors and stockholders. Subsequent to 
         July 31, 1998, the Company obtained loans from certain members of the
         board of directors and certain stockholders. The Company will attempt
         to continue to make use, if available, of these borrowings on a
         short-term basis while it pursues other capital.

         REDUCE OPERATING EXPENSES AND NET LOSSES

         -         Temporary cessation of contract commercial production 
         operations. As previously discussed, in October 1998 the Company
         temporarily ceased its contract commercial production operations,
         which had suffered a decline in revenues and a net loss in the last
         quarter of fiscal 1998. The Company is evaluating the form and
         direction of its future contract commercial production operations.
         While such operations are suspended, the Company estimates that it
         will realize cost savings of approximately $30,000 per month.

         -         Voluntary salary reductions. In March 1998 the Company 
         requested that all employees voluntarily reduce their salary levels.
         All employees participated in this voluntary reduction.

         -         Reduce staffing levels. The Company has reduced its staffing
         levels subsequent to July 31, 1998, principally through attrition, and
         has the ability to temporarily eliminate certain other positions,
         without suffering short-term revenue losses, if cash flow conditions
         require. Management will therefore continue to monitor and if
         necessary adjust staffing levels for certain projects to match cash
         flow availability.

         -        Maximize short-term cash inflows from film projects. As 
         previously discussed, the Company's False River film was screened as
         part of a special screening series in February 1999. Such screening
         marked the beginning of a process aimed at exposing the film to
         potential distributors. The Company also plans to submit False River
         for entry into several film festivals as part of its strategy to
         market this feature film project. The Company will, in negotiating
         with distributors, seek a license and/or sales agreement that
         maximizes the immediate or near-term cash payment it receives and
         offers the Company commitments for additional projects, in return for
         accepting a lesser than normal, or no, participation in the revenues
         or residual payments from the distribution of the film. A larger
         initial cash payment would allow the Company to both fund its
         operating expenses and finance the completion of certain other film
         projects, which then in turn could generate cash flows over the longer
         term.

         The elements of management's longer term plan include:

         -         Revised approach to LSVD financing. Through fiscal 1998 the
         Company has been attempting to obtain traditional debt or equity
         financing for its proposed LSVD operations. Recently the Company
         modified its approach, and is now also seeking joint venture/strategic
         alliance partners among larger companies in related businesses. The
         Company believes that this approach may be more likely to attract the
         financing


                                     F-11
<PAGE>   14


         necessary to commence the proposed LSVD operation in Atlanta, which in
         turn would provide cash flows for operations and the pursuit of other
         LSVD and film projects.

         -         Series programming relationship. The Company has increased 
         its efforts to pursue relationships with cable television networks for
         the production of a series of programs, as a means of providing the
         Company with a more predictable backlog of projects and potential
         revenues. The Company is currently in negotiations for several
         specific series with one large cable network, and additionally has
         engaged as a consultant an individual from the cable network industry
         whose experience and relationships in that industry could, management
         believes, substantially improve the Company's ability to implement
         this strategy.

         There can be no assurance that any or all of the elements of the
Company's short-term or longer term plans can or will be successfully
implemented. Additionally, even if such initiatives are successful, they may
not be sufficient to alleviate the Company's short term cash flow and liquidity
problems, or in the long term generate revenues sufficient to sustain
profitable operations. Should the Company fail to alleviate its short-term cash
flow and liquidity problems, or over the longer term achieve profitable
operations, the Company will have to either reduce the scope of its activities
or cease its operations.

YEAR 2000

         The year 2000 issue relates to computer programs and systems that
recognize dates using two digit year data rather than four digit year data. As
a result, such programs and systems may fail or provide incorrect information
for dates after December 31, 1999. If the year 2000 issue were to cause
disruption to the Company's internal information technology systems or to the
information technology systems of entities with whom the Company has commercial
relationships, material adverse effects to the Company's operations could
result.

         The Company's internal computer programs and systems consist of
programs and systems relating to virtually all segments of the Company's
business, including customer database management, marketing, production
budgeting and accounting, financial reporting, investor relations, proposal
generation, cash management and other key information systems. These programs
and systems are primarily comprised of:

         -         Personal computers. These systems are used for all of the
         Company's computer programs and systems.
         -         Telecommunications systems. These systems enable the
         Company to manage all its telecommunication services, including
         incoming/outgoing telephone calls and all connections to the internet.
         -        Voicemail systems. These systems are used for receiving and 
         storing messages to employees.
         -         Ancillary services systems. These include such systems as 
         heating, ventilation and air conditioning control systems and security
         systems. 
         -        Third party software programs. These programs are used 
         throughout the Company in a number of business applications, including
         word processing, spreadsheets, budgeting, financial reporting,
         proposal generation, telecommunications management and internet
         access.

         The Company has not yet completed its reviews of these programs and
systems, but does not expect that any remediation relating to such programs and
systems that might be necessary following such reviews will cause the Company
to incur material costs or present implementation challenges that cannot be
addressed prior to the end of calendar 1999. The Company expects to complete
its reviews of these programs and systems during fiscal 1999.

         The computer programs and operating systems used by entities with whom
the Company has commercial relationships also pose potential problems relating
to the year 2000 issue, which may affect the Company's operations in a variety
of ways. These risks are more difficult to assess than those posed by internal
programs and systems and the Company has not yet completed the process of
formulating a plan for assessing them.

         The Company expects to complete the formulation of its plan for
assessing the programs and systems of the entities with whom it has commercial
relationships and the identification of the related risks and uncertainties by
the end of fiscal 1999. Once such assessment and identification has been
completed, the Company intends to resolve any material risks and uncertainties
that are identified by: 1) communicating further with the relevant vendors and
service providers, 2) working internally to identify alternative sourcing, and
3) formulating contingency plans to deal with such material risks and
uncertainties. The Company expects the resolution of such material risks and
uncertainties to be an ongoing process until all year 2000 problems are
satisfactorily resolved.


                                     F-12
<PAGE>   15


PART II - OTHER INFORMATION

ITEM 2. CHANGES IN SECURITIES

         The Company commenced a private placement of its Class A common stock
in October 1998. During the quarter ended January 31, 1999, the Company sold
1.2 units with proceeds amounting to $30,000. Each unit is comprised of 50,000
shares of Class A common stock at $.50 per share. The purchaser of a unit also
receives in each unit, without additional consideration, a warrant to purchase
up to 25,000 shares of Class A common stock at $1.30 per share, exercisable
through December 2001. Purchasers of fractional units received a prorated
warrant.

         The Class A common stock was sold by the Company, and on behalf of the
Company by directors and executive officers of the Company without commission
or additional compensation. All sales were for cash. The sales were made in
reliance upon the exemption from registration contained in Regulation D of the
Securities Act of 1933. All of the purchasers were "accredited investors"
within the meaning of Regulation D.

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a)      Exhibits

         27.1  Financial Data Schedule

(b)      Reports on Form 8-K

         There were no reports filed on Form 8-K for the quarter ended January
         31, 1999.


                                     F-13
<PAGE>   16


                                   SIGNATURES

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


American Artists Entertainment Corporation




By:   /s/  Steven D. Brown                                     March 16, 1999
   ------------------------------------------------------
           Steven D. Brown
           Chief Executive Officer




By:   /s/  Robert A. Martinez                                  March 16, 1999
    -----------------------------------------------------
           Robert A. Martinez
           Vice President - Finance and
           Chief Financial Officer


                                     F-14