<PAGE>   1

================================================================================

                     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      October 31, 1998              
                                        -----------------------------------

         [ ]      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 2, 1999.

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


================================================================================

<PAGE>   2


                   AMERICAN ARTISTS ENTERTAINMENT CORPORATION
                                   FORM 10-QSB
                                    CONTENTS

PART I - FINANCIAL INFORMATION


ITEM 1.  FINANCIAL STATEMENTS

<TABLE>
<S>            <C>                                                                                     <C>
Condensed Consolidated Financial Statements:

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

               Statements of operations for the three months ended October 31, 1998 and
               October, 31, 1997...............................................................              F-3

               Statements of cash flows for the three months ended October 31, 1998 and 
               October 31, 1997................................................................              F-4

               Notes to Condensed Consolidated Financial Statements............................          F-5/F-9

ITEM 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.............................        F-10/F-13

PART II - OTHER INFORMATION

Item 2.  Changes in Securities.................................................................             F-13

Item 6.  Exhibits and Reports on Form 8-K......................................................             F-14

SIGNATURES.....................................................................................             F-15
</TABLE>





<PAGE>   3


PART I - FINANCIAL INFORMATION

ITEM 1.  FINANCIAL STATEMENTS

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


<TABLE>
<CAPTION>
                                                 October 31,          July 31,
                                                -------------       -----------
                                                   1998                 1998
                                                -------------       -----------

<S>                                             <C>                 <C>       
ASSETS

CASH                                                 $    815         $  35,568

ACCOUNTS RECEIVABLE                                    49,583            99,998

FILM COSTS, NET OF ACCUMULATED AMORTIZATION         1,280,537         1,230,231

PROPERTY AND EQUIPMENT, NET                            22,906            28,221

ADVANCES TO OFFICERS                                  236,040           253,012
                                                -------------       -----------

                                                  $ 1,589,881        $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>
                                                          October 31,        July 31,
                                                          -----------       -----------
                                                             1998              1998
                                                          -----------       -----------
<S>                                                       <C>               <C>        
LIABILITIES

Line of credit                                            $        --       $    52,549

Accounts payable                                              472,407           392,421

Accrued expenses                                               59,453            72,026

Accrued professional fees                                     176,583           161,816

Deferred revenues                                              28,662                --

Common stock issuable                                          10,000            45,313

Notes payable                                                 419,286           406,426

Notes payable/related parties                                 714,764           620,500
                                                          -----------        ----------
TOTAL LIABILITIES                                           1,881,155         1,751,051
                                                          -----------        ----------

MINORITY INTERESTS                                            625,610           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 3,235,937 and 3,157,789                           3,236             3,158

  Class B - shares authorized 20,000,000; issued and
  outstanding 3,229,324 and 3,282,472                           3,229             3,282

Additional paid-in capital                                  3,962,221         3,916,933

Accumulated deficit                                        (4,885,570)       (4,573,004)
                                                          -----------        ----------
TOTAL CAPITAL DEFICIT                                        (916,884)         (649,631)
                                                          -----------        ----------

                                                          $ 1,589,881        $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 October 31,
                                           ------------------------------
                                                1998             1997
                                            -----------       ----------
<S>                                         <C>               <C>       
REVENUES

Commercial production                       $     6,000       $1,505,577

Film revenues                                    25,000               --
                                            -----------       ----------

                                                 31,000        1,505,577
                                            -----------       ----------

COSTS AND EXPENSES

Cost of commercial production                     4,290        1,038,968

Film cost amortization                           23,035               --

Selling, general and administrative             288,036          361,015
                                            -----------       ----------

                                                315,361        1,399,983
                                            -----------       ----------

INCOME (LOSS) FROM OPERATIONS                  (284,361)         105,594

Interest expense                                 28,205            8,507
                                            -----------       ----------

NET INCOME (LOSS)                           $  (312,566)      $   97,087
                                            ===========       ==========

NET INCOME (LOSS) PER SHARE - BASIC                (.05)             .02
                                            ===========       ==========
NET INCOME (LOSS) PER SHARE - DILUTED              (.05)             .01
                                            ===========       ==========

WEIGHTED AVERAGE COMMON
  SHARES - BASIC                              6,456,928        6,403,140
                                            ===========       ==========
WEIGHTED AVERAGE COMMON
  SHARES - DILUTED                            6,456,928        7,744,747
                                            ===========       ==========
</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>
                                                                      Three Months Ended October 31,
                                                                      ------------------------------
                                                                         1998                1997
                                                                      ---------           ----------
<S>                                                                   <C>                 <C>      
OPERATING ACTIVITIES

  Net income (loss)                                                   $(312,566)          $  97,087

  Adjustments to reconcile net income (loss) to cash used in
     operating activities:

     Film costs amortization                                             23,035                  --

     Depreciation and amortization                                        5,315              14,833

     Changes in assets and liabilities:

         Accounts receivable                                             50,415            (124,751)

         Film costs additions                                           (73,341)            (36,394)

         Other assets                                                    16,972             (32,121)

         Accounts payable                                                79,986             117,903

         Accrued expenses                                                12,194            (125,743)

         Deferred revenue                                                28,662              21,703
                                                                      ---------           ---------
Cash used in operating activities                                      (169,328)            (67,483)

INVESTING ACTIVITIES

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

FINANCING ACTIVITIES

Repayment of notes payable                                              (10,140)            (42,946)

Borrowings under notes payable                                          117,264                  --

Borrowings under line of credit, net                                    (52,549)                 --

Issuance of minority interests                                           80,000                 117

Issuance of common stock                                                     --             100,000
                                                                      ---------           ---------
Cash provided by financing activities                                   134,575              57,171

NET DECREASE IN CASH                                                    (34,753)            (12,633)

                                                                      ---------           ---------
CASH, beginning of period                                                35,568              31,379
                                                                      ---------           ---------
CASH, end of period                                                   $     815           $  18,746
                                                                      =========           =========
</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 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 $116,486 at October 31, 1998 and $113,777
as of March 2, 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 quarter
ended October 31, 1998:

     (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
     October 31, 1998. 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 July 31, 1998, the Company was in arrears for the quarterly payment
     due May 1, 1998 on a $11,126 secured installment note. As of March 1999,
     the Company was in arrears for the final two full quarterly installments,
     due May 1 and August 1, on this secured installment note.

     (c) In September 1998, a shareholder extended a loan to the Company in the
     amount of $23,000. This note is secured, bears interest at the prime rate
     plus 1% and is due on demand but no later than September 1, 1999. 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.



                                      F-5
<PAGE>   8

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

     (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 quarter ended October 31, 1998:

     (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.

NOTE 5 - FALSE RIVER, LLC

         During the period from August 1998 to October 1998, False River sold
additional shares of its preferred distribution LLC shares for proceeds
amounting to $80,000. An officer and certain members of the board of directors
purchased $60,000 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
     three months ended October 31, 1998 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

          Conversions of Class B shares to
           Class A shares                           53,148               53             (53)                -
                                                           --------------------------------------------------
                                                                         78             (53)         $ 45,288
                                                 ============================================================
</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 $10,000 from the sale of .4
     units in October 1998. These shares were not issued as of October 31, 1998
     and 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 October 31, 1998.



                                      F-6
<PAGE>   9

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

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. The following table
reconciles the numerator and denominator used in the calculation of basic and
diluted earnings per share for the quarters ended October 31, 1998 and 1997:

<TABLE>
<CAPTION>
                                                   Three Months Ended October 31,
                                                 ----------------------------------
                                                        1998               1997
                                                 ----------------------------------
          <S>                                    <C>                     <C>      
          Numerators:  Numerator for both basic
          and diluted earnings per share, net
          income (loss)                              $ (312,566)         $  97,087
                                                 ==================================
          Denominators:  Denominator for basic                    
          earnings per share, weighted average
          common shares outstanding                   6,456,928          6,403,140
                    
          Potential dilutive shares resulting
          from outstanding stock options and
          warrants                                            -          1,341,607
                                                 ----------------------------------
          Denominator for diluted earnings per
          share                                       6,456,928          7,744,747
                                                 ==================================
</TABLE>

         Diluted earnings per share for the three months ended October 31, 1998
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 3,634,618 anti-dilutive common stock options and common stock
warrants outstanding at October 31, 1998.

NOTE 8 - SUBSEQUENT EVENTS

     The Company completed the following transactions subsequent to October 31,
     1998:

     (a) During the period from November 1998 to February 1999, False River sold
     shares of its preferred distribution LLC shares for proceeds amounting to
     $114,864. Certain members of the board of directors purchased $104,864 of
     these preferred distribution LLC share interests.

     (b) In November 1998, the Company entered into an investor relation
     services agreement with an investor relations firm, that provides for,
     among other things, certain investor relations and capital formation
     services. The consideration for this agreement included the issuance of
     50,000 shares of the Company's Class A common stock.




                                      F-7
<PAGE>   10



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

     (c) 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.

     (d) 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.

     (e) 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.

     (f) 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.
     These loans are unsecured, bear interest at the prime rate plus 1% and are
     due on demand.

     (g) In January 1999, a shareholder extended a loan to the Company amounting
     to $19,500. 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.

     (h) Subsequent to October 31, 1998, the Company received $110,000 from the
     sale of 4.4 units in the private placement of the Company's Class A common
     stock. (See Note 6(b)).

     (i) 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.

     (j) 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. 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.

     (k) 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-8
<PAGE>   11


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

     (l) 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. The Company has agreed to file a Form S-8 to register the
     issuance of these shares.

     (m) 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-9
<PAGE>   12


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

         RESULTS OF OPERATIONS

         THREE MONTHS ENDED OCTOBER 31, 1998 COMPARED TO THE THREE MONTHS ENDED
         OCTOBER 31, 1997

         Revenues for the first three months of fiscal 1999 decreased as
compared to revenues for the first three months of fiscal 1998, principally as a
result of a significant decrease in the level of commercial production revenues
in the first quarter of fiscal 1999.

         Commercial production revenues were $6,000 for the first three months
of fiscal 1999, representing a decrease of $1,499,577 or 99.6% from commercial
production revenues of $1,505,577 for the three months of fiscal 1998.

         The decrease in commercial production revenues was primarily the result
of the commencement of a reassessment of the Company's commercial production
operations in the first quarter of fiscal 1999. 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.

         Gross profits for commercial production were $1,710 and $466,409 for
the three months ended October 31, 1998 and 1997, respectively. Commercial
production costs, as a percentage of related revenues, were 71.5% and 69.0% for
the three months ended October 31, 1998 and 1997, respectively.

         There were film revenues of $25,000 for the first three months of
fiscal 1999 as compared to no film revenues for the three months ended October
31, 1997. The Company entered into agreements related to two film projects
during this period. Revenues of $20,662 have been deferred pending completion of
one of the projects.

         Film costs amortization increased by $23,035 for the first three months
of fiscal 1999 as a result of the recognition of related film revenues during
the same period.

         Selling, general and administrative ("SG&A") expenses decreased $72,979
or 20.2% to $288,036 for the three months ended October 31, 1998 from $361,015
for the three months ended October 31, 1997. SG&A decreased primarily as a
result of a cessation of operations at First Light, the departure of several
employee from the Company's LSVD operations and an absence of several consulting
agreements that were in effect during the three months ended October 31, 1997.

         Interest expense increased to $28,205 for the first three months of
fiscal 1999 from $8,507 for the first three months of fiscal 1998. This increase
was the result of an increase in outstanding debt during the first three months
of fiscal 1999 as compared to the first three months of fiscal 1998.

         As a result of the foregoing factors the Company incurred a net loss
$312,566 for the three months ended October 31, 1998 as compared to net income
of $97,087 for the three months ended October 31, 1997.

         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



                                      F-10
<PAGE>   13

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 $169,328 for the three months
ended October 31, 1998 and were primarily the result of the net loss caused by a
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 quarter ended October 31, 1998 principally due to the
collection of the contract commercial production receivables that remained at
July 31, 1998, and an increase in accounts payable. 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 $134,575 for the
three months ended October 31, 1998. During the first quarter of fiscal 1999,
the Company raised $117,264 (partially offset by $10,140 in repayments) in
borrowings under notes payable from a member of the board of directors, an
officer and a shareholder. Additionally, $80,000, obtained from the issuance of
minority interests, was used fund the activities of 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 three months
of fiscal 1999, the Company incurred a net loss of $312,566, and negative
operating cash flows of $169,328, due to losses suffered by its contract
commercial production operations and the expenses incurred in pursuing its film
and LSVD projects. At October 31, 1998 the Company had a deficit in
stockholders' equity of $916,884 and a significant working capital deficit. The
Company was unable to meet certain debt service requirements both during fiscal
1998 and in the first quarter of fiscal 1999. A significant portion of notes
payable and notes payable to related parties, which amount to $1,134,050, 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 October 31, 1998
the Company has obtained $177,500 through additional loans, principally from
members of the board of directors or shareholders, which for the most part have
been used to fund operations. As a result, at March 2, 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.

         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 warrants. The Company
         has raised $120,000 from the sale of 4.8 units through March 2, 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.


                                      F-11
<PAGE>   14

         - 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, which remains in effect.

         - 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
         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.



                                      F-12
<PAGE>   15


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.

PART II - OTHER INFORMATION

ITEM 2. CHANGES IN SECURITIES

         In September 1998, the Company issued 25,000 shares of its Class A
common stock in consideration of the settlement agreement that it entered into,
in July 1998, in relation to the acquisition of the outstanding shares of
Millennium Group, LLC.

         The Company commenced a private placement of its Class A common stock
in October 1998. As of October 31, 1998, the Company had sold .4 units with
proceeds amounting to $10,000. 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 



                                      F-13
<PAGE>   16

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

         The following report was filed on Form 8-K by the Company during the
quarter ended October 31, 1998:

                  (a)  Form 8-K filed on October 8, 1998



















                                      F-14
<PAGE>   17


                                   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 11, 1999
   ------------------------------------------
         Steven D. Brown
         Chief Executive Officer




By:   /s/ Robert A. Martinez                         March 11, 1999
    -----------------------------------------

         Robert A. Martinez
         Vice President/Finance, Chief
          Financial Officer and Treasurer















                                      F-15