<PAGE>
 
                      SECURITIES AND EXCHANGE COMMISSION
                            Washington, D.C. 20549


                                   FORM 10-K
              ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
                        SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended September 30, 1998      Commission file number 0-18102


                        MATTHEWS STUDIO EQUIPMENT GROUP
                        -------------------------------
            (Exact name of registrant as specified in its charter)

                  CALIFORNIA                         95-1447751
        --------------------------------------------------------------
              (State or other jurisdiction of     (I.R.S. Employer
              incorporation or organization)      Identification No.)

       3111 North Kenwood Street, Burbank, CA                      91505
       ------------------------------------------------------------------
           (Address of principal executive offices)            (Zip Code)


                                (818) 525-5200
                                -------------- 
             (Registrant's telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:  None

Securities registered pursuant to Section 12(g) of the Act:  Common Stock
                        _______________________________


Indicate by check mark whether the Registrant (1) has filed  all reports
required to be filed by Section 13 or 15(d) of the Exchange Act during the past
12 months (or for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements for the past
90 days.
Yes [X]   No [ ]

Indicate by check mark if disclosure of delinquent filers in response to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information  statements
incorporated  by reference in Part III of  this Form 10-K  or any  amendment  to
this Form 10-K.  Yes [X]   No [ ]

At December 15, 1998, the aggregate market value of the Registrant's voting
stock held by nonaffiliates of  the Registrant  was  approximately $10,812,812.
On December 15, 1998, Registrant's outstanding voting stock consisted of
9,130,856 shares of Common Stock, no par value.
<PAGE>
 
                               TABLE OF CONTENTS
                                    PART I
                                                                            
<TABLE>
<CAPTION>
                                                                            PAGE
                                                                            ----
<S>                                                                        <C>
Item 1.    BUSINESS......................................................    3

Item 2.    PROPERTIES....................................................    8

Item 3.    LEGAL PROCEEDINGS.............................................    8

Item 4.    SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS...........    8

                                    PART II

Item 5.    MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
           STOCKHOLDER MATTERS...........................................    9

Item 6     SELECTED FINANCIAL DATA.......................................    9

Item 7.    MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
           CONDITION AND RESULTS OF OPERATIONS...........................   11

Item 7A.   QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
           RISK..........................................................   20

Item 8.    FINANCIAL STATEMENTS..........................................   20

Item 9.    CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
           ON ACCOUNTING AND FINANCIAL DISCLOSURE........................   20

                                   PART III

Item 10.   DIRECTORS; EXECUTIVE OFFICERS, PROMOTERS AND CONTROL
           PERSONS; COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE
           ACT...........................................................   21

Item 11.   EXECUTIVE COMPENSATION........................................   25

Item 12.   SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
           MANAGEMENT....................................................   27

Item 13.   CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS................   30

                                    PART IV

Item 14.   EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS
           ON FORM 8-K...................................................   31

SIGNATURES...............................................................   32

INDEX TO FINANCIAL STATEMENTS AND INDEPENDENT AUDITORS'
REPORT...................................................................   33

INDEX TO EXHIBITS........................................................   58
</TABLE>

                                                                    Page 2 of 61
<PAGE>
 
                                    PART I

ITEM 1.  BUSINESS

Matthews Studio Equipment Group (the "Company") leases, rents, sells and
distributes essential audio, video, film and production equipment to the motion
picture, television, theatrical, corporate, video and photography industries.
The Company provides, as a single source, the necessary production equipment
which is otherwise only available by using many different suppliers.  The
Company supplies equipment such as lights, grip lighting supports, professional
video equipment, camera mounts, tripods, pedestals, fluid heads, camera dollies,
portable and foldable camera cranes, power generators and production trucks, and
its patented electronic Cam-Remote(R) and Mini-Mote(R)C.A.T.(R) Systems.

The Company has enhanced its available product lines through acquisitions.  As a
result, in recent years, Matthews Studio Equipment Group has also become a major
supplier of video cameras and theatrical production equipment, as well as film
cameras, fully operational soundstages and studios, complete with equipment
needed for productions using these soundstages and studios.

Matthews Studio Equipment Group believes that it plays a significant role in
both the entertainment and corporate industries by providing a single source
outlet for production equipment.  The Company won technical achievement awards
from the Academy of Motion Picture Arts and Sciences and from the Academy of
Television Arts and Sciences in 1986 and 1989, respectively; and an award from
the Society of Operating Cameramen in 1996 for its Cam-Remote(R) Systems.

Form and Year of Organization

The Company commenced to do business in 1970.  In February 1989, the company
effected its initial public offering through a reverse acquisition (exchange of
stock and pooling of interest) with a California corporation named Captech, Inc.
In connection with its initial public offering, the Company changed its name to
Matthews Studio Equipment Group.  Prior to the initial public offering, the
Company conducted business under the name Matthews Studio Equipment, Inc., as a
California corporation.

Rental Equipment

Production equipment, including grip, lighting and power generation.  Hollywood
Rental Company, LLC ("HRC") and HDI Holdings, Inc. ("HDI"), each of which is
wholly owned by the Company, supply the motion picture and television industry
with a diverse range of production equipment, specializing in lighting and grip
equipment, power generators and production trucks on a rental basic.

HRC offers a complete line of all levels of lighting and grip equipment, pre-
packaged trucks and production vans, as well as varied supplies and services in
support of its production packages.  Additionally, Hollywood Rental Generators,
a division of HRC, offers, on a rental basis, 40-foot and 45-foot production
vans and 200 amps to 3,000 amps tow generators to support the power demands
required in production environments.  HRC has facilities in Burbank, California,
Orlando, Florida, Charlotte, North Carolina, Phoenix, Arizona and Albuquerque,
New Mexico.

HRC's Orlando, Florida facility is adjacent to the Disney production facilities
located in Orlando, Florida. HRC occupies the facility and rents its production
equipment pursuant to an arrangement entered in May 1998 between the Company and
Disney Production Services, Inc. ("Disney Production Services").

                                                                    Page 3 of 61
<PAGE>
 
HRC is the successor by merger to Hollywood Rental Co., Inc. through an internal
reorganization, with HRC having succeeded to all of the business, assets and
liabilities of Hollywood Rental Co., Inc.

In fiscal 1996, HRC commenced long-term equipment management and marketing
arrangements ("Marketing Center") with Seattle-based Jonas Jensen Studios, Inc.
and Nashville-based D R & A, Inc.  For each Marketing Center arrangement, the
Company acquired the production equipment of the independent dealer and added
other production equipment to such inventory, to create a mix of equipment more
capable of fully servicing the needs of customers.

HDI also offers a complete line of all levels of lighting and grip equipment,
pre-packaged trucks and production vans, as well as film cameras.  HDI operates
out of several locations in Ohio, Tennessee and Kentucky.  HDI also operates a
fully operational soundstage and studio in Cincinnati, Ohio, complete with
equipment needed for productions.

HRC's and HDI's rentals vary from short periods of time to the complete duration
of the filming of a feature film or television series.  HRC and HDI generally
issue their invoices for these rentals weekly.  The lessee is typically
responsible for the loss, damage or destruction, whether by fire, other casualty
or accident, of such equipment, and in the event of damage, the lessee also
ordinarily agrees to pay the accrued rental plus the cost of necessary repairs.
HRC's and HDI's usual procedure is to require the lessees to furnish a
certificate of insurance providing for comprehensive coverage, including
liability, injury and property damage.

On a combined basis, HRC's and HDI's rental activities accounted for
approximately 29% of the Company's revenues in fiscal 1998.  On an individual
basis, HRC's and HDI's rental activities accounted for approximately 25% and 4%,
respectively, of the Company's revenues in fiscal 1998.

Theatrical Production Equipment.  In April 1998, the Company added theatrical
production equipment rental to its business, through the acquisition of Four
Star Lighting, Inc. ("Four Star").

Four Star supplies theatrical production equipment, including lighting, lighting
support and sound equipment, to the theatrical production industry.  Four Star
is headquartered in Mount Vernon, New York and Four Star's equipment is
regularly used by Broadway production companies.  When a Broadway show goes on
tour, Four Star's equipment often is rented by the production company for the
tour locations as well.

Rental terms for Four  Star vary with the duration of the shows it supports and
in some cases extend beyond one year or more.  Four Star generally issues its
invoices for these rentals weekly.  The lessee is typically responsible for the
loss, damage or destruction, whether by fire, other casualty or accident, of
such equipment, and in the event of damage, the lessee also ordinarily agrees to
pay the accrued rental plus the cost of necessary repairs.  Four Star's usual
procedure is to require each of its lessees to furnish a certificate of
insurance providing for comprehensive coverage, including liability, injury and
property damage.

Four Star's rental activities accounted for approximately 8% of the Company's
revenues in fiscal 1998.

Professional Broadcast Video Equipment.  Duke City Video, Inc. ("Duke City") was
acquired by the Company in May of 1997.  Duke City specializes in the rental of
professional broadcast video equipment (including cameras) to all sectors of the
production community.  Duke City provides video equipment production packages to
its customers for television broadcasting events.  Duke City's equipment
inventory

                                                                    Page 4 of 61
<PAGE>
 
is diverse enough to handle its customers' needs for productions made inside the
studio as well as outside the studio (i.e., "on location" productions). Duke
City has six operating outlets located in Dallas, Texas, Albuquerque, New
Mexico, New York, New York, Orlando, Florida, Burbank, California and Nashville,
Tennessee. The Albuquerque location also houses a small videocassette
duplication facility that operates under the name "Duke City Dubs". The Orlando,
Florida facility of Duke City is adjacent to the facility occupied by HRC. Duke
City also occupies the facility and rents its professional broadcast video
equipment under the same arrangement between the Company and Disney Production
Services.

Duke City supports both short and long term rental projects, with invoices
issued at the conclusion of the rental or monthly for extended shows.  The
lessee typically assumes responsibility for loss, damage or destruction, whether
by fire, other casualty or accident, of such equipment and, in the event of
damage, the lessee also ordinarily agrees to pay the accrued rental plus the
cost of necessary repairs.  Duke City also generally requires each of its
lessees to furnish a certificate of insurance providing for comprehensive
coverage, including liability, injury and property damage.

Duke City's rental activities accounted for approximately 16% of the Company's
revenues in fiscal 1998.

Cam-Remote(R) and Mini-Mote(R) C.A.T.(R) Systems.  Matthews Studio Electronics,
Inc., a wholly owned subsidiary of the Company ("Studio Electronics"),
manufactures and rents Cam-Remote(R) and Mini-Mote(R) C.A.T. Systems (the
"Systems") under short-term rental and long-term lease arrangements.  The
business of Studio Electronics is being managed by E. F. Nettmann & Associates,
Inc. ("Nettmann") under a management agreement between Nettmann and Studio
Electronics ("Management Agreement").  Nettmann's president and principal
shareholder is Ernst F. Nettmann, who is a director of the Company.  See Item
13, Certain Relationships and Related Transactions.

The Company and Nettmann jointly support the invention and marketing of products
that fall under the auspices of Studio Electronics.  The Systems utilize state
of the art electronic circuitry to duplicate delicate hand motions and enable
the operator remotely to pan, tilt, zoom and focus any film or video camera.
The Systems are available for rental or long term lease and, in fiscal 1996, the
Company also began to market and sell the Mini-Mote(R) C.A.T.(R) Systems.
Revenues from the aggregate of these activities accounted for approximately 1%
of the Company's revenues in fiscal 1998.

Long Term Leasing.  Matthews Acceptance Corporation ("MAC"), a wholly owned
subsidiary of the Company, is engaged in the leasing of equipment on a long term
basis.  MAC generally purchases equipment selected by a lessee and rents such
equipment to the lessee on a long term basis.  Historically MAC's leases have
been of equipment manufactured by the Manufacturing Operations - See
"Disposition of Assets" below.  At September 30, 1998, the MAC portfolio of
leases consisted of 13 leases and represented approximately $385,000 of  lease
receivables.  Revenues from this long term leasing segment represented less than
1% of the Company's revenues in fiscal 1998.

                                                                    Page 5 of 61
<PAGE>
 
Sales

Production and Theatrical Supplies and Products.  As part of its goal to be a
full service, one-source supplier to the entertainment industry, the Company
sells many different supplies which are generally consumed in the production
process.  These include art and cleaning products, hardware and tools,
draperies, light bulbs, tape, paint, gels, lubricants, lumber and other
miscellaneous items.  Through the acquisition of Olesen, the Company added
theatrical supplies and products to its product sales in fiscal 1998. These
supplies are sold by Matthews Studio Sales, Inc., from facilities in Hollywood
and Burbank, California, Charlotte, North Carolina, and Miami and Orlando,
Florida.  Sales from these supplies accounted for approximately 23% of the
Company's revenues in fiscal 1998.

Disposition of Assets

In September of 1998, the Company sold its grip equipment manufacturing
operations (the "Manufacturing Operations") to Phillips Associates, LLC
("Phillips Associates"), an affiliate of Mr. Edward Phillips.  Mr. Phillips was
a co-founder of the Company and served as a director of the Company until the
sale of the Manufacturing Operations.  The sale was effected through a sale of
all of the stock of Matthews Studio Equipment, Inc. ("Studio Equipment") to
Phillips Associates.  See Item 13, Certain Relationships and Related
Transactions.  In fiscal 1998, the Manufacturing Operations accounted for
approximately 22% of the Company's revenues.

Sales and Marketing

The Company's rental equipment is rented through representatives employed by the
Company, and by the Marketing Centers.  The Company's Cam-Remote(R) and Mini-
Mote(R) C.A.T.(R) Systems are rented by the Company's representatives and by
independent dealers in North America, Europe and Asia.  The Company supplies its
rental equipment to a wide range of customers.

Vendors and Suppliers

The Company purchases products, components, raw materials and services as
required from numerous suppliers, no one of which accounted for more than 10% of
the Company's purchases in fiscal 1998.  The Company believes that there are
adequate alternative sources of supply at commercially reasonable rates for all
products (including grip equipment), materials and services required by its
operations.

Competition

The Company competes with numerous equipment rental companies, distributors,
manufacturers, and suppliers of production and/or theatrical equipment for
commercial use.  The Company believes that some of these entities are larger and
better capitalized than the Company.  The principal competitive factors in the
industries serviced by the Company are product quality, product availability,
product support services, innovation and pricing.

The Company is aware of three principal competitors in the theatrical rental
market.  The Company's theatrical equipment operations also compete with
numerous small rental companies.  The Company is aware of two principal
competitors in the video equipment rental market.  The Company's video equipment
operations also compete with numerous small rental companies.

The Company believes that its domestic and international marketing network and
the quality of its

                                                                    Page 6 of 61
<PAGE>
 
products allow it to compete favorably in each of its business lines. The
Company believes that the quality and quantity of its production equipment
rental inventory coupled with the Company's reputation for reliability,
versatility, performance and competitive pricing will provide the Company with a
continuing competitive edge in the supply of equipment for commercial use by the
entertainment production industry (i.e., the motion picture, television,
theatrical, corporate and video production industries) and the still photography
industry.

Patents, Trademarks, and Licenses

While the Company has procured a number of trademark registrations, and one
patent related to its Cam-Remote(R) System, the Company's business is not
dependent on such protection.

Impact of Year 2000

The Year 2000 issue is the result of computer programs being written using two
digits rather than four to define the applicable year.  Any of the Company's
computer-programs that have time-sensitive software may recognize a date using
"00" as the year 1900 rather than the year 2000.  This could result in a system
failure or miscalculations causing disruptions of operations, including, among
other things, a temporary inability to process transactions, send invoices, or
engage in similar normal business activities.

Based on a recent assessment, the fiscal Company expects to complete the upgrade
of its software in the second quarter of 1999 so that its computer systems will
function properly with respect to dates in the year 2000 and thereafter. The
Company presently believes that with upgrades the Year 2000 issue will not pose
significant operational problems for its computer systems. However, if such
conversions are not made, or are not completed timely, the Year 2000 issue could
have a material impact on the operations of the Company.

The Company will be initializing formal communications with all of its
significant suppliers and large customers to determine the extent to which the
Company's interface systems are vulnerable to those third parties' failure to
remediate their own Year 2000 issues.  However, there can be no guarantee that
the systems of other companies on which the Company's systems rely will be
timely converted and would not have an adverse effect on the Company's systems.
The Company has determined it has no exposure to contingencies related to the
Year 2000 issue for the products it has sold.

The Company will utilize both internal and external resources to upgrade and
test the Company's software for Year 2000 modifications. The Company's total
Year 2000 project cost and estimates to complete include the estimated costs and
time associated with the impact of third party Year 2000 issues based on
presently available information. The total cost of the Year 2000 project has not
yet been estimated but it is not anticipated that such costs will be
significant. To date, the Company has not incurred any costs related to the
assessment of, and preliminary efforts on, its Year 2000 project and the
development of a modification plan, purchase of new systems and systems
modifications.

Employees

The Company had approximately 326 employees at September 30, 1998 (317 full-time
and 9 part-time).  Four Star's employees (approximately 30) are represented by
the International Alliance of Theatrical Stage Employees, AFL-CIO, union and
Four Star has entered into contractual arrangements with such union in respect
of its employees that expire on December 31, 2002.

                                                                    Page 7 of 61
<PAGE>
 
ITEM 2. PROPERTIES

In May 1997, the Company relocated its corporate and principal rental and sales
offices to a location with approximately 193,000 square feet in Burbank,
California.  This facility also houses the Company's principal warehouse and
showroom space.  The facility is leased from an unrelated party, at an aggregate
monthly rent of approximately $46,000 under a lease scheduled to expire in 2002.
In addition, the Company leases from other unrelated parties an aggregate of
approximately 152,000 square feet of sales office, warehouse and showroom space
in (i) Burbank, California, (ii) Miami, Florida, (iii) Dallas, Texas, (iv)
Phoenix, Arizona, (v) Charlotte, North Carolina, (vi) Las Vegas, Nevada, (vii)
Nashville and Knoxville, Tennessee, (viii) Louisville, Kentucky and (ix) New
York, New York, at an aggregate monthly rent of approximately $80,000.

During fiscal year 1997, the Studio Electronics operations, which is managed by
Nettmann, was relocated to a facility leased by Nettmann from an unrelated
party.  The Company will reimburse Nettmann approximately $3,000 per month in
rental costs.

The Company also leases approximately 49,000 square feet of  office and
warehouse space in Hollywood, California, from an affiliate of the Vice
President of Marketing for Olesen at a monthly rent of approximately $17,000,
and approximately 43,000 square feet of office, warehouse, and soundstage and
studio in Covington, Kentucky and Cincinnati, Ohio, from an affiliate of the
president of HDI at an aggregate monthly rent of approximately $31,000.

During fiscal year 1997, the Company acquired, in the Duke City acquisition,
land and a building located in Albuquerque, New Mexico, which includes a
soundstage and studio, rental office, warehouse and showroom space.  The Company
also acquired, as part of the Four Star acquisition, land and a building located
in Los Angeles, California which consists of office and warehouse space


ITEM 3. LEGAL PROCEEDINGS

The Company is from time to time named as a defendant in actions brought in the
ordinary course of its business.  In the opinion of management, after
consultation with outside counsel, there are no outstanding suits or claims that
may reasonably result in a material adverse effect on the business, financial
condition or results of operations of the Company.



ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

None.

                                                                    Page 8 of 61
<PAGE>
 
                                    PART II


ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

Commencing November 18, 1998, the Company's common stock is included in the
Nasdaq SmallCap Market under the symbol "MATT".  Prior to that time, the
Company's common stock was included in the Nasdaq National Market under the
symbol "MATT".  On November 17, 1998, the Company submitted an application with
The Nasdaq Stock Market ("Nasdaq") to have the Company's common stock listed on
the Nasdaq SmallCap Market, as a result of Nasdaq's inquiry into whether the
Company met all requirements for continued listing on the Nasdaq National
Market.  On January 5, 1999, Nasdaq approved the Company's application for
Nasdaq SmallCap Market listing.

As of December 15, 1998, there were 9,130,856 shares of common stock
outstanding, held by approximately 205 shareholders of record.  The Company
believes there are in excess of 1,200 beneficial holders based on prior proxy
listings.  The following table sets forth the high and low bid prices for the
Company's common stock, for the quarterly periods ended as shown:
<TABLE>
<CAPTION>
 
                                    (High)     (Low)
<S>                                 <C>       <C>
          (Fiscal year 1997)
            December 31, 1996      $ 2 1/2  $   2 1/4
            March 31, 1997           2 5/8      2 3/16
            June 30, 1997            4          3 1/8
            September 30, 1997       4 3/8      3 11/16
 
          (Fiscal year 1998)
            December 31, 1997      $ 4 3/4  $   3 11/16
            March 31, 1998           4 1/16     3 15/32
            June 30, 1998            5 3/8      4
            September 30, 1998       3 5/16     2 3/8
</TABLE>

The quotations for the common stock set forth above represent bid quotations
between dealers, do not include retail mark-ups, mark-downs or commissions, and
may not necessarily represent actual transactions and "real time" sale prices.
The source of the bid information is Nasdaq.

The Company has never paid dividends and does not expect to declare or pay any
dividends in the foreseeable future.  The Company's senior credit facility
prohibits the payment of cash dividends.


ITEM 6.  SELECTED FINANCIAL DATA

The following selected financial data as of and for the five years ended
September 30, 1998 are derived from the consolidated financial statements of
Matthews Studio Equipment Group and Subsidiaries, which have been audited by
Ernst & Young LLP, independent auditors.  The data set forth in this table
should be read in conjunction with "Management's Discussion and Analysis of
Financial Condition and Results of Operations," the Company's Consolidated
Financial Statements and the Notes thereto, and the other financial information
included elsewhere in this Annual Report on Form 10-K.

                                                                    Page 9 of 61
<PAGE>
 
<TABLE>
<CAPTION>
                                            SELECTED  FINANCIAL  DATA
                                     (in thousands, except per share data)
 
                                                                      1998        1997        1996        1995        1994    
                                                                    ---------   ---------   ---------   ---------   --------- 
<S>                                                                 <C>         <C>         <C>         <C>         <C>       
Revenues from rental operations                                     $ 33,317     $25,589     $14,125     $12,797     $12,944  
Net product sales                                                     27,954      20,769      16,079      14,554      12,482  
                                                                    --------     -------     -------     -------     -------  
Total revenue                                                         61,271      46,358      30,204      27,351      25,426  

Gross profit - rental operations                                      13,043      11,070       6,109       5,301       6,018  
Gross profit - sales                                                   8,770       6,688       5,822       4,562       3,924  
                                                                    --------     -------     -------     -------     -------  
Total gross profit                                                    21,813      17,758      11,931       9,863       9,942  
                                                                                                                              
Income (loss) before extraordinary item (Footnote 2)                      49       1,706       1,003         208        (478) 
Net income (loss) (Footnote 2)                                            49       1,512       1,003      (2,020)       (478) 
                                                                                                                              
Net income (loss) per common share - basic (Footnote  2):                                                                     
  Income (loss) before extraordinary item                           $   0.00     $  0.16     $  0.10     $  0.02     $ (0.05) 
  Extraordinary item                                                       -       (0.02)          -       (0.22)          -  
  Net income (loss) per share                                           0.00        0.14        0.10       (0.20)      (0.05) 
                                                                                                                              
Net income (loss) per common share-diluted (Footnote 2):                                                                      
  Income (loss) before extraordinary item                               0.00        0.15        0.10        0.02       (0.05) 
  Extraordinary item                                                       -       (0.02)          -       (0.22)          -  
  Net income (loss) per share                                           0.00        0.13        0.10       (0.20)      (0.05) 
                                                                                                                              
Cash provided by (used in) operations                               $  4,669     $ 2,216     $ 4,698     $(1,168)    $ 1,207  
Cash used in investing activities                                    (42,420)     (9,476)     (5,789)     (3,177)     (1,160) 
Cash provided by (used in) financing activities                       37,689       7,191       1,115       4,048         (60) 
EBITDA from operations (Footnote 1)                                   14,011       9,650       6,043       4,849       2,466  
Total assets (Footnote 2)                                             94,386      61,871      34,484      30,703      31,223  
Working capital (Footnote 2)                                           2,515       9,662       7,953       7,872       4,405  
Net property and equipment (Footnote 2)                               51,650      35,187      20,339      17,226      16,223  
Long term debt and capital lease obligations (Footnote 2)             74,691      36,715      18,914       7,664      11,597  
Shareholders' equity (Footnote 2)                                      2,613      11,170       9,074       8,054       9,893   
</TABLE>


(1)  EBITDA represents earnings before taxes, interest expense, depreciation and
     amortization. The EBITDA for 1998 included the $3,963,000 gain on sale of
     the Manufacturing Operations. The EBITDA for 1997 and 1995 are before the
     extraordinary item. The Company believes that EBITDA serves as a financial
     analysis tool for measuring financial information such as operating
     performance and leverage ratios. EBITDA should not be considered by the
     reader as an alternative to net income as an indicator of the Company's
     performance or as an alternative to cash flows as a measure of liquidity.

(2)  During the year ended September 30, 1998, the Company adopted the Statement
     of Financial Accounting Standards No. 128 "Earnings Per Share" ("SFAS No.
     128") which established standards for computing and presenting earnings
     per share for publicly-held common stock or potential common stock. All
     periods presented reflect the adoption of SFAS No. 128 and the impact on
     amounts previously reported was not material. The income and related per
     share amounts shown above for fiscal year 1998 includes a $3,963,000 gain
     on sale of the Manufacturing Operations. In addition, the balance sheet
     data shown above in fiscal year 1998 reflects the disposition of the
     Manufacturing Operations. The total assets and liabilities of the
     Manufacturing Operations on the date of sale were approximately $10,561,000
     and $6,610,000, respectively. The shareholders' equity was reduced by
     $9,582,000, as a result of the retirement of Company common stock received
     in the transaction.

                                                                   Page 10 of 61
<PAGE>
 
ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

Overview

During fiscal 1998, the Company's principal strategy was to expand and
strengthen its equipment rental operations, and at the same time to discontinue
its Manufacturing Operations. Discontinuation (and disposition) of the
Manufacturing Operations was made due to the growing inherent conflicts between
the Company's expanding rental operations and the Manufacturing Operations,
where many of the Manufacturing Operations' customers competed directly against
the Company's rental operations. The Company's decision to dispose of the
Manufacturing Operations was also based on the availability of alternative
sources of supply, at commercially reasonable rates, for the equipment which was
being manufactured by the Manufacturing Operations.

The Company's business is also continuing to evolve to meet the ongoing
technological and business changes prevalent in the entertainment production
industry and competitive pressures.

Similar to prior fiscal years, in fiscal 1998 the Company continued to focus on
opportunities to provide its products and services from outlets located in
different parts of the United States as well as expanding its product lines.
The development of a marketing and distribution network in select geographic
marketplaces throughout the United States enabled the Company to improve rental
asset utilization and expand the Company's core businesses.  These activities
were funded by cash generated from operating activities and bank borrowings.
The Company's strategy for the next fiscal year is to devote its cash generated
from operating activities and other financial resources toward expansion of its
marketing and distribution network, and strengthening of its existing
operations, including the acquisition of additional rental equipment to
supplement the Company's existing rental equipment inventory. The availability
of additional rental equipment enables the Company to expand its market share
and to control sub-rental costs, which are costs incurred to rent equipment from
third parties in order to meet Company customers' needs.

Company revenues for fiscal year 1998 increased to $61,271,000, an increase of
$14,913,000 or 32% over fiscal year 1997.  In addition, EBITDA (earnings before
interest expense, income taxes, depreciation and amortization) increased to
$14,011,000 in fiscal 1998 as compared to $9,650,000 in fiscal 1997.  The fiscal
1998 EBITDA includes a gain of $3,963,000 from the sale of the manufacturing
operations.

The Company achieved its growth through acquisitions and expansion of existing
operations.  Revenues from operations acquired in fiscal year 1998 amounted to
$13,219,000.  Company revenues also includes sales from the Manufacturing
Operations of $13,452,000 for the fiscal year 1998 and $12,688,000 for  fiscal
year 1997.  The Manufacturing Operations were divested near the 1998 fiscal 
year end.

The Company realized a gain on the sale of the Manufacturing Operations of
$3,963,000, which partially offset the loss from operations of $4,789,000.
Operations were negatively affected by general conditions in the entertainment
production industry as well as by higher expenses associated with expanded
operations and costs to improve systems and absorb new operations.

The Company's revenues from rentals of production equipment in fiscal 1998 were
affected in part by the threat of a strike by the Screen Actors Guild and the
Federation of Television and Radio Artists (the "Actors' Unions").  While this
strike did not materialize, production activities decreased significantly during
the summer of 1998 in anticipation of the strike.  The strike was averted by the
successful

                                                                   Page 11 of 61
<PAGE>
 
completion of new contracts for the Actors' Unions and production activities
began to increase thereafter, but the increase remained only gradual throughout
the fourth quarter of fiscal 1998. Another factor that affected the Company's
revenues from rentals of production equipment in fiscal 1998 was a general
decrease in the number of large budget motion pictures undertaken by the
entertainment production industry, which resulted in a general slowdown in the
production equipment rental industry.

Revenues from the Company's rental operations grew a combined 30%, and accounted
for 54% of total revenues of the Company.  Approximately 16% in 1998 and 9% in
1997 of the Company's total revenues were from rentals of professional
broadcast/video equipment by Duke City, which was acquired in fiscal 1997.
Approximately 8% of the Company's total revenues was from rentals of theatrical
production equipment by Four Star, which was acquired during the third quarter
of fiscal 1998. The Company's rental revenues from rentals of production
equipment (i.e., grip, lighting and related production equipment) by HRC and HDI
represented the remaining 29% of the Company's revenues.

The increase in revenues from the Company's rental operations was attributable
primarily to the acquisitions of Four Star and HDI and to the addition of
equipment to the Company's rental equipment inventory.

During fiscal year 1998, the Company amended and restated its senior secured
revolving credit facility with The Chase Manhattan Bank, as agent for a
syndicate of lenders ("Chase Facility"). The Chase Facility increased the credit
line from $50,000,000 to $80,000,000. A portion of the credit line was used to
fund the acquisition of Four Star and the acquisition of additional rental
equipment. Remaining funds available under the Chase Facility will be used for
the Company's working capital needs. The Chase Facility has also been further
amended in January 1999. The January 1999 amendment reset certain financial
covenants required of the Company under the facility and reduced the credit line
to $77 million.

At September 30, 1998, the Company's outstanding principal obligations under the
Chase Facility was approximately $70,227,000 with all current repayment
obligations under the facility having been met.


Year ended September 30, 1998, compared
to year ended September 30, 1997
----------------------------------------


Revenues from Rental Operations

Revenues from rental operations increased $7,728,000 or 30% in fiscal 1998, to
$33,317,000 from $25,589,000 in fiscal 1997.  The fiscal 1998 acquisitions of
two theatrical rental operations contributed $5,250,000 to rental revenues
during the year.  In addition, revenues from video equipment rentals increased
$5,694,000 or 134% in fiscal 1998, to $9,938,000 from $4,244,000 in fiscal 1997.
The increase was largely due to the fact that Duke City was acquired in May
1997.

Rental revenues from production equipment (i.e., grip, lighting and related
production equipment) decreased from $20,900,000 to $17,783,000 primarily as a
result of the industry-wide slowdown due to the threatened Actors' Unions strike
and the general decrease in the number of large budget motion pictures.

                                                                   Page 12 of 61
<PAGE>
 
Net Product Sales

Net equipment and supply sales for fiscal 1998 were $27,954,000, an increase of
$7,185,000 or 35% from $20,769,000 in fiscal 1997.  Equipment sales increased by
$2,866,000 or 21% from fiscal 1997, primarily due to continued concentrated
marketing efforts and product promotion.  Sales of expendable supplies increased
by $4,318,000 as a result of the continued expansion of the expendable supplies
business in fiscal 1998, including the addition of Olesen's expendable supply
product lines.  The Manufacturing Operations accounted for $13,452,000 and
$12,688,000 of the net equipment and supply sales for fiscal 1998 and fiscal
1997, respectively.  As discussed above, the Manufacturing Operations were
disposed of by the Company in the fourth quarter of fiscal 1998.

Gross Profit - Rental

Gross profit on rental revenues, as a percentage of revenues, was 39% in fiscal
1998 and 43% in fiscal 1997.  Higher gross profit percentages from theatrical
operations acquired during fiscal 1998 were offset by lower margins in rentals
of production and video equipment.  The gross profit percentage from rentals of
production equipment (i.e., grip, lighting and related production equipment)
decreased 3% in fiscal 1998 to 41%, from 44% in fiscal 1997.  Lower revenues and
increased fixed costs such as depreciation expense contributed to the decline in
gross margin.  Depreciation expense increased $428,000 due to additions to
rental asset inventory, and $929,000 from a fiscal 1998 acquisition.  The profit
percentages from video equipment rentals were negatively impacted by costs
associated with the geographic expansion of the operations, less activity in the
market compared to the prior year and higher depreciation expense associated
with rental inventory additions.

Gross Profit - Sales

Gross profit, as a percentage of sales, was 31% in fiscal 1998 as compared to
32% in fiscal 1997.  The decrease was primarily due to increased volume in lower
margin expendable supply sales.

Selling, General and Administrative

Selling, general and administrative expenses, including provision for doubtful
accounts receivable, increased in fiscal 1998 by $8,172,000 to $20,801,000, as
compared to $12,629,000 in fiscal 1997. As a percentage of sales such expenses
increased to 34% in fiscal 1998 compared to 27% in fiscal 1997. The dollar
increase is primarily due to the acquisitions of Four Star, Olesen and HDI, as
well as a general increase in the Company's overall operations, resulting in
higher payroll, goodwill amortization costs, rent expenses and sales
commissions. Selling, general and administrative expenses as a percentage of
sales would be 36% and 27% in fiscal 1998 and 1997, respectively, if results
from the Manufacturing Operations were excluded from the calculation.

The increased selling, general and administrative expenses, as a percentage of
sales, generally relate to the traits of specific operations recently acquired
and Company's overall expansion efforts.  First, relative to the original
operations of the Company, recent acquisitions in the video rental and
expendable supply operations require greater sales efforts, due to the structure
of the markets in which they compete.  Second, the Company expended a
substantial amount of effort and administrative costs in completing the
acquisitions during the fiscal year.  In addition, start up operations in
Orlando, Florida, video operations in New York City, New York, and sales/rental
operations in Las Vegas, Nevada, all completed in fiscal year 1998 have caused
increased levels of operating expenses.

                                                                   Page 13 of 61
<PAGE>
 
Interest

Interest expense for fiscal 1998 was $5,836,000, an increase of $3,073,000 or
111% from $2,763,000 in fiscal 1997.  The increase is attributable to increased
indebtedness in fiscal 1998 incurred to fund the Company's growth, including
capital asset acquisitions to increase the Company's rental equipment inventory
and to fund the acquisitions of Four Star, Olesen and HDI.

Income Taxes

The Company recognized a benefit for income taxes of $875,000 in fiscal 1998
compared to a provision for income taxes on income before extraordinary item of
$748,000 in fiscal 1997.  The Company's effective tax rate for fiscal 1997 on
income before extraordinary item was 30%.  In fiscal 1998 the income tax benefit
was recognized at a substantially higher effective rate on the pre-tax loss
because of the effect of the tax-free gain on sale of the Manufacturing
Operations.

Gain on Disposition of Assets

The Company recorded a gain on the disposition of the Manufacturing Operations
during fiscal 1998 of $3,963,000.


Year ended September 30, 1997, compared
to year ended September 30, 1996
---------------------------------------

Revenues from Rental Operations

Revenues from rental operations were $25,589,000 in fiscal 1997, an increase of
$11,464,000 or 81% from $14,125,000 in fiscal 1996.  Rental revenues at HRC
increased by $7,177,000 to $20,900,000, as compared to $13,723,000 in fiscal
1996.  This increase is primarily due to availability of additional rental
equipment acquired during fiscal 1996 and 1997, industry-wide favorable
conditions, including several large budget film projects and expansion in new
geographic areas.  In addition, the acquisition of Duke City in May 1997
accounted for $4,244,000 of the increased revenues.

Net Product Sales

Net equipment and supply sales for fiscal 1997 were $20,769,000, an increase of
$4,690,000 or 29% from $16,079,000 in fiscal 1996.  Equipment sales increased by
$708,000 or 6% from fiscal 1996, primarily due to continued concentrated
marketing efforts with expanded sales staff and product promotion.  Sales of
expendable supplies increased by $3,982,000 as a result of the renewed focus on
the expendable supply business, including the acquisition of Media Lighting
Supply Inc. ("MLS") in the southeastern United States in January 1997, which
accounted for $3,259,000 of the increase.

                                                                   Page 14 of 61
<PAGE>
 
Gross Profit - Rental

Gross profit on rental revenues, as a percentage of revenues, was 43% in fiscal
1997 and fiscal 1996.  HRC's gross profit increased to 44%, compared to 43% in
fiscal 1996.  The increase in HRC's gross profit percentage was primarily due to
increased rental activities, made possible partly from an increase of the
Company's rental equipment inventory and partly from industry-wide favorable
conditions, offset by higher sub-rental costs to support the substantial
increases in rental demand.   In addition, $1,403,000 of increased depreciation
expenses were incurred in connection with additions to the rental equipment
inventory and the acquisition of Duke City.

Gross Profit - Sales

Gross profit, as a percentage of sales, was 32% in fiscal 1997 as compared to
36% in fiscal 1996.  The decrease was primarily due to an increase in lower-
margin production supply sales in fiscal 1997.  Gross profit on equipment sales,
as a percentage of sales, decreased to 38% in fiscal 1997 from 39% in fiscal
1996 primarily due to a decrease in sales of higher-margin retail products.

Selling, General and Administrative

Selling, general and administrative expenses including provision for doubtful
accounts receivable increased $3,780,000 in fiscal 1997 from $8,849,000 to
$12,629,000.  As a percentage of sales such expenses decreased 2% to 27% in 1997
compared to 29% in 1996.  The dollar increase is primarily due to the
acquisitions of Duke City and MLS as well as a general increase in the Company's
overall operations resulting in higher payroll, sales commission and bonus
expenses.

Interest

Interest expense for fiscal 1997 was $2,763,000, an increase of $612,000 or 28%
from $2,151,000 in fiscal 1996.  The increase is attributable to increased
indebtedness in fiscal 1997 incurred to fund the Company's growth including
capital asset acquisitions to increase the Company's rental equipment inventory.
Interest income in fiscal 1997 was $88,000, a decrease of $19,000 from $107,000
in fiscal 1996.

Income Taxes

The Company recognized a provision for income taxes on income before
extraordinary item of $748,000 in fiscal 1997 compared to $35,000 in fiscal
1996.  The Company's effective tax rate for fiscal 1997 was 30% compared to 3%
in fiscal 1996, on income before extraordinary item.  The difference between the
effective tax rates is attributable to substantially lower recognition of net
operating loss carryforwards in fiscal year 1997 compared to fiscal 1996.

Extraordinary Loss on the Early Extinguishment of Debt

The Company incurred an extraordinary loss on the early extinguishment of debt
during fiscal 1997 of $194,000, net of income tax benefit of $130,000.  These
costs were incurred as a result of the early repayment of the Company's senior
subordinated note to ING.

                                                                   Page 15 of 61
<PAGE>
 
Liquidity and Capital Resources

During the fiscal year ended September 30, 1998, the Company financed its
operations primarily through bank borrowings and internally generated funds.

The Chase Bank Facility

On July 27, 1995, the Company and its then principal subsidiaries (the
"Borrowers") entered into an agreement for a senior secured revolving credit
facility with The Chase Manhattan Bank, as agent for the lenders ("Chase Bank")
in an aggregate principal amount of up to $17 million (the "Chase Facility").
This facility has been subsequently expanded and amended several times to
provide additional funds for acquisitions and growth and to reflect the impact
of those acquisitions, the divestiture of the manufacturing operations and
changing economic conditions.

At September 30, 1998 the Chase Facility included a $16,000,000 term loan and
$64,000,000 revolving credit loan.  The term loan requires quarterly principal
payments of $500,000 commencing December 31, 1998, such payment having been made
by the Company, and increasing to $750,000 commencing December 31, 1999 with the
balance due at maturity.

Interest is payable quarterly and accrues at a rate, depending on the Company's
leverage ratio as defined in the Chase Facility, and at the Company's option at
either (a) LIBOR plus a maximum of 3.25% or (b) the greater of (i) Chase Bank's
Prime Rate plus a maximum of 1.25%, (ii) the Base CD Rate (as determined by
Chase Bank) plus a maximum of 2.25% or (iii) the Federal Funds Effective Rate
plus a maximum of 1.75%.  In addition, the Company pays a fee ranging from
three-eighths of one percent to one-half of one percent on the unused credit
commitment.

The Chase Facility matures August 14, 2002.  The Amended Chase Facility requires
the Company to maintain certain levels of net worth and, on a quarterly basis,
certain levels of EBITDA (earnings before interest, taxes, depreciation and
amortization), and to meet several financial ratios (including interest
coverage, leverage and debt service coverage ratios as defined in the
agreement).  The Chase Facility provides for annual capital expenditure
limitations.

Borrowings under the Chase Facility by any of the Borrowers are cross-
collateralized pursuant to a security agreement in which the Borrowers have
granted Chase Bank a first priority lien and security interest in substantially
all of their respective assets.  In January 1999, in connection with the
issuance of $3,000,000 letter of credit by ING in favor of the lenders, (see
below) the Company again amended the Chase Facility.  As a result, the revolving
credit loan was reduced to $61,000,000, the covenants were modified for fiscal
1999 and the effects of prior defaults were eliminated either through waiver or
modification of certain covenants.

                                                                   Page 16 of 61
<PAGE>
 
The ING Equity Partners, L.P. I Senior Subordinated Promissory Notes

In July 1995, the Company entered into a purchase agreement (the "Purchase
Agreement") with ING Equity Partners, L.P. I ("ING"), pursuant to which the
Company sold to ING for a total purchase price of $5 million (i) its senior
subordinated promissory notes in the aggregate principal amount of $5 million,
bearing interest at an initial rate of 10% per annum, (ii) a common stock
purchase warrant (the "ING Warrant") entitling ING to purchase 2,322,464 of the
Company's outstanding shares of common stock at an initial purchase price per
share of $2.50 and having certain antidilutive rights and (iii) one share of
preferred stock of the Company entitling ING to voting rights with respect to
the number of shares underlying the ING Warrant.  The ING Warrant required an
adjustment of the exercise price to $2.00 per share if the Company did not
complete a public offering of its common stock at a price of at least $2.50 per
share with net proceeds to the Company of at least $10 million by December 31,
1999 (a "Qualifying Offering").

As amended in April 1996, the Purchase Agreement provided for a $100,000
subordinated note maturing July 27, 2005, and a $4,900,000 subordinated note
maturing July 27, 2000, and the share of preferred stock issued to ING was
amended to provide voting rights only in the event of a default under the
Purchase Agreement.  On September 29, 1997, the Company prepaid the $4,900,000
subordinated note.  In connection with this prepayment, the Company and ING
extended the date for the Qualifying Offering to December 31, 1999.

The Purchase Agreement is being amended to reset financial covenants, including
annual capital expenditure limits, required thereunder to be similar to those
required under the Chase Facility.

Interest on the remaining $100,000 subordinated note is at the rate of 10.00%
until its maturity.

As part of the transaction with ING, the Company in July 1995 also entered into
a registration rights agreement (the "Registration Rights Agreement") with ING
and Sutro & Co., Incorporated ("Sutro"), which acted as the Company's investment
bankers in connection with the transaction, entitling the holders of the ING
Warrant and the common stock purchase warrant issued to Sutro (for the purchase
of up to 100,000 shares of common stock of the Company), to certain piggy back
registration rights with respect to the shares of common stock issuable upon
exercise of these warrants, as well as any shares of common stock subsequently
acquired by ING.  The Registration Rights Agreement also grants ING the right to
require the Company to file a shelf registration statement with respect to the
sale from time to time of 1.4 million shares of common stock of the Company
acquired by ING from a former employee of the Company.

In addition, as part of the transaction with ING, in July 1995 the Company,
Carlos D. DeMattos and Edward Phillips and their affiliates ("Management
Shareholders") entered into a Stockholders' Agreement with ING (the
"Stockholders Agreement") pursuant to which the Company and the Management
Shareholders agreed to nominate and vote for the election of two representatives
of ING to the Board of Directors of the Company, the number of members of which
would be set at nine.  The Stockholders Agreement also contains certain
restrictions on the transfer of shares held by ING and the Management
Shareholders.  In addition, the Stockholders Agreement was amended in April 1996
to provide that the obligations of the Management Shareholders to vote for ING
nominees for the Company's Board of Directors, and the obligation of the Company
to nominate such ING nominees, extend to July 27, 2005, unless a change in
control or certain public offering of the Company's common stock, as described
in the Stockholders Agreement, occurs, in which case those obligations will
terminate.

                                                                   Page 17 of 61
<PAGE>
 
In connection with the sale of the Manufacturing Operations, Phillips Associates
transferred 1,916,450 shares of the Company's common stock to the Company in
consideration for 100% of the stock in Matthews Studio Equipment, Inc.  ING and
Mr. DeMattos waived restrictions under the Stockholders Agreement on such
transfer of Phillips Associates' stock.  Mr. Phillips and his affiliates by
reason of such transfer are no longer subject to the Stockholders Agreement.

As part of the January 1999 amendment to the Amended Chase Facility, ING caused
ING (U.S.) Capital LLC to issue in favor of the lenders under the Amended Chase
Facility a $3 million letter of credit. The letter of credit expires December
31, 2000. The lenders may draw on the letter of credit only in the event the
Company files for bankruptcy protection or, due to a default under the Amended
Chase Facility, the lenders elect to declare all outstanding term and revolving
credit loans immediately due and payable and to terminate the facility. The
Company and its subsidiaries entered into a Reimbursement Agreement in favor of
ING and granted to ING subordinated a security interest in substantially all of
their respective assets. Pursuant to the Reimbursement Agreement, the Company
and its subsidiaries are obligated to reimburse ING for any amounts paid by ING
to ING (U.S.) Capital LLC by reason of a draw on the letter of credit.

As additional consideration for ING's procurement of the letter of credit, the
Company issued to ING warrants to purchase 450,000 shares of the Company's
common stock, at an exercise price of $2.50 per share.  These warrants have
antidilutive rights similar to those available to ING under the ING Warrant, but
the exercise price is not subject to decrease due to failure to complete the
Qualifying Offering.  Also the one share of preferred stock issued to ING does
not accord voting rights with respect to the number of shares underlying these
warrants.  These warrants are entitled to the benefits of and subject to the
restrictions under the Registration Rights Agreement and the Stockholders
Agreement.

Warrants to purchase 150,000 shares will be automatically canceled in the event
the lenders release the letter of credit on or before December 31, 1999. The
lenders are obligated to release the letter of credit if the Company achieves in
any fiscal quarter leverage ratio of 4.50 or less and has an availability for
revolving credit loans under the Chase Facility of $2,000,000.

Working Capital - Cash Flows

(The following comments reflect the disposal of the Manufacturing Operations and
their effect on the consolidated financial information of the Company.)

At September 30, 1998, the Company's working capital was $2,515,000, which was a
decrease of $7,147,000 from its working capital at September 30, 1997.  The
significant decrease is primarily due to the disposition of the Manufacturing
Operations.

In fiscal 1998, the Company generated cash from operating activities of
$4,669,000.  The major contributor to cash from operating activities was
earnings before depreciation and amortization of $9,085,000.  Partially
offsetting this major contributor to cash from operating activities was an
increase in trade accounts receivable of $1,385,000 and inventory of $1,057,000,
as a result of a general increase in business activities and expansion of the
Company through acquisitions made during fiscal year 1998.

In fiscal 1998, the Company primarily utilized cash from operating activities of
$4,669,000, augmented by additional borrowings from the Chase Facility of
$41,605,000, to finance the acquisition made to pay down debt assumed in these
acquisitions made in fiscal year 1998 and for the acquisitions of capital
equipment. The major components of the net capital equipment additions were
equipment for the Company's video equipment rental operations of approximately
$3,264,000 and equipment additions to other rental operations of approximately
$7,234,000.

                                                                   Page 18 of 61
<PAGE>
 
During the next twelve months, the Company expects to purchase additional
capital equipment as part of the expansion of the Company's marketing and
distribution network, and to allow its operations to be more efficient and to
minimize the sub-rental of equipment necessary to meet customer orders.  The
Company expects to finance its capital acquisition program through a combination
of cash generated from operations and additional borrowings under the Amended
Chase Facility.  The Company believes it will have sufficient funds from
operations and bank borrowings to meet its anticipated requirements for working
capital during the next twelve months.


SAFE HARBOR FOR FORWARD-LOOKING STATEMENTS

The Company is including the following cautionary statement in this Form 10-K to
make applicable and take advantage of safe harbor provisions of the Private
Securities Litigation Reform Act of 1995 for any forward looking statements made
by, or on behalf of, the Company.  Forward-looking statements include statements
concerning plans, objectives, goals, strategies, future events or performance
and underlying assumptions and other statements which are other than statements
of historical facts.  From time to time, the Company may publish or otherwise
make available forward-looking statements of this nature.  All such subsequent
forward-looking statements, whether written or oral, and whether made by or on
behalf of the Company, are also expressly qualified by these cautionary
statements.  Certain statements contained herein are forward-looking statements
and accordingly involve risks and uncertainties which could cause actual results
or outcomes to differ materially from those expressed in the forward-looking
statements.

The Company wishes to caution the reader that in addition to the important
factors described elsewhere in this Form 10-K, the following important factors,
among others, sometimes have affected, and in the future could affect, the
Company's actual results and could cause the Company's actual results in fiscal
1999, and beyond, to differ materially from those expressed in any forward-
looking statements made by, or on behalf of, the Company:

     The Company's business remains substantially dependent on the level of
     motion picture (or feature film) production undertaken from year to year by
     the entertainment production industry. While the trend in fiscal 1996 and
     1997 was to produce motion pictures with a large budget and substantial
     requirements for special effects, the trend in fiscal 1998 and 1999 seems
     to be to produce motion pictures with a smaller budget and lesser use of
     special effects. This industry-wide trend will have the effect of
     decreasing the need for production equipment, which in turn will very
     likely result in a general decrease in the rental rates charged by
     production equipment renters as they attempt to attract business in a more
     difficult environment. While the Company aims to effectively utilize its
     rental equipment inventory by focusing, in fiscal 1999, on efficiently
     allocating the Company's inventory among its locations throughout the
     United States, there is no assurance such efforts will effectively
     counteract this industry-wide trend;

     Since the early 1980's Canada has been competing for television and feature
     film production work that has typically been serviced by the entertainment
     production industry located in the Southern California area. Favorable tax
     treatment offered by Canadian authorities and the weak Canadian dollar may
     permit Canada to attract an increasing level of production work in the
     future; and

     The entertainment production industry in Southern California is
     experiencing a slowdown

                                                                   Page 19 of 61
<PAGE>
 
     in activity, especially in comparison to the growth pace experienced during
     the prior years. Factors that motivated this slowdown include major studios
     trimming their film slates, drops in commercial production due to economic
     uncertainty and cost pressures on both the television and film industry.


ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

None.


ITEM 8. FINANCIAL STATEMENTS

The required financial statements commence at page 35.


ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

None.

                                                                   Page 20 of 61
<PAGE>
 
                                   PART III

ITEM 10.  DIRECTORS; EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT


<TABLE>
<CAPTION>
              (Name)                      (Age)                            (Position)
              ------                      -----                            ----------
<S>                                        <C>          <C>
Carlos D. DeMattos(5)                       46         Chairman of the Board, Chief Executive Officer,
                                                       President

Ernst F. Nettmann                           59         Director, President of Electronics

Jack Brehm(1)(2)(3)(4)                      70         Director

John H. Donlon(1)(2)(3)(4)                  53         Director

Jerome E. Farley(1)(2)(3)(4)                57         Director

Benjamin P. Giess(1)(2)(3)(4)(5)            36         Director

John F. Jastrem(1)(2)(3)(4)                 43         Director

John Alonzo                                 64         Director

John D. Murray                              57         Executive Vice President, Operations

Alan S. Unger                               45         Chief Financial Officer

Carly Barber                                43         President of HRC

Darren DeVerna                              38         President of Four Star
</TABLE>


   (1)   Member of 1994 Stock Option Plan for Directors Committee

   (2)   Member of 1994 Stock Option Plan Committee.

   (3)   Member of Audit Committee

   (4)   Member of Compensation Committee

   (5)   Member of Executive Committee


The term of office of all directors is until the next annual meeting, which is
scheduled for April 7, 1999, and the term of office of all officers is for one
year and until their successors are chosen and qualify.  The Company's Board of
Directors currently has one vacancy, which came about when the Manufacturing
Operations were sold to Phillips Associates and Mr. Phillips in connection
therewith resigned from the Board.

                                                                   Page 21 of 61
<PAGE>
 
Carlos D. Demattos was founder of the Company and has served as a director and
the Company's Chairman, President and Chief Executive Officer since January
1995, and prior thereto as the Company's co-chairman and Chief Executive Officer
from February 1989 to January 1995. He is a co-recipient of two Technical
Achievement Awards from the Academy of Motion Picture Arts and Sciences in March
1983 and March 1985, respectively for the Tulip Crane and for the development of
the Cam-Remote(R) System. He is also a co-recipient of a Technical Achievement
Award from the Academy of Television Arts and Sciences in September 1989 for the
development of the Cam-Remote(R) System. Mr. DeMattos is an active member of the
principal trade associations pertaining to the industry serviced by the Company.
In June 1991, the government of Portugal inducted him into the select membership
of the prestigious Order of Henry the Navigator as a Knight Commander. In July
1998, he was awarded the Entrepreneur of the Year Award for the Greater Los
Angeles area, Entertainment Category. He is a member of the Academy of Motion
Picture Arts and Sciences, the American Society of Cinematographers and the
Portuguese-American Leadership Council of the United States based in Washington,
D.C. Since October 15, 1998, Mr. DeMattos has been a director of Alpha
Microsystems, an information technology services provider and internet company
listed on Nasdaq.

Ernst F. (Bob) Nettmann has served as a director of the Company since February
1989.  Mr. Nettmann is President of Studio Electronics.  He is also President of
E.F. Nettmann & Associates Inc., a privately held corporation, which has been
managing the business of Studio Electronics since October 1, 1994 pursuant to a
management and license agreement.  He is also the managing partner in the Gyron
Group, an advanced systems stabilization group.  Prior to 1988, Mr. Nettmann was
President and owner of Continental Camera Systems, Inc., which designed and
rented camera systems for airborne and groundbased applications.  He has
received awards for technical achievement of his designs from the Academy of
Motion Picture Arts & Sciences, the Academy of Television Arts & Sciences and
the Society of Operating Cameramen.

Jack Brehm has served as a director since February 1989, and served as chief
financial officer of the Company from that date through December 1991.  Mr.
Brehm was with Ernst & Young LLP from 1951 until his retirement as a partner in
1988.  Since his retirement in September 1988, Mr. Brehm has acted as a
financial consultant.  Until 1998, Mr. Brehm was a director of Zegarelli Group
International, Inc., a Nasdaq listed corporation, which manufactures and
distributes professional hair care products.

John H. Donlon has served as a director of the Company since February 1995. He
is president and director of Four Media Company ("4MC"), a Nasdaq listed
corporation with revenues in excess of $100 million.  4MC employs over 700
people worldwide, principally at its facilities in Universal City, Burbank and
Santa Monica, California, and Singapore.  4MC provides post-production services
to the Hollywood television and motion picture industry along with playback and
satellite transmission services for eighteen channels of cable programming to
the USA. The Singapore subsidiary provides similar services to American
companies in Asia. From 1984 to 1993, Mr. Donlon was president and chief
executive officer of Compact Video Group, Inc. ("CVG"). During his tenure, CVG
expanded its editing and sound services, consolidated its duplication and
satellite transmission, developed syndication capability and established a
successful network origination business. From 1981 to 1984 he was president of
Technicolor Videocassette where he launched a videocassette duplication facility
from the ground up. From 1977 to 1981 he was Vice President of Operations for
Technicolor, the largest motion picture and television film laboratory in the
world.

Jerome E. Farley has served as a director of the Company since April, 1994.  He
is President and Chief Executive Officer of Western Security Bancorp, a bank
holding company. Continuously since December 1992 he has also been President,
Chief Executive Officer and a director of Western Security Bank, a

                                                                   Page 22 of 61
<PAGE>
 
National Banking Corporation. From 1981 through most of 1992, Mr. Farley was a
director and an executive officer of First Regional Bank. From 1979 to 1997 Mr.
Farley has been a director of Regional Properties, Inc., a real estate
development company, principally active in Riverside County, California. Mr.
Farley has been a member of the State Bar of California since 1973. From 1973
through 1985 he was general counsel to a number of subsidiaries of City
Investing Company, which was listed on the New York Stock Exchange. Mr. Farley
has been a professor at the Pepperdine University School of Business and
Management since 1984.

Benjamin P. Giess was elected a director of the Company in September 1995.  He
has been employed by ING Equity Partners and its predecessors and affiliates
since 1992 and currently serves as a Partner responsible for originating,
structuring and managing equity and debt investments.  From 1991 to 1992, Mr.
Giess worked in the Corporate Finance Group of ING Capital.  From 1990 to 1991,
Mr. Giess was employed by the Corporate Finance Group of General Electric
Capital Corporation.  Mr. Giess serves as a director for e.spire Communications,
Inc., a Nasdaq company which is a competitive local access telecommunications
provider, as well as Alpha Microsystems, an information technology services
provider and internet company listed on Nasdaq.  In addition Mr. Giess serves on
the board of several privately held companies.

John F. Jastrem was elected a director of the Company in September 1995.  Since
1998 he is the Chief Executive Officer of Rapp Collins Dallas, a subsidiary of
Omnicom, a Company listed on the New York Stock Exchange.  From 1997 to 1998 he
served as a management consultant to major business enterprises.  From 1996 to
1997, he served as Chairman and Chief Executive Officer of Hooven Direct
Marketing, a privately held corporation founded in 1922 with more than 250
employees.  From 1995 to 1996 Mr. Jastrem served as President and Chief
Executive Officer of Colt's Manufacturing Company, Inc.  From 1993 to 1995 Mr.
Jastrem was President and Chief Operating Officer of Acme Holdings, Inc. and
Acme Acquisition Corp., (currently Rental Services Corp.), the fifth largest
equipment rental business in the United States.  From 1990 to 1993 Mr. Jastrem
was Senior Vice President and Chief Financial Officer of Knapp Communications
Corp., the publisher of Architectural Digest and Bon Appetit magazines which was
acquired by Conde Nast.  From 1989 through 1990 Mr. Jastrem was Chief Financial
Officer of Reliance Steel & Aluminum Company, a metals distributing company.
From 1985 to 1989 Mr. Jastrem was part of the management team of Wickes
Companies, Inc., a $6 billion manufacturer and retailer, during its successful
reorganization.  From 1977 to 1985 Mr. Jastrem was a senior manager for Arthur
Andersen LLP.  He is also a director of Medicam Ventures, LLP, a privately held
firm.

John A. Alonzo was elected a director of the Company in July 1996.  Mr. Alonzo
is the first cinematographer to be recognized by the U.S. Library of Congress,
for his cinematography work on the feature film "Chinatown", and is a member of
the American Society of Cinematographers.  Other feature films on which Mr.
Alonzo was the principal cinematographer include "Harold and Maude," "Scarface,"
"Steel Magnolias," and "Star Trek, Generations." Mr. Alonzo holds an honorary
Doctorate Degree in Humane Letters from Columbia College, Hollywood, and an
honorary Bachelors Degree from The Brooks Institute.  Mr. Alonzo has given
seminars and lectures at the University of Southern California and is currently
on the faculty of The American Film Institute.

John D. Murray, Executive Vice President, Operations.  Mr. Murray joined the
Company as Executive Vice President, Operations in October, 1998.  Between May
to October 1998, he served as a consultant for various business enterprises.
Between May 1996 to May 1998, Mr. Murray served as the Chief Operating Officer
and Chief Financial Officer of Virtual Mortgage Network, a Nevada corporation.
From 1995 to 1996, Mr. Murray was chief financial officer and executive vice
president of the Company.

                                                                   Page 23 of 61
<PAGE>
 
From 1992 to 1995, Mr. Murray was the executive vice president and chief
operating officer of Alpha Microsystems, an information technology services
provider and internet company listed on Nasdaq. From 1988 to 1992, Mr. Murray
was the executive vice president and chief financial officer of South Coast
Communications Group, a privately held investment relations firm. From 1979 to
1988, Mr. Murray was a director, executive vice president and chief financial
officer of General Automation, Inc., a publicly held company listed on Nasdaq.

Alan S. Unger, Chief Financial Officer.  Mr. Unger is a certified public
accountant and joined the Company as Chief Financial Officer in November, 1998.
Between May 1997 to November 1998, Mr. Unger served as chief financial officer
of Four Media Company ("4MC"), a Nasdaq listed corporation with revenues in
excess of $100 million.  Between August 1993 to May 1997, Mr. Unger served as
Director of Mergers and Acquisitions of 4MC.  He successfully structured,
negotiated and closed several acquisitions for 4MC.  He also acted as chief
financial officer of 4MC Asia since its inception in 1994.  Prior to joining
4MC, Mr. Unger was corporate controller for The Cheesecake Factory.  Prior to
that he was with Coopers & Lybrand for 10 1/2 years.  During that time he was
involved with many publicly held companies, mergers and acquisitions and other
special transactions. He left Coopers & Lybrand as senior audit manager.

Carly Barber, President, HRC.  Ms. Barber joined the Company in March of 1986.
From 1984 to 1986, Ms Barber was the manager of Cinepro, a Panavision
expendables, camera, lighting and grip company. From 1981 to 1984, Ms. Barber
worked for Samuelsons Film Services, an international supplier of rental cameras
and lighting equipment as a representative of the company on production.

Darren DeVerna, President, Four Star.  Mr. DeVerna has been the President of
Four Star since April 1, 1998.  For the three years prior to that, he was a Vice
President of Four Star in charge of marketing, and its Director of Operations.
Between 1987 and 1995, Mr. DeVerna was Four Star's Purchasing Agent, Production
Foreman, and its liaison with theatrical designers and production electricians
for the many Broadway plays that Four Star serviced.  In addition, he has been a
member of the technical staff of numerous Broadway productions.  Mr. DeVerna is
the founder and co-chairman of the Tony Randall National Actor's Theater golf
tournament.


Compliance with Section 16(a) of the Securities Exchange Act of 1934

Section 16(a) of the Exchange Act requires the Company's directors and executive
officers, and persons who own more than ten percent of a registered class of
shares of the Company's equity securities, to file by specific dates with the
SEC initial reports of ownership and reports of changes in ownership of equity
securities of the Company.  Officers, directors and greater than 10 percent
stockholders are required by security regulations to furnish the Company with
copies of all Section 16(a) forms that they may file.  The Company is required
to report in this Form 10-K annual report any failure of its directors and
executive officers and greater than ten percent stockholders to file by the
relevant due date any of these reports during the preceding fiscal year.

To the best of the Company's knowledge, based solely on review of copies of such
reports furnished to the Company during the fiscal year ended September 30,
1998, all Section 16(a) filing requirements applicable to the Company's
officers, directors and greater than ten percent stockholders were complied
with, except, due to administrative errors, no Form 3 has been filed by Ms.
Carly Barber, Mr. Darren DeVerna, Mr. John Murray or Mr. Alan Unger.

                                                                   Page 24 of 61
<PAGE>
 
ITEM 11.  EXECUTIVE COMPENSATION

The table which follows sets forth all cash compensation paid and/or accrued for
services rendered in all capacities with respect to the fiscal year ended
September 30, 1998, to (i) the Chief Executive Officer, (ii) the Company's
executive officers whose total salary and bonus equaled or exceeded $100,000,
and (iii) other Company employees whose total salary and bonus equaled or
exceeded $100,000 (the "Named Executive Officers"):


<TABLE>
<CAPTION>
                                              SUMMARY COMPENSATION TABLE
 
 
                                                                           Long Term Compensation
                                Annual Compensation                          Awards              Payouts
                               ---------------------                         ------              -------
 
 Name and Principal     Year    Salary       Bonus       Other      Restricted    Securities      LTIP      All Other
      Position                    ($)         ($)        Annual        Stock      Underlying    Pay-outs     Compen-
                                                        Compen-       Awards       Options/        ($)       sation*
                                                       sation ($)       ($)        SARs (#)                    ($)
 
<S>                     <C>     <C>         <C>             <C>          <C>      <C>              <C>        <C>
Carlos D.  DeMattos,    1998    413,244           -          -           -         100,000         -         1,816
Chairman, Chief         1997    351,421     140,568          -           -               -         -         1,230
Executive Officer,      1996    263,425      50,000          -           -         200,000         -         1,462
President
 
Gary S. Borman,         1998    112,115           -          -           -               -         -         1,152
Vice President,         1997    100,769      30,203          -           -          30,000         -           900
Corporate Controller    1996     48,462       6,000          -           -          30,000         -            21
 
Kenneth W. Kramer,      1998    109,154           -          -           -               -         -         1,662
Vice President -        1997          -           -          -           -          60,000         -             -
Development &           1996          -           -          -           -               -         -             -
Operations
</TABLE>

*ALL OTHER COMPENSATION - This represents Company contributions to the Company's
401(k) plan.



   The following table shows the options granted during the fiscal year ended
   September 30, 1998, to the Named Executive Officers.


<TABLE>
<CAPTION>
                      OPTION GRANTS FOR THE YEAR ENDED SEPTEMBER 30, 1998
 
----------------------------------------------------------------------------------------------- 
                                       Individual Grants
-----------------------------------------------------------------------------------------------
Name                  Number of    Percentage    Exercise   Expiration    Potential Realizable
                      Securities    of Total     or Base       Date         Value at Assumed
                      Underlying     Options      Price                   Rates of Stock Price
                       Options     Granted to    $/Share                    Appreciation for
                       Granted      Employees                                 Option Term
                                                                          ---------------------
                                                                            5%         10%
-----------------------------------------------------------------------------------------------
<S>                   <C>          <C>           <C>        <C>          <C>          <C> 
Carlos D. DeMattos     100,000          33%       $4.74         2004     $226,000    $542,000
</TABLE>

                                                                   Page 25 of 61
<PAGE>
 
The following table shows the value of options with respect to each of the Named
Executive Officers based on the difference between the exercise price and the
closing price on September 30, 1998, as reported by Nasdaq.


<TABLE>
<CAPTION>
                                                  OPTION EXERCISES AND FY-END VALUE TABLE

<S>                     <C>                    <C>                     <C>                                     <C>
Name                    Shares Acquired       ($) Value               # of Shares Underlying                  Value of Unexercised
                        On Exercise            Realized                Unexercised Options                     In-the-Money Options
                                                                         Exercisable (E)/                        at FY-End ($)
                                                                         Unexercisable (U)                       Exercisable (E)/
                                                                                                                 Unexercisable (U)

Carlos D. DeMattos               -                 -                    200,000 (E)/                                     --  (E)/
                                                                        100,000 (U)                                      --  (U)
Gary S. Borman                   -                 -                     22,000 (E)/                                  16,000 (E)/
                                                                         38,000 (U)                                   27,000 (U)
Kenneth W. Kramer                -                 -                     20,000 (E)/                                   9,000 (E)/
                                                                         40,000 (U)                                   19,000 (U)
----------------------------------------------------------------------------------------------------------------------------------
</TABLE>


The Company has an employee benefit plan intended to qualify under Section
401(k) of the Internal Revenue Code. Employees may contribute as deferred
compensation up to 6% of compensation (not to exceed $10,000 annually).  The
Company matches from 20% to 50% of employee contributions based on individual
salary levels.

Board of Directors Remuneration

Non-employee members of the Board receive a retainer of $1,000 per month for
services rendered to the Board of Directors and Committee(s) of the Board of
Directors and for his or her attendance at the meetings.  The Chairman of the
Audit Committee and Compensation Committee receives an additional fee of $500
per month. In addition, the Company's 1994 Stock Option Plan for Directors
provides that each independent Director is to receive options to purchase 15,000
shares of Common Stock.  Under the terms of such plan, such options are
exercisable ratably 6, 24 and 36 months after the grant date, and the exercise
price per share is the market value at the grant date.  Each of the current
independent directors has received such options for 15,000 shares, exercisable
at the market value on the date of grant, except that the options granted to Mr.
Giess and Mr. Jastrem are exercisable at $3.00 per share even though the market
value was less than $3.00 on the date on which these options were granted.  Mr.
Giess has assigned to ING the compensation to which he would be entitled as an
independent Director.  On December 10, 1997, options to purchase an additional
5,000 shares of Common Stock were granted to each of the Company's independent
directors.  Such options were also granted under the Company's 1994 Stock Option
Plan for Directors, and are exercisable ratably 12 and 24 months after the grant
date, at an exercise price per share equal to the market value at the grant
date.  Mr. Giess has also assigned to ING these additional options.  The
committee administering the 1994 Stock Option Plan for Directors granted these
additional options in recognition of the extraordinary efforts required of the
Board during the year.

                                                                   Page 26 of 61
<PAGE>
 
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND    MANAGEMENT

(a)  The table below shows as of December 15, 1998 the amount and class of the
Company's voting stock owned beneficially (within the meaning of Rule 13d-3 of
the Securities Exchange Act of 1934, as amended) by each holder of more than 5%
of the Company's shares, each director of the Company, each Named Executive
Officer and all directors and officers of the Company as a group:

<TABLE>
<CAPTION>
      Name and Address of                  Number of Shares                     Percentage of
      Beneficial Owner (1)                Beneficially Owned                   Common Stock (8)
-------------------------------          ---------------------            -------------------------
<S>                                          <C>                                 <C>
Carlos D. DeMattos                          2,149,784 (9)                         23.0%
 
Ernst F. Nettmann                            105,000 (10)                          1.1%
 
Jack Brehm (2)                                20,500 (11)                           *
 
John H. Donlon (3)                            17,500 (12)                           *
 
Jerome E. Farley (4)                          17,500 (13)                           *
 
Benjamin P. Giess (5)                      4,139,964 (14)                         36.1%
 
ING Equity Partners, L.P. I (6)            4,139,964 (15)                         36.1%
 
John F. Jastrem (7)                           17,500 (16)                           *
 
John H. Alonzo                                17,500 (17)                           *
 
Gary S. Borman                                22,000 (18)                           *
 
Kenneth W. Kramer                             27,000 (19)                           *
 
---------------------------------------------------------------------------------------------------------- 
                                          
All officers and directors as a group      6,534,248                              71.6%
(13 persons)
</TABLE>

* Less than 1%

(1)     Unless otherwise noted, all shares are beneficially owned and the sole
        voting power is held by the person indicated, and the address of each of
        these individuals is: c/o Matthews Studio Equipment Group, 3111 North
        Kenwood Street, Burbank, California 91505.

(2)     This individual's address is: 19501 Greenbriar Drive, Tarzana,
        California 91356.

(3)     This individual's address is: 2813 West Alameda Avenue, Burbank,
        California 91506.

(4)     This individual's address is: 4100 West Alameda Avenue, Burbank,
        California 91505.

(5)     This individual's address is: 135 East 57th Street, 16th Floor, New
        York, New York 10022.


                                                                   Page 27 of 61
<PAGE>
(6)     This company's address is: 135 East 57th Street, 16th Floor, New York,
        New York 10022.
 
(7)     This individual's address is: 1913 Ripley Avenue, Redondo Beach,
        California 90278.

(8)     Based on 9,130,856 shares outstanding. Options and warrants are added
        where applicable.

(9)     Includes 1,674,450 shares owned by a family trust with trust management
        vested in the named director as the trustee.  Includes options to
        purchase 233,334 shares of the Company's common stock.

(10)    Includes options to purchase 100,000 shares of the Company's common
        stock.

(11)    Includes options to purchase 17,500 shares of the Company's common
        stock.

(12)    Represents options to purchase 17,500 shares of the Company's common
        stock.

(13)    Represents options to purchase 17,500 shares of the Company's common
        stock.

(14)    Mr. Giess disclaims beneficial ownership of these shares.  Mr. Giess is
        an executive officer of Lexington Partners, Inc., which is the sole
        general partner of Lexington Partners, L.P., the sole general partner of
        ING.  However, the Company has been advised by Mr. Giess that he does
        not exercise sole or shared voting or dispositive power with respect to
        the shares held by ING described in footnote (15).

(15)    Includes a warrant to purchase 2,322,464 shares of the Company's common
        stock.  Upon occurrence of an event of default under the Purchase
        Agreement, ING Equity Partners, L.P. I is entitled to exercise voting
        rights for the 2,322,464 shares underlying the warrant pursuant to a
        share of the Company's preferred stock issued to ING.  Also includes
        options issued to ING Equity Partners, L.P. I, to purchase 17,500 shares
        of the Company's common stock, as consideration for services of its
        appointee, Benjamin P. Giess.

(16)    Represents options to purchase 17,500 shares of the Company's common
        stock.

(17)    Represents options to purchase 17,500 shares of the Company's common
        stock.

(18)    Represents options to purchase 22,000 shares of the Company's common
        stock.

(19)    Includes options to purchase 20,000 shares of the Company's common
        stock.

(b) There are no arrangements, known to the Company, the operation of which may
 at a subsequent date result in a change in control of the Company, except as
 described in Item 7 hereof.

                                                                   Page 28 of 61
<PAGE>
 
Employment Agreements

DeMattos Agreement

The Company entered into a written Employment Agreement with Carlos D. DeMattos
on July 1, 1995 for such individual to serve as the Company's Chief Executive
Officer, President and Chairman of the Board for a three-year term commencing
July 1, 1995.  Mr. DeMattos was also granted options to purchase 200,000 shares
of the Company's common stock at an exercise price of $3.00 per share.  The
right to purchase up to 66,667 shares vests in like installments commencing on
July 1, 1996 and the next two successive anniversaries of that date, and these
options are exercisable until July 2005.  At the Company's annual shareholder
meeting held on May 30, 1996, the shareholders approved these options.

Effective as of October 1, 1997, the Employment Agreement with Mr. DeMattos was
amended (as amended, the "DeMattos Agreement").  The term of employment under
the DeMattos Agreement will expire September 30, 2000 but, similar to the July
1, 1995 Employment Agreement, Mr. DeMattos has agreed to provide consulting
services to the Company for a period of five years following the termination
date, at 50% of the base salary.  The base salary under the DeMattos Agreement
was increased to $400,000 effective October 1, 1997 and to $440,000 effective
October 1, 1998.  Mr. DeMattos' Agreement call for him to receive an incentive
bonus for fiscal year 1998 ranging from 20% to 100% of his base salary, based
upon attainment by the Company of specific earnings per share levels (described
in more detail in the DeMattos Agreement).  The annual incentive bonus for
fiscal years 1999 and 2000 will be based on performance levels to be established
by the Company's Compensation Committee.  As part of the amendment, options to
purchase an additional 100,000 shares of the Company's common stock at an
exercise price of $4.74 per share were granted to Mr. DeMattos.  These options
are in addition to the options to purchase 200,000 shares of the Company's
common stock granted under the July 1, 1995 Employment Agreement. These
additional options will vest at one-third increments on October 1, 1998 and on
the next two successive anniversaries of that date, and were granted under and
are subject to the terms of the Company's 1994 Stock Option Plan.

Phillips Agreement

On July 1, 1995, the Company and Studio Equipment entered into a written
Employment Agreement ("Phillips Agreement") with Edward Phillips, for him to
serve as president of Studio Equipment.  In connection with the sale of the
Manufacturing Operations, Mr. Phillips released the Company from all obligations
under the Phillips Agreement.


COMPENSATION COMMITTEE INTERLOCKS AND INSIDER
PARTICIPATION IN COMPENSATION DECISIONS

None.


REPORT ON EXECUTIVE COMPENSATION

The compensation for the highest paid executive officers of the Company in
fiscal 1998 (whose total salary and bonus equals or exceeds $100,000) is set
forth in the Summary Compensation Table which preceded this section.

                                                                   Page 29 of 61
<PAGE>
 
Total compensation for executive officers consists of a combination of salaries,
bonuses and contributions to the Company's 401(k) plan.

Other than the Chairman of the Board of the Company and those officers with
written agreements for incentive bonuses, incentive bonuses that are awarded
from time to time are determined by senior management based on the financial
performance of the individual subsidiaries, responsibilities of the executive
and other factors.


ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Nettmann, a corporation owned by a director of the Company, manages the Cam-
Remote(R) and Mini-Mote(R) C.A.T.(R) business of Studio Electronics.  The
Company and Nettmann share costs under the Management Agreement.  See Item 1.
Business - Cam-Remote and Mini-Mote Systems.  Under the Management Agreement
Nettmann is entitled to compensation based on revenues of Studio Electronics.

For discussion of the issuance of the subordinated notes to ING pursuant to the
Purchase Agreement between the Company and ING, which is an affiliate of
Benjamin P. Giess, a director of the Company, as well as other agreements made
by the Company and Carlos D. DeMattos, such as the Registration Rights Agreement
and the Stockholders Agreement, see Item 7, Management's Discussion and Analysis
of Financial Condition and Results of Operation.

On September 28, 1998, the Company sold the Manufacturing Operations to Phillips
Associates, an affiliate of Mr. Edward Phillips.  Prior to that date Mr.
Phillips was a director of the Company.  The Company's decision to sell the
Manufacturing Operations was based on the inherent conflicts between the
Manufacturing Operations and the Company's rental operations, where many of the
Manufacturing Operations' customers competed directly against the Company's
rental operations.  The Company's decision to dispose of the Manufacturing
Operations was also based on the availability of alternative sources of supply,
at commercially reasonable rates, for the equipment which was being manufactured
by the Manufacturing Operations.

The transaction was structured as a stock for stock exchange in which the
Company transferred all of the shares of stock in Studio Equipment to Phillips
Associates in exchange for 1,916,450 shares of the Company's common stock held
by Phillips Associates and assumption of $5,000,000 of the Company's debt.  In
connection with this transaction, Mr. Phillips surrendered his options to
purchase 274,000 shares of the Company's common stock in consideration for a
$75,000 payment from the Company, and released the Company from all obligations
under the Employment Agreement dated July 1, 1995, between the Company and
Studio Equipment, on the one hand, and Mr. Phillips, on the other hand.

The Company and Studio Equipment have entered into a three-year royalty-free
license agreement pursuant to which Studio Equipment is permitted to use the
trademark "Matthews" for the Manufacturing Operations.  Also as part of the
transaction, PDM, a general partnership comprised of Messrs. DeMattos and
Phillips, released the Company from all obligations under the lease for real
property occupied by Studio Equipment in Burbank, California.  This lease has an
expiration date of December 31, 1999 and requires approximately $40,000 in
monthly rent.

On the closing of the sale of the Manufacturing Operations, Mr. Phillips
resigned from the Company's Board of Directors and the Executive Committee of
the Company's Board of Directors.

As part of the acquisition, the Company entered into real estate leases with an
affiliate of HDI, for facilities in Covington, Kentucky and Cincinnati, Ohio
from which HDI's business was conducted. These leases have expiration dates
through October 31, 2002 and require approximately $31,000 in monthly rent.

As part of the acquisition, the Company entered into real estate leases with an 
affiliate of Oleser, for facilities located in Hollywood, California, from which
Oleser's business was conducted.  These leases have expiration dates through 
October 31, 2002 and require approximately $17,000 in monthly rent.

                                                                   Page 30 of 61
<PAGE>
 
                                    PART IV

ITEM 14.  EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

(a)(1) & (2)      The response to this portion of Item 14 is submitted as a
                  separate section of this report and appears on page 
                  33.

(a)(3)            The Exhibit Index appears at page 58.

(b)               Reports on Form 8-K - Form 8-K dated April 1, 1998 was filed
                  during the third quarter of the period covered by this report
                  and Form 8-K dated September 28, 1998 was filed during the
                  last quarter of the period covered by this report.

(c)               The Exhibit Index appears at page 58 which follows the
                  Financial Statements.

(d)               Financial Statement Schedules - The response to this portion
                  of Item 14 is submitted as a separate section of this report
                  and appears on page 33.

                                                                   Page 31 of 61
<PAGE>
 
SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this annual report on Form 10-K for
the fiscal year ended September 30, 1998, to be signed on its behalf by the
undersigned, thereunto duly authorized.


Dated:  January 13, 1999                  MATTHEWS STUDIO EQUIPMEN GROUP

                                           By:  S/Carlos D. DeMattos
                                                  --------------------
                                                Carlos D. De Mattos
                                                Chairman of the Board, Chief
                                                Executive Officer and President
            

Pursuant to the requirements of the Securities Exchange Act of 1934, this Report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.


<TABLE>
<CAPTION>
<S>                                             <C>                                           <C> 
S/Carlos D. DeMattos                            Chairman of the Board,                        January 13, 1999
-------------------------------------           Chief Executive Officer
Carlos D. De Mattos                             and President
 
S/Ernst F. Nettmann                             Director, President of Matthews Studio        January 13, 1999
-------------------------------------           Electronics, Inc.
Ernst F. Nettmann

S/Jack Brehm                                    Director                                      January 13, 1999
-------------------------------------
Jack Brehm

S/John H. Donlon                                Director                                      January 13, 1999
-------------------------------------
John H. Donlon

S/Jerome E. Farley                              Director                                      January 13, 1999
-------------------------------------
Jerome E. Farley

S/Benjamin P. Giess                             Director                                      January 13, 1999
-------------------------------------
Benjamin P. Giess

S/John F. Jastrem                               Director                                      January 13, 1999
-------------------------------------
John F. Jastrem

S/John A. Alonzo                                Director                                      January 13, 1999
-------------------------------------
John A. Alonzo

S/Godwin Eruaga                                 Chief Accounting Officer                      January 13, 1999
-------------------------------------
Godwin Eruaga
</TABLE>

                                                                   Page 32 of 61
<PAGE>
 
               Matthews Studio Equipment Group and Subsidiaries
                  Index to Consolidated Financial Statements
                       and Financial Statement Schedule



                                                                       Page No. 


Report of Independent Auditors .........................................  34

Consolidated Balance Sheets at September 30, 1998 and 1997 .............  35

Consolidated Statements of Operations for the years ended September 30,
1998, 1997 and 1996 ...................................................   36

Consolidated Statements of Shareholders' Equity for the years ended
September 30, 1998, 1997 and 1996 .....................................   37

Consolidated Statements of Cash Flows for the years ended
September 30, 1998, 1997 and 1996 .....................................   38

Notes to Consolidated Financial Statements ............................   39 

The following Consolidated Financial Statement Schedule of Matthews
Studio Equipment Group is included in Item 14 (d)

Schedule II          Valuation and Qualifying Accounts


All other schedules for which provision is made in the applicable accounting
regulation of the Securities and Exchange Commission are not required under  the
related instructions or are inapplicable and, therefore, have been omitted.

                                                                   Page 33 of 61
<PAGE>
 
                        Report of Independent Auditors


Shareholders and Board of Directors
Matthews Studio Equipment Group

We have audited the accompanying consolidated balance sheets of Matthews Studio
Equipment Group and subsidiaries as of September 30, 1998 and 1997, and the
related consolidated statements of operations, shareholders' equity, and cash
flows for each of the three years in the period ended September 30, 1998.  Our
audits also included the financial statement schedule listed in the Index at
Item 14(a).  These financial statements and schedule are the responsibility of
the Company's management.  Our responsibility is to express an opinion on these
financial statements and schedule based on our audits.

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

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Matthews Studio Equipment Group and subsidiaries at September 30, 1998 and 1997,
and the consolidated results of their operations and their cash flows for each
of the three years in the period ended September 30, 1998, in conformity with
generally accepted accounting principles.  Also in our opinion, the related
financial statement schedule, when considered in relation to the basic financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.


                                         S/Ernst & Young LLP

Los Angeles, California
December 29, 1998

                                                                   Page 34 of 61
<PAGE>
 
               Matthews Studio Equipment Group and Subsidiaries
                          Consolidated Balance Sheets
                               ($ in thousands)


<TABLE>
<CAPTION>
                                                                                                  September 30,
                                                                                          1998                    1997
                                                                                   ----------------        ----------------
<S>                                                                                   <C>                     <C>
ASSETS:
Current assets:
   Cash and cash equivalents                                                                $   331                 $   393
   Accounts receivable less allowance for
      doubtful accounts of $1,259 in 1998 and $745 in 1997                                    8,981                   9,144
   Current portion of net investment in finance
      and sales-type leases                                                                     353                     829
   Inventories                                                                                3,783                   7,844
   Prepaid expenses and other current assets                                                    536                     923
   Income tax refund receivable                                                               1,045                     645
   Deferred income taxes                                                                        753                     894
                                                                                            -------                 -------
      Total current assets                                                                   15,782                  20,672
 
Property plant and equipment, net                                                            51,650                  35,187
Net investment in finance and sales-type leases, less current portion                           248                     455
Goodwill less accumulated amortization of $681 in 1998 and $303 in 1997                      23,168                   4,052
Other assets                                                                                  3,538                   1,505
                                                                                            -------                 -------
   Total assets                                                                             $94,386                 $61,871
                                                                                            =======                 =======
 
LIABILITIES AND SHAREHOLDERS' EQUITY:
Current liabilities:
   Accounts payable                                                                         $ 4,634                 $ 5,241
   Accrued liabilities                                                                        3,946                   2,950
   Current portion of long-term debt and capital lease obligations                            4,687                   2,819
                                                                                            -------                 -------
   Total current liabilities                                                                 13,267                  11,010
 
Long-term debt and capital lease obligations less current portion                            74,691                  36,715
Deferred income taxes                                                                         3,815                   2,976
 
Commitments and contingencies
 
Shareholders' equity
   Preferred stock, no par value, authorized
      1,000,000 shares; issued and outstanding
      one share in 1998 and 1997                                                                  -                       -
      Common stock, no par value, authorized
      20,000,000 shares; issued and outstanding 9,110,000 shares in 1998
      and 10,632,000 shares in 1997                                                           7,144                   6,168
      Retained earnings                                                                       5,051                   5,002
                                                                                            -------                 -------
                                                                                             12,195                  11,170

Less retired common stock  (1,916,450 shares in 1998)                                         9,582                       -
                                                                                            -------                 -------
Total shareholders' equity                                                                    2,613                  11,170
                                                                                            -------                 -------
Total liabilities and shareholders' equity                                                  $94,386                 $61,871
                                                                                            =======                 =======
</TABLE>

The accompanying notes are an integral part of these consolidated financial
statements.

                                                                   Page 35 of 61
<PAGE>
 
               Matthews Studio Equipment Group and Subsidiaries
                     Consolidated Statements of Operations
                     (in thousands, except per share data)

<TABLE>
<CAPTION>                                         
                                                                            Year ended September 30,
                                                                       1998           1997           1996
                                                                     ---------      ---------      --------
<S>                                                                  <C>            <C>            <C>
Revenues from rental operations                                       $33,317        $25,589        $14,125
Net product sales                                                      27,954         20,769         16,079
                                                                      -------        -------        -------
                                                                       61,271         46,358         30,204
Costs and expenses:
   Cost of rental operations                                           20,274         14,519          8,016
   Cost of product sales                                               19,184         14,081         10,257
   Selling, general and administrative                                 20,801         12,629          8,849
   Interest, net                                                        5,801          2,675          2,044
                                                                      -------        -------        -------
                                                                       66,060         43,904         29,166
                                                                      -------        -------        -------
   Income (loss) from operations                                       (4,789)         2,454          1,038
   Gain on sale of manufacturing subsidiary                             3,963       -                     -
                                                                      -------        -------        -------
   Income (loss) before income taxes and extraordinary item              (826)         2,454          1,038
   Income tax provision (benefit)                                        (875)           748             35
                                                                      -------        -------        -------
   Income before extraordinary item                                        49          1,706          1,003
   Extraordinary loss on early extinguishment of debt - net
    of income tax benefit of $130                                           -           (194)             -
                                                                      -------        -------        -------
Net income                                                            $    49        $ 1,512        $ 1,003
                                                                      =======        =======        =======
 
Income per common share - basic:
   Income before extraordinary item                                   $  0.00        $  0.16        $  0.10
   Extraordinary loss                                                       -          (0.02)             -
                                                                      -------        -------        -------
   Net income per share                                               $  0.00           0.14        $  0.10
                                                                      =======        =======        =======
 
Income per common share - diluted:
   Income before extraordinary item                                   $  0.00        $  0.15        $  0.10
   Extraordinary loss                                                       -          (0.02)             -
                                                                      -------        -------        -------
   Net income per share                                               $  0.00        $  0.13        $  0.10
                                                                      =======        =======        =======
 
   Weighted average number of common shares outstanding:
   Basic                                                               10,848         10,456         10,328
                                                                      =======        =======        =======
   Diluted                                                             12,223         11,108         10,330
                                                                      =======        =======        =======
</TABLE>



The accompanying notes are an integral part of these consolidated financial
statements.

                                                                   Page 36 of 61
<PAGE>
 
               Matthews Studio Equipment Group and Subsidiaries
                Consolidated Statements of Shareholders' Equity
                                (in thousands)



<TABLE>
<CAPTION>
                                                                    Common Stock
                                                                   -------------
                                                                                                   Retired
                                                                Number of              Retained    Common
                                                                  shares     Amount    Earnings     Stock      Total
                                                                ----------   -------   --------   ---------   --------
<S>                                                             <C>          <C>       <C>        <C>         <C>
Balance at September 30, 1995                                      10,314     $5,567     $2,487   $  -        $ 8,054
   Exercise of stock options and warrants                              17         17          -          -         17
   Net income                                                           -          -      1,003          -      1,003
                                                                   ------     ------     ------   --------    -------
Balance at September 30, 1996                                      10,331      5,584      3,490          -      9,074
   Exercise of stock options and warrants                              15         24          -          -         24
   Issuance of common stock in
       connection with the acquisition of
       Duke City Video, Inc.                                          286        560          -          -        560
       Net income                                                       -          -      1,512          -      1,512
                                                                   ------     ------     ------   --------    -------
Balance at September 30, 1997                                      10,632      6,168      5,002          -     11,170
Exercise of stock options and warrants                                 44         92          -          -         92
Issuance of common stock in
   connection with the acquisition of
   Haehnle Dwertman, Inc.                                             350        884          -          -        884
        Retired Shares                                             (1,916)         -          -     (9,582)    (9,582)
        Net income                                                      -          -         49          -         49
                                                                   ------     ------     ------   --------    -------
Balance at September 30, 1998                                       9,110     $7,144     $5,051    $(9,582)   $ 2,613
                                                                   ======     ======     ======   ========    =======
</TABLE>


The accompanying notes are an integral part of these financial statements.


                                                                   Page 37 of 61
<PAGE>
 
               Matthews Studio Equipment Group and Subsidiaries
                     Consolidated Statements of Cash Flows
                                (in thousands)


<TABLE>
<CAPTION>
                                                                         Year ended September 30,
                                                                           1998      1997       1996
                                                                       --------   -------    -------
<S>                                                                   <C>         <C>        <C>
Operating activities:
Net income                                                            $     49    $ 1,512    $ 1,003
Adjustments to reconcile net income to net cash
        provided by operating activities:
          Provision for doubtful accounts                                  562        269        295
          Depreciation and amortization
           of property, plant and equipment                              8,301      4,567      2,839
          Amortization of intangibles                                      735        136         57
          Deferred income taxes                                           (834)       404          -
          Gain on sale of assets                                          (442)      (330)      (298)
          Gain on sale of manufacturing operations                      (3,963)         -          -
          Extraordinary loss on early extinguishment of debt                 -        194          -
          Changes in operating assets and liabilities
           net of effects from acquisitions and disposition:
                  Accounts receivable                                   (1,385)    (2,037)    (1,402)
                  Inventories                                           (1,057)    (2,365)      (406)
                  Net investment in leases                                 683        397        697
                  Prepaids and other assets                              1,135       (633)        73
                  Income tax refund receivable                             163       (645)       252
                  Accounts payable and accrued liabilities                 722        747      1,588
                                                                      --------    -------    -------
Net cash provided by operating activities                                4,669      2,216      4,698
 
Investing activities:
Payment for acquisitions                                               (30,770)      (437)         -
Purchase of property and equipment                                     (12,290)    (9,660)    (6,905)
Proceeds from sale of property and equipment                               640        621      1,116
                                                                      --------    -------    -------
Net cash used in investing activities                                  (42,420)    (9,476)    (5,789)
 
Financing activities:
Proceeds from exercise of stock options                                     92         24         17
Proceeds from borrowings                                                41,605     14,065      1,098
Repayment of borrowings                                                 (4,008)    (6,898)         -
                                                                      --------    -------    -------
Net cash provided by financing activities                               37,689      7,191      1,115
 
Net increase (decrease) in cash and cash equivalents                       (62)       (69)        24
 
Cash and cash equivalents at beginning of period                           393        462        438
                                                                      --------    -------    -------
Cash and cash equivalents at end of period                            $    331    $   393    $   462
                                                                      ========    =======    =======
 
Schedule of non-cash investing and financing  transactions:
   Capital lease obligations incurred                                 $    775    $   160    $   143
   Common stock issued for acquired companies                              884        560          -
 
Additional disclosures - Cash paid during year for:
                   Interest                                           $  5,268    $ 2,495    $ 1,878
                   Income taxes                                             68        853         47
</TABLE>


The accompanying notes are an integral part of these consolidated financial
statements.

                                                                   Page 38 of 61
<PAGE>
 
               Matthews Studio Equipment Group and Subsidiaries
                  Notes to Consolidated Financial Statements


1.   Business and Acquisitions

Business - Matthews Studio Equipment Group (the "Company") sells, leases and
rents audio, video, theatrical, film and production equipment and accessories,
to the motion picture, television, corporate, theatrical, video and photography
industries.  The Company operates in one business segment and provides, as a
single source, the necessary production equipment which is otherwise only
available by using many different suppliers.  The Company supplies equipment
such as lights, grip lighting supports,  professional video equipment, camera
mounts, tripods, pedestals,  fluid heads, camera dollies, portable camera
cranes, power generators and production trucks.  In addition, the Company has
fully operational and equipment supplied soundstages and studios.

Acquisitions - Effective January 1, 1997, the Company purchased the assets and
business of Media Lighting Supply, Inc., a lighting supply company in Miami,
Florida. This was merged into Matthews Studio Sales Inc. a newly formed entity
in September, 1998. The acquisition was accounted for under the purchase method
of accounting for business combinations.  The acquisition was made for cash of
$425,000.  In addition, the Company incurred debt of $1,505,000 related to the
transaction.  Cash of  $200,000  was paid on closing, with the remaining portion
of the purchase price becoming due in installments of $100,000, $100,000 and
$25,000 on the first, second and third anniversaries of the closing,
respectively.  The first anniversary installment was paid during fiscal 1998.

Effective May 1, 1997, the Company acquired Duke City Video, Inc. ("Duke City"),
pursuant to stock exchange agreements dated as of May 2, 1997, among the
shareholders of Duke City and Duke City Holdings Inc., a wholly-owned subsidiary
of the Company.  The acquisition was accounted for under the purchase method of
accounting for business combinations.  Pursuant to the stock exchange agreements
the Duke City shareholders received 285,715 restricted shares of the Company's
common stock in exchange for all of the common stock of Duke City, in a
transaction exempt from registration under the Securities Act of 1933.  In
connection with the transaction, the Company reissued a note payable to an
officer of Duke City in the amount of $580,000.

Effective June 1, 1997,  the Company purchased the assets and business of
Centerline Stage & Studio Lighting, Inc. of Tempe, Arizona. The acquisition was
accounted for under the purchase method of accounting for business combinations.
The acquisition was made for cash of $382,000 of which  $237,000  was paid on
closing, with the remaining portion of the purchase price becoming due on
January 1, 1999. In addition, the Company assumed debt of $164,000 related to
the transaction.

In respect of the acquisitions effected during fiscal year 1997 (the "1997
Acquisitions"), goodwill amounted to $4,074,000, and the fair market value of
assets acquired was $13,091,000.  The fair value of liabilities assumed in
connection with those acquisitions was $16,168,000.

Effective October 1, 1997, the Company purchased the assets and business of
Haehnle Dwertman, Inc. ("HDI"), a grip, lighting and video camera rental company
in Covington, Kentucky and Cincinnati, Ohio. The acquisition was accounted for
under the purchase method of accounting for business combinations.  The
acquisition was made for cash of $800,000 and 350,000 restricted and
unregistered shares of the Company's common stock in exchange for all of the
common stock of HDI, in a transaction exempt from registration under the
Securities Act of 1933.  In addition, the Company assumed debt of $1,558,000
relating to the transaction.

                                                                   Page 39 of 61
<PAGE>
 
               Matthews Studio Equipment Group and Subsidiaries
            Notes to Consolidated Financial Statements (continued)


1.   Business and Acquisitions (continued)

As part of the acquisition, the Company entered into real estate leases with an
affiliate of HDI, for facilities in Covington, Kentucky and Cincinnati, Ohio
from which HDI's business was conducted.  The Company is continuing to operate
the business acquired from HDI at those facilities.

Effective November 1, 1997, the Company purchased the assets and business of
Olesen, a theatrical supply company in Hollywood, California.  The acquisition
was accounted for under the purchase method of accounting for business
combinations.  The acquisition was made for cash of $1,450,000 of which
$1,000,000 of cash was paid on closing, with the remaining portion of the
purchase price becoming due in two equal installments on October 31, 1998 and
October 31, 1999.  In addition, the Company assumed debt of $692,000 relating to
the transaction.  As part of the acquisition, the Company entered into real
estate leases with an affiliate of Olesen, for facilities located in Hollywood,
California, from which Olesen's business was conducted.  The Company is
continuing to operate the business acquired from Olesen from those facilities.  
The first installment of $225,000 was paid in October 1998.

Effective April 1, 1998, the Company purchased the assets and business of Four
Star Holding, Inc. ("Four Star"), a holding company which owns 100% of Four Star
Lighting, Inc.  The acquisition was accounted for under the purchase method of
accounting for business combinations.  Four Star provides rentals of lighting
and other equipment for use in theatrical productions.  Pursuant to a stock
purchase agreement, in exchange for all of the capital stock of Four Star, the
Company paid $18,421,000 in cash to the shareholders of Four Star and $9,104,000
in cash to reduce the long-term debt of Four Star.  In addition, the Company
assumed debt of $1,907,000 relating to the transaction.  Four Star has
operations in Mount Vernon, New York.  It is continuing its business and
operations as a wholly-owned subsidiary of the Company.

In respect to the acquisitions made during fiscal year 1998, the excess of
purchase price over the fair market value of net assets acquired amounted to
$19,089,000 and was recorded as goodwill. The fair market value of assets
acquired was $15,387,000 and the fair value of liabilities assumed in connection
with these acquisitions was $4,157,000.

The Company's other operating subsidiaries include Hollywood Rental Company, LLC
("HRC"), Matthews Studio Electronics, Inc. ("Studio Electronics") and Matthews
Acceptance Corporation ("MAC"), each of which is wholly owned by the Company.
HRC supplies the motion picture and television industry with a diverse range of
production equipment, specializing in lighting and grip equipment, power
generators and production trucks on a rental basic. HRC is the successor by
merger to Hollywood Rental Co., Inc. through an internal reorganization, with
HRC having succeeded to all of the business, assets and liabilities of Hollywood
Rental Co., Inc. Studio Electronics manufactures and rents Cam-Remote(R) and
Mini-Mote(R) C.A.T. Systems (the "Systems") under short-term rental and long-
term lease arrangements. MAC is engaged in the leasing of equipment on a long
term basis. MAC generally purchases equipment selected by a lessee and rents
such equipment to the lessee on a long term basis.

                                                                   Page 40 of 61
<PAGE>
 
               Matthews Studio Equipment Group and Subsidiaries
            Notes to Consolidated Financial Statements (continued)


2.  Accounting Policies

Principles of Consolidation - The financial statements include the accounts of
the Company and its subsidiaries as of the respective date each subsidiary was
acquired.  All significant intercompany balances and transactions have been
eliminated.

Use of Estimates - The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
the disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period.  Actual results could differ from those estimates.

Cash Equivalents - The Company considers all highly liquid investments with a
maturity of three months or less when purchased to be cash equivalents.  The
carrying value of these instruments approximates market value because of their
short maturity.

Concentration of Credit Risk - The Company's customers are located around the
world and are principally engaged in motion picture and television production,
theatrical production, corporate video, commercial photography, or in providing
rental equipment to companies in these industries.  The Company generally sells
on credit terms of 30 days and does not require collateral, except for items
sold under capital leases in which it retains a security interest.  The Company
rents equipment under short-term operating leases on credit terms of generally
30 days and retains a security interest.

For the fiscal year ended September 30, 1997, a single rental customer accounted
for approximately 10.9% of total revenues.

Fair Values of Financial Instruments - The Statement of Financial Accounting
Standards No. 107 "Disclosure About Fair Value of Financial Instruments" ("SFAS
No. 107") requires disclosure of fair value information about most financial
instruments both on and off the balance sheet, if it is practicable to estimate.
SFAS No. 107 excludes certain financial instruments such as certain insurance
contracts and all non-financial instruments from its disclosure requirements.  A
financial instrument is defined as a contractual obligation that ultimately ends
with the delivery of cash or an ownership interest in an entity.  Disclosure
regarding the fair value of financial instruments is derived using external
market sources, estimates using present value or other valuation techniques.
Cash, accounts receivable, accounts payable, accrued and other liabilities and
short-term revolving credit agreements and variable rate long-term debt
instruments approximate their fair value.

Inventories - Inventories are principally stated at the lower of first-in,
first-out cost or market.

Other Assets - The Company purchased the grip and lighting equipment of Disney
Production Services, Inc. ("DPS") in June 1998, and concurrently entered into an
agreement to operate equipment rental and supply departments at certain DPS
locations. In connection with these transactions, the Company paid $1,500,000
for the right to operate the equipment rental and supply departments at DPS
locations and has capitalized this amount as a deferred asset to be amortized
over the seven-year term of the agreement. Also, included in other assets are
loan fees that are being amortized as interest expense over the term of the bank
facility.

                                                                   Page 41 of 61
<PAGE>
 
               Matthews Studio Equipment Group and Subsidiaries
            Notes to Consolidated Financial Statements (continued)


2.  Accounting Policies (continued)

Goodwill - Goodwill represents the excess of cost over the fair value of net
assets acquired and is amortized using the straight-line method, generally over
25 years. Useful lives are determined on a case by case basis for each business
acquired. The carrying value of goodwill is reviewed if the facts and
circumstances suggest that it may be impaired. If this review indicates that
goodwill will not be recoverable, as determined based on estimated undiscounted
cash flows of the Company over the remaining amortization period, the Company's
carrying value would be reduced by the estimated shortfall of discounted cash
flows.

Marketing and Advertising Expenses - Marketing expenses (including trade show
and catalogue costs) are capitalized as prepaid expenses and amortized  over six
to twenty-four-month  periods.  The marketing  expenses, including amortization
of capitalized costs, for the years ended September 30, 1998, 1997 and 1996 were
$384,000, $409,000, and $234,000. respectively.  The advertising expenses
(including media advertising and promotions)  for the years ended September 30,
1998, 1997 and 1996 were $335,000, $175,000 and $139,000, respectively.

Property and Equipment - Property and equipment, including items purchased under
capital leases, are recorded at cost.  Costs incurred for major renewals and
betterments that extend the useful life of the assets are capitalized, whereas
repair and maintenance costs are charged to expense as incurred.  When property
is retired or otherwise disposed of, the related cost and accumulated
depreciation are removed from the accounts and any resulting gain or loss is
reflected in income.  Depreciation and amortization is calculated using the
straight-line method over the estimated useful lives of the assets as follows:


     Rental equipment                 5 - 10 years


     Buildings and improvements       10 - 40 years


     Other                            5 - 10 years


Leasehold improvements are amortized over the estimated useful lives, or the
term of the related leases,  for improvements, whichever is shorter.

Revenue Recognition - The Company recognizes revenue from rentals under
operating leases in the week in which they are earned and recognizes product
sales upon shipment.

Per Share Data - During the year ended September 30, 1998, the Company adopted
the statement of Financial Accounting Standards No. 128 "Earnings Per Share"
("SFAS No. 128") which established standards for computing and presenting
earnings per share ("EPS") for publicly-held common stock or potential common
stock.  SFAS No. 128 supersedes the standards for computing earnings per share
previously found in APB opinion No. 15 "Earnings per Share" and simplifies the
standards for computing earnings per share.   In addition, SFAS No. 128 replaces
the presentation of primary earnings per share with a presentation of basic
earnings per share, requires dual presentation of basic and diluted earnings per
share on the face of the income statement for all entities with complex capital
structures, and requires a reconciliation of the numerator and denominator on
the basic earnings per share computation to the numerator and denominator of the
diluted earnings per share computation.  All periods presented reflect the
adoption of SFAS No. 128 and the impact on amounts previously reported was not
material.

                                                                   Page 42 of 61
<PAGE>
 
               Matthews Studio Equipment Group and Subsidiaries
            Notes to Consolidated Financial Statements (continued)


2.  Accounting Policies (continued)

Income Taxes - The Company utilizes the liability method to determine the
provision for income taxes.  Deferred tax assets and liabilities are determined
based on differences between the financial reporting and tax bases of assets and
liabilities and are measured using the enacted tax rates and laws that will be
in effect when the differences are expected to reverse.  For the years ended
September 30, 1997 and 1996 income tax expense was reduced as a result of
recognition of net operating loss carryforwards which were reserved in prior
years due to uncertainty of realization.

Long-Lived Assets - Long-lived assets used in operations are reviewed
periodically to determine that the carrying values are not impaired and if
indicators of impairment are present or if long-lived assets are expected to be
disposed of, impairment losses are recorded.

Financial Statement Presentation - Certain balances from the September 30, 1997
and 1996 financial statements have been reclassified to conform to the September
30, 1998 presentation.

New Accounting Principles

Comprehensive Income - In June  1997, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards No. 130, "Reporting
Comprehensive Income" ("SFAS 130").  SFAS 130  establishes standards for
reporting and displaying comprehensive income and its components (revenue,
expenses, gains and losses) in financial statements.  SFAS 130 requires that all
items that are required to be recognized under accounting standards as
components of comprehensive income be reported in a financial statements that is
displayed with same prominence as other financial statements.  It is effective
for fiscal years beginning after December 15, 1997.  The Company adopted this
new standard in fiscal year 1998, and has determined that such new standard has
no impact on the Company's financial statements.

Segment Reporting - In June 1997, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards No. 131, "Disclosures about
Segments of an Enterprise and Related Information " ("SFAS 131"). This Statement
requires that a public business enterprise report financial and descriptive
information about its reportable operating segments. Generally, financial
information is required to be reported on the basis that it is used internally
for evaluating segment performance and deciding how to allocate resources to
segments. It is effective for fiscal years beginning after December 15, 1997.
The Company adopted this new standard in fiscal year 1998, and has determined
that such new standard has no impact on its financial statements.

In June 1998, the FASB issued No. 133, "Accounting for Derivative Instruments
and Hedging Activities"("SFAS 133"). This statement requires that all derivative
instruments to be recorded on the balance sheet at their fair value. Changes in
the fair value of derivatives will be recorded each period in current earnings
or other comprehensive income, depending on whether a derivative is designated a
part of a hedge transaction and, if it is, the type of hedge transaction. The
new rules will be effective the first quarter of 2000. The company is in the
process of determining the impact of this new standard and anticipates that it
will not have a material impact on the Company's financial results when
effective.


                                                                   Page 43 of 61
<PAGE>
 
               Matthews Studio Equipment Group and Subsidiaries
            Notes to Consolidated Financial Statements (continued)


3.   Earnings per Share

The following is a reconciliation of the computations for basic and diluted EPS
(in thousands, except per share data):


<TABLE>
<CAPTION>
                                                        For the Year Ended September 30,
                                                        --------------------------------
                                               1998                                                 1997
                             --------------------------------------------------------------------------------------
                               Income         Shares       Per-Share         Income         Shares       Per-Share
                             (Numerator)   (Denominator)     Amount        (Numerator)   (Denominator)     Amount
                             -----------   -------------   ----------      -----------   -------------   ----------
<S>                          <C>           <C>             <C>             <C>           <C>             <C>
Basic EPS:
Income available
to common stockholders              $49          10,848         $0.00          $1,512          10,456         $0.14
                                                                =====                                         =====
 
Effect of dilutive
options and warrants                  -           1,376                             -             652
                                    ---          ------                        ------          ------
 
Diluted EPS:
Income available to
common stockholders and
 assumed conversions                $49          12,223         $0.00          $1,512          11,108         $0.13
                                    ===          ======         =====          ======          ======         =====
</TABLE>

<TABLE>
<CAPTION>
                                        For the Year Ended September 30, 1996
                                        -------------------------------------
 
                                   Income               Shares            Per -Share
                                 (Numerator)        (Denominator)           Amount
                              -----------------   ------------------   ----------------
<S>                           <C>                 <C>                  <C>
Basic EPS:
Income available
to common stockholders                  $1,003               10,328               $0.10
                                                                                  =====
 
Effect of dilutive
options and warrants                         -                    2
                                        ------               ------
 
Diluted EPS:
Income available to
common stockholders and
assumed conversions                     $1,003               10,330               $0.10
                                        ======               ======               =====
</TABLE>


Options to purchase 162,000 shares of common stock at a range of $4.13 to $4.74
per share, and 673,000 shares of common stock at a range of $3.00 to $4.38 per
share, and 3,300,000 shares of common stock at a range of $2.20 to $4.13 per
share, for the year ended September 30, 1998, 1997 and 1996, respectively, were
outstanding during the periods yet excluded from the computation of diluted EPS
because the options' exercise prices were greater than the average market price
of the common stock.

                                                                   Page 44 of 61
<PAGE>
 
               Matthews Studio Equipment Group and Subsidiaries
            Notes to Consolidated Financial Statements (continued)


4.   Inventories

Inventories consist of the following (in thousands):

<TABLE>
<CAPTION>
                                                                              September 30,
                                                            1998                                          1997
                                                 ----------------------------------------------------------------------
 
<S>                                                        <C>                                           <C>
Raw materials and work in process                          $     -                                         $2,388
Finished Goods                                               3,783                                          5,456
                                                            ------                                         ------
                                                            $3,783                                         $7,844
                                                            ======                                         ======
</TABLE>


5. Property, Plant and Equipment

The following is a summary of property, plant and equipment (in thousands):
<TABLE>
<CAPTION>
 
                                                            September 30,
                                                         1998         1997
                                                         ----         ----
<S>                                                    <C>            <C>
 
   Rental equipment                                     $71,550         $47,169
   Manufacturing equipment and tooling                       99           1,952
   Office furniture and equipment                         3,421           3,627
   Land and building                                      1,554           2,131
   Leasehold improvements                                 1,181           1,112
                                                        -------         -------
                                                         77,805          55,991
   Less accumulated depreciation and amortization                                
     (including $23,633 and $16,530 in 1998 & 1997, 
     respectively, for rental equipment)                 26,155          20,804 
                                                        -------         ------- 

   Property and equipment, net                          $51,650         $35,187
                                                        =======         =======
 
</TABLE>

Amortization of capital leases is included in depreciation expense Property Plan
E and equipment also includes the following assets recorded under capital
leases. (in thousands):

<TABLE>
<CAPTION>
                                                                                            September 30,
                                                                                  1998                       1997
                                                                                 -----------------------------------
<S>                                                                               <C>                        <C>
Property and equipment                                                            $6,079                      $5,933
Less accumulated amortization                                                     $1,645                      $  742
                                                                                  ------                      ------
                                                                                  $4,434                      $5,191
                                                                                  ======                      ======
</TABLE>


                                                                   Page 45 of 61
<PAGE>
 
               Matthews Studio Equipment Group and Subsidiaries
            Notes to Consolidated Financial Statements (continued)


6. Gain on Sale of Manufacturing Subsidiary

In September 1998, the Company transferred all of the shares of stock of its
subsidiary Matthews Studio Equipment, Inc. which designed and manufactured
equipment and accessories for lighting support and lighting control to Phillips
Associates, an entity owned by a trust controlled by a former shareholder and
director of the Company, in exchange for 1,916,450 shares of the Company's
common stock and assumption of $5,000,000 of the Company's bank debt.  As a
result of this transaction, the Company recorded a gain of $3,963,000.  The
Company's results of operations included net sales and operating income
of $13,452,000 and $763,000, in 1998 respectively, and $12,689,000 and $424,000
in 1997, and $11,489,000 and $672,000 in 1996 from this manufacturing
subsidiary.

7.    Net Investment in Leases

Finance and Sales Type Leases - The Company's net investment in finance and
sales-type leases consists of the following (in thousands):

<TABLE>
<CAPTION>
                                                                                   September 30,
                                                                     1998                                1997
                                                                    ---------------------------------------------
<S>                                                                  <C>                             <C>                   
Minimum lease payments receivable                                      $ 668                           $1,398
Unearned income                                                          (67)                            (114)
                                                                       -----                           ------
Net investment in leases,
       including current portion of $353 in 1998
        and $829 in 1997                                               $ 601                           $1,284
                                                                       =====                           ======
</TABLE>


Future annual minimum lease payments receivable under finance and sales-type
leases are as follows at September 30, 1998 (in thousands):
<TABLE>
<CAPTION>
 
<S>                                                  <C>   
     1999                                            $374  
     2000                                             117  
     2001                                              56  
     2002                                              53  
     2003 and thereafter                               68  
                                                     ----  
                                                     $668  
                                                     ====   
                             
</TABLE>
Any unguaranteed residual value of leased property at the end of the lease term
under finance leases accrues to the benefit of the Company.

Operating Leases - The Company is the lessor of equipment and accessories used
in the film, video, television, corporate, commercial photography and theatrical
production industries.  Such leases generally range from one day to several
weeks, with certain rentals of several months.  Substantially all of the leases
are non-cancelable.

                                                                   Page 46 of 61
<PAGE>
 
               Matthews Studio Equipment Group and Subsidiaries
            Notes to Consolidated Financial Statements (continued)


8.   Long-Term Debt

Long-term debt consists of the following (in thousands):

<TABLE>
<CAPTION>
                                                                                       September 30,
                                                                               1998                            1997
                                                                               ----                            ----
<S>                                                                           <C>                            <C>
Revolving Credit Loan                                                           $54,227                        $28,622
Term Note                                                                        16,000                              -
Senior subordinated notes                                                           100                            100
                                                                                -------                        -------
                                                                                 70,327                         28,722
Bank and vendor notes payable, partially collateralized by
     land, building, vehicles and equipment, payable in monthly
      installments, with interest at approximately 6.4% to 10.4%
      due through 2016                                                            3,131                          3,830
Capital lease obligations, with interest at approximately
             6.5% to 22.6% due through 2002                                       4,615                          6,026
Notes payable to related parties, interest at 8% to 8.75%                         1,305                            956
                                                                                -------                        -------
                                                                                 79,378                         39,534
Less current portion                                                              4,687                          2,819
                                                                                -------                        -------
                                                                                $74,691                        $36,715
                                                                                =======                        =======
</TABLE>

The aggregate annual maturities of long-term debt and payments on capital leases
consist of the following at September 30, 1998 (in thousands):

<TABLE>
<CAPTION>
                                                    Long-Term               Capital
                                                       Debt                  Leases
                                                       ----                  ------
<S>                                            <C>                    <C>
1999                                                  $ 2,562                 $2,322        
2000                                                    4,017                  1,803        
2001                                                    3,098                    933        
2002                                                   62,733                    350        
2003                                                      103                    227        
and thereafter                                          2,250                      -        
                                                      -------                 ------        
                                                       74,763                  5,635        
Less amounts representing interest on                                         $1,020        
 capital leases                                                               ------        
Present value of net minimum lease payments                                                 
(including current portion of $2,125)                                         $4,615        
                                                                              ======        
</TABLE>

                                                                   Page 47 of 61
<PAGE>
 
               Matthews Studio Equipment Group and Subsidiaries
            Notes to Consolidated Financial Statements (continued)


8.   Long-Term Debt (continued)

The Chase Bank Facility - On July 27, 1995, the Company and its then principal
subsidiaries (the "Borrowers") entered into an agreement for a senior secured
revolving credit facility with The Chase Manhattan Bank, as agent for the
lenders ("Chase Bank") in an aggregate principal amount of up to $17 million
(the "Chase Facility"). This facility has been subsequently expanded and amended
several times to provide additional funds for acquisitions and growth and to
reflect the impact of those acquisitions, the divestiture of the manufacturing
operations and changing economic conditions.

At September 30, 1998 the Chase Facility included a $16,000,000 term loan and
$64,000,000 revolving credit loan.  The term loan requires quarterly principal
payments of $500,000 commencing December 31, 1998, such payment having been made
by the Company, and increasing to $750,000 commencing December 31, 1999 with the
balance due at maturity.

Interest is payable quarterly and accrues at a rate, depending on the Company's
leverage ratio as defined in the Chase Facility, and at the Company's option at
either (a) LIBOR plus a maximum of 3.25% or (b) the greater of (i) Chase Bank's
Prime Rate plus a maximum of 1.25%, (ii) the Base CD Rate (as determined by
Chase Bank) plus a maximum of 2.25% or (iii) the Federal Funds Effective Rate
plus a maximum of 1.75%.  In addition, the Company pays a fee ranging from
three-eighths of one percent to one-half of one percent on the unused credit
commitment.

The Chase Facility matures August 14, 2002, prohibits the payment of cash
dividends and requires the Company to maintain certain levels of net worth and,
on a quarterly basis, certain levels of EBITDA (earnings before interest, taxes,
depreciation and amortization), and to meet several financial ratios (including
interest coverage, leverage and debt service coverage ratios as defined in the
agreement). The Chase Facility provides for annual capital expenditure
limitations.

Borrowings under the Chase Facility by any of the Borrowers are cross-
collateralized pursuant to a security agreement in which the Borrowers have
granted Chase Bank a first priority lien and security interest in substantially
all of their respective assets. In January 1999, in connection with the issuance
of $3,000,000 letter of credit by ING in favor of the lenders, (see below) the
Company again amended the Chase Facility.  As a result, the revolving credit
loan was reduced to $61,000,000, the covenants were modified for fiscal 1999 and
the effects of prior defaults were eliminated either through waiver or
modification of certain covenants.

ING Subordinated Debt - In July 1995, the Company entered into a purchase
agreement (the "Purchase Agreement") with ING Equity Partners, L.P. I ("ING"),
pursuant to which the Company sold to ING for a total purchase price of $5
million (i) its senior subordinated promissory notes in the aggregate principal
amount of $5 million, bearing interest at an initial rate of 10% per annum, (ii)
a common stock purchase warrant (the "ING Warrant") entitling ING to purchase
2,322,464 of the Company's outstanding shares of common stock at an initial
purchase price per share of $2.50 and having certain antidilutive rights and
(iii) one share of preferred stock of the Company entitling ING to voting rights
with respect to the number of shares underlying the ING Warrant.  The ING
Warrant required an adjustment of the exercise price to $2.00 per share if the
Company did not complete a public offering of its common stock at a price of at
least $2.50 per share with net proceeds to the Company of at least $10 million
by December 31, 1999 (a "Qualifying Offering").

As amended in April 1996, the Purchase Agreement provided for a $100,000
subordinated note maturing July 27, 2005, and a $4,900,000 subordinated note
maturing July 27, 2000, and the share of preferred

                                                                   Page 48 of 61
<PAGE>
 
               Matthews Studio Equipment Group and Subsidiaries
            Notes to Consolidated Financial Statements (continued)


Long-Term Debt (continued)

stock issued to ING was amended to provide voting rights only in the event of a
default under the Purchase Agreement.  On September 29, 1997, the Company
prepaid the $4,900,000 subordinated note.  In connection with this prepayment,
the Company and ING extended the date for the Qualifying Offering to December
31, 1999.  In the fourth quarter of 1997, the Company incurred an extraordinary
loss on the extinguishment of the ING debt of $324,000, before the related tax
benefit of $130,000.

The Purchase Agreement is being amended to reset financial covenants, including
annual capital expenditure limits and acquisition limits, to be similar to those
required under the Chase Facility.

Interest on the remaining $100,000 subordinated note is at the rate of 10.00%
until its maturity.

As part of the transaction with ING, the Company in July 1995 also entered into
a registration rights agreement (the "Registration Rights Agreement") with ING
and Sutro & Co., Incorporated ("Sutro"), which acted as the Company's investment
bankers in connection with the transaction, entitling the holders of the ING
Warrant and the common stock purchase warrant issued to Sutro (for the purchase
of up to 100,000 shares of common stock of the Company), to certain piggy back
registration rights with respect to the shares of common stock issuable upon
exercise of these warrants, as well as any shares of common stock subsequently
acquired by ING. The Registration Rights Agreement also grants ING the right to
require the Company to file a shelf registration statement with respect to the
sale from time to time of 1.4 million shares of common stock of the Company
acquired by ING from a former employee of the Company.

In addition, as part of the transaction with ING, in July 1995 the Company,
Carlos D. DeMattos and Edward Phillips and their affiliates ("Management
Shareholders") entered into a Stockholders' Agreement with ING (the
"Stockholders Agreement") pursuant to which the Company and the Management
Shareholders agreed to nominate and vote for the election of two representatives
of ING to the Board of Directors of the Company, the number of members of which
would be set at nine.  The Stockholders Agreement also contains certain
restrictions on the transfer of shares held by ING and the Management
Shareholders.  In addition, the Stockholders Agreement was amended in April 1996
to provide that the obligations of the Management Shareholders to vote for ING
nominees for the Company's Board of Directors, and the obligation of the Company
to nominate such ING nominees would extend to July 27, 2005, unless a change in
control or certain public offering of the Company's common stock, as described
in the Stockholders Agreement, occurs, in which case those obligations will
terminate.

As part of the January 1999 amendment to the Chase Facility, ING caused ING
(U.S.) Capital LLC to issue in favor of the lenders under the Chase Facility a
$3 million letter of credit. The letter of credit expires December 31, 2000. The
lenders may draw on the letter of credit only in the event the Company files for
bankruptcy protection or, due to a default under the Chase Facility, the lenders
elect to declare all outstanding term and revolving credit loans immediately due
and payable and to terminate the facility. The Company and its subsidiaries
entered into a Reimbursement Agreement in favor of ING and granted to ING a
subordinated security interest in substantially all of their respective assets.
Pursuant to the Reimbursement Agreement, the Company and its subsidiaries are
obligated to reimburse ING for any amounts paid by ING to ING (U.S.) Capital LLC
by reason of a draw on the letter of credit.

                                                                   Page 49 of 61
<PAGE>
 
               Matthews Studio Equipment Group and Subsidiaries
            Notes to Consolidated Financial Statements (continued)


As consideration for ING's procurement of the letter of credit, the Company
issued to ING warrants to purchase 450,000 shares of the Company's common stock
at an exercise price of $2.50 per share.  These warrants have antidilutive
rights similar to those available to ING under the ING Warrant, but the exercise
price is not subject to decrease due to failure to complete the Qualifying
Offering.  Also the one share of preferred stock issued to ING does not accord
voting rights with respect to the number of shares underlying these warrants.
These warrants are entitled to the benefits of and subject to the restrictions
under the Registration Rights Agreement and the Stockholders Agreement.

Warrants to purchase 150,000 shares will be automatically canceled in the event
the lenders release the letter of credit on or before December 31, 1999.  The
lenders are obligated to release the letter of credit if the Company achieves in
any fiscal quarter, leverage ratio of 4.50 or less and has an availability for
revolving credit loans under the Chase Facility of $2,000,000.


9.  Income Taxes

Significant components of the Company's deferred tax liabilities and assets are
as follows (in thousands):

<TABLE>
<CAPTION>
                                                                                              September 30,
                                                                                  1998                            1997
                                                                                  ----                            ----
<S>                                                                               <C>                              <C>
Deferred tax liabilities:
    Tax depreciation in excess of book depreciation                               $6,043                          $3,773
    Leasing income                                                                   420                             551
    Other                                                                            153                              98
                                                                                  ------                          ------
Total deferred tax liabilities                                                     6,616                           4,422
 
Deferred tax assets:
     Net operating loss carryforwards                                              2,575                             560
     Alternative minimum tax credit carryforwards                                    830                             862
     ITC credit carryforwards                                                        148                             148
     Allowance for doubtful accounts receivable                                      471                             237
     Excess of tax basis over financial statement
          basis of inventory                                                         153                             347
     Other accruals                                                                   12                             258
     Valuation allowance                                                            (635)                            (72)
                                                                                  ------                          ------
Total deferred tax assets                                                          3,554                           2,340
                                                                                  ------                          ------
Net deferred tax liabilities                                                      $3,062                          $2,082
                                                                                  ======                          ======
</TABLE>
                                                                   Page 50 of 61
<PAGE>
 
               Matthews Studio Equipment Group and Subsidiaries
            Notes to Consolidated Financial Statements (continued)


9.  Income Taxes (continued)

The provision (benefit) for income taxes on income before extraordinary item is
as follows (in thousands):

<TABLE>
<CAPTION>
                                                                 September 30,
                                                          1998                  1997                1996
                                                          -----                -----               -----   
<S>                                                   <C>                       <C>                 <C>    
Current:                                                                                                   
          Federal                                        $   -                   $ 209               $  25 
          State                                             18                     135                  10 
                                                        ------                   -----               ----- 
                                                            18                     344                  35 
                                                                                                           
Deferred:                                                                                                  
          Federal                                         (730)                    335                  - 
          State                                           (163)                     69                  - 
                                                        ------                   -----               ----- 
                                                          (893)                    404                  - 
                                                        ------                   -----               ----- 
                                                         $(875)                  $ 748               $  35 
                                                         =====                   =====               =====  
</TABLE>


The reconciliation of income tax computed at the U.S. federal statutory tax
rates to income tax expense (benefit) for income, before extraordinary item, is
($ in thousands):


<TABLE>
<CAPTION>
                                                        For the Year Ended September 30,
                                                 1998                  1997                 1996
                                                 -----                 ----                 ----
                                           Amount    Percent    Amount    Percent    Amount    Percent
                                          --------   --------   -------   --------   -------   --------
<S>                                       <C>        <C>        <C>       <C>        <C>       <C>
Tax at U.S. statutory rate                $  (281)      (34)%    $ 834         34%    $ 353         34%
State income taxes, net of
   federal tax benefit                        (96)      (12)       147          6         -          -
Tax free gain on sale of
   manufacturing subsidiary                (1,347)     (163)         -          -         -          -
Permanent differences                         305        37         37          1        41          4
Increase (decrease) in valuation
   allowance on NOL carryforwards             563        68       (264)       (11)     (458)       (44)
AMT rate differences
   (carryforwards)                              -         -          -          -        35          3
Provision to return items:
   Additional depreciation                      -         -          -          -        20          2
   Tax effect of Electronics
     dissolution                                -         -          -          -        31          3
   Other                                        -         -                              13          1
Other - net                                   (19)       (2)        (6)         -         -          -
                                          -------      ----      -----        ---     -----        ---
                                          $  (875)     (106)%    $ 748         30%    $  35          3%
                                          =======      ====      =====        ===     =====        ===
</TABLE>


At September 30, 1998, the Company has alternative minimum tax credit
carryforwards, with no expiration date, of $715,000, and Federal net operating
loss carryforwards of approximately $6,881,000, that expire principally in the
year 2013.


                                                                   Page 51 of 61
<PAGE>
 
               Matthews Studio Equipment Group and Subsidiaries
            Notes to Consolidated Financial Statements (continued)


10.   Shareholders' Equity

At September 30, 1998, the Company had the following warrants and stock options
outstanding for the purchase of its common stock:

<TABLE>
<CAPTION>
                                                                            NUMBER OF
DESCRIPTION                                EXPIRATION DATE               SHARES ISSUABLE           EXERCISE PRICE
---------------------------------------------------------------------------------------------------------------------
 
<S>                                <C>                                <C>                      <C>
ING Warrants                       September 2005                              2,322,464              $      2.50        
Sutro Warrants                     September 2005                                100,000              $      2.50        
Other Warrants                     September 1998 to May 2002                    115,000              $2.75-$4.13        
1989 Plan Options.                 February 1999                                 202,400              $1.00-$3.75        
1994 Plan Options.                 March 2004                                  1,101,950              $2.00-$4.74        
1994 Directors' Plan Options       March 2005                                    110,000              $2.00-$4.13        
Options outside of Plans           June 2005                                     215,000              $      3.00        
                                                                               ---------                                 
Total number of common                                                                                                   
   shares issuable                                                             4,166,814                                 
                                                                               =========                                 
</TABLE>

Warrants - In connection with the ING transaction (see Note 8), the Company
issued the ING Warrant to ING for the purchase of 2,322,464 shares of common
stock (subject to certain antidilution rights) at an initial purchase price of
$2.50 per share, which expires July 27, 2005.  As amended, the ING Warrant
requires an adjustment of the warrant exercise price to $2.00 per share if the
Company does not complete a public offering of its common stock at a price of at
least $2.50 per share with net proceeds to the Company of at least $10 million
by December 31, 1999.   And, as part of the same July 27, 1995 transaction, the
Company issued a warrant to Sutro & Co. for the purchase of 100,000 shares of
common stock at $2.50 per share  (the "Sutro Warrant") subject to certain
antidilutive provisions similar to those granted to ING.  During fiscal 1991 the
Company issued a warrant to Princeton Securities for the purchase of 50,000
shares of common stock at $3.44 per share.  The Company has also issued warrants
to the owner of an entity with whom the Company has established a marketing
arrangement.

Stock Options - At September 30, 1998, the Company has three stock-based
compensation plans, which are described below.  The Company applies APB Opinion
25, "Accounting for Stock Issued to Employees", and related Interpretations in
accounting for its stock-based compensation plans.  Accordingly, no compensation
cost has been recognized for its fixed stock option plans.  Had compensation
cost for the Company's option plans been determined based on the fair value at
the grant dates for awards under those plans consistent with the method of FASB
Statement 123, "Accounting for Stock-Based Compensation", the Company's net loss
and earnings per share on a pro forma basis for the year ended September 30,
1998, would have been as indicated below (in thousands, except per share data):


                                                                   Page 52 of 61
<PAGE>
 
               Matthews Studio Equipment Group and Subsidiaries
            Notes to Consolidated Financial Statements (continued)


10.   Shareholders' Equity (continued)

     Net income (loss)
                As reported                      $ 49
                Pro forma                         (75)

     Net income (loss) per share,
     basic and diluted
                As reported                      $0.00
                Pro forma                        (0.01)

Pro forma information regarding net income and earnings per share is required by
the Statement of Financial Accounting Standards No. 123, Accounting for Stock-
Based Compensation, and has been determined as if the Company had accounted for
its employee stock options under the fair value method of that statement. The
fair value for these options was estimated at the date of grant using the Black-
Scholes option pricing model with the weighted-average assumptions,
respectively: risk-free interest rate of 6.5%; dividend yields of 0%; expected
volatility of 0.3% to 0.5%; and expected lives of the options from 3 to 5 years.
Pro forma information regarding net income and earnings per share has not been
presented for the fiscal years 1997 and 1996, because the effect of the employee
stock options grants was immaterial.

The 1989 Stock Option Plan (the "1989 Plan") provides for the grant of incentive
and non-qualified options to purchase up to 1,000,000 shares of common stock.
The Stock Option Committee of the Board of Directors determines the number of
shares, date of grant, exercise price,  when the options become exercisable and
expiration date of each grant.  The exercise price of incentive stock options
cannot be less than the fair market value of the shares at the grant date.  The
outstanding options are generally exercisable 20% a year commencing one year
after date of grant.

In 1994, the Board of Directors adopted, and the shareholders approved, the 1994
Stock Option Plan (the "1994 Plan") and the 1994 Stock Option Plan for Directors
(the "1994 Directors Plan").  Both plans are administered by a committee of the
Board of Directors and terminate in March 2004.

The 1994 Plan provides for the granting of options to purchase up to 1,200,000
shares of common stock.  Incentive and nonqualified stock options may be granted
to any full-time salaried employees, and nonqualified options to any consultant.
The Stock Option Committee of the Board of Directors determines the number of
shares, date of grant, exercise price,  when the options become exercisable and
expiration date of each grant.  The exercise price of incentive stock options
cannot be less than the fair market value of the shares at the grant date.  The
outstanding options are generally exercisable 20% a year commencing one year
after date of grant.

The 1994 Directors Plan provides for the granting of options to purchase up to
300,000 shares of common stock.  As of the date of each Annual Meeting of
Shareholders, non-employee directors who have not previously received a grant
under the 1994 Directors Plan, will receive an option to purchase 15,000 shares
of common stock.  Such shares are exercisable ratably 6, 24 and 36 months after
the grant date, and at the fair market value of the shares at the grant date.
During 1998, 1997 and 1996, no options were exercised under the 1994 Directors
Plan.

                                                                   Page 53 of 61
<PAGE>
 
               Matthews Studio Equipment Group and Subsidiaries
            Notes to Consolidated Financial Statements (continued)


10.   Shareholders' Equity (continued)

The following summarizes the option activity related to the plans:

<TABLE>
<CAPTION>
                                                             1998                                        1997
                                               --------------------------------           -----------------------------------
                                                                    WEIGHTED                                     WEIGHTED
                                                                    AVERAGE                                       AVERAGE
                                                   SHARES           EXERCISE                   SHARES            EXERCISE
                DESCRIPTION                        (000'S)           PRICE                     (000'S)             PRICE
--------------------------------------------   ---------------   --------------           -----------------   ---------------
<S>                                            <C>               <C>                      <C>                 <C>
Fixed Options:
Outstanding, at beginning of year                      $1,209        $     2.44                        870         $     2.37
Granted                                                   337        $     4.09                        388         $     2.65
Exercised                                                 (44)       $     2.08                        (15)        $     1.64
Forfeited                                                 (88)       $     2.72                        (34)        $     3.02
                                                       ------                                        -----
Outstanding at end of year                             $1,414        $     2.83                      1,209         $     2.44
                                                       ======                                        =====
 
Options exercisable at year-end                        $  748        $     2.62                        622         $     2.47
                                                       ======        ==========                     ======         ==========
Weighted average fair value of exercisable                                                                         $     0.90
                                                                                                                   ==========
 options at year-end                                                 $     1.12
                                                                     ==========
</TABLE>


The weighted average remaining contract life of the plan options was 4.6 years
as of September 30, 1998.

At September 30, 1998, the range of prices of exercisable options under the
plans were $1.00 to $4.38.

In addition to options under the Plans, the Company also issued options outside
of these Plans to Carlos D. DeMattos, Edward Phillips and ING during fiscal
1995.  During 1998, 1997 and 1996, none of these options were exercised.
However, in connection with sale of the manufacturing subsidiary to Phillips
Associates, 200,000 of these options were terminated.

At September 30, 1998, the Company has adequately reserved common shares to
cover all outstanding options and warrants.


11.  Commitments and Contingencies

The Company leases certain of its facilities under non-cancelable operating
leases with companies owned by certain members of management; such leases expire
through 2002.  The Company also leases its primary facilities, equipment,
vehicles and other premises under capital leases and non-cancelable operating
leases.

Certain leases contain escalation clauses based on inflation or fixed amounts
and generally require the Company to pay utilities, insurance, taxes and other
operating expenses.

Future minimum payments under non-cancelable operating leases with initial terms
of one year or more consisted of the following at September 30, 1998 (in
thousands):


                                                                   Page 54 of 61
<PAGE>

11.  Commitments and Contingencies (continued)

 
               Matthews Studio Equipment Group and Subsidiaries
            Notes to Consolidated Financial Statements (continued)


<TABLE>
<CAPTION>
                                                        Operating
                                                          Leases
                                                   --------------------
                   <S>                                <C>
                      1999                                  $2,485           
                      2000                                   1,843           
                      2001                                   1,731           
                      2002                                   1,121           
                      2003                                     493           
                                                            ------           
                                                            $7,673           
                                                            ======           
</TABLE>                                                          

Rent expense under operating leases approximated $2,860,000 for 1998, $1,687,000
for 1997, and $1,661,000 in 1996.  Included in rent expense is rent for property
leased from certain officers/shareholders of $1,020,000, $479,000 and $479,000
for the years ended September 30, 1998,1997,and 1996, respectively.

The Company also entered into a registration rights agreement (the "Registration
Rights Agreement") with ING and Sutro & Co., Incorporated, which acted as the
Company's investment bankers in connection with the transaction ("Sutro"),
entitling the holders of the ING Warrant and the common stock purchase warrant
issued to Sutro with respect to the purchase of up to 100,000 shares of common
stock of the Company, to certain piggy back registration rights with respect to
the shares of common stock issuable upon exercise of the ING Warrant as well as
any shares of common stock subsequently acquired by ING.  The Registration
Rights Agreement also grants ING the right to require the Company to file a
shelf registration statement with respect to the sale from time to time of the
1.4 million shares of common stock of the Company acquired by ING from a former
employee of the Company.

The Company is from time to time named as a defendant in legal proceedings, in
the ordinary course of its business.  In the opinion of management, after
consultation with outside counsel, there are no outstanding suits or claims that
may reasonably result in a material adverse effect on the business, financial
condition or results of operations of the Company.


12.   Pro Forma Results

The pro forma results of operations for the years ended September 30, 1998 and
1997 assuming consummation of the 1998 and 1997 Acquisitions and disposal of the
manufacturing operations as of October 1, 1996, are as follows (in thousands,
except per share data):

<TABLE>
<CAPTION>
                                                                          For the Year Ended September 30,
                                                                          1998                      1997
                                                                          ----                      ----
<S>                                                                      <C>                       <C>
Net revenue                                                               $53,900                 $56,545
Net income (loss) before extraordinary item                                  (342)                    865
Net income (loss)                                                            (342)                    671
Net income (loss) per common share - basic and diluted                      (0.03)                   0.08
</TABLE>


                                                                   Page 55 of 61
<PAGE>
 
               Matthews Studio Equipment Group and Subsidiaries
            Notes to Consolidated Financial Statements (continued)


13.   Other Items

The Company maintains a defined contribution retirement plan (the "Plan"), which
qualifies under Section 401(k) of the Internal Revenue Code.  The Plan covers
substantially all employees with over one year of service.  The Company makes
matching contributions between 20% and 50% of the participant's deferral
depending on the participant's annual salary up to a maximum of 6% of
compensation.  The Company recognized expense under the plan of $158,000 in
1998, $77,000 in 1997 and $52,000 in 1996.

Four Star's employees (approximately 30) are represented by the International
Alliance of Theatrical Stage Employees, AFL-CIO, union and Four Star has entered
into contractual arrangements with such union in respect of its employees that
expire on December 31, 2002.

                                                                   Page 56 of 61
<PAGE>
 
                                  Schedule II

                       VALUATION AND QUALIFYING ACCOUNTS
                            (amounts in thousands)


<TABLE>
<CAPTION> 
     Year                                          Charged
     Ended                            Balance at   to Costs   Charged                       Balance
   September                          Beginning      and      to Other      Deductions      at End
      30            Description         of Year    Expenses   Accounts      - Describe      of Year
     ----           ------------      ----------   --------   --------      ----------      -------
<C>               <S>                 <C>          <C>        <C>           <C>             <C>
      1998        Allowance for
                  doubtful 
                  accounts                  $745       $562   $  156 (B)     $  204 (A)        $1,259
                 
      1997        Allowance for
                  doubtful 
                  accounts                   480        269      150 (B)        154 (A)           745
                 
      1996        Allowance for
                  doubtful 
                  accounts                   297        295           -         112 (A)           480
 
-----------------------------------------------------------------------------------------------------
</TABLE>

(A) Uncollectible accounts written off.
(B) Amount assumed in connection with acquisitions.

                                                                   Page 57 of 61
<PAGE>
 
                               INDEX TO EXHIBITS

<TABLE>
<CAPTION>

  Exhibit     
    No.              Description
    ---              -----------
<S>                  <C>
     3.1             Amended and Restated Articles of Incorporation.
              
     3.2             Bylaws of the Company, and amendments thereto, incorporated by reference to the
                     Company's Registration Statement on Form S-18 No. 33-30963 LA.
              
     3.3             Amendment to Bylaws of the Company, incorporated by reference to the Company's
                     Form 10-K for the fiscal year ended September 30, 1995.
              
     4.1             Common Stock Purchase Warrant dated as of July 27, 1995, issued by the Company
                     to ING Equity Partners, L.P. I, incorporated by reference to the Company's Form
                     8-K dated July 27, 1995.
              
     4.2             Amendment No. 1 to Common Stock Purchase Warrant, dated as of April 5, 1996,
                     between the Company and ING Equity Partners, L.P. I, incorporated by reference
                     to the Company's Form 10-Q for the fiscal quarter ended March 31, 1996.
              
     4.3             Registration Rights Agreement dated as of July 27, 1995, between the Company and
                     ING Equity Partners, L.P. I, incorporated by reference to the Company's Form 8-K
                     dated July 27, 1995.
              
     4.4             Stockholders Agreement dated as of July 27, 1995, among the Company, ING Equity
                     Partners, L.P. I, Carlos D. DeMattos, Edward Phillips, C&E DM Limited
                     Partnership, C&E DM LLC, The Carlos and Elena DeMattos Family Trust dated
                     February 12, 1991 and The Edward and Norma Phillips Family Trust dated June 5,
                     1991, incorporated by reference to the Company's Form 8-K dated July 27, 1995.
              
     4.5             Amendment No. 1 to Stockholders Agreement dated as of April 5, 1996, among the
                     Company, ING Equity Partners, L.P. I, Carlos D. DeMattos, Edward Phillips, C&E
                     DM Limited Partnership, C&E DM LLC, The Carlos and Elena DeMattos Family Trust
                     dated February 12, 1991 and the Edward and Norma Phillips Family Trust dated
                     June 5, 1991, incorporated by reference to the Company's Form 10-Q for the
                     fiscal quarter ended March 31, 1996.
              
     4.6             $100,000 Senior Subordinated Note dated July 27, 1995, made by the Company in
                          favor of ING Equity Partners, L.P. I, incorporated by
</TABLE> 

                                                                   Page 58 of 61
<PAGE>

<TABLE> 

<C>            <C>        <S> 
                          reference to the Company's Form 10-Q for the fiscal quarter ended March 31, 1996.

     4.7                  Common stock Purchase Warrant dated as of January 12, 1999, issued by the
                          Company in favor of ING Equity Partners, L.P. I, for 300,000 shares, but without
                          annexes, exhibits and schedules.

     4.8                  Common stock Purchase Warrant dated as of January 12, 1999, issued by the
                          Company in favor of ING Equity Partners, L.P. I, for 150,000 shares, but without
                          annexes, exhibits and schedules.

    10.1       N/A        1989 Stock Option Plan, incorporated by reference to the Company's Registration
                          Statement on Form S-18 No. 33-30963 LA.

    10.2       N/A        Amendment to 1989 Stock Option Plan, incorporated by reference to the Company's
                          Form 10-K for the fiscal year ended September 30, 1991.

    10.3       N/A        1994 Stock Option Plan, incorporated by reference to the Company's Proxy
                          Statement dated March 29, 1994.

    10.4       N/A        1994 Stock Option Plan for Directors, incorporated by reference to the Company's
                          Proxy Statement dated March 29, 1994.

    10.5       N/A        Agreement of Dissolution of General Partnership between Matthews Studio
                          Electronics, Inc., and E.F. Nettmann & Associates, Inc., dated as of September
                          30, 1994, incorporated by reference to the Company's Form 10-K for the fiscal
                          year ended September 30, 1995.

    10.6       N/A        Equipment Management Services Agreement between Matthews Studio Electronics,
                          Inc., and E.F. Nettmann & Associates, Inc., dated as of October 1, 1994,
                          incorporated by reference to the Company's Form 10-K for the fiscal year ended
                          September 30, 1995.

    10.7       N/A        Assignment of License Agreement With Option of First Refusal between Matthews
                          Studio Electronics, a general partnership and the Company, dated as of June 1,
                          1989, incorporated by reference to the Company's Form 10-K for the fiscal year
                          ended September 30, 1995.

    10.8       N/A        Purchase Agreement dated as of July 27, 1995 between the Company and ING Equity
                          Partners, L.P. I, incorporated by reference to the Company's Form 8-K dated July
                          27, 1995.

    10.9       N/A        Amendment No. 1 to Purchase Agreement dated as of April 5, 1996, between the
                          Company and ING Equity Partners, L.P. I, incorporated by reference to the
                          Company's Form 10-Q for the fiscal quarter ended March 31, 1996.

   10.10       N/A        Amended and Restated Credit Agreement dated as of April 1, 1998, among the
                          Company, Matthews Studio Equipment, Inc., Hollywood Rental Co., Inc., Matthews
                          Studio Electronics, Inc., Acceptance Corporation, Duke City Video, Inc., HDI
                          Holdings, Inc., Four Star Lighting, Inc., the guarantors named therein the
                          lenders named therein 
</TABLE> 
                                                                   Page 59 of 61
<PAGE>

<TABLE> 

<C>                   <S>  
                      and The Chase Manhattan Bank, as agent for the lenders,
                      incorporated by  reference to  the Company's  Form 8-K  dated April 1, 1998.
               
   10.11              Waiver and Amendment Agreement No. 2 dated as of September 25, 1998, among the
                      Company, Hollywood Rental Company, LLC, Matthews Studio Electronics, Inc.,
                      Matthews Acceptance Corporation, Duke City Video, Inc., HDI Holdings, Inc., Four
                      Star Lighting, Inc., Matthews Studio Sales, Inc., Matthews Studio Group Centers,
                      Inc., the guarantors named therein, The Chase Manhattan Bank, as Agent for the
                      lenders, and the lenders named therein, but without exhibits and schedules.
               
   10.12              Waiver and Amendment Agreement No. 3 dated as of January 12, 1999, among the
                      Company, Hollywood Rental Company, LLC, Matthews Studio Electronics, Inc.,
                      Matthews Acceptance Corporation, Duke City Video, Inc., HDI Holdings, Inc., Four
                      Star Lighting, Inc., Matthews Studio Sales, Inc., Matthews Studio Group Centers,
                      Inc., the guarantors named therein, The Chase Manhattan Bank, as Agent for the
                      lenders, and the lenders named therein, but without exhibits and schedules.
               
   10.13              Letter of Credit dated as of January 12, 1999, issued by ING (U.S.) Capital
                      LLC in favor of The Chase Manhattan Bank, as Agent.
               
   10.14              Reimbursement Agreement dated as of January 12, 1999, among the Company,
                      Hollywood Rental Company, LLC, Matthews Studio Electronics, Inc., Matthews
                      Acceptance Corporation, Duke City Video, Inc., HDI Holdings, Inc., Four Star
                      Lighting, Inc.,  Matthews Studio Sales, Inc., Matthews Studio Group Centers,
                      Inc., Keylite Holdings, Inc., Reel Wheels, Inc., Keylite Production Services,
                      Inc., Duke City Holdings, Inc., Four Star Holding, Inc. and ING Equity Partners,
                      L.P. I.
               
   10.15              Security Agreement dated as of January 12, 1999, among the Company, Hollywood
                      Rental Company, LLC, Matthews Studio Electronics, Inc., Matthews Acceptance
                      Corporation, Duke City Video, Inc., HDI Holdings, Inc., Four Star Lighting,
                      Inc.,  Matthews Studio Sales, Inc., Matthews Studio Group Centers, Inc., Keylite
                      Holdings, Inc., Reel Wheels, Inc., Keylite Production Services, Inc., Duke City
                      Holdings, Inc., Four Star Holding, Inc. and ING Equity Partners, L.P. I., but 
                      without exhibits and schedules.
               
   10.16              Stock Exchange Agreement and Plan of Reorganization dated as of May  2, 1997,
                      among Patricia M. Brusati, Harold Jay Lefkovitz, Louise K. Lefkovitz, Stephen F.
                      Ward, Duke City Video, Inc. and Duke City Holdings, Inc., incorporated by
                      reference to the Company's Form 8-K dated May 2, 1997.
               
   10.17              $585,561 Note dated as of May 2, 1997, made by Duke City Video, Inc. in favor of
                      Harold Jay Lefkovitz, incorporated by reference to the Company's Form 8-K dated
                      May 2, 1997.
               
   10.18              Subordination Agreement made by Harold Jay Lefkovitz in favor of The Chase
                          Manhattan Bank, as agent, incorporated by reference to the Company's Form 8-K
                          dated May 2, 1997.
</TABLE> 

                                                                   Page 60 of 61
<PAGE>

<TABLE> 

<C>                   <S> 
   10.19              Stock Exchange Agreement dated as of May 2, 1997, between Duke City Holdings,
                      Inc. and John E. Hensch, incorporated by reference to the Company's Form 8-K
                      dated May 2, 1997.
               
   10.20              Sale Agreement dated March 20, 1998, among the Company, Four Star Associates,
                      L.P., Stonebridge Partners Equity Fund, L.P., Bill L. Aishman, Anthony
                      P.Cancellieri, Darren DeVerna, Four Star Lighting, incorporated by Company's 
                      Form 8-K dated April 1, 1998.
               
   10.21              Employment Agreement dated April 1, 1998, between Darren DeVerna and the
                      Company, incorporated by reference to the Company's Form 8-K dated April 1, 1998.
               
   10.22              Amended and Restated Employment Agreement between the Company and Carlos D.
                      DeMattos dated October 1, 1997, incorporated by reference to the Company's Form
                      10-Q for the fiscal quarter ended December 31, 1997.
               
      21              List of the Company's subsidiaries.
               
      23              Consent of Independent Auditors.
               
      27              Financial Data Schedule
               
    99.1              Stock Exchange Agreement dated September 28, 1998, among the Company, Matthews
                      Studio Equipment, Inc., Phillips Associates, LLC and Edward Phillips,
                      incorporated by reference to the Company's Form 8-K dated September 28, 1998.
               
    99.2              Indemnification Agreement dated September 28, 1998, among the Company, Matthews
                      Studio Equipment, Inc., Phillips Associates, LLC and Edward Phillips,
                      incorporated by reference to the Company's Form 8-K dated September 28, 1998.
               
    99.3              Employment Agreement between the Company, Matthews Studio Equipment, Inc. and
                      Edward Phillips dated July 1, 1995, incorporated by reference to the Company's
                      Form 10-K for the fiscal year ended September 30, 1995.
               
    99.4              First Amendment to Employment Agreement, dated as April 5, 1996, between the
                      Company and Edward Phillips, incorporated by reference to the Company's Form
                      10-Q for the fiscal quarter ended March 31, 1996.
               
    99.5              Amendment No. 2 to Employment Agreement dated September 28, 1998, among the
                          Company, Matthews Studio Equipment, Inc. and Edward Phillips, incorporated by
                          reference to the Company's Form 8-K dated September 28, 1998.
</TABLE>

                                                                   Page 61 of 61