<PAGE>   1
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549
                                   FORM 10-KSB

      (X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
                              EXCHANGE ACT OF 1934

                   FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998

                          COMMISSION FILE NO. 000-21325

                             MANSUR INDUSTRIES INC.
        (Exact name of Small Business Issuer as Specified in its Charter)

                   FLORIDA                              65-0226813
        (State or Other Jurisdiction                 (I.R.S. Employer
       of Incorporation or Organization)             Identification No.)


                              8305 N.W. 27TH STREET
                                    SUITE 107
                              MIAMI, FLORIDA 33122
                                 (305) 593-8015

    (Address, Including Zip Code, and Telephone Number, Including Area Code,
                  of Registrant's Principal Executive Offices)

SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE EXCHANGE ACT:

                                      None.

SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE EXCHANGE ACT:

                          Common Stock, $.001 par value

Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 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 pursuant 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-KSB or any amendment to
this Form 10-KSB [X].

State the issuer's revenues for its most recent fiscal year:       $7,568,000.

The aggregate market value of the Registrant's Common Stock held by
non-affiliates as of March 23, 1999 was $21,050,000 computed by reference to the
closing bid price of the Common Stock as reported on the NASDAQ SmallCap Market
on such date.

As of March 23, 1999, there were 4,601,309 shares of the Registrant's Common
Stock issued and outstanding.

                       DOCUMENTS INCOPORATED BY REFERENCE:

The information required by Part III, Items 9-12, is incorporated by reference
from the Registrant's definitive proxy statement (to be filed within 120 days
after the end of the Registrant's fiscal year).


<PAGE>   2
ITEM 1.  DESCRIPTION OF BUSINESS.

GENERAL

Mansur Industries Inc., together with its wholly owned subsidiary
SystemOne/registered trademark/ Technologies Inc. (collectively, the "Company"),
designs, manufactures and sells a full line of patented, self-contained,
recycling industrial parts washers for use in the automotive, aviation, marine
and general industrial repair markets. The Company has been awarded ten patents
for its products, which incorporate innovative, proprietary resource recovery
and waste minimization technologies to distill contaminated solvent and yield
pure solvent and a by-product comparable to used motor oil. While the Company
intends to exploit its current full line of industrial washers, and to continue
research and development of new products, since its inception the Company has
focused its attention on its parts washer product line, marketed as
SystemOne/registered trademark/ Washers (the "SystemOne/registered trademark/
Washers"). The SystemOne/registered trademark/ Washer integrate a distillation
and recovery process which allows the solvent to be used, treated and re-used on
demand, without requiring off-site processing. During the year ended December
31, 1998, the Company sold 2,821 SystemOne/registered trademark/ Washers and
recorded revenues of approximately $7.6 million. The Company commenced the sale
of SystemOne/registered trademark/ Washers in July 1996.

Based on financial and trade journal reports, the Company believes that domestic
expenditures in connection with industrial parts cleaning machines exceed $1.0
billion annually, including costs of equipment, personnel, materials, storage
and transportation. Industrial parts cleaning machines are used by automotive,
aviation and marine service, repair and rebuilding facilities, gas stations,
transmission shops, parts remanufacturers, machine shops, and general
manufacturing operations of every size and category requiring parts cleaning.
Industrial parts cleaning machines typically remove lubrication oils from tools
and parts through the use of mineral spirits solvent that becomes progressively
more contaminated and less effective in the cleaning process. Eventually, the
solvent becomes saturated with oil, sludge and other contaminants, and is
typically classified as a hazardous waste under federal and state regulations.
Under the most common current practice, the contaminated solvent must be stored
until pick-up, when pure solvent is delivered and the contaminated solvent is
transported to regional refining facilities. This delivery and off-site
recycling program is typically scheduled on four to sixteen week cycles. In
contrast, the distillation process used in the Company's SystemOne/registered
trademark/ Washers removes all the contaminants from the solvent within the
cleaning unit itself, minimizing the volume of waste by-product and providing
pure solvent to the customer on demand, eliminating the need for the costly and
potentially dangerous storage and transportation of hazardous waste. Moreover,
the small amount of waste by-product yielded in the distillation process used in
the SystemOne/registered trademark/ Washers can typically be recycled or
disposed of together with the customer's used motor oil, which is generally not
classified as hazardous waste. Based on these factors, the Company believes that
its product line presents an attractive and economical alternative to users of
parts cleaning machines.

The Company believes that the response of users to its products has been
favorable because the products facilitate efficient and economical compliance
with environmental regulations, minimize waste disposal requirements, reduce
insurance costs and increase worker productivity as a result of enhanced
cleaning solution utilization. Purchasers of the Company's SystemOne/registered
trademark/ Washers include Waste Management, Delta Airlines, United Airlines,
Northwest Airlines, City of Philadelphia, the Counties of Miami-Dade, Orange,
Broward, and Palm Beach, Florida, Houston Lighting & Power, Florida Power &
Light, Baltimore Gas & Electric, Brooklyn Union Gas, United States Air Force,
United States Navy, the United States Postal Service, Republic Industries,
United Technologies/Pratt & Whitney, General Electric Engine Services, Aamco
Transmissions, Cummins Diesel, Detroit Diesel, Caterpillar, and a number of
automobile dealerships.

RECENT DEVELOPMENTS

During 1997, substantially all of the Company's sales of SystemOne/registered
trademark/ Washers were made to or through First Recovery, an affiliate of
Ashland, Inc., which acted as the Company's exclusive distributor in designated
metropolitan markets since August 1996. The Company selected First Recovery as
its SystemOne/registered trademark/ distributor because it and its affiliates,
including the Valvoline Oil Company and Ashland Chemical, maintain an extensive
distribution network including numerous national accounts with significant
requirements for parts washing equipment, and manufacture and distribute one of
the principal mineral spirits solvents used in parts washers.

In November 1997, in an effort to enhance long-term profitability, preserve
strategic opportunities, maximize value for its shareholders and generally
reduce its dependence on First Recovery, the Company announced plans to develop
a direct marketing and distribution organization for its SystemOne/registered
trademark/ product line. By December 31, 1998, the Company had opened a total of
62 distribution centers employing 85 service technicians and approximately 100
salesmen throughout the continental United States. The Company has direct
distribution capabilities in every major metropolitan market across the country
enabling the Company to pursue prime national accounts as well as municipal,
military and local accounts in all of the Company's target markets including
automotive, aviation, marine, heavy equipment, fleet maintenance and mass
transit. Primarily as a result of this strategic decision, the Company
experienced a material increase in operating expenses during 1998, while ramping
up its direct marketing and distribution capabilities. For the year ended
December 31, 1998, the Company incurred a net loss of approximately $13.0
million compared to a net loss of approximately $1.2 million for the year ended
December 31, 1997.

<PAGE>   3
The Company achieved over 50% sequential quarter on quarter revenue growth
during 1998 as a result of the development of the Company's direct marketing
channels, surpassing 1,000 units shipped during the fourth quarter. The Company
shipped 2,821 SystemOne/registered trademark/ units during 1998, of which
approximately 2,300 units were through the Company's developing direct
distribution infrastructure, compared to 1997 where all of the Company's
shipments were made through First Recovery. The Company expects that the
investment in its direct distribution infrastructure will result in a long-term
operating strategy that maximizes market share through aggressive factory direct
distribution and increased operating profits. No assurance can be given,
however, that the Company's efforts in establishing direct marketing and
distribution capabilities will be successful. In the event the Company is not
successful in its direct marketing and distribution efforts, the Company's
business and future prospects could be adversely affected.

In February 1998, the Company consummated a private placement (the "Private
Placement") of $17.0 million in principal amount of 8 1/4% Subordinated
Convertible Notes due 2003 (the "Notes"). Interest on the Notes is payable
semi-annually and during the first two years is payable through the Company's
issuance of additional Notes and thereafter, at the election of the Company, is
payable either in cash or through the issuance of additional Notes. The Notes
are convertible by the holders thereof into shares of the Company's common
stock, $.001 par value (the "Common Stock"), at a conversion price equal to
$17.00 per share (the "Conversion Price") and automatically convert into shares
of Common Stock after February 23, 1999, if the closing price of the Common
Stock, as reported on the Nasdaq SmallCap Market, exceeds 175% of the Conversion
Price for a period of twenty consecutive trading days, including the twenty
trading days immediately preceding February 23, 1999. The Company may redeem the
Notes after February 23, 2001 under certain circumstances. The Company has used
and will continue to use the proceeds of the Private Placement to accelerate the
development of its direct marketing and distribution organization, expand
manufacturing operations, and for working capital and general corporate
purposes.

INDUSTRY OVERVIEW AND COMPETITION

Industrial parts cleaning machines are used by automotive, aviation and marine
service, repair and rebuilding facilities, gas stations, transmission shops,
parts remanufacturers, machine shops, as well as general manufacturing
operations of every size and category requiring machinery maintenance, service
and repair. Based on financial and trade journal reports, the Company believes
that in 1998 businesses in the United States incurred more than $1 billion in
expenses for commercial and industrial parts cleaning using chemical cleaning 
techniques.

The industrial parts cleaning industry is highly competitive and dominated by
Safety-Kleen Corp. ("Safety-Kleen"), which has substantially greater financial
and other resources than the Company. Safety-Kleen services the parts cleaning
industry through a "closed-loop" recycling system in which contaminated solvent
is removed for recycling and fresh solvent is delivered on a periodic basis. The
Company believes that Safety-Kleen services a significant portion of the parts
washing machines currently in use and that no other competitor accounts for more
than 2% of the parts washer market in the United States. Although the Company
has been awarded ten patents for its products, there can be no assurance that
Safety-Kleen will not develop or acquire technology comparable to the Company's
that would allow Safety-Kleen to provide an on-site recycling service. To the
best of the Company's knowledge, no other company is currently commercially
marketing a recycling parts washer with characteristics comparable to the
Company's SystemOne/registered trademark/ products. See "--Patents, Trademarks
and Proprietary Technology."

The Company believes that certain of its target customers have attempted to
enhance the capabilities of their existing industrial parts washers by acquiring
stand alone machines capable of distilling solvent. Although there is a wide
variety of such machinery currently available to the public, the Company
believes its fully integrated SystemOne/registered trademark/ Washers provide
superior "on demand" pure solvent at a lower cost.

The Company believes that the SystemOne/registered trademark/ Washers compare
favorably with products of its competitors on the basis of, among other things:
(i) delivery of pure solvent on demand without frequent solvent replacement;
(ii) lower overall cost; (iii) reduced time and cost associated with documenting
compliance with applicable environmental and other laws; (iv) reduced safety and
environmental risks associated with competitive machines and services; (v)
customer service; and (vi) difficulty in handling the regulated substances used
and/or generated by competitive machines.

STRATEGY

The Company's strategy is to continue its focus on the manufacture, marketing
and sale of its SystemOne/registered trademark/ Washer. The Company believes
that its products have achieved fairly rapid market penetration because of its
technological, economic and environmental advantages over competitive equipment.

The Company has begun and intends to continue its penetration of the industrial
parts cleaning market through its own direct marketing and distribution efforts.
By the end 1998 the Company had opened a total of 62 distribution centers
employing 85 service technicians and approximately 100 salesmen throughout the
continental United States. The Company has direct distribution capabilities in
every major metropolitan market across the country enabling the Company to
pursue prime national accounts as well as municipal, military and local accounts
in all of the Company's target markets including automotive, aviation, marine,
heavy
<PAGE>   4
equipment, fleet maintenance and mass transit. The Company shipped 2,821
SystemOne/registered trademark/ units during 1998, of which approximately 2,300
units were through the Company's developing direct distribution infrastructure,
compared to 1997 where all shipments were made through third party distributors.
The Company expects that the investment in its direct distribution
infrastructure will result in a long-term operating strategy that maximizes
market share through aggressive factory direct distribution and increased
operating profits.

The Company intends to capitalize on the opportunities it has identified for the
sale of its industrial parts washers. Additionally, the Company is continuing
its research and development programs and efforts and intends to develop
multiple product lines that utilize its resource recovery and waste minimization
technologies and to expand its sales of all product lines in new markets. In
particular, the Company intends to focus on the following initiatives:

   /bullet/ ACCELERATE PRODUCT SALES THROUGH DIRECT MARKETING. The Company
   intends to continue the penetration of the industrial parts cleaning market
   through its own direct marketing and distribution efforts. The Company
   anticipates that it will be able to maximize market share through aggressive
   factory direct distribution and increased operating profits, although there
   is no assurance in this regard.

   /bullet/ COMMERCIALIZE ADDITIONAL PARTS WASHING EQUIPMENT. The Company
   expects to broaden its industrial parts cleaning product line with aqueous
   and VOC exempt based washers, an alternative to mineral spirits solvent based
   washers; immersion washers, which clean complex parts; power spray washers,
   which accommodate large or bulky parts; and spray gun washers, for use in
   paint thinner recovery. The Company has obtained patent protection and
   developed prototypes and commenced limited sales of each of these products.

   /bullet/ EXPAND PRODUCT LINE. Through its ongoing research and development
   initiatives, the Company has identified a number of potential applications of
   its core technologies, including commercial applications in the printing and
   dry cleaning industries, water purification, medical waste treatment, and
   consumer applications. The Company believes that these applications could be
   developed without significant additional research expense through the
   utilization of the Company's initial research which resulted in the
   commercialization of the SystemOne/registered trademark/ Washer.

   /bullet/ EXPAND TO INTERNATIONAL MARKETS. The Company believes that
   significant opportunities exist for international sales of the
   SystemOne/registered trademark/ product line. The Company intends to explore
   distribution arrangements in other markets through licensing, strategic
   alliances and/or joint ventures.

   PRODUCTS

The Company's product line includes the following self-contained recycling
industrial cleaning equipment, all of which incorporate proprietary
waste minimization technology with respect to which the Company has obtained or
applied for patent protection. The Company expects that all the products listed
below will be available for commercial exploitation at various times prior to
December 31, 2000. All of the Company's products utilize technology that (i)
provides continuously recycled cleaning solution during the cleaning process,
(ii) eliminates the necessity for continual replacement and disposal of
contaminated cleaning solution and (iii) facilitates practical and
cost effective compliance with demanding environmental laws and regulations.

     SYSTEMONE/registered trademark/ GENERAL PARTS WASHER, is the first of the
     Company's products to be available in commercial quantities. During 1998
     the Company sold 2,821 SystemOne/registered trademark/ units, of which
     approximately 2,300 units were sold through the Company's developing direct
     distribution infrastructure. The SystemOne/registered trademark/ Washer
     provides users with pure mineral spirit solvent "on demand" for parts and
     tools cleaning purposes, utilizing a low-temperature vacuum distillation
     process to recycle the used solvent within the SystemOne/registered
     trademark/ Washer. This process allows the solvent to be reused without the
     need for off-site processing, minimizes the volume of waste by-product and
     eliminates the need for storage and disposal of the hazardous waste
     solvent. The markets for SystemOne/registered trademark/ General Parts
     Washers are automotive, aviation and maritime service, repair and
     rebuilding facilities, gas stations, transmission shops, parts
     remanufacturers, machine shops, and general manufacturing operations of
     every size and category requiring small parts cleaning.

     SYSTEMONE/registered trademark/ BRAKE WASHER, currently manufactured and
     marketed on a full-scale basis, is a mobile telescoping mini-parts washer
     designed specifically for the automotive brake industry to meet
     Occupational Safety and Health Act standards for the containment of
     airborne asbestos particles during auto brake repair operations. As an
     auxiliary unit to the SystemOne/registered trademark/ Washer, the
     SystemOne/registered trademark/ Brake Washer may be placed directly under
     the automobile being serviced and provides clean solvent on demand to the
     user by utilizing the SystemOne/registered trademark/ Washer to distill the
     contaminated solvents. As of December 31, 1998, the Company had sold 151
     SystemOne/registered trademark/ Brake Washers.

     SYSTEMONE/registered trademark/ SPRAY GUN WASHER, scheduled for commercial
     introduction in the fourth quarter of 1999, incorporates the Company's
     recycling/reclamation capabilities for paint thinner recovery. The target
     market for spray gun washers consists of automotive, aviation and marine
     paint shops and all general manufacturing operations that utilize painting
     operations. 

<PAGE>   5
     The Company anticipates that the auto paint industry will represent a
     substantial market. The SystemOne/registered trademark/ Spray Gun Washer
     facilitates compliance with rigorous environmental disposal regulations for
     the paint industry.

     MULTIPROCESS POWER SPRAY WASHER is currently manufactured and being test
     marketed on a limited basis. The Power Spray Washer integrates three
     processes in one self-contained machine; a power spray wash process, a
     recycling/reclamation process and a thermal oxidation process. The Power
     Spray Washer is able to accommodate large and bulky parts or units that are
     too large for the SystemOne/registered trademark/ Washers. The target
     market for power spray washers consists of automotive, aviation and marine
     maintenance, repair and rebuilding facilities, parts remanufacturers,
     machine shops, transmission shops, and all facets of general manufacturing
     requiring maintenance and repair of mechanical equipment.

     MULTIPROCESS IMMERSION WASHER, scheduled for commercial introduction in
     2000, integrates an immersion wash process, a recycling/reclamation process
     and a thermal oxidation process in one self-contained machine. The
     MultiProcess Immersion Washer is designed to clean complex parts containing
     substantial integral and highly inaccessible passages requiring a total
     immersion washing. The primary target market for immersion washers consists
     of radiator rebuilding shops, as well as automotive, aviation and maritime
     maintenance, repair and rebuilding facilities, parts remanufacturers,
     machine shops, transmission shops, and all facets of general manufacturing
     requiring maintenance and repair of mechanical equipment.

     MINIDISPOSER, scheduled for commercial introduction in 2000, is a portable
     mini-thermal oxidizer developed as a practical and efficient means for the
     disposal of contaminants by thermal oxidation within a unit measuring only
     one cubic foot. The MiniDisposer will be marketed both as optional
     equipment with the SystemOne/registered trademark/ Washer and as a stand
     alone mini-thermal oxidizer. The Company believes that the size and scope
     of the market for the MiniDisposer is substantial and diversified and
     includes industrial, commercial and consumer applications that generate
     small contaminant waste by-products. The Company is exploring potential
     markets in medical, restaurant and other commercial and consumer
     applications.

MANUFACTURING AND SUPPLY OF RAW MATERIALS

The Company leases a 75,000 square foot facility located in Miami, Florida which
serves as the Company's primary manufacturing and research facility. All of the
Company's manufacturing operations, including design, fabrication, painting and
assembly are performed at this facility. Annual manufacturing capacity of
SystemOne/registered trademark/ Washers at this facility is approximately 25,000
units. The Company believes that these facilities will adequately meet the
Company's manufacturing needs through 1999. The Company currently manufactures
its other products in amounts required for testing, test marketing and/or
commercial production in these manufacturing facilities.

The SystemOne/registered trademark/ Washers is an assembly of raw materials and
components all of which the Company believes are readily obtainable in the
United States. The Company does not believe that it is dependent upon any of its
current suppliers to obtain the raw materials and components necessary to
assemble and manufacture SystemOne/registered trademark/ Washers. The Company
currently procures raw materials and components for its SystemOne/registered
trademark/ Washers from approximately 40 sources.

MARKETING, SALES AND CUSTOMER SERVICE

Commencing in Mid 1996, the Company launched a test program with an aggregate of
47 SystemOne/registered trademark/ Washers in 38 automotive dealerships,
municipal and private fleet maintenance facilities, repair facilities and other
users of parts cleaning equipment in South Florida. This test program was
conducted primarily to gauge consumer acceptance and potential demand.

In January 1997, following a four-month test program with First Recovery, the
Company and First Recovery entered into the Sales Representative Agreement
pursuant to which First Recovery served as the Company's exclusive distributor
of the SystemOne/registered trademark/ Washers in 21 metropolitan areas. The
Sales Representative Agreement replaced the Company's original limited pilot
program with First Recovery covering the Dallas and Houston, Texas markets.
Pursuant to the Sales Representative Agreement, First Recovery purchased, net 90
days, 2,250 SystemOne/registered trademark/ Washers.

Notwithstanding the existence of the Sales Representative Agreement, the Company
and First Recovery had been operating under terms similar to those contained in
the Purchase and Distribution Agreement during the majority of 1997. In December
1997, prior to the expiration of the Sales Representative Agreement, the Company
and First Recovery entered into the Purchase and Distribution Agreement,
effectively terminating and superseding the Sales Representative Agreement.
Pursuant to the Purchase and Distribution Agreement, First Recovery was granted
the exclusive right to purchase SystemOne/registered trademark/ Washers from the
Company and market and distribute such products through sale or lease in a
territory consisting of 21 major metropolitan markets throughout the United
States and to national customers operating in more than one state and in more
than fifteen locations. Pursuant to the Purchase and Distribution Agreement,
First Recovery purchased, net 90 days, 400 SystemOne/registered trademark/
Washers and 243 SystemOne/registered trademark/ Brake Washers during December
1997, and purchased, net 90 days, 600 SystemOne/registered trademark/
Washers during the first quarter of 1998. The Purchase and Distribution
Agreement expired June 30, 1998 and was not renewed.

<PAGE>   6
In an effort to enhance long-term profitability, preserve strategic
opportunities and maximize value for its shareholders, in November 1997, the
Company announced plans to develop a direct marketing and distribution
organization for its SystemOne/registered trademark/ product line. During 1998
the Company opened a total of 62 distribution centers employing 85 service
technicians and approximately 100 salesmen throughout the continental United
States. The Company has direct distribution capabilities in every major
metropolitan market across the country enabling the Company to pursue prime
national accounts as well as municipal, military and local accounts in all of
the Company's target markets including automotive, aviation, marine, heavy
equipment, fleet maintenance and mass transit. The Company sold 2,821
SystemOne/registered trademark/ units during 1998, of which approximately 2,300
units were through the Company's developing direct distribution infrastructure.
During 1997, all product sales were made through third party distributors. The
Company expects that the investment in its direct distribution infrastructure
will result in a long-term operating strategy that maximizes market share
through aggressive factory direct distribution and increased operating profits.
No assurance can be given that the Company's direct marketing and distribution
capabilities will be successful.

Through December 31, 1998, the Company had sold approximately 6,000
SystemOne/registered trademark/ Washers, approximately half of which were
purchased by First Recovery for sale to third parties.

The Company intends to continue to generate consumer awareness of its
SystemOne/registered trademark/ Washers through the efforts of its internal
marketing programs, general advertisements in trade publications, and
participation in trade conventions.

PATENTS, TRADEMARKS AND PROPRIETARY TECHNOLOGY

The Company has been awarded ten United States patents for its product line
including its SystemOne/registered trademark/ General Parts Washer (four
patents), Power Spray Washer, Spray Gun Washer, Immersion Washer, Floor Washer
MiniDisposer (thermal oxidizer) and Vapor Recovery System. The Company intends
to apply for additional patents as appropriate. The Company's patents have terms
commencing September 1994 and continue through September 2014. The Company
currently has four additional patents pending relating to vapor recovery
systems, machinery and processes using SystemOne/registered trademark/
technology. The Company also holds patents in Mexico and Japan relating to its
SystemOne/registered trademark/ technology and has applied for similar patents
in Canada and Europe.

The Company believes that patent protection is important to its business. There
can be no assurance as to the breadth or degree of protection which existing or
future patents, if any, may afford the Company, that any patent applications
will result in issued patents, that patents will not be circumvented or
invalidated or that the Company's competitors will not commence marketing
self-contained washers with similar technology. In the event the Company's
products or processes infringe patents or proprietary rights of others, the
Company may be required to modify the design of its products or obtain a
license.

The Company has received a federal trademark registration with respect to the
mark "SystemOne" and design.

The Company also relies on trade secrets and proprietary know-how and employs
various methods to protect the concepts, ideas and documentation of its
proprietary information. However, such methods may not afford complete
protection and there can be no assurance that others will not independently
develop such know-how or obtain access to the Company's know-how, concepts,
ideas and documentation. Although the Company has and expects to continue to
have confidentiality agreements with its employees, suppliers and appropriate
vendors, there can be no assurance that such arrangements will adequately
protect the Company's trade secrets. Since the Company believes that its
proprietary information is important to its business, failure to protect such
information could have a material adverse effect on the Company.

DIRECT SALES FINANCING

The Company makes its SystemOne/registered trademark/ Washers available to its
customers through a third party leasing program. The Company is party to an
agreement (the "Product Financing Agreement") with First Sierra Inc. ("First
Sierra"), pursuant to which First Sierra provides third party leasing services.
Pursuant to the Product Financing Agreement, the Company provides First Sierra
with certain information, including credit information, with respect to each
proposed lessee. First Sierra may reject a lease application if, in its sole
discretion, the proposed transaction does not comply with First Sierra's then
applicable financing criteria. If First Sierra elects to provide lease
financing, First Sierra purchases the SystemOne/registered trademark/ Washers in
the manner and for an amount agreed to by the Company and First Sierra from time
to time, upon First Sierra's receipt of required documentation and leases the
unit to the Company's customer.

Under the Product Financing Agreement, the Company has agreed, for a fee, to
utilize a reasonable and non-discriminatory approach to assist First Sierra in
reselling any SystemOne/registered trademark/ Washers with respect to which a
customer has failed to 





<PAGE>   7
discharge its payment obligations to First Sierra. First Sierra does not have
recourse against the Company for a customer's failure to discharge its
obligations to First Sierra unless the Company has breached and failed to cure
certain warranties made to First Sierra.

The Product Financing Agreement has a term of one year, which automatically
renews for successive one-year terms. Under the Product Financing Agreement,
either the Company or First Sierra may terminate the agreement with or without
cause upon 60 days notice, without affecting the rights and obligations of
either party with respect to previous sales.

RESEARCH AND DEVELOPMENT

During the years ended December 31, 1997 and 1998, the Company expended $415,000
and $303,000, respectively, in connection with research and development
activities.

The Company plans to continue to focus significant resources on the development
of additional products utilizing the Company's core recycling technologies. The
Company recognizes that the industrial parts cleaning industry may be entering a
phase of rapid technological change and progress and the Company will seek to
retain what it perceives as its technological superiority over competitors'
products. In this regard, the Company intends to continue to seek means of
refining and improving its SystemOne/registered trademark/ Washers. In order to
keep pace with the rate of technological change, the Company also intends to
devote considerable resources in time, personnel and funds on research and
development for future products. The Company recognizes that many of its
competitors have far greater financial and personnel resources than the Company
which may be devoted to research and development and there can be no assurance
that the Company will maintain a technological advantage over its competitors.
Additionally, although there can be no assurance that the Company will develop
new products capable of commercialization, the Company intends to continue its
programs to develop new products, some of which may utilize the Company's
patented products and processes.

GOVERNMENT REGULATION

The Company believes that federal and state laws and regulations have been
instrumental in shaping the industrial parts washing industry. Federal and state
regulations dictate and restrict to varying degrees what types of cleaning
solvents may be utilized, how a solvent may be stored and utilized, and the
manner in which contaminated solvents may be generated, handled, transported,
recycled and disposed of.

Although the federal and state laws and regulations discussed below regulate the
behavior of the Company's customers, and not the Company, the Company believes
that customer demand for its SystemOne/registered trademark/ Washers is
partially a function of the legal environment in which the Company's customers
conduct business. The Company's SystemOne/registered trademark/ Washers were
designed to help minimize the cost of complying with existing federal and state
environmental laws and regulations. Any changes, relaxation or repeal of the
federal or state laws and regulations which have shaped the parts washing
industry may significantly affect demand for the Company's products and the
Company's competitive position.

REGULATION OF HANDLING AND USE OF SOLVENTS. Federal and state regulations have
restricted the types of solvents that may be utilized in industrial parts
cleaning machines. Stoddard solvents, more commonly known as mineral spirits and
solvent naphtha, are the cleaning solvents typically used in industrial parts
washers. The Company intends to use mineral spirits with a minimum of 140
degrees Fahrenheit ignitable limits in its SystemOne/registered trademark/
Washers. Such mineral spirits do not exhibit the ignitability characteristic for
liquid hazardous wastes as defined in the Resource Conservation and Recovery Act
of 1976, as amended (the "RCRA"), and the regulations of that statute adopted by
the United States Environmental Protection Agency (the "EPA"). Certain machines
sold by the Company's competitors use mineral spirits with lower ignitable
limits, which may, after use, render such mineral spirits subject to regulation
as a hazardous waste. The Company believes that the ability to recycle the
mineral spirits used in its SystemOne/registered trademark/ Washers provide a
significant economic benefit to the Company's customers by allowing them to
avoid the expenses and potential liability associated with the disposal of such
solvent as a hazardous waste. 

Federal, state and many local governments have adopted regulations governing the
handling, transportation and disposal of such solvents. On the federal level,
under the Hazardous Materials Transportation Act ("HMTA"), the United States
Department of Transportation has promulgated requirements for the packaging,
labeling and transportation of mineral spirits in excess of specified
quantities. Relative to the handling and disposal of mineral spirits, many
states and local governments have established programs requiring the assessment
and remediation of hazardous materials that have been improperly discharged into
the environment. Liability under such programs is possible for unauthorized
release of mineral spirits in violation of applicable standards. Civil penalties
and administrative costs may also be imposed for such violations. The Company's
products do not require the transportation of mineral spirits that necessitate
compliance with HMTA requirements providing a significant economic benefit to
the Company's customers.

REGULATION OF GENERATION, TRANSPORTATION, TREATMENT, STORAGE AND DISPOSAL OF
CONTAMINATED SOLVENTS. The generation, transportation, treatment, storage and
disposal of contaminated solvents is regulated by the federal and state
governments.
<PAGE>   8
At the federal level, the RCRA authorized the EPA to develop specific rules and
regulations governing the generation, transportation, treatment, storage and
disposal of hazardous solvent wastes as defined by the EPA. The EPA's definition
of hazardous waste appears under Chapter 40 CFR Part 261. The Company believes
that none of the solvent recycled in SystemOne/registered trademark/ Washers
used in accordance with its intended purpose and instructions is subject to
regulation as a "hazardous waste." In contrast, the Company believes that the
mixture of solvent and contaminants which is periodically recovered from the
machines of many of its competitors is subject to regulation as "hazardous
waste."

The Company believes that the ability to manage its residue by-product as used
oil rather than as a hazardous waste is economically attractive to the Company's
customers for a number of reasons. The Company believes that substantially all
of its target customers currently have established systems for the handling,
transportation, recycling and/or disposal of used oil. Accordingly, the
classification of the residue as used oil would enable the Company's customers
to: (i) dispose of or recycle the residue at no significant additional cost; and
(ii) avoid certain costs associated with establishing and disposing of wastes in
compliance with a hazardous waste disposal system.

Even if the residue by-product was required to be handled, transported, recycled
and/or disposed of as a hazardous waste, the fact that the SystemOne/registered
trademark/ Washers effect a substantial reduction in the volume of waste product
requiring disposal would still serve to significantly minimize disposal costs.

PRODUCT LIABILITY AND INSURANCE

The Company is subject to potential product liability risks which are inherent
in the design and use of industrial parts cleaning machines. The Company has
implemented strict quality control measures and currently maintains product
liability insurance with respect to such potential liabilities.

EMPLOYEES

At December 31, 1998, the Company had 270 employees, of which 4 were in
corporate management, 3 were in research and development, 104 were in sales and
marketing, 41 were in manufacturing, 23 were in administration and 95 were in
field support.

ITEM 2. PROPERTIES.

The Company maintains its corporate headquarters and its manufacturing and
research and development facilities in a 75,000 square foot building located in
Miami, Florida. The initial term of the lease for this facility commenced on
August 1, 1997 and expires September 30, 2002. This lease provides for a renewal
term of five years and is exercisable at the Company's option upon six months
prior written notice. The Company's annual lease payments under this lease are
approximately $550,000, subject to an annual 4.5% increase, which amount does
not include the Company's obligation to pay all utilities charges and the
Company's proportionate share of the facilities maintenance and operating
expenses. The Company has the right to cancel this lease upon three months prior
written notice, subject to certain conditions. The Company has also been granted
a right of first refusal with respect to vacant space adjoining these
facilities. Pursuant to this right of first refusal, the landlord is required to
provide the Company with written notice of any adjacent space which becomes
vacant during the initial or extended term of the lease.

To date, the Company has opened 62 support centers in support of its direct
marketing and distribution efforts. The Company intends to open up an additional
3 support centers. Such support centers, which are typically leased on an annual
basis, average approximately 1,500 square feet and require average annual rental
payments of approximately $15,000.

ITEM 3. LEGAL PROCEEDINGS.

The Company is not presently involved in any legal proceedings.

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

No matters were submitted to a vote of the Company's security holders during the
fourth quarter of 1998.

                                     PART II

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

The Company's Common Stock is traded in the Nasdaq SmallCap Market ("Nasdaq")
under the symbol "MANS". The following table sets forth, for the periods
indicated, the high and low closing bid quotations for the Common Stock as
reported by Nasdaq. The 





<PAGE>   9

Nasdaq quotations represent quotations between dealers without adjustment for
retail markups, markdowns or commissions and may not necessarily represent
actual transactions.

                                          HIGH BID PRICE          LOW BID PRICE

                        1998

      Fourth Quarter...................         $15.75                $8.50
      Third Quarter....................         $16.625              $10.125
      Second Quarter...................         $20.00               $14.00
      First Quarter....................         $22.00               $14.50

                        1997

      Fourth Quarter...................         $24.25               $14.00
      Third Quarter....................         $27.00               $19.25
      Second Quarter...................         $27.375              $13.125
      First Quarter....................         $16.00                $7.6875


As of March 23, 1999, there were 42 holders of record of the Company's Common
Stock. The Company believes that there are in excess of 500 beneficial owners of
the Common Stock. On March 23, 1999, the closing bid price of the Common Stock
was $8.25 per share.

To date, the Company has not declared or paid any dividends on its Common Stock.
Pursuant to the Notes, the Company may not declare or pay any dividends or make
any other distributions, except dividends or distributions payable in equity
securities. The payment of dividends, if any, is within the discretion of the
Board of Directors and will depend upon the Company's earnings, its capital
requirements and financial condition, contractual restrictions and other
relevant factors. The Board does not intend to declare any dividends in the
foreseeable future, but instead intends to retain future earnings, if any, for
use in the Company's business operations.

In February 1998, the Company consummated the Private Placement of $17.0 million
of Notes generating net proceeds of approximately $15.7 million. To date, the
Company has used and will continue to use the proceeds from the Private
Placement to expand manufacturing operations, accelerate development of the
Company's direct marketing and distribution organization, establish additional
regional support and service centers and for working capital and general
corporate purposes. The Private Placement was made pursuant to the exemption
from registration afforded by Section 4(2) of the Securities Act of 1933, as
amended, and Rule 506 promulgated thereunder.

ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

The following discussion and analysis should be read in conjunction with the
Financial Statements, including the notes thereto, contained elsewhere in this
report.

THE FOLLOWING, AS WELL AS THE DESCRIPTION UNDER PART I "BUSINESS" CONTAINS
CERTAIN "FORWARD-LOOKING STATEMENTS" WITHIN THE MEANING OF SECTION 21E OF THE
SECURITIES EXCHANGE ACT OF 1934, AS AMENDED (THE "EXCHANGE ACT"), WHICH
REPRESENTS THE COMPANY'S EXPECTATIONS OR BELIEFS, INCLUDING, BUT NOT LIMITED TO,
STATEMENTS CONCERNING (I) TRENDS AFFECTING THE COMPANY'S FINANCIAL CONDITION OR
RESULTS OF OPERATIONS; (II) THE COMPANY'S CONTINUED GROWTH AND OPERATING
STRATEGY; AND (III) TRENDS IN GOVERNMENTAL REGULATION. FOR THIS PURPOSE, ANY
STATEMENTS CONTAINED HEREIN THAT ARE NOT STATEMENTS OF HISTORICAL FACT MAY BE
DEEMED TO BE FORWARD-LOOKING STATEMENTS. WITHOUT LIMITING THE GENERALITY OF THE
FOREGOING, WORDS SUCH AS "MAY," "WILL," "EXPECT," "BELIEVE," "ANTICIPATE,"
"INTEND," "COULD," "ESTIMATE" OR "CONTINUE" OR THE NEGATIVE OR OTHER VARIATIONS
THEREOF OR COMPARABLE TERMINOLOGY ARE INTENDED TO IDENTIFY FORWARD-LOOKING
STATEMENTS. THESE STATEMENTS BY THEIR NATURE INVOLVE SUBSTANTIAL RISKS AND
UNCERTAINTIES, CERTAIN OF WHICH ARE BEYOND THE COMPANY'S CONTROL. READERS ARE
CAUTIONED THAT ANY SUCH FORWARD LOOKING STATEMENTS ARE NOT GUARANTEES OF FUTURE
PERFORMANCE, AND THAT ACTUAL RESULTS MAY DIFFER MATERIALLY FROM THOSE PROJECTED
IN THE FORWARD LOOKING STATEMENTS AS A RESULT OF VARIOUS FACTORS. THE
ACCOMPANYING INFORMATION CONTAINED HEREIN INCLUDING WITHOUT LIMITATION THE
INFORMATION SET FORTH UNDER THE HEADINGS "MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS," AND "BUSINESS," IDENTIFIES
IMPORTANT FACTORS THAT COULD CAUSE SUCH DIFFERENCES.

GENERAL

The Company was incorporated in November 1990 and, as a development stage
company, devoted substantially all of its resources to











<PAGE>   10
research and development programs related to its full line of self contained,
recycling industrial parts washers until June 1996. The Company commenced its
planned principal operations in July 1996. The Company began to generate
significant revenue from product sales in 1997 and since its inception has only
had one quarter of profitability. Inasmuch as the Company's operating expenses
have increased significantly in connection with the Company's rapid expansion,
development of a direct marketing and distribution organization, establishment
of additional regional distribution centers and a service fleet, development of
new products through the application of the Company's core technologies and the
purchase of raw materials, the Company anticipates that negative operating cash
flow will continue until such time, if ever, as the Company is able to generate
sufficient revenues to offset its operating costs and the costs of continued
expansion and development.

In October 1996, the Company consummated an underwritten initial public offering
(the "IPO") of 1,100,000 shares of its Common Stock for aggregate net proceeds
of $6,034,660. The net proceeds were used for the development, sales and
marketing of the Company's products, establishment of regional centers and a
service fleet, development of manufacturing facilities and for working capital
and general corporate purposes.

In February 1998, the Company consummated the Private Placement of $17.0 million
of Notes generating net proceeds of approximately $15.7 million. The Company has
used the proceeds from the Private Placement to accelerate development of the
Company's direct marketing and distribution organization, expand manufacturing
operations, establish additional regional distribution and service centers and
for working capital and general corporate purposes.

Under the Company's Product Financing Arrangement, the Company recognizes
revenue from the sale of parts washers at the time the equipment is delivered by
the Company to the leasing company's customer. In general, the revenue
recognized approximates the discounted present value of the payment stream
related to the underlying lease.

RESULTS OF OPERATIONS

YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997

The Company sold 2,821 SystemOne/registered trademark/ units during 1998
compared to 1997 shipments of 2,986 units. During 1998 approximately 2,300 units
were sold through the Company's developing direct distribution infrastructure.
Substantially all of the units sold in 1997 were made through First Recovery.
Primarily as the result of an increase in average sales price per unit, revenues
increased by $323,529 to $7,567,956 during 1998 compared to $7,244,427 during
1997.

Cost of goods sold decreased by $138,159 to $4,522,627 during 1998 from 
$4,660,786 during 1997. As a percentage of net sales, cost of goods sold
represented 59.8% and 64.3% for the years ended December 31, 1998 and 1997,
respectively.

Selling, general and administrative expenses during 1998 were $14,753,914, an
increase of $11,292,669, compared to selling, general and administrative
expenses of $3,461,245 during 1997. The increase in general and administrative
expenses was primarily the result of the hiring of additional personnel in
connection with the Company's establishment of 62 support centers, ramping up of
direct marketing and distribution capabilities and the leasing of additional
manufacturing capacity in order to support the Company's increased production.

During 1998, the Company's research and development expenses decreased by
$112,366 from $415,428 during 1997 to $303,062 in 1998. The decrease was
primarily the result of increased focus on the manufacturing and distribution
and sale of SystemOne/registered trademark/ Washers during 1998.

The Company recognized net interest expense of $1,034,288 during 1998, compared
to net interest income of $104,108 during 1997. The increase in net interest
expense was primarily the result of accrued interest on the Company's $17.0
million of Subordinated Convertible Notes issued pursuant to the Private 
Placement in February 1998.

As a result of the foregoing, the Company incurred net losses of $13,045,935 and
$1,188,924 for 1998 and 1997, respectively. The Company's basic and diluted net
losses to shares for 1998 and 1997 were $13,045,935, or a loss per share of
$2.84, and $1,188,924, or a loss per share of $.26, respectively.

LIQUIDITY AND CAPITAL RESOURCES

At December 31, 1998, the Company had net working capital of $7,062,859 and cash
and cash equivalents aggregating $3,199,055 compared to net working capital of
$4,203,213 and cash and cash equivalents of $2,243,172 at December 31, 1997.

The Company's primary sources of working capital have been the net proceeds from
the Company's Private Placement of Notes consummated in February 1998, the
Company's lease financing arrangement with First Sierra, and direct sales to
customers.

In February 1998, the Company consummated the Private Placement of Notes
generating net proceeds approximately $15.7 million. 





<PAGE>   11
 Interest on the Notes is payable semi-annually through the Company's issuance
of additional Notes during the first two years and thereafter, at the election
of the Company, either in cash or through the issuance of additional Notes. The
Notes are convertible by the holders thereof into shares of Common Stock at a
Conversion Price of $17.00 per share. The Notes automatically convert into
shares of Common Stock after February 23, 1999, if the closing price of the
Common Stock, as reported on the Nasdaq SmallCap Market, exceeds 175% of the
Conversion Price for a period of twenty consecutive trading days, including the
twenty trading days immediately preceding February 23, 1999. The Company may
redeem the Notes after February, 2001, under certain circumstances. The net
proceeds of the Private Placement have been used by the Company to expand
manufacturing operations, accelerate the development of its direct marketing and
distribution organization, and for working capital and general corporate
purposes.

In November 1997, the Company entered into an agreement with a third party
providing for the factoring of the Company's accounts receivable (the "Factoring
Agreement"). Pursuant to the Factoring Agreement, the Company effectively
assigned all eligible receivables due from First Recovery to the third party and
was provided with credit against such receivables. During the year ended
December 31, 1998 and 1997, the Company factored $2,286,225 and $4,785,285 of
receivables, respectively, of which the Company borrowed and repaid $245,519 and
$1,000,000 during 1998 and 1997, respectively. The Company paid $11,375 in 1998
and $25,510 in 1997 in interest and commissions relating to this agreement. The
Factoring Agreement was terminated in June 1998 at which time all of the
Company's receivables were released from the factoring arrangement.

The Company's cash and cash equivalents balance increased by $955,883, or 42.6%,
from $2,243,172 as of December 31, 1997 to $3,199,055 as of December 31, 1998,
primarily as a result of the Private Placement of the Notes in February, offset
by net cash used to fund operating activities. Since the Company commenced the
sale of its products, it has experienced negative cash flow from operations.
During 1998, this negative cash flow was primarily a result of the Company
ramping up its direct marketing and distribution capabilities. On December 31,
1998, the Company's accounts receivable had increased by $1,248,827, or 124.1%
to $2,255,054 from $1,006,227 on December 31, 1997. During 1998, the Company's
inventories increased to $4,077,148 from $1,824,181 in order to meet anticipated
increased sales volume.

The Company's material financial commitments relate principally to its
obligations to make lease payments pursuant to certain real property and
equipment leases (currently an aggregate of $156,201 per month), and installment
payments for manufacturing equipment (currently an aggregate of $32,523 per
month). The increase in such material financial commitments during 1998 was the
result of the Company's expansion and development of direct marketing and
distribution capabilities.

Capital requirements relating to the implementation of the Company's business
plan have been and will continue to be significant. The Company believes that
its ability to generate cash from operations is dependent upon, among other
things, increased demand for its products and services and the successful
development of direct marketing and distribution capabilities. In order to
reduce certain of the Company's up-front capital requirements associated with
manufacturing operations as well as service center and service fleet
development, the Company leases and intends to continue to lease rather than
purchase, to the extent possible, equipment and vehicles. There can be no
assurance that the Company will have sufficient capital resources to permit the
Company to continue implementation of its business plan.

The Company has suffered recurring losses from operations primarily resulting
from the significant expenses incurred in establishing its direct national
marketing and distribution organization and has a net capital deficiency. As of
December 31, 1998, the Company's accumulated deficit totaled $18,964,725. Since
its inception, the Company has financed its operations through a number of stock
and debt issuances and conversions. The Company is currently seeking additional
sources of financing, which will supplement the Company's revenues from
operations, to satisfy its cash requirements over the next 12 months. Given the
Company's need for additional financing, the Company's auditors have inserted an
explanatory paragraph in their opinion relating to the Company's audited
financial statements for the years ended December 31, 1997 and 1998. Although
the Company believes that it will be able to secure additional financing in the
near future, there can be no assurance that any additional financing will be
available to the Company on acceptable terms, or at all. If adequate funds are
not available, the Company's business operations could be materially adversely
affected.

YEAR 2000
   
The Securities and Exchange Commission has issued Staff Legal Bulletin No. 5
stating that public operating companies should consider whether there will be
any anticipated costs, problems and uncertainties associated with the Year 2000
issue, which affects many existing computer programs that use only two digits to
identify a year in the date field. The Company has recently upgraded its
computer operating systems and believes that such systems are Year 2000
compliant. Additionally, the Company intends that any computer systems that it
may purchase or lease in the future will have already addressed the Year 2000
issue and anticipates that its business operations will electronically interact
with third parties very minimally, if at all. However, the Company has not fully
assessed the impact of the Year 2000 issue on third parties with whom the
Company has material relationships, including its suppliers. The Company will
undertake, where necessary, reasonable efforts in order to assess the Year 2000
readiness of third parties with which it has material relationships.

The Company has spent approximately $25,000 in order to complete its Year 2000
efforts. The Company does not expect to spend any additional amounts in
connection with Year 2000 readiness. All system modification costs associated
with Year 2000 readiness have between expensed as incurred.

The Company currently believes that the Year 2000 issue will not present a
materially adverse risk to its future results of operations, liquidity, and
capital resources. However, if the Company's belief that its computer operating
systems are compliant is incorrect or the level of timely compliance by key
suppliers or vendors is not sufficient, the Year 2000 issue could have a
material impact on the Company's operations including, but not limited to,
delays in delivery of supplies resulting in loss of revenue, increased operating
costs, loss of customers or suppliers, or other significant disruptions to the
Company's business.

NEW ACCOUNTING STANDARDS

In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS
No. 130"), which establishes standards for reporting and display of
comprehensive income and its components (revenue, expenses, gains, and losses)
in a full set of general-purpose financial statements. This statement requires
that all items that are required to be recognized under accounting standards as
components of comprehensive income, be reported in a financial statement that is
displayed with the same prominence as other financial statements. This statement
is effective for fiscal years beginning after December 15, 1997. The Company
adopted SFAS No. 130 during the three months ended March 31, 1998 and determined
that there is no material impact to the Company's financial and notes thereto.

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 No. 131"). This Statement supersedes
Statement of Financial Accounting Standards No. 14 and parts of various other
statements and provides accounting guidance for reporting information about
operating segments in annual financial statements by public business enterprises
and requires such enterprises to report selected information about 




<PAGE>   12

operating segments in interim financial reports. The Statement uses a
"management approach" to identify operating segments. Reportable segments are
operating segments that meet specified quantitative thresholds. The statement
also uses a "management approach" for determining some of the information
required to be disclosed. This statement is effective for fiscal years beginning
after December 15, 1997. The Company adopted SFAS No. 131 during the three
months ended March 31, 1998 and determined that there is no material impact to
the Company's financial statements and notes thereto.

ITEM 7. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

The Financial Statements of the Company required by Form 10-KSB are attached
hereto following Part III of this report commencing on page F-1.

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

None.




                                    PART III

ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE
WITH SECTION 16(A) OF THE EXCHANGE ACT.

Incorporated by reference from the Company's definitive proxy statement to be
filed within 120 days after the end of the Registrant's fiscal year.

ITEM 10. EXECUTIVE COMPENSATION.

Incorporated by reference from the Company's definitive proxy statement to be
filed within 120 days after the end of the Registrant's fiscal year.

ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.

Incorporated by reference from the Company's definitive proxy statement to be
filed within 120 days after the end of the Registrant's fiscal year.

ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

Incorporated by reference from the Company's definitive proxy statement to be
filed within 120 days after the end of the Registrant's fiscal year.






















<PAGE>   13


ITEM 13. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.

(A)   EXHIBITS

EXHIBIT                             DESCRIPTION

3.1           Restated Articles of Incorporation of Registrant(1) 3.2 Bylaws of
              Registrant, as amended(1) 4.1 Certificate for Shares of Common
              Stock, par value $.001(1)

4.3           Representatives' Warrant Agreement between the Registrant and the
              Underwriter(1) 10.1 Registrant's Executive Incentive Plan(1) 10.2
              Master Lease and Distribution Agreement, effective August 1, 1996,
              among the Registrant, The Valvoline Company and First Recovery(1)

10.3          Form of Indemnification Agreement between the Registrant and each
              of its director and executive officers(1)

10.4          Employment Agreement between Pierre G. Mansur and the Registrant 
              dated September 1, 1995(1) 10.5 Employment Agreement between Paul
              I. Mansur and the Registrant dated September 1, 1995(1) 10.6
              Employment Agreement between the Company and Charles W. Profilet,
              dated as of November 27, 1995(1)

10.7          Vendor Lease Plan Agreement between the Registrant and Oakmont
              Financial Services, dated as of May 28, 1996(1)

10.8          A Manufacture Agreement between the Registrant and EMJAC
              Industries, Inc., dated as of May 7, 1996(1)

10.9          Lease Agreement, dated October 29, 1994, between Registrant and
              Marvin L. Duncan(1) 

10.10         Security Agreement between the Registrant and The CIT
              Group/Equipment Financing, Inc. for one (1) TRUMPF TC 200 CNC
              Punching Machine, Serial No. 070080 with tolling package, dated as
              of October 25, 1995(1)

10.11         Term Life Insurance  Policy for Pierce G. Mansur with the
              Equitable Life Assurance Society of the United States, dated as of
              November 9, 1994(1)

10.12         Term Life  Insurance  Policy for Paul I. Mansur with the
              Equitable Life Assurance Society of the United States, dated as of
              May 24, 1996(1)

10.13         United States Patent No. 5,277,208 for Multi-Process Power Spray
              Washer Apparatus dated January 11, 1994(1) 

10.14         United States Patent No. 5,349,974 for SystemOne(TM) Washer dated
              September 27, 1994(1) 

10.15         United States Patent Application No. 08/394,290 for Improved
              SystemOne(TM) Washer allowed April 2, 1996(1)

10.16         United States Patent No. 5,388,601 for Spray Gun Washer dated
              February 14, 1995(1)

10.17         United States Patent No. 5,518,013 for Immersion Washer dated May
              21, 1996(1)

10.18         United States Patent Applications NO. 08/364,785 for apparatus for
              disposal of refuse by thermal oxidation allowed June 26, 1996(1)

10.19         Short Term Note, dated as of September 9, 1996, between Maria G.
              Jackson and the Registrant in the principal amount of $100,000(1)

10.20         Short Term Note, dated as of September 9, 1996, between First
              Malro and the Registrant in the principal amount of $250,000(1)

10.21         Short Term Note, dated as of September 9, 1996, between Martin E.
              Samy and the Registrant in the principal amount of $50,000(1)


<PAGE>   14

10.22         Short Term Note, dated as of September 9, 1996, between Crestwell
              Corporation and the Registrant in the principal amount of
              $100,000(1)

10.23         Employment Agreement, dated as of July 31, 1996, between Richard
              P. Smith and the Registrant (1) 

10.24         Lease, dated as of September 1, 1996 between Y.F.G., Inc. and the
              Registrant (1) 

10.25         Lease, dated as of September 15, 1996 between Business Enterprises
              of Pinellas Limited and the Registrant (1)

10.26         United States Patent No. 5,549,128 for improved general parts
              washer dated August 27, 1996(1)

10.27         United States Patent No. 5,579,704 for apparatus for disposing of
              refuse by thermal oxidation dated December 31, 1996 (1)

10.28         United States Patent Application for floor washing apparatus dated
              December 3, 1996 (1) 

10.29         United States Patent Application for system and method of vapor
              recovery in industrial washing equipment dated December 19, 1996
              (1)

10.30         United States Patent Application for a process for integrated
              recycling of cleaning solution in industrial washing equipment
              dated February 26, 1997 (1).

10.31         Commission Sales Representative Agreement, dated January 16, 1997,
              among the Valvoline Oil Company, Ecogard, Inc. and the 
              Registrant (2)

10.32         United States Patent Officer Notice of Allowance (3)

10.33         Intertek Testing Services Listing, Labeling, and Follow-up Service
              Agreement (3)

10.34         United States Patent Office Notice of Allowance (4)

10.35         Factoring Agreement between the Registrant and Capital Factors,
              Inc. ("Capital") dated November 26, 1997 (5)

10.36         Security Agreement Supplement between the Registrant and Capital
              (5)

10.37         License Agreement between the Registrant and Capital dated
              November 26, 1997 (5)

10.38         Purchase and Distribution Agreement between First Recovery and
              SystemOne Technologies, Inc. (5)

10.39         Vendor Lease Plan Agreement between the Registrant and First
              Sierra Financial Financial Services, dated as of November 15, 1998

23.1          Consent of KPMG LLP relating to the Company's Registration
              Statements on Form S-3 (No. 333-50401) and Form S-8 (No.
              333-70379).

27.1          Financial Data Schedule

(1) Incorporated by reference to the exhibit of the same number filed with the
    Company's Registration Statement on Form S-1 (No. 333-08657).

(2) Incorporated by reference to the Company's Current Report on Form 8-K dated
    January 22, 1997.

(3) Incorporated by reference to the Company's Quarterly Report on Form 10-QSB
    for the Quarterly Period Ended June 30, 1997.

(4) Incorporated by reference to the Company's Quarterly Report on Form 10-QSB
    for the Quarterly Period Ended September 30, 1997.

(5) Incorporated by reference to the Company's Annual Report on Form 10-KSB for
    the Yearly Period Ended December 31, 1997.

           (B)      REPORTS OF FORM 8-K
None.


<PAGE>   15

                                   SIGNATURES

         Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.

                            MANSUR INDUSTRIES INC.

Dated: March 31, 1999       By: /s/ PAUL I. MANSUR
                                -------------------------------------
                                Chief Executive Officer
                                (Principal Executive Officer)

Pursuant to the requirements of the Securities Act of 1934, this report has been
signed below by the following persons on behalf of the Registrant and in
capacities and on the dates indicated.
<TABLE>
<CAPTION>

          SIGNATURES                    TITLE                                      DATE

<S>                        <C>                                                 <C> 
/s/ PIERRE G. MANSUR       Chairman of the Board and President;                March 31, 1999
-----------------------    Director
Pierre G. Mansur           

/s/ PAUL I. MANSUR         Chief Executive Officer; Principal                  March 31, 1999
-----------------------    Executive Officer; Director
Paul I. Mansur             

/s/ RICHARD P. SMITH       Chief Financial Officer; Principal Financial        March 31, 1999
-----------------------    Accounting Officer
Richard P. Smith           

/s/ RONALD J. KORN         Director                                            March 31, 1999
-----------------------
Ronald J. Korn

/s/ DR. JAN HEDBERG        Director                                            March 31, 1999
-----------------------
Dr. Jan Hedberg

/s/ JOSEPH E. JACK         Director                                            March 31, 1999
-----------------------
Joseph E. Jack
</TABLE>


<PAGE>   16



                          INDEX TO FINANCIAL STATEMENTS

                                                                         PAGE

Independent Auditors' Report                                              F-2

Balance Sheets as of December 31, 1998 and 1997                           F-3

Statements of Operations for the years ended
    December 31, 1998 and 1997                                            F-4

Statements of Stockholders' Equity (Deficit) for the years
    ended December 31, 1998 and 1997                                      F-5

Statement of Cash Flows for the years ended
    December 31, 1998 and 1997                                            F-6

Notes to Financial Statements                                             F-7


<PAGE>   17
                          INDEPENDENT AUDITORS' REPORT


The Board of Directors
Mansur Industries Inc.


We have audited the accompanying balance sheets of Mansur Industries Inc. as of
December 31, 1998 and 1997, and the related statements of operations,
stockholders' equity (deficit) and cash flows for the years then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.

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

In our opinion, the financial statements referred to above present fairly, in 
all material respects, the financial position of Mansur Industries Inc. as of 
December 31, 1998 and 1997, and the results of its operations and its cash 
flows for the years then ended in conformity with generally accepted accounting 
principles.

The accompanying financial statements have been prepared assuming that the 
Company will continue as a going concern. As discussed in Note 1(a) to the 
financial statements, the Company has suffered recurring losses from operations 
primarily resulting from the significant expenses incurred in establishing its 
direct national marketing and distribution organization and has a net capital 
deficiency. These factors raise substantial doubt about the Company's ability 
to continue as a going concern. Management's plans, including additional 
financing to address these matters, are also described in Note 1(a). The 
financial statements do not include any adjustments that might result from the 
outcome of this uncertainty.



/s/ KPMG LLP


February 17, 1999



                                      F-2
<PAGE>   18

                             MANSUR INDUSTRIES INC.

                                 BALANCE SHEETS

                           December 31, 1998 and 1997
<TABLE>
<CAPTION>

                                     ASSETS                                        1998            1997
                                     ------                                        ----            ----
<S>                                                                            <C>                <C>      
    Current assets:
         Cash and cash equivalents                                             $  3,199,055       2,243,172
         Accounts receivable, net                                                 2,255,054       1,006,227
         Inventory, net                                                           4,077,148       1,824,181
         Other assets                                                               368,492         213,452
                                                                               ------------    ------------
                       Total current assets                                       9,899,749       5,287,032

    Intangible assets, net                                                          113,049          71,894
    Property and equipment, net                                                   2,908,736       1,354,993
    Other assets                                                                  1,285,144          74,269
                                                                               ------------    ------------

                       Total assets                                            $ 14,206,678       6,788,188
                                                                               ============    ============

                     LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
                     ----------------------------------------------

    Current liabilities:
         Accounts payable and accrued expenses                                    2,389,664         758,872
         Deferred revenue                                                           173,788         169,913
         Interest payable                                                                --           2,156
         Current installments of obligations under capital leases                   273,438         152,878
                                                                               ------------    ------------

                       Total current liabilities                                  2,836,890       1,083,819

    Long-term debt and obligations under capital leases, 
         excluding current installments                                          19,214,054         502,700
                                                                               ------------    ------------

                       Total liabilities                                         22,050,944       1,586,519
                                                                               ------------    ------------

    Stockholders' equity (deficit):
         Common stock, $0.001 par value. Authorized
            25,000,000 shares, issued and outstanding
            4,601,309 in 1998 and 1997                                                4,601           4,601
         Additional paid-in capital                                              11,115,858      11,115,858
         Accumulated deficit                                                    (18,964,725)     (5,918,790)
                                                                               ------------    ------------

                       Total stockholders' equity (deficit)                      (7,844,266)      5,201,669
                                                                               ------------    ------------

                       Total liabilities and  stockholders' equity (deficit)   $ 14,206,678       6,788,188
                                                                               ============    ============
</TABLE>


See accompanying notes to financial statements.


                                      F-3
<PAGE>   19



                             MANSUR INDUSTRIES INC.

                            STATEMENTS OF OPERATIONS

                 For the years ended December 31, 1998 and 1997
<TABLE>
<CAPTION>

                                                                  1998            1997
                                                                  ----            ----
<S>                                                             <C>              <C>      
    Revenue                                                   $  7,567,956       7,244,427
    Costs of goods sold                                         (4,522,627)     (4,660,786)
                                                              ------------    ------------

                       Gross profit                              3,045,329       2,583,641
                                                              ------------    ------------
    Operating expenses:
         Selling, general and administrative                    14,753,914       3,461,245
         Research and development                                  303,062         415,428
                                                              ------------    ------------

                       Total operating expenses                 15,056,976       3,876,673
                                                              ------------    ------------

                       Loss from operations                    (12,011,647)     (1,293,032)

    Interest expense                                            (1,548,554)        (46,008)
    Interest income                                                514,266         150,116
                                                              ------------    ------------

                       Net loss                                (13,045,935)     (1,188,924)

                       Basic and diluted net loss per share   $      (2.84)   $      (0.26)
                                                              ============    ============

    Weighted average shares outstanding                          4,601,309       4,601,309
                                                              ============    ============
</TABLE>


See accompanying notes to financial statements.


                                      F-4
<PAGE>   20

                             MANSUR INDUSTRIES INC.

                  Statements of Stockholders' Equity (Deficit)

                 For the years ended December 31, 1998 and 1997

<TABLE>
<CAPTION>
                                       COMMON STOCK
                               ------------------------------                     TOTAL
                                                  ADDITIONAL                  STOCKHOLDERS'
                                                    PAID-IN     ACCUMULATED       EQUITY
                                 SHARES     PAR     CAPITAL       DEFICIT       (DEFICIT)
                               ---------   -----   ----------   -----------    -----------
<S>                            <C>         <C>     <C>            <C>             <C>      
Balance at December 31, 1996   4,601,309  $4,601  $11,115,858   $ (4,729,866)  $  6,390,593

     Net loss                         --      --           --     (1,188,924)    (1,188,924)
                               ---------  ------  -----------   ------------   ------------

Balance at December 31, 1997   4,601,309  $4,601  $11,115,858   $ (5,918,790)  $  5,201,669

     Net loss                         --      --           --    (13,045,935)   (13,045,935)
                               ---------  ------  -----------   ------------   ------------

Balance at December 31, 1998   4,601,309  $4,601  $11,115,858   $(18,964,725)  $ (7,844,266)
                               =========  ======  ===========   ============   ============
</TABLE>

See accompanying notes to financial statements.



                                      F-5
<PAGE>   21

                             MANSUR INDUSTRIES INC.

                            Statements of Cash Flows

                 For the years ended December 31, 1998 and 1997



<TABLE>
<CAPTION>

                                                                               1998           1997
                                                                           ------------    ----------
<S>                                                                        <C>             <C>        
Cash flows from operating activities:
     Net loss                                                              $(13,045,935)   (1,188,924)
     Adjustments to reconcile net loss to net cash used
      in operating activities:
           Depreciation and amortization                                        475,097        96,927
           Provision for obsolete inventory                                     200,000            -- 
           Loss on fixed asset write-offs                                         8,493            -- 
           Payment-in-kind of interest on convertible debt                    1,249,554            --
           Changes in operating assets and liabilities:
               Accounts receivable                                           (1,248,827)     (436,301)
               Inventory                                                     (2,452,967)   (1,206,716)
               Other assets                                                  (1,590,094)     (258,022)
               Intangible assets                                                (41,155)      (25,977)
               Accounts payable and accrued expenses                          1,630,792       463,280
               Deferred revenue                                                   3,875        74,753
                                                                           ------------    ----------

                    Net cash used in operating activities                   (14,811,167)   (2,480,980)
                                                                           ------------    ----------

Cash flows from investing activities:
     Purchase of property and equipment                                      (1,054,929)     (538,790)
                                                                           ------------    ----------

                    Net cash used in investing activities                    (1,054,929)     (538,790)
                                                                           ------------    ----------

Cash flows from financing activities:
     Proceeds from issuance of convertible debt                              17,000,000            -- 
     Repayments of capital lease obligations                                   (178,021)      (57,666)
                                                                           ------------    ----------

                    Net cash provided by (used in) 
                      financing activities                                  16,821,979       (57,666)
                                                                           ------------    ----------

                    Net increase (decrease) in cash and cash equivalents        955,883    (3,077,436)

Cash and cash equivalents, beginning of year                                  2,243,172     5,320,608
                                                                           ------------    ----------

Cash and cash equivalents, end of year                                     $  3,199,055     2,243,172
                                                                           ============    ==========

Supplemental cash flow disclosure:

     Interest paid                                                         $     74,819        46,008
                                                                           ============    ==========
</TABLE>


Supplemental disclosure of noncash financing activities: For the years ended
December 31, 1998 and 1997, the Company entered into capital lease obligations
totaling $758,224 and $539,366, respectively, for the purchase of machinery and
equipment.


See accompanying notes to financial statements.




                                      F-6
<PAGE>   22


                             MANSUR INDUSTRIES INC.

                          NOTES TO FINANCIAL STATEMENTS



(1)      THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

         Mansur Industries Inc. (the "Company") is primarily engaged in research
         and development, marketing, and production of industrial parts cleaning
         equipment for use in automotive, aviation, marine and general
         manufacturing industries. The Company's focus is on the design,
         development and manufacture of industrial cleaning equipment which
         incorporate continuous recycling and recovery technologies for solvents
         and solutions, thereby reducing the need to replace and dispose of
         contaminants.

         (a)    OPERATIONS AND LIQUIDITY

                The Company has been primarily engaged in research and
                development, marketing, and production of its products. The
                Company's ultimate success is dependent upon future events,
                including the successful commercialization of the Company's
                products which includes, among other things, achieving volume
                levels sufficient to support its sales and service
                infrastructure. The Company was considered a development stage
                enterprise up until it realized its first product sales during
                the third quarter of 1996.

                As indicated in the accompanying financial statements as of
                December 31, 1998 and 1997, the Company's accumulated deficit
                totaled $18,964,725 and $5,918,790 respectively. In past years,
                the Company has financed this deficiency primarily through
                additional debt, private placements of convertible redeemable
                preferred stock and an initial public offering ("IPO") of 1.1
                million shares of its common stock. In February 1998, the
                Company issued subordinated convertible notes in the amount of
                $17 million.

                The proceeds of the subordinated convertible notes (note 4) have
                been used primarily for, among other things, the development of
                manufacturing capacity, research and development activities,
                development and implementation of direct marketing and
                distribution capabilities and for working capital and general
                corporate purposes. The Company has suffered recurring losses
                from operations primarily resulting from the significant
                expenses incurred in establishing its direct national marketing
                and distribution organization and has a net capital deficiency.
                The Company is currently seeking additional sources of
                financing, which will supplement the Company's revenues from
                operations, to satisfy its cash requirements over the next 12
                months. Although the Company believes that it will be able to
                secure additional financing in the near future, there can be no
                assurance that any additional financing will be available to the
                Company on acceptable terms, or at all. If adequate funds are
                not available, the Company's business operations could be
                materially adversely affected. In the event that the Company's
                plans change, its assumptions change or prove to be inaccurate
                or if the proceeds of additional financing along with available
                cash flow prove to be insufficient to fund the Company's
                expansion (due to unanticipated delays, problems, etc.), the
                Company could restructure its operations to minimize cash
                expenditures and/or obtain additional financing to support its
                plan of operations.


         (b)    REVENUE RECOGNITION

                Under the Product-Financing Agreement (note 8) and for all
                direct sales by the Company to customers, the Company recognizes
                revenue from the sale of industrial parts cleaning equipment at
                the time that the equipment is delivered by the Company to the
                customer. 

                                      F-7
<PAGE>   23


                             MANSUR INDUSTRIES INC.

                          NOTES TO FINANCIAL STATEMENTS



                Under the Purchase and Distribution Agreement (note 9), the
                Company recognized revenue upon delivery of the industrial parts
                cleaning equipment and written acceptance of delivery of the
                equipment from the customer.

         (c)    DEFERRED REVENUE

                A portion of the sales price that represents shipping and
                handling fees for sales that are made to the Company's sales
                representative are deferred until the unit is sold by the
                Company's sales representative to the end user. In addition, a
                portion of the sales price that represents a five-year solvent
                program is deferred and recognized over the respective period.

         (d)    CASH AND CASH EQUIVALENTS

                Cash and cash equivalents include cash on hand, demand deposits,
                and short-term investments with original maturities of three
                months or less.

         (e)    INVENTORY, NET

                Inventories are stated at the lower of cost or market. Cost is
                determined using the first-in, first-out method for all
                inventories. Inventory consists of the following at December 31,
                1998 and 1997:
<TABLE>
<CAPTION>

                                                                  1998          1997
                                                                  ----          ----
<S>                                                            <C>           <C>    
                    Raw materials                              $ 1,705,298   $   872,871
                    Work in progress and finished goods          2,635,588     1,015,048
                                                               -----------   -----------
                                                                 4,340,886     1,887,919

                    Less: allowance for obsolete inventories       263,738        63,738
                                                               -----------   -----------

                                                               $ 4,077,148   $ 1,824,181
                                                               ===========   ===========
</TABLE>

         (f)    PROPERTY AND EQUIPMENT, NET

                Property and equipment are stated at cost, less accumulated
                depreciation. Equipment under capital leases is stated at the
                present value of minimum lease payments.

                Depreciation is calculated using the straight-line method over
                the estimated useful life of the assets. Equipment held under
                capital leases and leasehold improvements are amortized using
                the straight-line method over the shorter of the lease term,
                estimated useful life of the asset, or units of production
                method.

         (g)    INTANGIBLE ASSETS, NET

                Intangible assets, net, consist of patents, patent applications
                and rights that are stated at acquisition cost. Amortization is
                recorded using the straight-line method over the legal lives of
                the patents, generally for a period ranging up to 17 years. The
                carrying value of intangible assets is periodically reviewed by
                the Company and impairments are recognized when the expected
                future cash flows from operations derived from intangible assets
                is less than their carrying value. At December 31, 1998 and
                1997, intangible assets, net includes accumulated amortization
                of approximately $1,624 and $500, respectively.


                                      F-8
<PAGE>   24

                             MANSUR INDUSTRIES INC.

                          NOTES TO FINANCIAL STATEMENTS




         (h)    OTHER ASSETS

                Legal and accounting fees, printing costs, and other expenses
                associated with the private placement in February 1998 of the
                Company's 8.25% Subordinated Convertible Notes due 2003 (note 4)
                are being amortized on the effective interest method over the
                term of the notes. Amortization expense charged to operations
                for the year ended December 31, 1998 was $224,180. The balance
                of unamortized debt issue costs at December 31, 1998 was
                $1,170,144.

                At December 31, 1998, in accordance with terms of one of the
                capital lease agreements with a finance company for certain
                machinery and equipment, the Company has $115,000 of restricted
                cash to be used as additional security for such machinery and
                equipment.

          (i)   FINANCIAL INSTRUMENTS

                In assessing the fair value of financial instruments, at
                December 31, 1998 and 1997, the Company has used a variety of
                methods and assumptions, which were based on estimates of market
                conditions and risks existing at that time. The fair value of
                the Company's long term debt is estimated by discounting the
                future cash flows at rates currently offered to the Company for
                similar debt instruments of comparable maturities by the
                Company's bankers. For certain instruments, including cash and
                cash equivalents, trade accounts receivable, other current
                assets, other assets, accounts payable and accrued expenses, and
                current installments of obligations under capital leases, the
                carrying amount approximates fair value due to their short
                maturity.

         (j)    RESEARCH AND DEVELOPMENT

                Research and development expenses consist primarily of costs
                incurred in connection with engineering activities related to
                the development of industrial parts cleaning machinery and are
                expensed as incurred.

         (k)    INCOME TAXES

                Income taxes are accounted for under the asset and liability
                method. Deferred tax assets and liabilities are recognized for
                the future tax consequences attributable to differences between
                the financial statement carrying amounts of existing assets and
                liabilities and their respective tax bases and operating loss
                and tax credit carryforwards. Deferred tax assets and
                liabilities are measured using enacted tax rates expected to
                apply to taxable income in the years in which those temporary
                differences are expected to be recovered or settled. The effect
                on deferred tax assets and liabilities of a change in tax rates
                is recognized in income in the period that includes the
                enactment date. For the years ended December 31, 1998 and 1997,
                a valuation allowance has been recorded resulting from
                assessment of future taxable income of the Company and the
                realization of the deferred tax assets.


                                      F-9
<PAGE>   25


                             MANSUR INDUSTRIES INC.

                          NOTES TO FINANCIAL STATEMENTS




         (l)    BASIC AND DILUTED NET LOSS PER SHARE

                For the years ended December 31, 1998 and 1997, basic and
                diluted net loss per share is computed based on a
                weighted-average number of common shares outstanding of
                4,601,309. Diluted loss per share has not been presented
                separately, as the outstanding stock options and warrants are
                anti-dilutive for each of the periods presented. Securities that
                could potentially dilute basic earnings per share (EPS) in the
                future that were not included in the diluted EPS because their
                effect on the periods presented was anti-dilutive total 138,562
                shares and 105,001 shares for the years ended December 31, 1998
                and 1997, respectively.

         (m)    USE OF ESTIMATES

                Management of the Company has made a number of estimates and
                assumptions relating to the reporting of assets and liabilities
                and the disclosure of contingent assets and liabilities to
                prepare these financial statements in conformity with generally
                accepted accounting principles. Actual results could differ from
                those estimates.

         (n)    PRODUCT WARRANTY OBLIGATIONS AND PRODUCT LIABILITY

                The Company provides a three-year standard warranty on its
                products from the date of delivery to the customer. For
                promotional purposes. The Company provided an additional two
                years of warranty at no cost for 1998 sales made pursuant to the
                Product Financing Agreement (note 8). The Company warrants that
                its products during the warranty period will be free of material
                defects and, if properly used in accordance with the operator
                manual, will not generate hazardous waste under current
                interpretations of applicable federal and state regulations.
                Estimated future warranty obligations related to units sold are
                accrued for by charges to operations in the period in which the
                related revenue is recognized. The accrued warranty obligation
                as of December 31, 1998 and 1997 was $186,159 and $107,167,
                respectively.


                                      F-10
<PAGE>   26


                             MANSUR INDUSTRIES INC.

                          NOTES TO FINANCIAL STATEMENTS




 (2)     PROPERTY AND EQUIPMENT, NET

         Property and equipment, net as of December 31, 1998 and 1997 was as
         follows:

<TABLE>
<CAPTION>
                                                                         1998            1997       USEFUL LIFE
                                                                         ----            ----       -----------

<S>                                                                    <C>             <C>            <C>    
                  Furniture and equipment                              $   558,500     $  226,079      5 years
                  Machinery and equipment                                2,048,106        978,728     10 years
                  Leasehold improvements                                   281,560        172,979      5 years
                  Construction in progress                                 472,172        182,516
                                                                       -----------     ----------
                                                                         3,360,338      1,560,302

                  Less accumulated depreciation                            451,602        205,309
                                                                       -----------     ----------
                                                                       $ 2,908,736     $1,354,993
                                                                       ===========     ==========
</TABLE>



         Depreciation expense was $250,917 and $96,927 for the years ended
         December 31, 1998 and 1997, respectively.

 (3)     LEASE AGREEMENTS

         The Company leases operating facilities under fixed rent operating
         leases. The facilities have lease terms ranging from twelve months to
         five years. In February 1997, the Company entered into a lease
         obligation for its new corporate headquarters. The initial term of the
         lease for this facility commences on August 1, 1997 and expires on
         September 30, 2002. This lease provides for a renewal term of five
         years exercisable at the Company's option upon six months prior
         written notice. The Company's annual lease payments under this lease
         are $520,114 subject to an annual increase of 4.5 percent, which does
         not include utilities and the Company's proportionate share of the
         facilities maintenance and operating expenses.

         The Company also leases approximately fifty-seven service fleet
         vehicles under various operating leases expiring in twelve to
         twenty-four months.

         Total rent expense was $1,721,502 and $541,426 for the years ended
         December 31, 1998 and 1997, respectively.

         The Company is obliged under various capital leases for certain
         machinery and equipment that expire at various dates during the next
         five years. At December 31, 1998 and 1997, the gross amount of property
         and equipment and related accumulated amortization recorded under
         capital leases were as follows:

                                                       1998          1997
                                                       ----          ----

           Machinery and equipment                $  1,573,844     $ 832,519
           Less  accumulated amortization              164,429       112,663
                                                  ------------     ---------

                                                  $  1,409,415     $ 719,856
                                                  ============     =========

         Amortization of assets held under capital leases is included with
         depreciation expense.

                                      F-11
<PAGE>   27


                             MANSUR INDUSTRIES INC.

                         NOTES TO FINANCIAL STATEMENTS



         Future minimum lease payments under noncancelable operating leases
         (with initial or remaining lease terms in excess of one year) and
         future minimum capital lease payments as of December 31, 1998 are:

<TABLE>
<CAPTION>
                                  Year ending                                     Capital      Operating
                                  December 31,                                    Leases         Leases
                                  ------------                                    ------         ------
<S>                                   <C>                                    <C>              <C>      
                                      1999                                   $     361,819    $  1,361,250
                                      2000                                         321,996       1,120,535
                                      2001                                         321,996         626,040
                                      2002                                         314,699         478,826
                                      2003                                         154,919              --
                                                                             -------------    ------------

                          Total minimum lease payments                       $   1,475,429    $  3,586,651
                                                                                              ============

                Less amount representing interest (at rates
                     ranging from 6.35% to 12.5%)                                  237,491
                                                                             -------------
                Present value of net minimum capital lease
                     payments                                                    1,237,938
                Less current installments of obligations under
                     capital leases                                                273,438
                                                                             -------------
                        Obligations under capital leases,
                           excluding current installment                     $     964,500
                                                                             =============
</TABLE>

(4)      SUBORDINATED CONVERTIBLE NOTES

         In February 1998, the Company consummated a private placement of an
         aggregate of $17.0 million in principal amount of the Company's 8 1/4%
         Subordinated Convertible Notes due 2003 (the "Notes") generating net
         proceeds of $15.7 million. Interest on the Notes is payable
         semi-annually and during the first two years is payable through the
         Company's issuance of additional Notes and thereafter, at the election
         of the Company, is payable either in cash or through the issuance of
         additional Notes. The Notes are convertible by the holders thereof into
         shares of the Company's common stock at a conversion price equal to
         $17.00 per share (the "Conversion Price") and automatically convert
         into shares of Common Stock after February 23, 1999, if the closing
         price of the Common Stock, as reported on the Nasdaq SmallCap Market,
         exceeds 175% of the Conversion Price for a period of twenty consecutive
         trading days, including the twenty trading days immediately preceding
         February 23, 1999. The Company may redeem the Notes after February 23,
         2001 under certain circumstances.

         Under the terms and conditions of such notes, the Company is permitted
         to incur up to $5,000,000 of total debt (excluding the Notes) at any
         time.

 (5)     INCOME TAXES

         There is no current or deferred tax expense for the years ended
         December 31, 1998 and 1997.


                                      F-12
<PAGE>   28

                             MANSUR INDUSTRIES INC.

                          NOTES TO FINANCIAL STATEMENTS



         The actual income tax expense differs from the "expected" income tax
         effect (computed by applying the U.S. federal corporate tax rate of 34
         percent to loss before income taxes) for the years ended December 31,
         1998 and 1997 as follows:

<TABLE>
<CAPTION>
                                                                                              1998             1997
                                                                                              ----             ----
<S>                                                                                        <C>                <C>       
             Computed "expected" income tax benefit                                        $ (4,435,618)      $(404,234)
             State income tax benefit, net of U.S. federal income tax benefit                  (730,184)        (72,843)
             Change in deferred taxes due to difference in rates                                142,036        (283,137)
             Change in valuation allowance                                                    5,342,858         755,117
             Effect of change in state valuation allowance                                     (377,446)             --
             Other                                                                               58,354           5,097
                                                                                           ------------       ---------

             Income tax expense                                                            $         --       $      --
                                                                                           ============       =========
</TABLE>

         Temporary differences between financial statement carrying amounts and
         tax basis of assets and liabilities that give rise to significant
         portions of the deferred tax assets and liabilities as of December 31,
         1998 and 1997 are as follows:

<TABLE>
<CAPTION>
                                                                                    1998               1997
                                                                                    ----               ----
<S>                                                                              <C>                 <C>      
          Deferred tax assets:

               Net operating loss                                                $ 6,424,036        $1,471,776
               Deferred revenue                                                       70,180            63,938
               Warranty                                                               75,175            35,586
               Start-up costs                                                        198,216           266,800
               Research and development                                              395,854           267,106
               Original issue discount                                                10,434                --
               Inventory reserve                                                     106,503                --
               Inventory                                                             201,910                --
               Bad debt reserve                                                       13,518                --
               Accrued expenses                                                       75,474                --
               Patent                                                                429,850           456,713
                                                                                 -----------        ----------

                  Total gross deferred tax assets                                  8,001,150         2,561,919

               Less valuation allowance                                            7,852,975         2,510,117
                                                                                 -----------        ----------

               Net deferred tax asset                                                148,175            51,802
                                                                                 -----------        ----------

          Deferred tax liabilities:
               Debt issue costs                                                        3,139
               Depreciation                                                          145,036            51,802
                                                                                 -----------        ----------

                  Total gross deferred tax liabilities                               148,175            51,802
                                                                                 -----------        ----------

               Deferred tax assets, net                                          $        --        $       --
                                                                                 ===========        ==========
</TABLE>

         The valuation allowance for deferred tax assets as of January 1, 1997,
         was $2,510,117. The change in the total valuation allowance for the
         year ended December 31, 1998 was an increase of $5,342,858, resulting
         from assessment of the future taxable income of the Company and the
         realization of the deferred tax assets.

                                      F-13
<PAGE>   29

                             MANSUR INDUSTRIES INC.

                          NOTES TO FINANCIAL STATEMENTS



         At December 31, 1998, the Company had net operating loss carryforwards
         of $16,313,844 which expire beginning in the year 2007 through 2018.

         In addition, if certain substantial changes in ownership should occur
         there would be an annual limitation of the amount of tax attribute
         carryforwards which can be utilized in the future.

(6)      STOCKHOLDERS' EQUITY

         (a)    COMMON STOCK

                In connection with the initial public offering in October 1996,
                the Company agreed to sell to the underwriters, for nominal
                consideration, warrants to purchase from the Company 100,000
                shares of common stock at a price of $9.00 per share. The
                warrants are initially exercisable for a period of four years
                commencing one year after September 27, 1996. As of December 31,
                1998, the underwriters have not exercised their warrants.

         (b)    STOCK-BASED COMPENSATION

                In 1996, the Company adopted an executive incentive compensation
                plan (the "Plan") pursuant to which the Company's board of
                directors may grant stock options to officers and key employees.
                The Plan authorizes grants of options to purchase up to 375,000
                shares of authorized but unissued common stock. Stock options
                are granted with an exercise price equal to the stock's fair
                market value at the date of grant. All stock options have
                seven-year terms and vest and become exercisable over a three
                year period from the date of grant.

                At December 31, 1998 and 1997, there were 178,778 and 261,820
                additional shares, respectively, available for grant under the
                Plan. The per share weighted-average fair value on the date of
                grant of stock options granted during 1998 and 1997 was $4.94
                and $4.21, respectively, using the Black-Scholes option-pricing
                model with the following weighted-average assumptions:
                1998-expected dividend yield -0- percent, risk-free interest
                rate of 5.32 percent, expected life of seven years and a
                volatility rate of 71.14 percent; 1997-expected dividend yield
                -0- percent, risk-free interest rate of 5.57 percent, expected
                life of seven years and a volatility rate of 70.71 percent.

                The Company applies Accounting Principles Board Opinion No. 25
                (ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES) in accounting for its
                Plan and, accordingly, no compensation cost has been recognized
                for its stock options in the financial statements. Had the
                Company determined compensation cost based on the fair value at


                                      F-14
<PAGE>   30

                             MANSUR INDUSTRIES INC.

                          NOTES TO FINANCIAL STATEMENTS


                the grant date for its stock options under SFAS No. 123
                (ACCOUNTING FOR STOCK-BASED COMPENSATION), the Company's net
                loss and basic and diluted net loss per share would have been
                increased to the pro forma amounts indicated below:

<TABLE>
<CAPTION>


                                                                     1998             1997
                                                                     ----             ----
<S>                                                              <C>              <C>        
                  Net loss                      As reported      $(13,045,935)    $(1,188,924)
                                                Pro forma         (13,355,467)     (1,633,852)

                  Basic and diluted net loss
                       per share                As reported      $      (2.84)          (0.26)
                                                Pro forma               (2.90)    $     (0.36)
</TABLE>



                Stock-option activity during the period indicated is as follows:

                                                            Weighted-
                                              Number of      Average
                                                shares    exercise price
                                              ---------   --------------

                Balance at December 31, 1996     15,000    $    7.71
                     Granted                     99,180        13.34
                     Exercised                       --           -- 
                     Forfeited                   (1,000)          --
                     Expired                         --           --
                                              ---------    ---------

                Balance at December 31, 1997    113,180        12.59
                     Granted                     97,042        16.47
                     Exercised                       --           -- 
                     Forfeited                  (14,000)       14.01
                     Expired                         --           --
                                              ---------    ---------

                Balance at December 31, 1998    196,222    $   15.32
                                              =========    =========

                At December 31, 1998, the range of exercise prices and
                weighted-average remaining contractual life of outstanding
                options was $7.50 - $19.50 and 5.72 years, respectively. At
                December 31, 1997, the range of exercise prices and
                weighted-average remaining contractual life of outstanding
                options was $7.50 - $15.86 and 6. 2 years, respectively

                At December 31, 1998 and 1997, the number of options exercisable
                was 38,562 and 5,001, respectively, and the weighted-average
                exercise price of those options was $12.52 and $7.71,
                respectively.

(7)      EMPLOYMENT AGREEMENT

                In September 1997, the Company entered into a two year
                employment agreement with the Company's Chairman of the Board
                and President, providing for an annual base salary of $120,000
                through September 1, 1998 and $150,000 thereafter and
                discretionary bonuses, based on such individual's performance,
                as determined by the Board of Directors.


                                      F-15
<PAGE>   31

                             MANSUR INDUSTRIES INC.

                          NOTES TO FINANCIAL STATEMENTS


                In September 1997, the Company entered into a two year
                employment agreement with the Company's Chief Executive Officer,
                providing for an annual base salary of $120,000 through
                September 1, 1998 and $150,000 thereafter and discretionary
                bonuses, based on such individual's performance, as determined
                by the Board of Directors.

(8)      PRODUCT-FINANCING AGREEMENT

         In November 1998, the Company renewed its agreement (the
         "Product-Financing Agreement") with a leasing company which agrees to
         purchase machines produced by the Company and subsequently lease these
         machines to customers on twelve to sixty month terms. The Company will
         market the machines and provide the leasing company with credit
         information on potential customers that the leasing company may either
         accept or reject. The Product-Financing Agreement states that the
         leasing company does not have recourse against the Company for customer
         failures to discharge their obligations to the leasing company unless
         the Company has breached and failed to cure certain warranties.

         Under the Product-Financing Agreement, the Company has agreed to
         provide periodic service for the machines and replace solvent used in
         the machines. Revenue from providing such services is deferred and
         recognized over the lease term of the machine. In addition, upon the
         leasing company's request, the Company agrees to assist the leasing
         company in remarketing any repossessed or surrendered equipment for a
         fee. At the end of each customer lease, the Company has the option to
         purchase the machine from the leasing company at its fair market value.

         The Company is dependent upon the Product-Financing Agreement for a
         significant portion of the Company's business activity with customers.
         At December 31, 1998, the Company's receivables from the leasing
         company totaled $999,370, or 44.3% of the total accounts receivable
         balance.

(9)      PURCHASE AND DISTRIBUTION AGREEMENT

         In December 1997, the Company entered into an agreement ("Purchase and
         Distribution Agreement") with a third party whereby the third party
         served as the Company's exclusive sales representative in a territory
         comprising markets throughout the United States. Such agreement lapsed
         in June 1998.

(10)     FACTORING AGREEMENT

         On November 26, 1997, the Company entered into a factoring agreement
         with a third party. This agreement assigned the third party all
         accounts due from the Company's customers for a period of six months.
         Such agreement lapsed in June 1998. The balance factored during 1998
         and 1997 was $2,286,225 and $4,785,285, respectively, and borrowings
         during 1998 and 1997 totaled $245,519 and $1,000,000, respectively. The
         Company paid $11,375 and $25,510 in interest and commissions relating
         to this agreement during 1998 and 1997, respectively.



                                      F-16