<PAGE>   1
                    U. S. SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                   FORM 10-KSB

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


  FOR THE FISCAL YEAR ENDED                               COMMISSION FILE NO.
         DECEMBER 31, 1996                                       000-28112

                           MOTORVAC TECHNOLOGIES, INC.
                 (Name of Small Business Issuer in its Charter)

          DELAWARE                                         33-0522018
(State or Other Jurisdiction of                        (I.R.S. Employer
Incorporation or Organization)                          Identification No.)

                1431 S. Village Way, Santa Ana, California 92705
               (Address of Principal Executive Offices)(Zip Code)

                    Issuer's telephone number: (714) 558-4822

     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, $0.01 Par Value
--------------------------------------------------------------------------------
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes X No
                                                             ---
Check if there is no disclosure of delinquent filers in response to Item 405 of
regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [ ]

The issuer's revenues for the fiscal period ended December 31, 1996 were
$8,242,735.

The aggregate market value of the voting stock held by non-affiliates of the
issuer as of February 3, 1997, was $8,681,030. Shares of common stock held by
each officer and director and by each person who owns 5% of more of the
outstanding common stock of the Company have been excluded because such persons
may be deemed to be affiliates.

The total number of shares outstanding of the Issuer's Common Stock was
4,514,918 as of March 25, 1997.
-------------------------------------------------------------------------------
                       DOCUMENTS INCORPORATED BY REFERENCE

Issuer's definitive Proxy Statement to be filed with the Commission pursuant to
Regulation 14A in connection with the Issuer's 1997 Annual Meeting of
Stockholders is incorporated herein by reference into Part III of this report.

                                        1

<PAGE>   2




                           MOTORVAC TECHNOLOGIES, INC.
                                   FORM 10-KSB
                          YEAR ENDED DECEMBER 31, 1996
                                TABLE OF CONTENTS


<TABLE>
<CAPTION>
       Item
       Number                                                                                          Page
       ------                                                                                          ----

                                     PART I

<S>      <C>      <C>                                                                                  <C>
         1.       Description of Business........................................................        3
         2.       Description of Property........................................................       21
         3.       Legal Proceedings..............................................................       22
         4.       Submission of Matters to a Vote of Security Holders............................       22

                                     PART II

         5.       Market for Common Equity and Related Stockholders Matters......................       23
         6.       Management's Discussion and Analysis of Financial
                  Condition and Results of Operations............................................       23
         7.       Financial Statements...........................................................       27
         8.       Changes in and Disagreements with Accountants on
                  Accounting and Financial Disclosures...........................................       27

                                    PART III

         9.       Directors, Executive Officers, Promoters and Control Persons;
                  Compliance with Section 16(a) of the Exchange Act..............................       27
         10.      Executive Compensation.........................................................       27
         11.      Security Ownership of Certain Beneficial Owners and Management.................       27
         12.      Certain Relationships and Related Transactions.................................       27

                                     PART IV

         13.      Exhibits, Lists and Reports on Form 8-K........................................       28
                  Signatures.....................................................................       32
                  Power of Attorney..............................................................       32
</TABLE>














                                        2

<PAGE>   3



                                     PART I



This Annual Report on Form 10-KSB contains forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933, as amended, and Section
21E of the Securities Exchange Act of 1934, as amended. The Company intends that
such statements shall be protected by the safe harbors provided for in such
sections. Such statements are subject to risks and uncertainties that could
cause actual results to vary materially from those projected in the
forward-looking statements. The Company may experience significant fluctuations
in future operating results due to a number of economic, competitive,
governmental and technological factors, including, among other things, changes
in laws, the size and timing of customer orders, new or increased competition,
delays in new product enhancements and new product introductions, quality
control difficulties, changes in market demand, market acceptance of new
products, product returns, seasonality in product purchases by distributors and
end users, and pricing trends in the automotive after-market industry in
general, and in specific, markets in which the Company is active. Any of these
factors, or others, could cause operating results to vary significantly from
those in prior periods, and those projected in the forward-looking statements.
Additional information with respect to these and other factors which could
materially affect the Company and its operations is included in the Company's
filings with the Securities and Exchange Commission, including the Registration
Statement on Form SB-2 dated April 25, 1996 and any subsequent filings.



ITEM 1.           DESCRIPTION OF BUSINESS.

         MotorVac Technologies, Inc. (the "Company") designs, develops,
assembles, markets and sells the MotorVac CarbonClean System for the diagnosis,
maintenance and repair of internal combustion engine fuel systems primarily for
the automotive after-market repair and service industry. The MotorVac
CarbonClean System is comprised of a fuel system cleaning machine and a
proprietary cleaning detergent. Servicing an engine with the MotorVac
CarbonClean System enhances engine performance by removing dirt, carbon deposits
and other contaminants from fuel systems of both gasoline and diesel-powered
engines. Additionally, the MotorVac CarbonClean System's diagnostic capabilities
help to insure fuel system safety and reliability by allowing the technician to
check fuel pressure, fuel volume and system leak down (internal fuel pressure
system loss). The Company believes that its MotorVac CarbonClean System advances
both the vehicle manufacturers' mandated goal to develop efficient fuel
distribution systems that meet increasingly stringent state and federal emission
requirements and customer demands for enhanced engine performance and improved
fuel economy.

         The Company was incorporated in the State of Delaware on June 19, 1992
as CarbonClean Corporation. In August 1992, the Company acquired certain assets
from Enviromotive Inc. ("EMI"), an independent third party, which, in February
1992, had acquired the assets from the Chapter 11 Trustee in the Parker
Automotive Corporation bankruptcy proceeding. At the same time, a then existing
affiliate of the Company licensed from EMI the worldwide rights to utilize
certain patent rights and certain trademarks and service marks, including the
name "CarbonClean" (collectively, the "EMI Property"), and the affiliate of the
Company sublicensed to the Company the right to utilize the EMI Property in the
United States and Canada. In March 1993, CarbonClean Corporation changed its
name to MotorVac Technologies, Inc. The tradename MotorVac is used by the
Company throughout North America. The Company also uses the tradename
CarbonClean in North America, but the Company uses the CarbonClean name outside
of the United States and Canada because the Company believes the tradename
CarbonClean has stronger brand name recognition outside the United States and
Canada. Through a series of restructurings effected in 1994 and 1995, the
Company acquired the license to utilize the EMI property worldwide. Effective as
of December 31, 1995, the Company purchased all of the EMI Property from EMI.



                                        3

<PAGE>   4



INDUSTRY OVERVIEW

         The Fuel System Contamination Problem. Today's engines are computer
controlled and, although generally effective in providing reliable performance
and reasonable fuel mileage while complying with applicable state and federal
emission standards, they provide little opportunity for adjustment when
driveability problems occur. Specifically, fuel system contamination causes
problems such as knocking, pinging, rough idle, and high speed miss. All fuel
system components, from the intake through the fuel rail, injector screens,
injector pintel, intake valves, combustion chamber, O2 sensor and catalytic
converters, are impacted by the contamination caused by dirt and carbon build-up
in the fuel system.

         The Company believes that the automotive service and repair industry,
along with vehicle owners, are experiencing some or all of the following
problems:

         -        Driveability Problems. A driveability problem is present when
                  a vehicle is not performing well and the problem is difficult
                  to solve or repair. Typically, these problems are caused by a
                  computer problem, a transmission problem, or a fuel system
                  problem. Additionally, automotive manufacturers do not
                  generally recommend regular cleaning of the vehicle's fuel
                  system with available solvents because of the potential
                  damaging effect that some of these solvents may have on engine
                  parts.

         -        Tune-Ups. Tune-ups are presently done as preventive
                  maintenance and do not usually correct or reduce driveability
                  problems with today's engines. Generally, all that can be done
                  on today's engines is replace the spark plugs because many
                  engines have no distributors or plug wires and the ignition
                  timing is set at the factory and controlled by the vehicle's
                  on-board computer.

         -        Emissions. In response to emission programs established in
                  most states, emission testing and repair has become a major
                  profit center for many automotive service and repair
                  facilities. However, most automotive service and repair
                  facilities do not currently have a complete fuel system
                  cleaning service available to repair vehicles that, when
                  tested on existing emissions equipment, exhibit no parts
                  failures but nevertheless fail inspection.

         -        Profitability. Automotive service and repair facilities need
                  maintenance services that are easily performed by their
                  technicians, are profitable for the facility and provide a
                  noticeable difference in performance to the consumer,
                  particularly given the declining necessity for a tune-up on
                  today's computer-controlled engines.

         -        Maintaining Customer Satisfaction. Repeat and referral
                  business is critical to the automotive service and repair
                  facility's survival. Because most automotive service and
                  repair facilities do not currently have a cost effective
                  solution for addressing many driveability problems, the
                  Company believes that a cost effective solution that enhances
                  vehicle performance is central to increased customer
                  satisfaction and a stable customer base.


         Current Market Solution. In addition to the Company's products, there
are presently three main product lines broadly available to address the market
opportunity created by the fuel system contamination problem:

                  The first product solution is positioned as a fuel tank
         additive and marketed as a fuel system cleaner by such companies as
         Wynn's International, Inc., First Brands Corporation (which markets and
         sells STP) and Pennzoil Company (which markets and sells GUMOUT).

                  The second product solution is presented by national brands of
         gasoline, such as Chevron with Techron and Mobil, that include
         additives that purport to clean fuel injectors and other parts of the
         fuel system.


                                        4

<PAGE>   5



                  The third product solution currently offered by companies such
         as Borg Warner and Champion are pressurized spray cans that contain
         solvents which are sprayed into the engine's fuel system, usually
         without the aid of any mechanical process regulating pressure and flow
         or longevity of the cleaning process.

         The Company believes that the foregoing methods provide an incomplete
solution to the fuel system contamination problem primarily because (i) they
usually introduce the cleaning additive in a more diluted form than the MotorVac
CarbonClean System and/or (ii) the cleaning additive does not remain in the fuel
system during the cleaning process for as long a period of time as with the
MotorVac CarbonClean System. The Company believes that the industry is now faced
with a rapidly growing problem that requires a solution not offered by existing
products. The MotorVac CarbonClean System provides a complete all-in-one fuel
system service, diagnostic and cleaning solution which the Company believes is
positioned to effectively address this market opportunity.

         The MotorVac CarbonClean System Solution. The Company markets and sells
the MotorVac CarbonClean System for the diagnosis, maintenance and repair of
both gasoline and diesel engine fuel systems. The MotorVac CarbonClean System is
comprised of a machine and a proprietary detergent. Servicing an engine with the
MotorVac CarbonClean System simultaneously accomplishes two goals:

                  Diagnosis. The MotorVac CarbonClean System is a fuel system
         diagnostic tool that allows the technician to check fuel pressure, fuel
         volume, system leak down and fuel pump "dead-head" test in order to
         identify problems and ensure overall system reliability and safety.

         The MotorVac CarbonClean System cleans the entire fuel system in
         gasoline engines with a three-step process:

                  (1) The first step recirculates the detergent and gas mixture
         through the fuel rail, behind the regulator and over the top of the
         injector openings (where the tiny injector screens are located) or the
         throttle plat carburetor and choke system. During this step, the
         MotorVac CarbonClean machine pulses the mixture in the rail which
         vacuums off the debris lodged in the injector screens and filters
         contaminants through the machine's on-board filtering system.

                  (2) The second step in the cleaning process uses the Company's
         intake cleaning kit to coat the inside of the air intake manifold and
         idle air control opening. This removes the build-up that causes
         stalling and hesitation.

                  (3) The third and final step is as simple as starting the
         engine and letting it idle. The fuel keeps the engine running while the
         detergent/gas mixture passes through and cleans the injectors intake
         valves, combustion chambers and exhaust valves by removing soft carbon
         and other contaminants. Because the detergent survives combustion, the
         exhaust gases carry the detergent as steam, which cleans the O2 sensor
         and catalytic converter before dissipating. In addition, the service
         and detergent are safe on all engine components and will not harm
         injectors or any sensitive computer components.

                  Repair. The MotorVac CarbonClean System is a repair tool that
         enhances engine performance by removing dirt and carbon deposits
         through a three-step process from the complete fuel system (air intake
         through the fuel rail, throttle plate, idle control devices, injector
         screens and pintel, intake valves, combustion chamber, O2 sensor,
         catalytic converters and exhaust system components). Central to the
         cleaning process is the MotorVac CarbonClean detergent, which is a
         proprietary detergent that is safe for use in all engines and survives
         combustion, thereby cleaning the entire fuel system from the air intake
         through the catalytic converter.



                                        5

<PAGE>   6



MOTORVAC'S PRODUCTS

         The MotorVac CarbonClean System--Product Overview.

         The Company markets and sells internal combustion engine fuel system
cleaning systems for both gasoline and diesel-powered engines under the
tradenames MotorVac CarbonClean System in the United States and Canada and
CarbonClean System in other international markets. The MotorVac CarbonClean
System is comprised of fuel system cleaning machines and proprietary cleaning
detergents designed for both gasoline and diesel engines.

         The gasoline system machine is a 12-volt powered 2-line cleaning system
which connects to the engine through vehicle specific adapters for all types of
carbureted and fuel-injected engines. The machine passes a detergent and gas
mixture over the components of the fuel system. With gasoline systems, the
gasoline to detergent mixture is generally three to one. With the engine off,
the system removes both organic and inorganic fuel deposits that build up in the
fuel rail, injector screens, and pressure regulator areas while filtering the
contaminants through the on-board filtering system. With the engine idling, the
solution passes through the injectors or carburetor jets and into the engine's
combustion chambers. Carbon, gum and varnishes built up in these areas are
softened and removed, and then passed out the exhaust.

         The Company markets its diesel engine cleaning system under the
tradename Industrial Diesel Tune ("IDT"), which is comprised of a patented
diesel engine cleaning machine and a proprietary diesel detergent. The machine
is a 2-line cleaning system that connects to the engine through specific
adapters temporarily taking the place of the engine's fuel tank. The IDT passes
a concentrated mixture of MotorVac3D cleaning detergent and diesel fuel through
the components of the fuel system while the engine is running. With diesel
systems, the diesel fuel to detergent mixture is generally one to one. The
system removes both organic and inorganic fuel deposits that build up in the
fuel injectors, injection pumps and combustion chambers. Carbon, gum and
varnishes in the upper engine are softened and removed during combustion and
then passed out of the exhaust.

         The Company believes that its proprietary cleaning detergent is the
safest and most effective engine fuel system cleaner on the market. It is safe
for use on all engine components and will not harm injectors or any sensitive
computer components. The Company has obtained test results that indicate that
the MotorVac CarbonClean System improves the performance of the vehicle,
increases fuel mileage and reduces harmful emissions. Because of these results,
the Company refers to the MotorVac CarbonClean service as "The Tune-Up of the
90's."

         During the twelve-month year ended December 31, 1995, the Company
derived approximately 77% of its total sales from sales of fuel system cleaning
machines, approximately 17% of its total sales from sales of fuel system
cleaning detergents and approximately 6% of its total sales from sales of
adapters and parts. During the Company's fiscal year ended December 31, 1996,
the Company derived approximately 75% of its total sales from the sale of fuel
system cleaning machines, approximately 22% of total sales from the sales of
fuel system cleaning detergent, and 3% of its total sales from adapters and
parts.

         Fuel System Cleaning Machines. The Company markets and sells a number
of different models of the MotorVac CarbonClean fuel system cleaning machine for
gasoline engines as described below:

                                        6

<PAGE>   7



<TABLE>
<CAPTION>
                                                                                                    SUGGESTED
MODEL                                                   DESCRIPTION                                RETAIL PRICES

<S>                        <C>                                                                 <C>
MCS400                     Sold in the United States and Canada through independent                  $4,495
                           automotive distributors.  This unit is housed in a metal
                           cabinet, uses analog displays and is manually controlled.

EEFS100A                   A patented system distributed exclusively by Sun/Snap-On.                 $4,495
                           Performs same functions as MCS400 but with microprocessor
                           controls, digital and analog readouts and a composite cabinet.

EEFS302A                   Distributed in Canada and Japan by Snap-On.  Identical to the             $5,495
                            EEFS100A except for brand name.                                   (Canadian Dollars)

ECS300e                    Marketed under the CarbonClean brand name in over 55                  Approximately $4,000
                           countries worldwide.  Performs same functions as MCS400                 (estimate may vary
                            in a different style cabinet.                                           depending upon
                                                                                                    country, duties
                                                                                                    and freight)

CarbonClean                Marketed as the CarbonClean System II and is the Company's            Approximately $2,500
System II,                 international entry-level product designed with fewer features          (estimate may vary
Model LE1                  for use with less sophisticated fuel systems.   It is a compact          depending upon
                           portable version of the ECS300e.                                         country, duties
                                                                                                     and freight)

ProLine 500                Distributed in the United States, Canada and Europe by                    $4,495
                           John Bean Company.  Identical to the MCS400 except for
                           cranberry-colored cabinet and brand name.

</TABLE>

         The Company markets and sells the MotorVac CarbonClean fuel system
cleaning machine for diesel engines under the tradename Industrial Diesel Tune
or IDT. The Company markets three models of the IDT, each of which is
specifically designed and patented for use with all sizes and makes of diesel
engines as described below:

<TABLE>
<CAPTION>
                                                                                                      SUGGESTED
MODEL                                                   DESCRIPTION                                 RETAIL PRICES


<S>                        <C>                                                                <C>
IDT 4000                   Sold in the United States and Canada under the MotorVac                   $4,495
                           brand name.

IDT 4000i                  Marketed under the CarbonClean brand name in over 55                Approximately $4,000
                           countries worldwide.  Identical to IDT 4000 except for                  (estimate may vary
                           brand name.                                                             depending upon
                                                                                                   country, duties
                                                                                                   and freight)

EEFS103A                   A patented system distributed exclusively by Sun/Snap-On.                 $4,495
                           Identical to IDT 4000 except for brand name.

ProLine 550                Distributed in the United States, Canada and Europe by                    $4,495
                           John Bean Company.  Identical to the IDT 4000 except for
                           cranberry-colored cabinet and brand name.


</TABLE>


                                        7

<PAGE>   8



         The Company also markets and sells both separately and together with
its fuel system cleaning machines, standard and deluxe adapter kits which allow
the Company's fuel system cleaning machines to be connected to the fuel system
lines of most vehicles on the road today.

         Product Warranties. The Company offers a limited warranty covering
parts for a period of one year from the date of sale on all equipment
distributed in the United States. For equipment delivered internationally, the
Company provides a limited parts warranty only for a period of either 12 or 18
months from the date of shipment. The Company also offers a limited warranty for
a period of one year for all of its proprietary fuel system detergents. The
Company's warranties generally provide that, in the case of defects in material
or workmanship, the Company will, at its option, replace or repair the defective
product without charge. The Company's warranty provides that it is void if any
detergent other than the Company's detergents are utilized in the Company's fuel
system cleaning machines. During the Company's fiscal year ended December 31,
1996, the Company's aggregate warranty expense was approximately $41,000. During
the Company's fiscal year ended December 31, 1995, the Company's aggregate
warranty expense was approximately $53,000. There can be no assurance that
future warranty expense will not have an adverse effect on the Company's results
of operations or financial condition. The Company currently maintains product
liability insurance for its products worldwide, with limits of $10,000,000 per
occurrence and $11,000,000 in the aggregate per annum. Such coverage is becoming
increasingly expensive and there can be no assurance that the Company's
insurance will be adequate to cover future product liability claims, or that the
Company will be able to maintain adequate product liability insurance at
commercially reasonable rates. The Company may be exposed to potential
significant product liability claims by its customers and users of its products.
See "Risk Factors--Risk of Product Liability."

         Fuel System Cleaning Detergents. The Company markets and sells its
proprietary fuel system detergents for both the United States and international
markets utilizing different tradenames in different markets as described below.
All of the Company's detergents clean dirt, varnish, waxes, carbon and other
types of contaminants that build up in critical areas of the engine. The
Company's detergents will not damage vehicle surfaces or paint, and are safe for
use on all engine fuel system components (will not harm injectors or any
sensitive computer components).

<TABLE>
<CAPTION>
                                                                                                      SUGGESTED
DETERGENT                                      DESCRIPTION                                         RETAIL PRICES


<S>                        <C>                                                                   <C>
MotorVac3                  The Company's original gasoline engine detergent for                  $100.00 per case
                           use in MotorVac CarbonClean machines, as well as for                  of twelve
                           use in any other fuel system service tool that requires a             eight-ounce bottles
                           fuel cleaning mixture.  MotorVac3 is also marketed in
                           international markets as CarbonClean Gas Detergent.
                           The Company also distributes MotorVac3 under the
                           tradename MotorVac Carbon Clean System Detergent
                           and Top Engine Cleaner exclusively through Snap-On.


 MotorVac4                 The Company's newest formulation of detergent for                     $110.00 per case
                           decoking intake plenums and cleaning throttle plates                  of twelve
                           and idle bypass circuits.  Also a suitable replacement                eight-ounce bottles
                           for any top engine application requirement.  MotorVac4
                           is designed to work with the Company's ICS intake
                           cleaning system kit.

MotorVac 3D                Specially formulated to address the unique conditions                 $180.00 per case
                           that exist in diesel engines and designed to safely                   of twelve
                           increase horsepower and lower opacity as well as                      sixteen-ounce cans
                           increase fuel mileage.  MotorVac 3D is also marketed
                           in international markets under the name CarbonClean
                           Diesel Detergent.
</TABLE>

                                        8

<PAGE>   9


<TABLE>
<CAPTION>
<S>                        <C>                                                                       <C>
ICS Intake                 Designed to remove the build-up of residues in the air                    $79.95
Cleaning System            intake manifold of fuel injected engines and the air
                           intake on carbureted engines. Used as part of the
                           MotorVac CarbonClean System to coat the inside of the
                           air intake manifold and idle air control opening in
                           order to remove build-up that causes stalling and
                           hesitation. Also sold as a separate product for use
                           independently from the MotorVac CarbonClean System.
                           Consists of a reusable pressure sprayer, an
                           eight-ounce bottle of MotorVac4 and an applicator
                           tube with perforations at the tip.
</TABLE>


PRODUCT DISTRIBUTION

         The Company's products are currently sold through a national and
international distribution network consisting primarily of the categories
described below:

         Snap-On Incorporated/Sun Electric Corporation Division. The Company
sells the MotorVac CarbonClean System Model Nos. EEFS100A and EEFS103A to the
Sun Electric Corporation Division ("Sun") of Snap-On, Incorporated ("Snap-On")
and the MotorVac CarbonClean Detergent and Top Engine Cleaner to Snap-On for
distribution through Snap-On's tool and equipment network, made up in the U.S.
of approximately 3,800 Snap-On dealers and approximately 325 Sun tech reps
selling to approximately 300,000 automotive after-market consumers. The Company
also sells the MotorVac CarbonClean System, Model No. EEFS302A and Model No.
EEFS301A to Snap-On Canada with the Snap-On Detergent and Top Engine Cleaner.

         Snap-On is a leading manufacturer and distributor of high-quality hand
tools, power tools, tool storage products, diagnostics and shop equipment and
information services primarily for use by professional technicians. Snap- On
markets the Company's MotorVac CarbonClean System and MotorVac CarbonClean
Detergent and Top Engine Cleaner to individual automotive technicians, shop
owners and professional equipment users for use in automotive service and repair
shops, industrial and governmental entities and original equipment
manufacturers, throughout the United States and Canada. Snap-On also distributes
the Industrial Diesel Tune System and MotorVac Diesel Detergent, the Company's
proprietary diesel detergent, through its approximately 400-person industrial
and governmental sales network.

         The Company entered into an Exclusive Distribution Agreement dated as
of April 10, 1995 (the "Snap-On Distribution Agreement") with Snap-On. Pursuant
to the Snap-On Distribution Agreement, the Company appointed Snap-On as its
exclusive distributor in the United States and Canada of the Company's engine
cleaning system (the "Sun System"), fuel system detergent and enhanced adapter
kit when marketed under the names "MotorVac CarbonClean System Model No.
EEFS100A" and "MotorVac CarbonClean System Cleaning Detergent and Top Engine
Cleaner, distributed exclusively by Snap-On." The Company has the right,
however, to enter into other distribution arrangements in the United States and
Canada for machines that perform the same functions as the Sun System being sold
through Snap-On and for its fuel system detergent in the same formulation as
that sold to Snap-On in any size container other than the 32-oz. container,
provided that the machines are not identical in design to the Sun System and
that the machines and detergent are marketed under a name other than "MotorVac
CarbonClean System Model No. EEFS100A" and "MotorVac CarbonClean System Cleaning
Detergent and Top Engine Cleaner, distributed exclusively by Snap-On,"
respectively. In order to maintain its exclusivity, Snap-On must meet minimum
purchase requirements set forth in the Snap-On Distribution Agreement. If
Snap-On fails to meet the minimum purchase requirements, the Company's sole
remedy is to withdraw Snap-On's exclusivity and to increase the purchase price
for the Sun System and the detergent in accordance with the Snap-On Distribution
Agreement. The Snap-On Distribution Agreement expires on April 10, 1998 but is
automatically renewable for additional one-year terms unless either party gives
written notice of cancellation within sixty (60) days prior to the expiration of
such term. In addition, the agreement may be terminated prior to such dates in
the event of certain defaults by the Company or Snap-On.


                                        9

<PAGE>   10



         John Bean Company. The Company sells the MotorVac CarbonClean System
Model Numbers ProLine 500 and ProLine 550, and MotorVac CarbonClean Detergent
through John Bean Company's sales and distribution network in the United States,
Canada and in a number of international markets. John Bean Company ("John Bean")
is a division of Snap-On Incorporated and is a leading manufacturer of under-car
and under-hood maintenance and diagnostic equipment with approximately 60
distributors worldwide. John Bean markets the Company's products to automotive
service and repair shops throughout the United States and Canada and certain
other international markets.

         Other Independent Distributors. The Company also markets the MotorVac
CarbonClean System throughout the United States and Canada through a small
network of independent distributors. In addition, the Company markets the
CarbonClean System in over 55 countries worldwide through local and , in some
cases, multinational independent distributors. The Company sells its products to
a number of distributors covering the United States, Canada and many other
international markets, including, but not limited to, Australia, New Zealand,
China, Taiwan, Korea, Japan, India, Indonesia, the Philippines, Poland, Greece,
Turkey, Italy, France, Great Britain, Germany, a number of Middle Eastern and
African countries, South America, Mexico and others.

         In general, the Company's international distribution agreements provide
that the distributor has the exclusive right to sell and distribute the
Company's products within the specified territory . The distribution agreements
generally include minimum performance goals that, if not met, entitle the
Company to terminate the agreements. The distribution agreements generally have
initial terms of three (3) years which are automatically extendible for
successive one-year periods unless either party gives written notice of
termination a specified number of days prior to the expiration of the
then-effective term. The distribution agreements generally provide that the
distributor must obtain all of its supply of products from the Company.
Furthermore, the distribution agreements generally provide that the distributor
may not sell other products in the territory that are similar to or competitive
with the Company's products and that during the term of the agreement and any
extensions thereto, and for a period of three (3) years after termination of the
distribution agreement, the distributor will not replicate, sell or manufacture
any cleaning solution or fuel system cleaning machines for use with the
Company's system.

         By selling its products through independent distribution channels, the
Company is able to target broader markets for its products while avoiding the
expense of supporting a large in-house sales force. During the fiscal years
ended December 31, 1995 and December 31, 1996, respectively, sales of the
Company's products to Sun Equipment, a division of Snap-On Incorporated,
accounted for approximately 45% and 51%, respectively, of the Company's net
sales. No other distributor or customer accounted for more than 10% of the
Company's net sales in the fiscal years ended December 31, 1995 and December 31,
1996.


SALES

         The Company maintains a highly responsive sales, technical support and
service staff. The Company's customer service department is divided into two
departments, a technical service department and an order entry department. The
Company's technical service department is open from 7:00 a.m. to 6:00 p.m.,
California time, daily for service inquiries and technical assistance and
maintains toll free (800) hot lines for the Company's distributors, customers
and service technicians. In addition, the Company maintains an order entry
department which handles customer inquiries for advertising, order entry and
invoicing. The Company provides customers and distributors with toll free
telephone sales and technical support, an account representative for orders, and
shipping and general information. Technical and sales support personnel receive
training in all of the Company's products and services.

         The Company's sales department is divided into two divisions, one for
the United States and Canada and one for other international markets. The
Company employs six Regional Managers in the United States, one Regional Manager
in Canada, and two Industrial Diesel Tune Specialists. Regional Managers are
responsible for training and sales support for the Sun/Snap-On and John Bean
Company sales group. The Industrial Diesel Tune specialists are responsible for
developing, educating and establishing the MotorVac CarbonClean System via the
Snap-On Industrial Sales group and John Bean Company specialty distributors. The
Company divides the United States into six regional areas in automotive and two
industrial areas in diesel, which report to the Company's Vice President,
Marketing and Sales. The Company also has a National Account Manager who is
responsible for developing the national distribution


                                       10

<PAGE>   11



network with Snap-On's and other distributors' National Account Managers.
National accounts to which the Company is currently selling through Snap-On or
through John Bean include Goodyear, Hyundai and Canadian Tire. Generally, the
Company's terms of sales in the United States and Canada are net 30 days, FOB
the Company's facilities in Santa Ana, California.

         The Company's international sales department is comprised of a Managing
Director of International Sales, who is directly responsible for South America,
Central America and Asia, and a Director of International Sales responsible for
Europe, the Middle East, Africa and India. Terms of sales in the international
markets generally require payment in full in advance or delivery of irrevocable
letters of credit. Some international sales are made on a net 30-day basis with
freight paid by the distributor and shipped FOB warehouse or FOB port of export.
The Company seeks to expand its international sales by addressing selected
foreign markets and securing foreign distribution channels for its products. For
the fiscal year ended December 31, 1996 and the nine months ended December 31,
1995, international sales accounted for approximately 29% and 28%, respectively,
of the Company's net sales.


MARKETING

         Market Segments.   The following provides a brief general discussion of
the various target markets for the Company's products:

         Automotive Service and Repair Shops. This market consists primarily of
automotive service and repair shops, including independent, chain and dealership
facilities. The Company estimates that there are over 300,000 automotive service
and repair shops in the United States and Canada and approximately 1.5 million
in other international countries. Locations that are targeted in this segment
include automobile dealerships, repair garages, service stations, and specialty
repair and service shops. In the United States, the Company's products can be
found in Goodyear shops, Precision Tune shops and SpeeDee Oil Change and Tune-Up
shops, as well as many independent repair and service shops. In Canada, the
Company's products can be found in Canadian Tire shops, as well as many
independent repair and service locations. From April 1, 1994 to December 31,
1995, the Company sold approximately 2,228 MotorVac CarbonClean Systems in the
United States and Canada, and approximately 2,093 in other international
markets. For the year ended December 31, 1996, the Company sold approximately
3,126 MotorVac CarbonClean Systems in the United States and Canada, and 886 in
other international markets. To date, this market segment has been the primary
focus of the Company's marketing efforts.

         Fleet Operators. This segment is comprised of over 585,000 fleets in
the United States, according to Fleet Owner Magazine. In its 1997 media kit,
Fleet Owner Magazine estimated that these fleets contain approximately seven (7)
million cars, trucks, buses and vans and are comprised of government and public
utility vehicles, trucking and public transportation companies, taxis and other
livery services. The Company believes this market offers significant potential
due to the MotorVac CarbonClean System's ease of operation and proven ability to
reduce fuel costs, maintenance and harmful emissions while potentially
lengthening vehicle life. An independent test conducted in early 1996 showed an
average 14% increase in miles per gallon for a fleet of trucks following service
with the Company's MotorVac CarbonClean System.

         Governmental Agencies. The Company believes that fleets of vehicles
operated by the United States and foreign governmental agencies, such as the
postal service and military agencies, represent a significant potential market
for both the Company's gasoline and diesel engine products. To date, the Company
has not expended significant resources marketing its products to governmental
agencies; however, the Company's products have been approved by the United
States General Services Administration for sale to United States governmental
agencies. The Company has sold some of its products to certain governmental
agencies, including for military applications, and the Company is currently
targeting Snap-On's approximately 400-person industrial and governmental sales
force to provide assistance for future expansion of the Company's marketing
efforts to governmental agencies.



                                       11

<PAGE>   12



         Marine. This market is estimated by the Company at over one million
marine craft in the United States alone. Both gasoline and diesel engines are
target markets for the Company's service, although diesel engines are greater in
number. The Company's service can be performed while the craft is docked or at
any mobile location. While the Company has not, to date, expended significant
resources marketing its products in the marine markets, the Company believes
that this market segment offers significant potential for growth for the Company
in the future.

         Stationary Engines. The Company believes that oil pumps and fuel driven
generator motors represent a market opportunity in the United States of over a
million engines, including pumping stations and power stations. Because the
Company's MotorVac CarbonClean System is mobile, it can effectively treat these
engines on site. To date, the Company has not expended significant resources
marketing its products to the stationary engine market. However, the Company
believes that this market segment offers significant opportunities for future
growth for the Company.

         Marketing Methods. The Company's marketing department includes product
development, marketing communications and market development. The product
development staff identifies new products and product enhancements that meet
customer needs and manages product positioning and introductions. The marketing
staff creates and coordinates advertising in domestic and international trade
publications and magazines, produces the Company's brochures and documentation,
arranges for the Company's participation in automotive events and trade shows,
both in the United States and abroad, and assists in placing articles
highlighting applications of the Company's products in consumer, trade and
industry publications.

         The Company encourages its distributors to contribute to its marketing
and selling efforts through a variety of programs, including cooperative
advertising and sales incentive programs. The Company's marketing staff consists
of a Director of Marketing who reports directly to the Company's President, and
a marketing support manager. As a result of the Company's marketing efforts and
the quality of the Company's MotorVac CarbonClean System, Motor Magazine named
the MotorVac CarbonClean System as one of its "Top 20 Tools for 1995."

         The Company has retained the services of a press relations agency for
the purpose of increasing consumer awareness of the MotorVac CarbonClean service
through editorial coverage in general consumer and enthusiast publications,
including daily newspapers. An article about the benefits of the MotorVac
service has recently been published in the Repair and Maintenance section of
"The Auto Channel" Web Site (http://www.theautochannel.com).

         The Company has initiated, and Snap-On is now participating in, what
the Company believes is the first automotive after-market repair guarantee,
which the Company calls "MotorVac or Your Money Back." This guarantee is
extended by the Company through the service technician to the vehicle owner, who
purchases a MotorVac CarbonClean service in the United States or Canada. Simply
stated, if the customer cannot feel the difference in his vehicle within one
week after the service is performed, his money will be refunded. To date, tens
of thousands of cleanings have been performed and, to the Company's knowledge,
only four people have requested their money back.

         The Company continues to focus on additional methods to promote its
products, including product refinement, new product introduction and competitive
pricing, all with the goal of increasing the distribution of the Company's
products.

         Impact of Clean Air Regulations. The Company believes that the
continued worldwide concern with reducing air pollution and other harmful
emissions from diesel and gasoline internal combustion engines represents a
significant market opportunity for the Company's products.

         United States Federal Laws. The vehicle emissions testing industry
developed in response to the Clean Air Act of 1970 (the "Clean Air Act") and
subsequent amendments thereto. The Clean Air Act Amendments of 1977 required,
for the first time, the implementation of rudimentary inspection and maintenance
("I/M") programs in certain metropolitan areas. The 1990 Amendments classified
U.S. metropolitan areas by the degree of air pollution and required the U.S.
Environmental Protection Agency ("EPA") to review and revise its regulations on
I/M programs. On November 5, 1992, the EPA adopted regulations (the
"Regulations") that require approximately 181 metropolitan areas in 38 states
and the District of Columbia, with a total of approximately 87 million vehicles,
to have either a basic or enhanced I/M program in place by specified dates. The
number of areas requiring basic and enhanced I/M is

                                       12

<PAGE>   13



continuously updated by the EPA, and in February 1995, the EPA published a
report indicating that a total of 179 metropolitan areas required I/M, 84 of
which (with approximately 57 million vehicles) required enhanced I/M programs
and 95 of which (with approximately 30 million vehicles) required basic I/M
programs.

         The Company believes that many vehicles that fail emissions inspections
are suffering from engine contamination due to improper driving habits or poor
quality gas or suffering from inadequate or infrequent engine maintenance.
Consequently, the Company believes servicing a vehicle with the MotorVac
CarbonClean System provides motorists with a quick and economical way to bring
their vehicles into compliance. The Company has obtained test results showing
decreases in hydrocarbons, carbon monoxide, carbon dioxide, and nitrogen oxides
in exhausts from vehicles following a service with the MotorVac CarbonClean
System.

         California Smog Check Program. California, which has one of the
nation's most severe air quality problems, contains approximately 25% of the
vehicles nationwide that are, or will be, subject to the new federal testing
requirements. California has licensed approximately 35,000 mechanics and 8,400
repair shops, dealers and fleets to perform emissions inspections and repairs.
The State of California mandates bi-annual emissions certification under the
"Bar 90" program. Under the Bar 90 program, vehicles are subjected to a visual
and functional test and then are tested under both an idle and high idle test
for emissions of hydrocarbons, carbon monoxide and carbon dioxide. Under
recently passed legislation, California is upgrading both the licensing
requirements for mechanics and developing new mandatory equipment requirements
for inspection and repair facilities. As part of the new legislation, vehicle
emissions inspections will be required to test for nitrogen oxides in enhanced
program areas in addition to hydrocarbons, carbon monoxide and carbon dioxide,
and the California Bureau of Automotive Repair ("BAR") will be authorized to
list engine maintenance practices that reduce vehicle emissions.

         International Clean Air Programs. The Company believes that the
proliferation of clean air programs internationally represents a significant
opportunity for the sale of the Company's machines and detergent. Most countries
in Southeast Asia are now experiencing growth in the population of cars, trucks
and motorcycles. Emissions from their growing engine populations is exacerbated
by poor quality gasoline and lubricants. The CarbonClean System is suited for
those countries that choose to implement mandatory maintenance programs as a
cost effective alternative to U.S. or European style emissions inspection and
maintenance programs.


ASSEMBLY AND QUALITY ASSURANCE

         The Company assembles, finishes and packages its fuel system cleaning
machines at its Santa Ana, California facilities. See "Business--Properties."
The Company purchases the component parts utilized in the assembly of its fuel
system cleaning machines from independent third-party suppliers and the Company
assembles the machines at its facility. Manufacturing activities by outside
suppliers are coordinated by the Company's Vice President-Operations. The
Company's internal manufacturing operations consist primarily of the production
of prototypes, test engineering, material and component part purchasing,
assembly, testing, quality control and technical service.

         The Company uses material resource planning and schedules its
production to manage inventory levels and meet customer delivery demands. The
Company utilizes a "pull" system in its assembly operation that seeks to
minimize down time in the assembly process and maximize output by coordinating
assembly operations and the time required to perform each operation at each
stage of assembly. In addition, the Company continually seeks to increase
efficiency at its production facilities through automation and increased use of
technology. The Company anticipates that its existing production facilities and
equipment will be adequate to meet the Company's needs for the next 2 to 3 years
for its existing product lines.

         The Company maintains the MotorVac quality control system that begins
with design and continues through assembly, marketing, sales and customer
service. The Company involves its design and engineering department,
manufacturing personnel, marketing and sales departments in quality control.

         As stated above, the Company relies upon outside suppliers for the
manufacture of the component parts for its fuel system cleaning machines.
Although certain of these component parts are obtained from a single supplier or

                                       13

<PAGE>   14



a limited number of suppliers, the Company believes that there are a sufficient
number of alternative sources of supply for all of the component parts utilized
in its machines, except for the pumps incorporated into its machines. With
respect to the pumps, the Company relies upon Tuthill Corporation, a single
supplier, to manufacture a Company-designed proprietary pump. While the Company
believes it could secure another manufacturer of the pump, any significant
interruption in deliveries of pumps could have a material adverse effect upon
the Company's results of operations and financial condition until such time as
the Company was able to secure an alternative supplier.

         The Company generally estimates its anticipated need for components
over a three-month period and submits purchase orders to its suppliers for such
amounts based upon the specific lead time necessary for such supplier. There can
be no assurance that the Company's suppliers will be able to make timely
delivery of components in the future. The inability of the Company to obtain the
components necessary to enable it to fill its then-existing orders for any
reason, including, but not limited to, shortages, production delays or work
stoppages experienced by the Company's suppliers, could have a material adverse
effect on the Company's results of operations and financial condition. While, to
date, the Company has not experienced any significant interruptions in the
supply of its components, there is no assurance that significant supply
interruptions will not occur in the future.


BACKLOG

         The Company normally does not have any significant backlog.


COMPETITION

         The automotive service and after-market products industries are highly
competitive and require substantial technical expertise and capital resources.
These industries are characterized by an abundance of manufacturers focusing on
the technician, equipment and other after-market performance enhancements. The
Company believes that competition in the automotive service and after-market
products industries is based primarily on product performance, ease of
operation, price, product selection, product availability and service. The
Company's products compete with a variety of products designed to clean engine
fuel systems and reduce emissions while improving performance, including
gasoline fuel additives, detergent additives that are mixed with fuel in the
fuel tank, and solvents that are introduced directly into the fuel system,
either with or without the aid of a mechanical delivery system. Most of the
Company's competitors in each of these product categories have significantly
greater financial, manufacturing, marketing, distribution and other resources
than the Company.

         With respect to direct competition with the Company's integrated fuel
system cleaning machine and detergent delivery system, the Company is aware of a
few small manufacturers that produce products capable of performing functions
similar to those performed by the Company's products. One such competitor is
Injector Clean Systems, Inc., who manufactures a fuel injector cleaning machine
and cleaning detergent. Their product is distributed worldwide by Bilstein
Corporation under the Bilstein brand. Bilstein Corporation's main business is
the manufacturing of shock absorbers. In addition, a large number of companies,
such as Wynn's International, Inc., First Brands Corporation (which markets and
sells STP) and Pennzoil Company (which markets and sells GUMOUT), offer fuel
additives that are marketed as fuel system cleaners with claims that they
improve performance, reduce exhaust emissions and improve fuel economy.
Moreover, many national brands of gasoline, including Chevron with Techron and
Mobil, advertise that their gasoline additives clean fuel injectors and other
parts of the fuel system. The Company believes that it indirectly benefits from
this advertising because it increases the public's awareness of the engine fuel
system contamination problem and the need for cleaning engine fuel systems. The
Company believes that its fuel system cleaning service will be able to
effectively compete with fuel additives and gasoline detergents because the
MotorVac CarbonClean System offers a complete fuel intake to exhaust cleaning
service that improves engine performance, driveability and fuel economy. In
addition, most fuel additives become highly diluted when introduced into the
fuel tank and, therefore, are less effective in removing dirt and contamination
from the fuel system than a service with the MotorVac CarbonClean System.


                                       14

<PAGE>   15



         The business of providing an integrated fuel system cleaning service is
relatively new and the Company anticipates that competition will likely increase
from existing competitors, companies that are not currently competitors but have
the financial resources and expertise to compete in this market and newly-formed
companies as market awareness of the fuel system contamination problem
increases, and as and when government-mandated emissions testing programs
expand. The Company believes, however, that there are significant barriers to
entry for companies that are not currently marketing integrated fuel system
cleaning machine and detergent delivery systems such as the Company's MotorVac
CarbonClean System because any new entrant will likely be required to obtain
certifications from private and governmental agencies, which can take as long as
one year to obtain. Increased competition from manufacturers or distributors of
systems offering fuel system cleaning services or detergents similar to that
offered by the Company could result in price reductions, reduced margins and
loss of market share, all of which could have a material adverse effect on the
Company's results of operations and financial condition. There can be no
assurance that the Company will be able to successfully compete in this
marketplace.


GOVERNMENTAL REGULATION

         The Company's operations are subject to a number of federal, state and
local laws relating to environmental, health, safety and labor matters. The
Company believes its business is operated in substantial compliance with all
material applicable government regulations. There can be no assurance that
future regulations will not require the Company to modify its products, business
or operations to meet environmental, health, safety or labor requirements, or
that the Company will be able, for financial or other reasons, to comply with
such future requirements. Failure to comply with future governmental regulations
could subject the Company to fines and injunctions, which could result in a
material adverse effect on the Company's results of operations and financial
condition. Although the Company is not aware of any claim involving violation of
environmental, health, safety or labor laws or regulations, there can be no
assurance that such claims may not arise in the future, which may have a
material adverse effect on the Company.

         The Company's products are marketed in part based on their ability to
reduce air pollution and other harmful emissions from diesel and gasoline
internal combustion engines as required by foreign, federal, state and local
governmental regulations. Significant changes in such laws that reduce or alter
clean air requirements, or the failure of the Company's products to enhance
compliance with such laws in the future, could have a material adverse effect on
the Company's results of operations.


INTELLECTUAL PROPERTY

         The Company relies on patent and trademark protection and nondisclosure
agreements to protect its intellectual property. The Company believes that its
owned and licensed tradenames and trademarks are critical to the Company's
marketing strategy and its business.

         In connection with the purchase of certain assets from EMI in August
1992, a then-existing affiliate of the Company licensed from EMI under an
exclusive license agreement all of EMI's rights in and to U.S. Patent No.
4,787,348 (carbon cleaning apparatus for diesel engines), which covered certain
aspects of the Company's diesel fuel system cleaning machines, and licensed the
registered trademarks "CarbonClean(R)," "Industrial Diesel Tune(R)" and "Helping
You Get The Most Out Of Today's Engines(R)" (collectively, the "EMI Property").
At the same time, the affiliate of the Company sublicensed to the Company the
right to utilize the EMI Property in the United States and Canada. Through a
series of restructurings effected in 1994 and 1995, the Company acquired the
license to utilize the EMI Property worldwide. Effective as of December 31,
1995, the Company purchased all of the EMI Property from EMI. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."

         The Company licenses the rights with respect to U.S. Patent
No. 5,381,810 (for electronically controlled carbon cleaning system for internal
combustion engines), which covers certain aspects of the Company's gasoline and
diesel fuel system cleaning machines, from Frederick A. Mosher and Max Q
Systems, Inc. (collectively, "Max Q"). Under the license agreement, the Company
paid an initial royalty payment of $30,000 upon the signing of the agreement and

                                       15

<PAGE>   16



has agreed to pay royalties in the amount of the greater of (a) a minimum
royalty of $10,000 on each January 1, May 1 and September 1 of each calendar
year commencing January 1, 1995 or (b) $50 per unit sold during the term of the
license agreement. The license agreement terminates on the later of December
1998 or the expiration of the term of the patent and may be terminated earlier
by either party in the event of certain defaults.

         The Company purchases all of its fuel system cleaning detergents from
Shrader Packaging Co., Inc. ("Shrader"), a single supplier, under an Exclusive
Supply Agreement. Under the terms of the Exclusive Supply Agreement, Shrader has
agreed to produce and deliver to the Company, and the Company has agreed to buy,
all of the chemical formulations required by the Company in its business. The
Company is also required to make minimum annual purchases of $250,000 per year,
subject to annual inflation based increases. The Company pays Shrader the unit
price in effect at the time each order is placed by the Company and payment
terms are generally net 30 days from the date of shipment. Shrader has agreed to
limit price increases to increases in its material costs and operating overhead
as necessary to maintain Shrader's profit margins. Under the Exclusive Supply
Agreement, Shrader has agreed that it will not produce or sell any formulations
substantially similar to the chemical formulations produced for the Company or
which are in competition with the Company's chemical formulations without the
Company's written permission. In exchange for its exclusive rights to the
chemical formulations, the Company has agreed that in the event that it ceases
purchasing the chemical formulations from Shrader, it will purchase Shrader's
remaining inventory of chemical formulations and Shrader will not, for a period
of one year thereafter, sell any of the chemical formulations to any
distributors of the Company or any competitors of the Company. In addition, the
Company has obtained a right of first refusal from Shrader to purchase Shrader's
worldwide rights to the chemical formulations. The chemical formulations used in
the Company's detergents are the proprietary property and a trade secret of
Shrader but, to the Company's knowledge, are not patented or otherwise
protected. There can be no assurance that Shrader will be able to maintain its
chemical formulations as trade secrets or that others will not independently
develop chemical formulations that are similar to or competitive with Shrader's
chemical formulations. The Company believes that the proprietary nature of the
Company's detergents and the Company's exclusive right to obtain those
detergents from Shrader are important to the Company's business and any loss of
such proprietary protection or the exclusive rights to obtain the detergents
could have a material adverse effect on the Company's results of operations and
financial condition. See "Risk Factors-- Dependence Upon Single Sources of
Supply; Lack of Long Term Supply Contracts for Machine Components."


RESEARCH AND DEVELOPMENT

         For the fiscal year ended December 31, 1996 and the nine months ended
December 31, 1995, the Company spent $68,697 and $162,779, respectively, on
research, development and testing.


EMPLOYEES

         As of December 31, 1996, the Company had 40 employees, all of which
were full-time employees, including 14 employed in sales and marketing, 18
employed in research and development, technical support and production, and 8
employed as administrative, accounting and support staff. None of the Company's
employees are represented by unions, and the Company considers its employee
relations to be good.


RISK FACTORS

Operating Losses; Accumulated Deficit; Profitability Uncertain

         From August 28, 1992 (inception) through December 31, 1996, the Company
has continued to incur net losses. For the year ended December 31, 1996, the
Company's net loss was $1,281,090. In addition, as of that date, the Company had
an accumulated deficit of $11,974,082. There can be no assurance that the
Company will be able to realize significant revenues in the future in an amount
sufficient to realize profitable operations. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations."


                                       16

<PAGE>   17



Lack of Significant Operating History

         In February 1992, Enviromotive, Inc., a California corporation
unaffiliated with the Company ("EMI"), purchased certain assets of Parker
Automotive Corporation ("PAC") from the trustee in the PAC bankruptcy action,
and in August 1992, EMI sold and licensed certain of those assets to the Company
and an affiliate of the Company. The Company commenced operations in August 1992
after raising approximately $2.5 million in debt and equity financing from
EMIIC, which was used to fund the operations of the Company and to purchase and
license certain assets from EMI. Consequently, the Company is a relatively new
entity and has an unproven track record. Because of the Company's limited
operating history, the Company must be considered in light of the risks,
expenses and difficulties frequently encountered by companies in their early
stage of development. To address these risks, the Company must, among other
things, respond to competitive developments, continue to attract, retain and
motivate qualified personnel, manage its inventory levels and costs in relation
to rapidly increasing sales, and continue to expand its distribution network,
both domestically and internationally. There can be no assurance that the
Company will be successful in addressing such risks. Moreover, because of the
relatively short period of time during which the Company has been in operation,
there can be no assurance that the Company will be able to continue to
successfully market its products over an extended period of time. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."


Dependence Upon Single Sources of Supply; Lack of Long Term Supply Contracts for
Machine Components

         The formulations utilized in the Company's gasoline and diesel
detergents are manufactured by Shrader Packaging Co., Inc. ("Shrader"), an
independent third party. These formulations are the proprietary property and a
trade secret of such party, but are not, to the Company's knowledge, patented or
otherwise protected. There can be no assurance that the supplier will be able to
maintain its chemical formulations as trade secrets or that others will not
independently develop chemical formulations that are similar to or competitive
with the supplier's chemical formulations. The Company currently relies upon
this supplier as the sole supplier of the Company's gasoline and diesel engine
detergents under the terms of an exclusive supply agreement (the "Exclusive
Supply Agreement"). Under the Exclusive Supply Agreement, the supplier can
increase the price charged to the Company to reflect increases in material costs
and operating overhead and as necessary to maintain the supplier's profit
margins. Any increase in price that the Company is unable to pass through to its
customers could have a material adverse effect on the Company's results of
operations. The Company considers its detergents to be important proprietary
assets. The loss by the supplier of the proprietary protection for its detergent
formulas, a significant interruption in detergent deliveries by the supplier or
the inability to obtain detergents from the supplier for any reason for any
significant period of time could have a material adverse effect upon the Company
and its results of operations. See "Business--Intellectual Property."

         The Company relies upon outside suppliers for the manufacture of the
component parts of its fuel system cleaning machines. The Company does not have
written long-term contracts with any of these suppliers. The Company generally
estimates its anticipated need for components over a three-month period and
submits purchase orders to its suppliers for such amounts. There can be no
assurance that the Company's suppliers will be able to make timely delivery of
components in the future. The inability of the Company to obtain the components
necessary to enable it to fill its then-existing orders for any reason,
including, but not limited to, shortages, product delays or work stoppages
experienced by the Company's suppliers, could have a material adverse effect on
the Company's results of operations and financial condition.

         Certain of the Company's component parts are obtained from a single
supplier or a limited number of suppliers. The Company believes, however, that
there are a sufficient number of alternative sources of supply for all of the
component parts utilized in its machines, except for the pumps incorporated into
its machines. With respect to the pumps, the Company relies upon Tuthill
Corporation, a single supplier, to manufacture a Company-designed proprietary
pump. While the Company believes it could secure another manufacturer of the
pump, any significant interruption in deliveries of the pumps could have a
material adverse effect upon the Company's results of operations and financial
condition until such time as the Company was able to secure an alternative
supplier.



                                       17

<PAGE>   18



Dependence Upon Significant Customer

         During the fiscal year ended December 31, 1996 and the nine months
ended December 31, 1995, the Company derived approximately 51% and 45%,
respectively, of its total sales from sales to Sun Electric Corporation, a
division of Snap-On, Incorporated ("Sun/Snap-On"), a distributor of the
Company's products. No other customer accounted for more than 10% of the
Company's net sales during the fiscal year ended December 31, 1996 or the nine
months ended December 31, 1995. Any significant decrease in sales to the
Company's principal distributors, including Sun/Snap-On, or any termination of
existing relationships with any such principal distributors which are not offset
by increases in sales to other existing or new distributors, could have a
material adverse effect upon the Company's results of operations and financial
condition.


Future Capital Requirements

         The Company believes that available working capital at December 31,
1996 of $3,010,282 will be sufficient to allow the Company to meet its
obligations as they become due through January 1, 1998, including repayment of a
short-term note payable to Imperial Bank of $1,500,000 due June 16, 1997. There
can be no assurance that the Company's working capital will be sufficient to
enable the Company to increase its revenues in an amount sufficient to attain
profitable operations. To the extent that the Company's cash flow from
operations, if any, are insufficient to fund the Company's activities, the
Company will be required to raise additional funds through equity or debt
financings. No assurance can be given that such financing will be available on
terms acceptable to the Company, if at all, and if available, such financing may
result in further dilution to the Company's stockholders and/or in additional
interest expense. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and "Business."


Competition; Technological Developments

         The automotive service and after-market products industries are highly
competitive and require substantial technical expertise and capital resources.
These industries are characterized by an abundance of manufacturers focusing on
the technician, equipment and other after-market performance enhancements. The
Company believes that competition in the automotive service and after-market
products industries is based primarily on product performance, ease of
operation, price, product selection, product availability and service. The
Company's products compete with a variety of products designed to clean engine
fuel systems and reduce emissions while improving performance, including
gasoline fuel additives, chemical formulations that are mixed with fuel in the
fuel tank, and chemical formulations that are introduced directly into the fuel
system either with or without the aid of a mechanical delivery system. Most of
the Company's competitors in each of these product categories have significantly
greater financial, manufacturing, marketing, distribution and other resources
than the Company.

         With respect to direct competition with the Company's integrated fuel
system cleaning and detergent delivery system, the Company is aware of a few
small manufacturers and a number of distributors, including Bilstein, that
produce products capable of performing some functions similar to those performed
by the Company's products. In addition, a large number of companies, such as
Wynn's International, Inc., First Brands Corporation (which markets and sells
STP) and Pennzoil Company (which markets and sells GUMOUT), offer fuel additives
that are marketed as fuel system cleaners with claims that they improve
performance, reduce exhaust emissions and improve fuel economy. Moreover, many
national brands of gasoline, including Chevron with Techron and Mobil, advertise
that their gasoline additives clean fuel injectors and other parts of the fuel
system.

         The business of providing an integrated fuel system cleaning service is
relatively new and the Company anticipates that competition will likely increase
from existing competitors, companies that are not currently competitors but have
the financial resources and expertise to compete in this market and newly-formed
companies as the market awareness of the fuel system contamination problem
increases, and if and when government-mandated emissions testing programs
expand. Increased competition from manufacturers or distributors of systems
offering similar fuel system cleaning services or detergents could result in
price reductions, reduced margins and loss of market share or could render

                                       18

<PAGE>   19



the Company's technology obsolete, all of which could have a material adverse
effect on the Company's results of operations and financial condition. Although
the Company is aware of a number of competitors that have attempted to duplicate
the Company's detergent formulations, to date the Company is not aware of any
competitor that has been successful in duplicating the formulations. There can
be no assurance that the Company will be able to successfully compete in this
marketplace or develop sufficient new products or chemical formulations to
maintain its position in the market, and any failure to do so could have a
material adverse effect on its results of operations and financial condition.
See "Business--Competition."


Dependence Upon Trademarks, Patents and Proprietary Rights

         The Company's success is, in part, dependent upon the protection
afforded by the patented technology incorporated in some of the fuel system
cleaning machines manufactured by the Company, the Company's rights to its
trademarks "MotorVac" and "CarbonClean" and the goodwill associated therewith.
The Company believes that its products and trademarks do not infringe on any
third party's patents, trademarks or other proprietary rights. In the event of a
legal challenge, the Company would be required to defend its patents and
trademarks and there can be no assurance that the Company would prevail in such
a proceeding. Additionally, the Company must identify and prosecute infringement
by others in order to protect its patents and trademarks. Trademark and patent
litigation entails substantial legal and other costs. There can be no assurance
that the Company will have the necessary financial resources to defend or
prosecute its rights in connection with any such litigation. Responding to,
defending or bringing claims related to the Company's rights to its intellectual
property may require the Company's management to redirect its resources to
address such claims, which could have a material adverse effect on the Company's
business, financial condition and results of operations. Moreover, if any
significant suppliers of the Company are subjected to claims challenging their
proprietary rights, the Company could be materially adversely affected if such
suppliers' operations are significantly interrupted or if they re unable to
defend their respective proprietary rights against such a challenge. See "Risk
Factors-- Dependence Upon Single Sources of Supply; Lack of Long Term Supply
Contracts for Machine Components" and "Business--Intellectual Property."


Variability in Operating Results; Seasonality

         The Company may experience significant fluctuations in future operating
results due to a number of factors including, among other things, the size and
timing of customer orders, new or increased competition, delays in new product
enhancements and new product introductions, quality control difficulties,
changes in market demand, market acceptance of new products, product returns,
seasonality in product purchases by distributors and end users and pricing
trends in the automotive after-market industry in general, and in the specific,
markets in which the Company is active. Any of these factors could cause
operating results to vary significantly from prior periods. Further, the
Company's business is seasonal. Historically, the Company's net sales have been
highest in the third quarter and lowest in the first quarter of each calendar
year, and the Company anticipates that this trend will continue in the future.
The primary reason for the decrease in net sales in the first quarter is the
impact of buying patterns in both the domestic and international markets
following the holiday period in November and December, and traditionally slower
sales in the automotive equipment after-market following these holiday periods.
Significant variability in orders during any period may have a material adverse
impact on the Company's cash flow or work flow, and any significant decrease in
orders could have a material adverse impact on the Company's results of
operations and financial condition. As a result, the Company believes that
period-to-period comparisons of its results of operations are not necessarily
meaningful and should not be relied upon as any indication of future
performance. Fluctuations in the Company's operating results could cause the
price of the Company's Common Stock to fluctuate substantially. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."


Management of Company Growth

         The Company has experienced significant revenue and personnel growth in
recent years. This growth will continue to make significant demands on the
Company's management, resources and operations. To manage its growth

                                       19

<PAGE>   20



effectively, the Company has improved and intends to continue to improve its
operational, financial, sales and marketing systems and to hire and train new
employees and better manage its current employees. There can be no assurance
that the Company will be able to identify, hire, train and retain qualified
individuals or otherwise manage its growth effectively, and such failure could
have a material adverse effect on the Company's results of operations and
financial condition. In addition, the Company may increase its operating
expenses in order to fund the expansion of its advertising and marketing
efforts, hire additional advertising and marketing personnel, and make strategic
acquisitions of related and/or complimentary products and/or product lines. The
foregoing expenses will, by necessity, be incurred prior to any potential
positive impact on revenues. If such expenses are not subsequently followed by
sufficient increased revenues, the Company's operating results and financial
condition for the period ending December 31, 1997 could be materially adversely
affected.


Dependence on International Sales

         A significant element of the Company's business strategy is to continue
to expand in selected international markets. In the Company's fiscal year ended
December 31, 1996 and the nine months ended December 31, 1995, respectively, the
Company derived approximately 29% and 28%, respectively, of total sales from
international markets. The Company's international sales efforts are subject to
the customary risks of doing business abroad, including exposure to regulatory
requirements, political and economic instability, barriers to trade, trade
restrictions (including import quotas), tariff regulations, foreign taxes,
restrictions on transfer of funds, difficulty in obtaining distribution and
support and export licensing requirements, any of which could have a material
adverse effect on the Company's results of operations and financial condition.
The Company sells its products in United States dollar denominations only.
Consequently, a weakening in the value of foreign currencies relative to the
U.S. dollar and potential fluctuations in foreign currency exchange rates could
have an adverse impact on the Company's sales and could cause the Company to
reduce its selling prices, which could have a negative impact on gross margins
on international sales. See "Business-- Product Distribution."


Risk of Product Liability

         The nature of the Company's business exposes it to risk from product
liability claims. The Company currently maintains product liability insurance
for its products worldwide, with limits of $10,000,000 per occurrence and
$11,000,000 in the aggregate, per annum. However, such coverage is becoming
increasingly expensive and there can be no assurance that the Company's
insurance will be adequate to cover future product liability claims, or that the
Company will be successful in maintaining adequate product liability insurance
at commercially reasonable rates. Any losses that the Company may suffer from
future liability claims, including the successful assertion against the Company
of one or a series of large uninsured claims in excess of the Company's
coverage, may have a material adverse effect on the Company's business,
financial condition and results of operation. Even if the Company is successful
in the defense of product liability claims, the defense of product liability
claims generally requires substantial expenditures of funds and management time
which could have a material adverse effect on the Company's business, financial
condition and results of operations. In addition, any product liability
litigation may have a material adverse effect on the reputation and
marketability of the Company's products. See "Business--Product Warranties."


Governmental Regulation

         The Company's products are marketed in part based on their ability to
reduce air pollution and other harmful emissions from diesel and gasoline
combustion engines as required by foreign, federal and state governmental
regulations, as well as their ability to fix some driveability problems and
increase fuel economy. Significant changes in such laws that reduce clean air
requirements or the failure of the Company's products to enhance compliance with
such laws in the future could have a material adverse effect on the Company's
results of operations. Additionally, there may be changes in governmental
regulations related to environmental, health, safety or labor matters with which
the Company will have to comply. There can be no assurance that the Company will
be able, for financial or other reasons, to comply with the requirements of any
future changes in governmental regulations. Failure to comply with future

                                                        20

<PAGE>   21



governmental regulations could subject the Company to fines and injunctions,
which could result in a material adverse effect on the Company's results of
operations and financial condition. Although the Company is not aware of any
claim involving violation of environmental, health, safety or labor laws or
regulations, there can be no assurance that such a claim may not arise in the
future, which may have a material adverse effect on the Company. See "Business--
Governmental Regulation."


Control by Existing Stockholders

         At December 31, 1996, EMIIC, the principal stockholder of the Company,
and the Company's directors and officers collectively beneficially owned
approximately 64.51% of the Company's Common Stock (EMIIC, 61.37%; the Company's
directors and officers, 3.14%). Consequently, these persons will have the
ability to control the election of all the Company's directors, to determine the
outcome of most corporate actions submitted to the vote of the Company's
stockholders and to generally control the affairs and management of the Company.
See "Security Ownership of Certain Beneficial Owners and Management." In
addition, such concentration of ownership and control may have the effect of
delaying, deferring or preventing a change of control in the Company.


Dependence on Key Personnel

         The Company's success is dependent, in part, upon the continued
services of certain key executive officers, including Lee W. Melody, the
Company's President and Chief Executive Officer. The loss of any one of its key
executive officers could have a material adverse effect on the Company's results
of operations and financial condition. The continued success of the Company may
also be dependent upon its ability to attract and retain highly qualified
marketing, sales and other personnel. There can be no assurance that the Company
will be able to recruit and retain such personnel. See "Directors, Executive
Officers, Promoters and Control Persons; Compliance with Section 16(a) of the
Exchange Act."


Possible Issuance of Preferred Stock; Anti-takeover Effect of Delaware Law

         The Company is authorized to issue up to 500,000 shares of preferred
stock, par value $.01 per share (the "Preferred Stock"). The Preferred Stock may
be issued in one or more series, the terms of which may be determined at the
time of issuance by the Board of Directors, without further action by the
Company's stockholders, and may include voting rights, preferences as to
dividends and liquidation, conversion and redemption rights, and sinking fund
provisions as determined by the Board of Directors. Although the Company has no
present plans to issue any shares of Preferred Stock following consummation of
this offering, the issuance of any additional shares of Preferred Stock in the
future could affect the rights of the holders of Common Stock and thereby reduce
the value of the Common Stock. In particular, specific rights granted to future
holders of Preferred Stock could be used to restrict the Company's ability to
merge with or sell its assets to a third party, thereby preserving control of
the Company by its present owners. These provisions, together with certain
provisions of Delaware law, may also have the effect of delaying or preventing
changes in control or management of the Company which could adversely affect the
market price of the Company's Common Stock.


ITEM 2.           DESCRIPTION OF PROPERTY

         The Company's executive offices, research and product development,
assembly, warehousing and distribution facilities are currently housed in a
single leased industrial building comprised of approximately 24,360 square feet
located in a state-designated enterprise zone in Santa Ana, California. Under
the terms of the lease, the Company presently pays rent of approximately $8,282
per month plus the Company's pro rata share of common area maintenance and
operating expenses. The lease expires on January 31, 1998 and the Company has an
option to renew the lease for


                                       21

<PAGE>   22



an additional five-year term. Commencing in March 1997, the monthly rent
increases to approximately $8,614 and will increase (but not decrease) to the
prevailing market rate during the extension period if the Company exercises its
extension option. The Company believes that its existing facilities are adequate
to meet its needs for at least the next 2 to 3 years.


ITEM 3.           LEGAL PROCEEDINGS.

         On May 24, 1996, the Company was served with a complaint by its former
Australia distributor in a matter entitled DeCarbon Australia Pty. Ltd. v.
MotorVac Technologies, Inc. (Case No. 764248) in the Superior Court of the State
of California, County of Orange. On August 13, 1996, the Company filed a
cross-complaint against DeCarbon and Robert L. Fisher, the Company's former Vice
President of International Sales, and ETCO, Mr. Fisher's company (collectively
"Fisher"). On September 16, 1996, Fisher filed a cross-complaint against the
Company and Lee W. Melody, the Company's President. On October 31, 1996, Judge
Ronald L. Bauer granted a preliminary injunction against DeCarbon and Fisher. On
January 6, 1997, the Company and DeCarbon entered into a Settlement Agreement
pursuant to which, among other things, (a) DeCarbon paid MotorVac $100,000, (b)
DeCarbon agreed to an additional $150,000 Stipulation for Entry of Judgment
against DeCarbon should DeCarbon violate the Settlement Agreement, and (c)
MotorVac and DeCarbon provided each other with mutual releases. On March 14,
1997, the Company and Lee Melody, on one side, and Fisher and ETCO, on the
other, entered into a letter agreement of full and final settlement.
The definitive agreement was entered into on March 27, 1997.

         On February 28, 1996, the Company filed a proceeding in the United
States District Court, Northern District of Ohio, Eastern Division, against
Richard R. Green, individually and doing business as P & R Equipment Company,
Gregory M. Phillips, C. S. P. International, Inc. and certain other defendants
seeking compensatory and punitive damages and injunctive relief for trademark
and trade name infringement, breach of contract, unfair competition, deceptive
trade practices, misappropriation of trade secrets, breach of loyalty, and
interference with contracts and business relations. The foregoing proceeding
arises out of actions taken by Messrs. Green, Phillips and the other named
defendants, each of whom are former officers and/or employees of the Company, in
forming a new company for the purpose of competing with the business of the
Company. On April 3, 1996, a counterclaim was filed by certain of the defendants
in the foregoing action pursuant to which such defendants allege that the
Company brought the foregoing action for the unlawful purpose of harassing and
injuring the defendants and that the Company is engaged in unfair competition
and attempting to unlawfully restrain trade. Such defendants have requested
compensatory damages in the amount of $500,000, punitive damages in the amount
of $1,000,000 and attorneys' fees and costs. The Company believes that the
defendants' counterclaims are without merit and intends to prosecute this action
vigorously. The Company also has filed an arbitration action in Orange County,
California against Messrs. Phillips and Green covering substantially the same
subject matter as the foregoing litigation.

         In addition to the foregoing, the Company, from time to time, is
involved in routine litigation incidental to the conduct of its business. Except
for the litigation described above, there are currently no material pending
legal proceedings to which the Company is a party to or to which any of its
property is subject.


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

                  None.




                                       22

<PAGE>   23




                                     PART II



ITEM 5.           MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.

         The Company's Common Stock trades on the Nasdaq SmallCap Market under
the symbol "MVAC." The following table sets forth, for the periods indicated,
the high and low sales prices of the Company's Common Stock as furnished by
Nasdaq. Prices reflect inter-dealer prices without retail mark-up, mark-down or
commissions, and may not necessarily reflect actual transactions.

<TABLE>
<CAPTION>

                                                                       HIGH             LOW
                                                                       ----             ---

         YEAR ENDED DECEMBER 31, 1996
<S>                                                                    <C>             <C>
                  Second Quarter (from April 26, 1996)                 7                3 3/8
                  Third Quarter..................                      6 1/8            4 1/2
                  Fourth Quarter.................                      6 3/4            4 11/32
</TABLE>
         There were approximately 156 holders of record as of March 25, 1997.

         No dividends have been declared or paid on the Company's Common Stock.

         Subsequent to January 1, 1996 and on various dates through April 25,
1996, the Company issued incentive and nonstatutory stock options to purchase an
aggregate of 231,954 shares of Common Stock to directors, officers, employees
and consultants. The exercise price for such options ranges from $5.10 to $5.375
per share. The Company issued such options in reliance upon the exemption
provided by Rule 701 under the Securities Act of 1933, as amended (the "Act").
Subsequent to April 25, 1996 and on various dates through December 31, 1996, the
Company issued incentive and nonstatutory stock options to purchase an aggregate
of 70,100 shares of Common Stock to directors, officers, employees and
consultants. The exercise price for such options was $6.125 per share. The
Company issued such options in reliance upon the exemption provided by Section
4(2) of the Act.

         On April 24, 1996, immediately prior to consummation of the Company's
initial public offering, approximately $4,410,000 of outstanding indebtedness
owed to EMIIC was exchanged for 820,521 shares of Common Stock, and all of the
95,105 shares of Series A Preferred Stock (including all accrued dividends
thereon) held by EMIIC and one individual was converted into 966,247 shares of
Common Stock at a per share price of $5.375.


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

         The following discussion and analysis should be read together with the
financial statements and notes thereto included elsewhere in this Annual Report
on Form 10-KSB.


OVERVIEW

         MotorVac Technologies, Inc. (the "Company") designs, develops,
assembles, markets and sells the MotorVac CarbonClean System for the diagnosis,
maintenance and repair of internal combustion engine fuel systems primarily for
the automotive after-market repair and service industry. The Company markets and
sells its fuel system cleaning machines and detergents through various
distribution channels, both in the United States and Canada ("Domestic") under
the trade name MotorVac, and outside the United States and Canada
("International") under the trade name CarbonClean.


                                       23

<PAGE>   24



         The Company elected to change its fiscal year end to December 31 from
March 31, effective with the fiscal year ended December 31, 1995. The Company
elected to make this change because the quarters ended December 31 and March 31
have traditionally been the Company's slowest quarters for sales and, therefore,
the Company believes that this fiscal year-end better matches the Company's
natural business cycle. The Company continues on a March 31 year-end for tax
reporting purposes. The following discussion and analysis addresses the results
of the Company's operations for the twelve months ended December 31, 1996, as
compared to the Company's results of operations for the twelve months ended
December 31, 1995, except as otherwise noted. On May 1, 1996, the Company
consummated an initial public offering (the "IPO") of 1,100,000 shares of its
common stock, resulting in gross proceeds of approximately $5,912,500. On June
13, 1996, the Company completed the sale of an additional 110,000 shares of its
Common Stock upon exercise of the underwriter's overallotment option (the
"Overallotment"), resulting in gross proceeds to the Company of approximately
$591,250.

         This Annual Report on Form 10-KSB contains certain forward-looking
statements within the meaning of Section 27A of the Securities Act of 1933 and
Section 21E of the Securities Exchange Act of 1934 (the "Exchange Act"), and the
Company intends that such forward-looking statements be subject to the safe
harbors created thereby. The Company may experience significant fluctuations in
future operating results due to a number of factors, including, among other
things, the size and timing of customer orders, new or increased competition,
delays in new product enhancements and new product introductions, quality
control difficulties, changes in market demand, market acceptance of new
products, product returns, seasonality in product purchases by distributors and
end users, changes in inventory levels, and pricing trends in the automotive
after-market industry in general, and in the specific markets in which the
Company is active. Any of these factors could cause operating results to vary
significantly from prior periods. Significant variability in orders during any
period may have a material adverse impact on the Company's cash flow or work
flow, and any significant decrease in orders could have a material adverse
impact on the Company's results of operations and financial condition. As a
result, the Company believes that period-to-period comparisons of its results of
operations are not necessarily meaningful and should not be relied upon as any
indication of future performance. Fluctuations in the Company's operating
results could cause the price of the Company's Common Stock to fluctuate
substantially.

         Assumptions relating to the foregoing involve judgments with respect
to, among other things, future economic, competitive and market conditions, all
of which are difficult or impossible to predict accurately, and many of which
are beyond the control of the Company. In addition, the business and operations
of the Company are subject to substantial risks which increase the uncertainty
inherent in the forward-looking statements. In light of the significant
uncertainties inherent in the forward-looking information included herein, the
inclusion of such information should not be regarded as a representation by the
Company or any other person that the objectives or plans of the Company will be
achieved.


RESULTS OF OPERATIONS

         The Company's fiscal year in 1995 was nine months and its fiscal year
in 1996 was twelve months. The Company believes that a comparison of the pro
forma twelve months ended December 31, 1995 to the twelve months ended December
31, 1996 provides a more meaningful comparison. Consequently, the Results of
Operations discussion below compares these two twelve-month periods as set out
below. The Liquidity and Capital Resources section compares the cash flow
statements for the nine-month period ended December 31, 1995 and the
twelve-month period ended December 31, 1996.


                                       24

<PAGE>   25



The results of operations for the twelve months ended December 31, 1995 and
December 31, 1996 were as follows:
<TABLE>
<CAPTION>
                                                                                                    Audited
                                         3 Mos. Ended       9 Mos. Ended      12 Mos. Ended       Year Ended
                                            3/31/95           12/31/95           12/31/95          12/31/96
                                        -----------------  --------------     --------------      -----------
                                                                               (Pro Forma)
                                          (Unaudited)         (Audited)        (Unaudited)

<S>                                       <C>               <C>                 <C>                <C>
NET SALES                                 $1,033,880       $ 3,992,398         $ 5,026,278        $ 8,242,735
COST OF SALES                                595,136         2,480,690           3,075,826          5,026,486
                                          ----------       -----------         -----------        -----------
GROSS PROFIT                                 438,744         1,511,708           1,950,452          3,216,249
OPERATING EXPENSES                         1,288,513         3,194,957           4,483,470          4,338,332
                                          ----------       -----------         -----------        -----------
LOSS FROM OPERATIONS                        (849,769)       (1,683,249)         (2,533,018)        (1,122,083)
INTEREST EXPENSE-
     RELATED PARTIES                         112,308           446,309             558,617            157,751
                                          ----------       -----------         -----------        -----------
LOSS BEFORE PROVISION
     FOR INCOME TAX                         (962,077)       (2,129,558)         (3,091,635)        (1,279,834)
PROVISION FOR INCOME TAX                           0               850                 850              1,256
                                          ----------       -----------         -----------        -----------
NET LOSS                                  $ (962,077)      $(2,130,408)        $(3,092,485)       $(1,281,090)
                                          ==========       ===========         ===========        ===========

</TABLE>


Certain amounts in the twelve months ended March 31, 1995 and the nine months
ended December 31, 1995 have been reclassified to reflect the 1996 presentation.


COMPARISON OF TWELVE MONTHS ENDED DECEMBER 31, 1996 TO THE PRO FORMA UNAUDITED
TWELVE MONTHS ENDED DECEMBER 31, 1995

         Net Sales. Net sales for the twelve months ended December 31, 1996 of
$8,242,735 increased $3,216,457 (approximately 64%) from $5,026,278 for the
twelve months ended December 31, 1995. The primary reason for the sales
increases was the increase in the number of MotorVac CarbonClean Systems sold of
approximately 55.8% and an increase in equivalent cases of detergent sold of
approximately 99%.

         Domestic sales increased $2,629,674 (approximately 81.1%) to $5,870,757
for the twelve months ended December 31, 1996 from $3,241,083 for the twelve
months ended December 31, 1995. International sales increased $586,783
(approximately 32.9%) to $2,371,978 for the twelve months ended December 31,
1996 from $1,785,195 for the twelve months ended December 31, 1995.

         The primary reason for the domestic sales increase was the increase in
units sold to the Company's largest customer, Sun/Snap-On, in the U.S., the
launch of Sun/Snap-On in Canada, and the launch of John Bean Company in late
1996 in the U.S. and Canada. The primary reason for the international sales
increase was the increase in orders by a number of existing and new distributors
and a large international order sold by the Company to one customer in China in
early 1996.

         Cost of Sales. Cost of sales for the twelve months ended December 31,
1996 increased by $1,950,660 (approximately 63.4%) to $5,026,486 from $3,075,826
for the twelve months ended December 31, 1995. The primary reason for the cost
of sales increase of 63.4% is the sales increase of approximately 64%. Cost of
sales as a percent of sales, for the twelve months ended December 31, 1996, was
61% of sales and was 61.2% of sales for the twelve months ended December 31,
1995. The primary reason for the cost of sales decrease as a percent of sales
was the favorable effect of the increase in detergent equivalent cases sold less
the effect of a unilateral price increase from a former supplier of electronic
components used in the Company's MotorVac CarbonClean Systems.


                                       25

<PAGE>   26



         Gross Profit. Gross profit for the twelve months ended December 31,
1996 of $3,216,249 increased by $1,265,797 (approximately 64.9%) from $1,950,452
for the twelve months ended December 31, 1995. The primary reason for this
increase is the sales increase and cost of sales decrease discussed above.

         Operating Expenses. Operating expenses for the twelve months ended
December 31, 1996 of $4,338,332 decreased $145,138 (approximately 3.2%) from
$4,483,470 for the twelve months ended December 31, 1995. The major reason for
the decrease was staff cutbacks from 1995 to 1996, elimination of duplication of
certain expenses, such as duplicate plant costs for some of 1995, net of certain
increases in other operating expenses. These increased operating expenses in
1996 include: royalty asset amortization of $318,090 (the royalty asset was
acquired effective December 31, 1995), increased insurance costs, largely
related to Directors and Officers Insurance, and legal expense, largely related
to defending a suit from a former distributor, which was favorably settled in
early 1997.

         Loss from Operations. As a result of the above, the loss from
operations for the twelve months ended December 31, 1996 of $1,122,083 improved
by $1,410,935 (approximately 55.7%) from $2,533,018 for the twelve months ended
December 31, 1995.

         Interest Expense (Net) - Related Parties. Interest expense, net,
related parties for the twelve months ended December 31, 1996 of $157,751
decreased by $400,866 (approximately 71.8%) from $558,617 for the twelve months
ended December 31, 1995. The improvement was a result of the conversion of
$4,410,300 of notes payable to EMIIC and related parties, repayment of $123,572
of debt to EMIIC at the time of the Company's initial public offering related to
initial public offering costs advanced by EMIIC, and the interest earned by the
Company on initial public offering funds invested from time to time.

         Net Loss. The net loss for the twelve months ended December 31, 1996 of
$1,281,090 improved by $1,811,395 (approximately 58.6%) from $3,092,485 for the
twelve months ended December 31, 1995.


LIQUIDITY AND CAPITAL RESOURCES

         As of December 31, 1995, the Company had a working capital deficit of
$179,276. As of December 31, 1996, the Company had working capital of
$3,010,282.

For the Nine Months Ended December 31, 1995

         Cash at April 1, 1995 was $17,196. Cash used in operating activities,
which includes changes in current assets and current liabilities, except notes
and amounts payable to related parties, was $1,578,872 for the nine months ended
December 31, 1995. Cash used in investing activities was $116,934, which
primarily represented the purchase of computer equipment and software. Cash flow
from financing activities for the nine months ended December 31, 1995 was
$1,683,618. This amount includes proceeds from the issuance of notes payable to
EMIIC and related parties of $2,590,000, payments of notes payable to EMIIC of
$920,000, and a decrease in receivable from licensor of $13,618. Cash at
December 31, 1995 was $5,008. The Company, in the nine months ended December 31,
1995, paid $22,340 in interest and $1,650 in income taxes. These amounts are
included in net cash used in operating activities above.

For the Twelve Months Ended December 31, 1996

         Cash at January 1, 1996 was $5,008. Cash used in operating activities,
which includes changes in current assets and current liabilities, except notes
and amounts payable to related parties and ex-licensor, was $2,801,557 for the
twelve months ended December 31, 1996. Cash used in investing activities was
$73,316, which primarily represents purchase of computer equipment and software,
and manufacturing molds. Cash from financing activities for the twelve months
ended December 31, 1996 was $5,429,854. This amount includes net proceeds from
the issuance of 1,210,000 shares of common stock of $5,151,978, proceeds from
the issuance of notes payable to EMIIC and related parties of $680,000, payments
of notes payable to EMIIC and related parties of $1,543,572, payments to
ex-licensor of $358,552 and proceeds from the issuance of notes payable to
Imperial Bank of $1,500,000. The Company, during the twelve months ended
December 31, 1996, paid $930,127 for interest and $1,256 for taxes. In addition,
the Company (i)

                                       26

<PAGE>   27



converted 95,295 shares of Preferred Stock, Series A with a carrying value of
$4,659,499, into 966,247 shares of common stock, (ii) converted 54,300 shares of
Preferred Stock, Series B, with a carrying value of $2,170,425, into 570,150
shares of common stock, (iii) converted $4,410,300 of notes payable to EMIIC
into 820,521 shares of common stock, and (iv) reduced the payable to
ex-licensor by $79,993 (non-cash) by receiving a discount for paying other
amounts due early, which totaled approximately $280,052 at that time. Cash at
December 31, 1996 was $2,559,989, of which $1,500,000 is pledged as collateral
for a bank loan of an equal amount.


ITEM 7.           FINANCIAL STATEMENTS.

         The information required by this item is included in Pages F-1 through
F-17 attached hereto and incorporated herein by reference.


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.

         The information required by this item is incorporated herein by
reference from Issuer's Definitive Proxy Statement to be filed with the
Commission pursuant to Regulation 14A in connection with the Issuer's 1997
Annual Meeting of Stockholders (the "Proxy Statement") under the headings
"Proposal 1--Election of Directors," "Compliance with Section 16(a) of the
Securities Exchange Act of 1934" and "Additional Information--Management."


ITEM 10.          EXECUTIVE COMPENSATION.

         The information required by this item is incorporated herein by
reference from Issuer's Proxy Statement under the heading "Executive
Compensation."


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

         The information required by this item is incorporated herein by
reference from Issuer's Proxy Statement under the heading "Security Ownership of
Certain Beneficial Owners and Management."


ITEM 12.          CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

         The information required by this item is incorporated herein by
reference from Issuer's Proxy Statement under the heading "Certain Relationships
and Related Transactions."






                                       27

<PAGE>   28


<TABLE>
<CAPTION>
ITEM 13.          EXHIBITS AND REPORTS ON FORM 8-K.

         <S>      <C>      <C>
         1.       (a)      Financial Statements.   Financial statements are
                           attached to this report as pages F-1 through F-17.
                           The index to the financial statements is found on
                           page F-1.

                  (b)      The Company did not file any reports on Form 8-K
                           during the quarter ended December 31, 1996.

         2.       Exhibits.    See Exhibit Index below.
</TABLE>



                                       28

<PAGE>   29


<TABLE>
<CAPTION>
EXHIBIT
NUMBER                                      DESCRIPTION
------                                      -----------

<S>  <C>      <C>
3.1  (1)      Amended and Restated Certificate of Incorporation.

3.2  (1)      Third Amended and Restated Bylaws, as amended.

4.1           Reference is made to Exhibits 3.1 and 3.2.

4.2  (1)      Specimen Stock Certificate.

10.1 (1)      Letter Agreement dated February 12, 1996 by and among the
              Registrant, Enviromotive, Inc. and International Turbo Center,
              Inc.

10.2 (1)+     1996 Stock Incentive Award Plan of Registrant.

10.3 (1)+     Form of 1996 Director Nonqualified Stock Option Agreement.

10.4 (1)+     Form of 1996 Employee Nonqualified Stock Option Agreement.

10.5 (1)+     1996 Director Stock Plan of Registrant.

10.6 (1)+     Amended and Restated Employment Agreement dated March 21, 1996
              between the Registrant and Allan T. Maguire.

10.7 (1)      Form of Consent to Amendment of Registration Rights Agreement and
              Stock Purchase Warrant and Waiver of Notice entered into between
              the Registrant and each of the holders of Stock Purchase Warrants
              to purchase Series B Preferred Stock.

10.8 (2)      Products Distribution Agreement dated May 1, 1996 by and between
              the Registrant and Sun Electric De Mexico, S.A. De C.V.

10.9 (1)      Transfer Agreement dated October 23, 1995 by and between
              CarbonClean International Ltd. and the Registrant.

10.10 (1)     Transfer Agreement dated October 23, 1995 by and between MIML and
              the Registrant.

10.11 (1)     Amended and Restated Secured Subordinated Promissory Note dated
              December 31, 1995 in the original principal amount of $1,040,000
              payable by the Registrant in favor of The WH & NC Eighteen
              Corporation.

10.12 (1)     Security Agreement dated August 3, 1995 by and between the
              Registrant and The WH & NC Eighteen Corporation.

10.13 (3)     First Amendment to Purchase Agreement dated September 30, 1996, by
              and among the Registrant, International Turbo Center, Inc., and
              Enviromotive, Inc.

10.14         Products Distribution Agreement dated December 1, 1996, by and
              between the Registrant and Snap-On Tools Japan K.K.

10.15         Products Distribution Agreement dated January 6, 1997, by and
              between the Registrant and China Motor-Vehicle Safety Appraisal
              and Inspection Center.
</TABLE>


                                       29

<PAGE>   30
<TABLE>
<CAPTION>

<S>          <C>
10.16 (1)     Products Distribution Agreement dated January 27, 1995 by and
              between the Registrant and DeCarbon Pty. Ltd.

10.17 (1)     Supplier Purchase Agreement dated April 10, 1995 by and between
              the Registrant and Snap-On Incorporated.

10.18 (1)     Exclusive Distribution Agreement dated April 10, 1995 by and
              between the Registrant and Snap-On Incorporated.

10.19 (1)     Products Distribution Agreement dated November 16, 1995 by and
              between the Registrant and Automotive Diagnostics.

10.20 (1)     Letter Agreement dated February 12, 1996 by and among the
              Registrant, Enviromotive, Inc., and International Turbo Center,
              Inc.

10.21 (1)     Standard Industrial Lease--Multi-Tenant dated November 29, 1995
              by and between Northern McFadden Limited Partnership, an
              Illinois limited partnership, and the Registrant.

10.22 (4)     Products Distribution Agreement dated March 28, 1996, by and
              between the Registrant and Cameo (QLD) Pty. Ltd.

10.23 (1)+    Employment Agreement dated October 24, 1994 by and between the
              Registrant and Lee William Melody, as amended as of November 3,
              1995.

10.24 (1)     Employment Agreement dated as of November 20, 1995 by and between
              the Registrant and Michael G. Arkell.

10.25 (1)     Offer Letter to Michael G. Hosch dated December 16, 1992 from the
              Registrant, as amended by Memorandum dated March 21, 1995.

10.26 (1)     Form of Indemnity Agreement entered into with each of the
              Registrant's officers and directors.

10.27 (1)     Amendment to Stockholders Voting Agreement dated March 8, 1996 by
              and among the Registrant, Erin Mills International Investment
              Corporation, George H. David and Robert G. Reese.

10.28 (1)     Purchase Agreement dated February 22, 1996, but made effective as
              of December 31, 1995, by and among the Registrant, International
              Turbo Center, Inc. and Enviromotive, Inc.

10.29 (1)     MotorVac Technologies, Inc. Cash Bonus Plan.

10.30 (1)     Letter Agreement dated April 5, 1996 between the Registrant and
              Shrader Packaging Co., Inc. amending the Exclusive Supply
              Agreement and granting a right of first refusal to the Registrant.

10.31         Settlement Agreement and Mutual Release dated January 6, 1997 by
              and between the Registrant, DeCarbon Australia Pty. Ltd. , Carbon
              Clean Corporation Pty. Ltd., Carbon Tune Pty. Ltd., Chris Somas,
              Roydn Sweet and Jim Litis (collectively "DeCarbon").

10.32         First Amendment and Modification to Settlement Agreement and
              Mutual Release by and between the Registrant and DeCarbon, dated
              January 4, 1997.

10.33         Second Amendment and Modification to Settlement Agreement and
              Mutual Release by and between the Registrant and DeCarbon, dated
              January 7, 1997.

</TABLE>

                                       30

<PAGE>   31


<TABLE>
<CAPTION>

<S>           <C>
10.34         Letter Agreement confirming settlement between the Registrant and
              Lee W. Melody on the one hand and Robert L. Fisher and ETCO on the
              other hand, dated March 14, 1997.

10.35 (3)     Letter Agreement dated September 15, 1996, by and between the
              Registrant and Automotive Diagnostics canceling the Products
              Distribution Agreement dated November 16, 1995, along with the
              Product Labeling Agreement.

10.36 (3)     Products Distribution Agreement dated September 15, 1996, by and
              between the Registrant and Cartek International, Inc.

10.37 (1)     Letter Agreement dated as of December 31, 1995 between the
              Registrant and EMIIC amending certain promissory notes and waiving
              certain defaults thereunder.

10.38         Settlement Agreement and Mutual Release dated March 27, 1997 by
              and between Lee W. Melody and the Registrant on the one side, and
              Robert L. Fisher and ETCO on the other.

11.1          Statement of Calculation of Net Loss Per Share and Supplementary
              Net Loss Per Share.

24.1          Power of Attorney.  Reference is made to page 32.

27.1          Financial Data Schedule in accordance with Article 5 of Regulation
              SX.
</TABLE>

--------------------------
(1)      Previously filed as an exhibit to the Registration Statement on
         Form SB-2, as amended (No. 333-1866-LA), and incorporated herein by
         reference.

(2)      Previously filed as an exhibit to the Form 10-QSB for the period ended
         March 31, 1996, and incorporated herein by reference.

(3)      Previously filed as an exhibit to the Form 10-QSB for the period ended
         September 30, 1996, and incorporated herein by reference.

(4)      Previously filed as an exhibit to the Form 10-QSB for the period ended
         June 30, 1996, and incorporated herein by reference.

+        Indicates a management contract or compensatory plan or arrangement.



                                       31

<PAGE>   32



                                   SIGNATURES


In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
<TABLE>
<CAPTION>
<S>                            <C>   <C>
                                     MotorVac Technologies, Inc.


Date: March 31, 1997          By:    /s/ Lee W. Melody
                                     -------------------------------------------
                                     Lee W. Melody
                                     President and Chief Executive Officer

Date: March 31, 1997          By:    /s/ Allan T. Maguire
                                     -------------------------------------------
                                     Allan T. Maguire
                                     Vice President of Finance, Chief Financial
                                     Officer, Treasurer and Secretary

</TABLE>






                                POWER OF ATTORNEY


         KNOW ALL MEN BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Lee W. Melody his attorney-in-fact, with
the power of substitution, for him, in any and all capacities, to sign any
amendments to this report, and to file the same, with exhibits thereto and other
documents in connection therewith, with the Securities and Exchange Commission,
hereby ratifying and conforming all that the attorney-in-fact, or his
substitute, may do or cause to be done by virtue hereof.























                                       32

<PAGE>   33
In accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated:

<TABLE>
<CAPTION>

         Signature                          Title                    Date
         ---------                          -----                    ----


<S>                                   <C>                         <C>
/s/ Gerald C. Quinn                Chairman of the Board,        March 27, 1997
------------------------------     Director
    Gerald C. Quinn


/s/ Lee W. Melody                  President and Chief           March 27, 1997
------------------------------     Executive Officer,
    Lee W. Melody                  Director



/s/ Allan T. Maguire               Vice President of Finance,    March 27, 1997
------------------------------     Chief Financial Officer,
    Allan T. Maguire               Treasurer and Secretary,
                                   Director



/s/ Stephen L. Greaves             Director                      March 27, 1997
------------------------------
    Stephen L. Greaves


/s/ James M. Andre                 Director                      March 27, 1997
------------------------------
    James M. Andre


/s/ Robert P. Schaen               Director                      March 27, 1997
------------------------------
    Robert P. Schaen


/s/ George L. Schmutz              Director                      March 27, 1997
------------------------------
    George L. Schmutz


/s/ John I. Leahy                  Director                      March 27, 1997
------------------------------
    John I. Leahy
</TABLE>



















                                       33

<PAGE>   34
                           MOTORVAC TECHNOLOGIES, INC.



                        CONSOLIDATED FINANCIAL STATEMENTS
                    FOR THE YEAR ENDED DECEMBER 31, 1996 AND
                   THE NINE MONTHS ENDED DECEMBER 31, 1995 AND
                          INDEPENDENT AUDITORS' REPORT






























<PAGE>   35



                          INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>



                                                                                    PAGE
                                                                                    ----


<S>                                                                                 <C>
INDEPENDENT AUDITORS' REPORT                                                        F-2

FINANCIAL STATEMENTS:
Consolidated balance sheets as of December 31, 1996 and December 31, 1995           F-3
Consolidated statements of operations for the year ended December 31, 1996
   and the nine months ended December 31, 1995                                      F-4
Consolidated statements of stockholders' equity (deficiency) for the year ended
   December 31, 1996 and the nine months ended December 31, 1995                    F-5
Consolidated statements of cash flows for the year ended December 31, 1996
   and the nine months ended December 31, 1995                                      F-6
Notes to consolidated financial statements                                          F-8

</TABLE>

























                                       F-1


<PAGE>   36



INDEPENDENT AUDITORS' REPORT



To the Board of Directors and Stockholders of
   MotorVac Technologies, Inc.:


We have audited the accompanying consolidated balance sheets of MotorVac
Technologies, Inc. (the "Company") as of December 31, 1996 and 1995, and the
related consolidated statements of operations, stockholders' equity (deficiency)
and cash flows for the year ended December 31, 1996 and the nine months ended
December 31, 1995. 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, such consolidated financial statements present fairly, in all
material respects, the financial position of MotorVac Technologies, Inc. as of
December 31, 1996 and 1995, and the results of their operations and their cash
flows for the year ended December 31, 1996 and nine months ended December 31,
1995, in conformity with generally accepted accounting principles.



DELOITTE & TOUCHE LLP
Costa Mesa, California


February 28, 1997







                                       F-2


<PAGE>   37



                           MOTORVAC TECHNOLOGIES, INC.
                           CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
                                                                                             DECEMBER 31,           DECEMBER 31,
                                                                                                1996                     1995
                                                                                          ----------------        -----------------
                                            ASSETS
CURRENT ASSETS:
<S>                                                                                          <C>                  <C>
   Cash and cash equivalents (Note 6)                                                        $2,559,989           $       5,008
   Accounts receivable, net of allowance for doubtful
   accounts of $14,952 (December 31, 1996) and
   $28,310 (December 31, 1995)                                                                1,220,029                 773,329
   Inventories, net of reserve of $40,000 (December 31, 1996) (Note 3)                        1,165,411               1,109,250
   Other current assets (including deposits with vendors of
   $345,779 at December 31, 1996)                                                               459,465                 166,778
   ------------------------------                                                            ----------             -----------

   Total Current Assets                                                                       5,404,894               2,054,365

PROPERTY AND EQUIPMENT, net (Note 4)                                                            259,651                 288,527
INTANGIBLE ASSETS, net of accumulated amortization of
   $516,983 (December 31, 1996) and $152,095
   (December 31, 1995)   (Note 9)                                                             1,307,460               1,672,348
OTHER ASSETS                                                                                     17,227                  25,000
                                                                                             ----------             -----------
                                                                                             $6,989,232             $ 4,040,240
                                                                                            ===========             ===========



         LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY)
CURRENT LIABILITIES:
   Accounts payable and other current liabilities (Note 5)                                  $   894,612              $1,364,490
   Accrued interest - related parties (Note 10)                                                                         649,901
   Amounts payable to ex-licensor (Note 9)                                                                              219,250
   Short-term note payable to bank (Note 6)                                                   1,500,000
                                                                                             ----------               ----------
   Total Current Liabilities                                                                  2,394,612               2,233,641
AMOUNTS PAYABLE TO EX-LICENSOR (Note 9)                                                                                 219,295
NOTES PAYABLE TO RELATED PARTIES (Note 10)                                                                            5,273,872
COMMITMENTS AND CONTINGENCIES (Note 7)
STOCKHOLDERS' EQUITY (DEFICIENCY) (Notes 1,11 and 12):
   Cumulative Series A preferred stock ($.01 par); 95,295 shares authorized and
     outstanding at December 31, 1995 (preferred liquidation preference
     $4,764,750 at December 31, 1995)                                                                                       953
   Cumulative Series B preferred stock ($.01 par); 55,000 shares
     authorized; 54,300 outstanding at December 31, 1995
     (preferred liquidation preference $2,715,000
     at December 31, 1995)                                                                                                  543
   Common stock, $.01 par value; 10,000,000 shares authorized;
   948,000 and 4,514,918 issued and outstanding at December 31,
   1995 and December 31, 1996, respectively                                                      45,149                   9,480
   Additional paid-in capital                                                                16,523,553               6,995,448
   Accumulated deficit                                                                      (11,974,082)            (10,692,992)
                                                                                             ----------              ----------
Total Stockholders' Equity (Deficiency)                                                       4,594,620              (3,686,568)
                                                                                             ----------              ----------


                                                                                             $6,989,232              $4,040,240
                                                                                             ==========              ==========

</TABLE>





                See notes to consolidated financial statements.

                                       F-3


<PAGE>   38


                          MOTORVAC TECHNOLOGIES, INC.

                     CONSOLIDATED STATEMENTS OF OPERATIONS


<TABLE>
<CAPTION>

                                                                            NINE MONTHS
                                                      YEAR ENDED              ENDED
                                                     DECEMBER 31,          DECEMBER 31,
                                                          1996                1995
                                                    -------------          ------------


<S>                                                 <C>                    <C>
NET SALES (Note 13)                                 $ 8,242,735            $ 3,992,398

COST OF SALES                                         5,026,486              2,480,690

GROSS PROFIT                                          3,216,249              1,511,708

OPERATING EXPENSES (Notes 7 and 9)                    4,338,332              3,194,957
                                                    -----------            -----------

LOSS FROM OPERATIONS                                 (1,122,083)            (1,683,249)

INTEREST EXPENSE (NET) -
   RELATED PARTIES (Note 10)                            157,751                446,309
                                                    -----------            -----------

LOSS BEFORE PROVISION FOR INCOME TAXES               (1,279,834)            (2,129,558)
PROVISION FOR INCOME TAXES (Note 8)                       1,256                    850
                                                    -----------            -----------

NET LOSS                                            $(1,281,090)           $(2,130,408)
                                                    ===========            ===========

NET LOSS PER SHARE AND COMMON
   SHARE EQUIVALENT                                      $(0.31)                $(0.64)
                                                    ===========            ===========

WEIGHTED AVERAGE OUTSTANDING COMMON AND
   COMMON EQUIVALENT SHARES                           4,140,845              3,304,918
                                                    ===========            ===========

SUPPLEMENTARY DATA (Note 1)
  Historical net loss                               $(1,281,090)           $(2,130,408)
  Supplementary reduction in interest expense           132,416                446,309
                                                    -----------            -----------

SUPPLEMENTARY NET LOSS                              $(1,148,674)           $(1,684,099)
                                                    ===========            ===========

SUPPLEMENTARY NET LOSS PER SHARE AND
  COMMON EQUIVALENT SHARES                               $(0.28)                $(0.50)
                                                    ===========            ===========

SUPPLEMENTARY WEIGHTED AVERAGE OUTSTANDING
  COMMON AND COMMON EQUIVALENT SHARES                 4,165,481              3,387,952
                                                    ===========            ===========


</TABLE>



                See notes to consolidated financial statements.



                                       F-4


<PAGE>   39



                           MOTORVAC TECHNOLOGIES, INC.
          CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY)
<TABLE>
<CAPTION>


                                                 SERIES A                 SERIES B
                                             PREFERRED STOCK            PREFERRED STOCK               COMMON STOCK
                                             ---------------            ---------------               ------------

                                            SHARES          AMOUNT       SHARES      AMOUNT        SHARES        AMOUNT
                                            ------          ------       ------      ------        ------        ------



<S>                                          <C>             <C>         <C>          <C>         <C>           <C>
BALANCE, April 1, 1995                       95,295          $953        54,300       $543        948,000       $  9,480

Net loss

Decrease in receivable
 from ex-licensor

Exchange of receivable from
 ex-licensor for an intangible
 asset (Note 9)

                                             ------      --------       -------       ----      ---------       --------
BALANCE, December 31, 1995                   95,295           953        54,300        543        948,000          9,480


Issuance of common stock to
 EMIIC in exchange for debt                                                                       820,521          8,205

Exchange of Series A
 preferred stock for
 common stock                              (95,295)         (953)                                 966,247          9,662

Exchange of Series B
 preferred stock for
 common stock                                                          (54,300)      (543)        570,150          5,702

Issuance of shares on initial
 public offering, net of issuance cost                                                          1,210,000         12,100
Net loss
                                             ------      --------       -------       ----      ---------       --------
BALANCE, December 31, 1996                   --         $  --           --          $   --      4,514,918        $45,149
                                             ======      ========       =======       ====      =========       ========
</TABLE>








<TABLE>
<CAPTION>
                                        ADDITIONAL                            RECEIVABLE
                                         PAID-IN          ACCUMULATED            FROM
                                         CAPITAL            DEFICIT           EX-LICENSOR            TOTAL
                                         -------            -------           -----------            -----



<S>                                     <C>                <C>                <C>                 <C>
BALANCE, April 1, 1995                  $ 6,995,448        ($8,562,584)       ($1,203,814)        ($2,759,974)

Net loss                                                    (2,130,408)                            (2,130,408)

Decrease in receivable
 from ex-licensor                                                                  13,618              13,618

Exchange of receivable from
 ex-licensor for an intangible
 asset (Note 9)                                                                 1,190,196           1,190,196
                                        -----------        -----------         ----------          ----------
BALANCE, December 31, 1995                6,995,448        (10,692,992)                            (3,686,568)


Issuance of common stock to
 EMIIC in exchange for debt              4,402,095                                                  4,410,300

Exchange of Series A
 preferred stock for
 common stock                               (8,709)

Exchange of Series B
 preferred stock for
 common stock                               (5,159)

Issuance of shares on initial
 public offering, net of issuance cost   5,139,878                                                  5,151,978
Net loss                                                    (1,281,090)                            (1,281,090)
                                        -----------        -----------         ----------          ----------
BALANCE, December 31, 1996             $16,523,553        ($11,974,082)        $     --            $4,594,620
                                        ===========        ===========         ==========          ==========
</TABLE>


See Notes to consolidated financial statements.



                                       F-5


<PAGE>   40



                           MOTORVAC TECHNOLOGIES, INC.

                      CONSOLIDATED STATEMENTS OF CASH FLOW



<TABLE>
<CAPTION>

                                                                                                              NINE MONTHS
                                                                                  YEAR ENDED                     ENDED
                                                                                 DECEMBER 31,                 DECEMBER 31,
                                                                                     1996                        1995
                                                                                 ----------------             ------------
<S>                                                                             <C>                           <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
  Net loss                                                                      ($1,281,090)                  ($2,130,408)

  Adjustments to reconcile net loss to net cash used in operating activities:
     Depreciation and amortization                                                  467,080                       123,871
     Loss on disposal of long-term assets                                                                          57,894
     Discounts earned for early payment to ex-licensor                              (79,993)
     Net change in operating assets and liabilities:
        Accounts receivable                                                        (446,700)                     (184,416)
        Inventories                                                                 (56,161)                       35,573
        Other current assets, intangibles and other assets                         (284,914)                      (75,523)
        Interest payable to related parties                                        (649,901)
        Accounts payable and other current liabilities                             (469,878)                      594,137
                                                                                  ----------                    ---------
         Net cash used in operating activities                                   (2,801,557)                   (1,578,872)

CASH FLOW FROM INVESTING ACTIVITY -
   Purchase of equipment                                                            (73,316)                     (116,934)

CASH FLOW FROM FINANCING ACTIVITIES:
   Net proceeds from issuance of common shares                                    5,151,978
   Proceeds from issuance of notes payable to related parties                       680,000                     2,590,000
   Payments of notes payable to related parties                                  (1,543,572)                     (920,000)
   Decrease in receivable from ex-licensor                                                                         13,618
   Payments to ex-licensor                                                         (358,552)
   Proceeds from issuance of notes payable to bank                                1,500,000
                                                                                  ----------                    ---------
         Net cash provided by financing activities                                5,429,854                     1,683,618


NET INCREASE (DECREASE) IN CASH                                                   2,554,981                       (12,188)

CASH AND CASH EQUIVALENTS, beginning of period                                        5,008                        17,196
                                                                                 ----------                      --------
CASH AND CASH EQUIVALENTS, end of period                                         $2,559,989                        $5,008
                                                                                 ==========                      ========


SUPPLEMENTAL DISCLOSURES OF NONCASH
   INFORMATION:
      Interest paid                                                                $930,127                       $22,340
                                                                                 ==========                      ========
      Income taxes paid                                                              $1,256                        $1,650
                                                                                 ==========                      ========

</TABLE>



See notes to consolidated financial statements.


                                       F-6


<PAGE>   41



                           MOTORVAC TECHNOLOGIES, INC.

                CONSOLIDATED STATEMENTS OF CASH FLOW (CONTINUED)


<TABLE>
<CAPTION>

                                                                                                              NINE MONTHS
                                                                                 YEAR ENDED                      ENDED
                                                                                DECEMBER 31,                  DECEMBER 31,
                                                                                   1996                           1995
                                                                              --------------                  --------------




SUPPLEMENTAL DISCLOSURES OF NONCASH
   FINANCING ACTIVITIES:
<S>                                                                           <C>
      Conversion of Series A preferred stock to
         common stock net of issuance costs                                   $4,659,499
                                                                              ==========

      Conversion of Series B preferred stock to
         common stock net of issuance costs                                   $2,170,425
                                                                              ==========


      Conversion of notes payable to related
         parties to common stock                                              $4,410,300
                                                                              ==========
</TABLE>































                                       F-7


<PAGE>   42



                           MOTORVAC TECHNOLOGIES, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                    FOR THE YEAR ENDED DECEMBER 31, 1996 AND
                     THE NINE MONTHS ENDED DECEMBER 31, 1995



1.       GENERAL

         Incorporation - MotorVac Technologies, Inc. (the "Company") was
         incorporated under the general corporation law of the State of Delaware
         on June 19, 1992 as CarbonClean Corporation ("CCC"). On March 12, 1993,
         CCC changed the name of the corporation to MotorVac Technologies, Inc.

         On April 1, 1994, MotorVac International Marketing Ltd. ("MIML") (a
         company under common ownership control) and the Company entered into an
         Asset Transfer Agreement and an Operations Transfer Agreement whereby
         MIML transferred all operations and assets and liabilities to the
         Company. The Company continued the business of MIML from that date
         forward. On November 29, 1995, MIML was dissolved into the Company,
         effective December 31, 1995.

         On June 9, 1994, the Company acquired 100% of the outstanding common
         stock of MIML in exchange for 1,500,000 shares of the Company's common
         stock. The licensing and sublicensing agreements between the Company
         and MIML were replaced by two exclusive license agreements - one
         between the Company and Enviromotive, Inc. ("EMI"), now an ex-licensor,
         and one between MIML and EMI. The new agreements licensed certain
         patents, trademarks and other rights to the Company in the United
         States ("U.S.") and Canada and to MIML outside the U.S. and Canada in
         exchange for a continuing royalty payment. Effective December 31, 1995,
         the Company terminated the exclusive license agreements and purchased
         the patents, trademarks and other rights of EMI (Note 8).

         Line of Business - The Company designs, develops, assembles, markets
         and sells the MotorVac CarbonClean System and proprietary detergent
         primarily to the automotive after-market industry through various
         distribution channels both in the U.S. and Canada under the trade name
         MotorVac, and outside the U.S. and Canada under the trade name
         CarbonClean.

         Fiscal Year - In January 1996, the Company's Board of Directors elected
         to change the Company's year-end for financial reporting purposes to
         December 31, effective December 31, 1995. The Company continues to
         report on a March 31 year-end for income tax purposes.

         Principles of Consolidation - The consolidated financial statements for
         1995 include the accounts of MotorVac Technologies, Inc. and MIML. All
         intercompany accounts and transactions are eliminated in consolidation.

         Stock Split - The Company's Board of Directors and stockholders
         approved a 1-for-.316 reverse stock split of its common stock on
         February 29, 1996. All share and per share amounts included in the
         accompanying consolidated financial statements have been restated to
         reflect the reverse stock split.

         Initial Public Offering - The Company closed an initial public offering
         on May 1, 1996, and the overallotment on June 13, 1996 where the
         Company sold 1,100,000 and 110,000 shares of common stock,
         respectively. Immediately prior to the closing of the initial public
         offering, the holders of the Series A preferred stock and Series B
         preferred stock converted that stock into 966,247 and 570,150 shares of
         common stock, respectively. At the same time, the Erin Mills
         International Investment Corporation ("EMIIC"), a related party,
         converted $4,410,300 of debt payable by the Company into 820,521 shares
         of common stock.



                                       F-8


<PAGE>   43



                           MOTORVAC TECHNOLOGIES, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                    FOR THE YEAR ENDED DECEMBER 31, 1996 AND
               THE NINE MONTHS ENDED DECEMBER 31, 1995 (Continued)



         Supplementary Net Loss - Supplementary net loss for the nine months
         ended December 31, 1995 and the twelve months ended December 31, 1996
         represent the results of operations adjusted to reflect the impact of
         the elimination of interest expense related to the $4,410,300 in debt
         due EMIIC, and The WH & NC Eighteen Corporation ("WH & NC"), an
         affiliate of EMIIC, which was exchanged for common stock immediately
         prior to the consummation of the initial public offering (Note 10).

         Supplementary Net Loss Per Common and Common Equivalent Share -
         Supplementary net loss per common and common equivalent share is
         computed by dividing supplementary net loss by the weighted average
         number of shares of common stock outstanding during the period.
         Weighted average common shares include common stock, options for the
         purchase of stock issued during the most recent 12 months using the
         treasury stock method, and the conversion of all outstanding shares of
         Series A and B preferred stock into shares of common stock, the assumed
         issuance of 820,521 shares of common stock by the Company to effect the
         exchange (using an initial offering price of $5.375 per share) of
         $4,410,300 in borrowings and the issuance of 83,034 shares of common
         stock which would be necessary to generate gross proceeds of $446,309
         of pro forma interest expenses due EMIIC and WH & NC. Pursuant to
         Securities and Exchange Commission Staff Accounting Bulletin Topic 4D,
         stock options granted during the twelve months prior to the date of the
         initial filing of the Company's Form SB-2 Registration Statement have
         been included in the calculation of common equivalent shares using the
         treasury stock method, if they were outstanding as of the beginning of
         the period, for the nine months ended December 31, 1995.


2.       SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

         Revenue Recognition - The Company recognizes revenue when products are
         shipped.

         Concentration of Credit Risk - The Company's revenues are generated
         primarily from credit sales. The Company performs ongoing credit
         evaluations of its customers and maintains reserves for potential
         credit losses. The Company does not require collateral for its
         receivables.

         Significant Supplier - The Company currently relies on a supplier as a
         sole source of the Company's gasoline and diesel engine detergents
         under the terms of an exclusive supply contract. The Company considers
         its detergents to be a critical proprietary asset. The loss of the
         supplier of the proprietary product or an inability to obtain detergent
         from the supplier for any significant period of time could have a
         material adverse effect on results of operations.

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

         Inventories  - Inventories are stated at the lower of cost, determined
         by the first-in, first-out (FIFO) method, or market.





                                       F-9


<PAGE>   44



                           MOTORVAC TECHNOLOGIES, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                    FOR THE YEAR ENDED DECEMBER 31, 1996 AND
               THE NINE MONTHS ENDED DECEMBER 31, 1995 (Continued)




         Depreciation and Amortization - Depreciation and amortization are
         provided using the straight-line method, over the following estimated
         useful lives:
<TABLE>
<S>                                                                    <C>
                  Computer equipment and software                      5 years
                  Machinery and equipment                              5 years
                  Furniture and fixtures                               5 years
                  Leasehold improvements             Lesser of life of lease or 5 years
</TABLE>

         Intangible Assets - Intangible assets, consisting of organization costs
         and a covenant not-to-compete, are stated at cost and amortized using
         the straight-line method over the lesser of five years or the useful
         life of the asset. Effective December 31, 1995, the Company acquired
         certain patents, trademarks and other rights described in Note 8. These
         rights are to be amortized using the straight-line method over five
         years or 3% of net sales, if greater in any year. The recoverability of
         intangibles is measured based on gross profit margin on the sale of
         related products and is evaluated annually.

         Income Taxes - The Company provides for income taxes in accordance with
         Statement of Financial Accounting Standards (SFAS) No. 109. SFAS No.
         109 is an asset and liability approach that requires the recognition of
         deferred tax assets (if realizable) and liabilities for the expected
         future tax consequences of events that have been recognized in the
         Company's financial statements or tax returns. In estimating future tax
         consequences, the Company generally considers all expected future
         events other than enactments of changes in the tax law or rates. In the
         event the future consequences of differences between financial
         reporting bases and the tax bases of the Company's assets and
         liabilities result in a deferred tax asset, SFAS No. 109 requires an
         evaluation of the probability of being able to realize the future
         benefits indicated by such asset. A valuation allowance related to a
         deferred tax asset is recorded when it is more likely than not that
         some portion or all of the deferred tax asset will not be realized.

         Reclassification  - Certain reclassifications have been made to the
         1995 financial statements to conform to the 1996 presentation.


3.       INVENTORIES

         Inventories, which include materials, supplies, labor and manufacturing
         overhead, are summarized as follows:

<TABLE>
<CAPTION>
                                       1996             1995

<S>                               <C>               <C>
Materials and supplies            $   710,174       $   639,914
Work in process                        74,902           100,750
Finished product                      420,335           368,586
Reserve                               (40,000)             --
                                  -----------       -----------

                                  $ 1,165,411       $ 1,109,250
                                  ===========       ===========

</TABLE>



                                      F-10


<PAGE>   45



                           MOTORVAC TECHNOLOGIES, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                    FOR THE YEAR ENDED DECEMBER 31, 1996 AND
               THE NINE MONTHS ENDED DECEMBER 31, 1995 (Continued)



4.       PROPERTY AND EQUIPMENT

         Property and equipment consist of the following:
<TABLE>
<CAPTION>

                                                                                  1996                       1995

<S>                                                                         <C>                        <C>
                  Computer equipment and software                           $   212,872                $   176,136
                  Machinery and equipment                                       145,260                    122,378
                  Furniture and fixtures                                        188,835                    176,591
                  Leasehold improvements                                          2,434                      1,030
                                                                            -----------                -----------
                                                                                549,401                    476,135

                  Less accumulated depreciation and
                  amortization                                                 (289,750)                  (187,608)
                                                                            -----------                -----------
                                                                            $   259,651                 $  288,527
                                                                            ===========                ===========
</TABLE>





5.       ACCOUNTS PAYABLE AND OTHER CURRENT LIABILITIES

         Accounts payable and other current liabilities consist of the
         following:
<TABLE>
<CAPTION>
                                                                                  1996                       1995

<S>                                                                          <C>                        <C>
                  Accounts payable                                           $   632,431                $ 1,045,869
                  Other accrued liabilities                                      262,181                    318,621
                                                                             -----------                -----------
                                                                             $   894,612                $ 1,364,490
                                                                             ===========                ===========
</TABLE>


6.       SHORT-TERM NOTE PAYABLE

         Short-term note payable consists of a note payable to Imperial Bank.
         The note is collateralized by a $1,500,000 certificate of deposit on
         deposit with the bank. Interest is payable monthly at prime (8.25% at
         December 31, 1996). Principal is due June 16, 1997.


7.       COMMITMENTS AND CONTINGENCIES

         Leases - The Company leases an office and manufacturing facility under
         an operating lease.



                                      F-11



<PAGE>   46



                           MOTORVAC TECHNOLOGIES, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                    FOR THE YEAR ENDED DECEMBER 31, 1996 AND
               THE NINE MONTHS ENDED DECEMBER 31, 1995 (Continued)




         Future minimum annual payments on the noncancelable facility lease are
as follows:
<TABLE>
<S>               <C>                                       <C>
                  Year ending December 31:
                           1997                             $ 116,054
                           1998                                10,319
                                                            ---------
                                                            $ 126,373
                                                            =========
</TABLE>



         Under the lease agreement, the Company is required to pay various
         expenses including maintenance, insurance, utility costs and property
         taxes. Rental expense amounted to $109,403 for the year ended December
         31, 1996 and $137,217 for the nine months ended December 31, 1995.

         Employment Contracts - The Company has entered into employment
         contracts with four officers of the Company that provide for minimum
         annual salaries aggregating $466,300 at December 31, 1996. The
         contracts have one-year or multiple-year automatic renewals based on
         the Company's failing to give "Notice of Non-Renewal" sixty (60) days
         before the expiration of such contracts. In the event of termination of
         a contract by the Company without cause, the Company would be required
         to pay continuing salary payments for specified periods in accordance
         with the contracts.

         License Agreements - The Company accepted written notice of termination
         of a licensing agreement under which royalties were paid monthly. For
         the year ended December 31, 1996 and the nine months ended December 31,
         1995, royalties of $1,200 and $18,650, respectively, expensed under
         this agreement.

         The Company has commitments to pay fees under an exclusive agreement to
         license certain technology. The agreement provides for payment of a
         minimum royalty of the greater of $50 per machine sold or $10,000 on
         January 1, May 1 and September 1 of each calendar year through the
         latter of December 31, 1998 or the expiration date of any patent
         related to the technology. For the year ended December 31, 1996 and the
         nine months ended December 31, 1995, royalties of $30,000 and $20,000,
         respectively, have been expensed under such agreement.

         Litigation - As of December 31, 1996, the Company is involved in
         various lawsuits, claims and inquiries arising from transactions
         entered into in the ordinary course of business. While the Company's
         future liability with respect to these matters cannot be predicted with
         certainty, it is the opinion of the management, after consultation with
         outside counsel, that any liability from lawsuits or claims known to
         the Company, whether asserted or unasserted, would not have a material
         adverse effect on the financial position or operations of the Company.
         At December 31, 1996, the Company had a lawsuit outstanding between
         itself and DeCarbon Australia Pty. Ltd., et al. This was settled in the
         Company's favor on January 6, 1997.








                                      F-12


<PAGE>   47



                           MOTORVAC TECHNOLOGIES, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                    FOR THE YEAR ENDED DECEMBER 31, 1996 AND
               THE NINE MONTHS ENDED DECEMBER 31, 1995 (Continued)



8.       INCOME TAXES

         Temporary differences which give rise to deferred income taxes are as
         follows:
<TABLE>
<CAPTION>
                                                                                  1996                      1995

<S>                                                                         <C>                       <C>
                  Net deferred taxes:
                     Accrued or disallowed related party interest           $         -               $    486,232
                     Tax credit carryforwards                                    50,053                     50,053
                     Reserves                                                    55,677                     94,499
                     Capitalized costs                                          295,394                    229,109
                     Net operating losses                                     4,193,720                  3,059,178
                     Other                                                      (65,197)                     9,993
                                                                            -----------               ------------
                                                                              4,529,647                  3,929,064
                     Valuation allowance                                     (4,529,647)                (3,929,064)
                                                                            -----------               ------------

                     Net deferred tax benefit                               $        -                $          -
                                                                            ===========               ============
</TABLE>



         The valuation allowance increased $600,583 and $659,856 during the year
         ended December 31, 1996 and the nine months ended December 31, 1995,
         respectively. The difference between the Company's effective tax rate
         and the federal statutory rate is comprised of the valuation allowance
         on deferred assets.

         As of December 31, 1996, the Company had net operating loss
         carryforwards for federal and state income tax purposes of
         approximately $10,470,070 and $5,690,277, respectively. The federal and
         state net operating loss carryforwards begin expiring in 2007 and 1997,
         respectively. The Company also has research and experimentation credit
         carryforwards for federal and state income tax purposes of
         approximately $37,000 and $13,000, respectively, which begin to expire
         in 2007. Pursuant to Section 382 of the Internal Revenue Code, use of
         the Company's net operating loss and credit carryforwards may be
         limited if the Company experiences a cumulative change in ownership of
         greater than 50% in a moving three-year period. Ownership changes could
         impact the Company's ability to utilize net operating losses and credit
         carryforwards remaining at the ownership change date. The limitation
         will be determined by the fair market value of common stock outstanding
         prior to the ownership change, multiplied by the applicable federal
         rate.


9.       PURCHASE OF INTANGIBLES

         On December 31, 1995, the Company purchased certain intangibles from
         EMI (ex-licensor) in an exchange transaction as described below. Prior
         to December 31, 1995, the Company advanced money to EMI to pay for
         substantially all of the operating expenses and obligations on behalf
         of EMI.


                                      F-13


<PAGE>   48



                           MOTORVAC TECHNOLOGIES, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                    FOR THE YEAR ENDED DECEMBER 31, 1996 AND
               THE NINE MONTHS ENDED DECEMBER 31, 1995 (Continued)




         Additionally, prior to December 31, 1995, the Company had two exclusive
         license agreements with the ex-licensor to utilize certain patents,
         trademarks and other rights in exchange for a royalty of 3% of net
         sales. For the nine months ended December 31, 1995, the Company
         recorded royalties of $119,901 related to this agreement (none during
         the year ended December 31, 1996).

         Effective December 31, 1995, the Company entered into a Purchase
         Agreement with EMI. The agreement provided for the termination of the
         license agreements and the purchase of the patents, trademarks and
         other rights in exchange for the forgiveness of receivables due from
         the ex-licensor, the discharge of accrued royalties owed to the
         ex-licensor, minimum payments of $116,000, payable at $20,000 upon
         signing of the agreement, and $4,000 per month through December 1997,
         and the assumption of an obligation for future payments based on sales
         of a certain product. The Company recorded $1,590,452 for the
         acquisition of these intangible assets, which reflects forgiveness of
         receivables of $1,190,196, discharge of accrued royalties payable of
         $38,289, required future payments of $116,000 and estimated minimum
         payments of $322,545 for the assumption of the obligation for future
         payments. On October 17, 1996, the Company paid $200,059, which
         represented payment in full of all amounts then due to EMI totaling
         $280,052. The Company recorded a gain of $79,993, which is included in
         operating expenses. No amounts are due EMI at December 31, 1996.


10.      RELATED PARTIES TRANSACTIONS

         Notes payable to related parties consist of the following:
<TABLE>
<CAPTION>

                                                                                                        DECEMBER 31,
                                                                                                            1995
                                                                                                         ----------

<S>                                                                                                     <C>
            Notes payable to EMIIC, a major stockholder, interest at prime plus
               2%, collateralized by all the assets of the Company (converted to
               common shares prior to the initial public offering) (Note 11)                             $3,853,872

            Note payable to the WH & NC bearing interest at prime plus 2%,
               collateralized by all the assets of the Company (paid on December
               16, 1996 with proceeds of short-term note payable to
               Imperial Bank)  (Note 6)                                                                   1,420,000
                                                                                                         ----------

                                                                                                         $5,273,872
                                                                                                         ==========
</TABLE>




         For the year ended December 31, 1996 and the nine months ended December
         31, 1995, the Company recorded interest expense due to related parties
         of $280,905 and $446,309, respectively. All accrued interest payable
         due related parties was paid during the year ended December 31, 1996.

                                      F-14


<PAGE>   49



                           MOTORVAC TECHNOLOGIES, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                    FOR THE YEAR ENDED DECEMBER 31, 1996 AND
               THE NINE MONTHS ENDED DECEMBER 31, 1995 (Continued)




11.      PREFERRED STOCK

         Series A Preferred Stock - On June 9, 1994, the stockholders of the
         Company exchanged $4,764,750 of notes payable for 95,295 shares of
         Series A preferred stock. Under the original terms, the Series A
         preferred stock was nonvoting, not convertible into common stock,
         redeemable at the option of the Company upon certain events, and had a
         6% cumulative dividend payable quarterly, if declared.

         Series B Preferred Stock - Under the original terms, the Series B
         preferred stock had a 6% cumulative dividend, payable quarterly, if
         declared, and was convertible at any time at the option of the holder
         or automatically converted upon a public offering into shares of the
         Company's common stock at a conversion price of $5.10 per share.

         The Company revised the terms of the above preferred stock issues as
         follows:

         Series A Preferred Stock - The Company provided a conversion privilege
         to these stockholders to convert to common shares all Series A
         preferred stock (including all accrued dividends thereon) at the actual
         initial public offering price per share.

         In conjunction with the issuance of Series B preferred shares, the
         Company issued warrants to purchase 5,500 shares of Series B preferred
         stock at $50 per share at any time through October 1998. At December
         31, 1996, all the warrants were outstanding and exercisable. No value
         has been ascribed to such warrants.

         Initial Public Offering - The holders of Series A preferred stock and
         Series B preferred stock converted such stock into 966,247 and 570,150
         shares of common stock, respectively, immediately prior to the
         consummation of the initial public offering.


12.      STOCK INCENTIVE AWARD PLAN

         In 1994, the Company adopted the 1994 Stock Incentive Award Plan (the
         1994 Plan). The Company has reserved an aggregate of 126,400 shares of
         common stock for issuance under the Plan. All options were granted at
         fair market value at the date of grant. On February 9, 1996, the
         Company's Board of Directors approved the 1996 Stock Incentive Award
         Plan (the "Incentive Plan") and the 1996 Director Stock Plan (the
         "Director Plan"). These plans provide for the Company to issue options
         to purchase up to 325,000 and 50,000 shares, respectively, of the
         Company's common stock at fair market value on the date of grant. All
         options granted have been granted in accordance with the provisions of
         the 1994 Plan and the Incentive Plan. Provisions of the plans call for
         options to be granted at the estimated fair market value which is
         generally the average of the bid and ask price on the day of the grant.
         As of December 31, 1996, options representing 65,445 shares were
         exercisable. Subsequent to December 31, 1995 but prior to consummation
         of the initial public offering, all options were granted at $5.10,
         which reflected fair market value at that time.




                                      F-15


<PAGE>   50
                           MOTORVAC TECHNOLOGIES, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                    FOR THE YEAR ENDED DECEMBER 31, 1996 AND
               THE NINE MONTHS ENDED DECEMBER 31, 1995 (Continued)



         Stock option activity for the year ended December 31, 1996 and the nine
         months ended December 31, 1995 is as follows:

<TABLE>
<CAPTION>

                                                NUMBER OF       PRICE PER
                                                 SHARES           SHARE
                                                --------        --------

<S>                                              <C>            <C>
             BALANCE, April 1, 1995              106,710        $ 5.10

             Granted                              25,912        $ 5.10

             Options lapsed                      (16,116)       $ 5.10
                                                --------



             BALANCE, December 31, 1995          116,506        $ 5.10

             Granted                             288,594        $ 5.10 to $6.125

             Options lapsed                       (8,660)       $ 5.10
                                                --------

             BALANCE, December 31, 1996          396,440        $ 5.10 to $6.125
                                                ========
</TABLE>



         As discussed in Note 1, the Company continues to account for its
         stock-based awards using the intrinsic value method in accordance with
         Accounting Principles Board Opinion No. 25, Accounting for Stock Issued
         to Employees, and its related interpretations. Accordingly, no
         compensation expense has been recognized in the financial statements
         for employee stock arrangements.

         SFAS No. 123, Accounting for Stock-Based Compensation, requires the
         disclosure of pro forma net income and earnings per share had the
         Company adopted the fair value method as of the beginning of fiscal
         1995. Under SFAS No. 123, the fair value of stock-based awards to
         employees is calculated through the use of option pricing models, even
         though such models were developed to estimate the fair value of freely
         tradable, fully transferable options without vesting restrictions,
         which significantly differ from the Company's stock option awards.
         These models also require subjective assumptions, including future
         stock price volatility and expected time to exercise, which greatly
         affect the calculated values. The Company's calculations were made
         using the Black-Scholes option pricing model with the following
         weighted average assumptions: expected life, 120 months following
         grant; stock volatility, 32% in 1996 and 1995; risk-free interest
         rates, 5.5% in 1996 and 1995; and no dividends during the expected
         term. Forfeitures are recognized as they occur. If the computed fair
         values of the 1995 and 1996 awards had been amortized to expense over
         the vesting period of the awards, pro forma net loss would have been
         $2,143,126 ($0.65 per share) in 1995 and $1,386,513 ($0.33 per share)
         in 1996. However, the impact of outstanding stock options granted prior
         to 1995 has been excluded from the pro forma calculation; accordingly,
         the 1995 and 1996 pro forma adjustments are not indicative of future
         period pro forma adjustments, when the calculation will apply to all
         applicable stock options.

                                      F-16


<PAGE>   51



                           MOTORVAC TECHNOLOGIES, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                    FOR THE YEAR ENDED DECEMBER 31, 1996 AND
               THE NINE MONTHS ENDED DECEMBER 31, 1995 (Continued)




         The weighted average remaining contractual life and weighted average
         exercise price are 8.2 years and $5.42, respectively. The weighted
         average fair value of options granted during the periods ending
         December 31, 1996 and 1995 were $2.83 and $3.07, respectively.


13.      CONCENTRATION OF NET SALES

         Approximately 51% and 45% of the Company's net sales were made to one
         customer during the year ended December 31, 1996 and the nine-month
         period ended December 31, 1995, respectively. A decision by this
         customer to decrease the amount purchased from the Company or to cease
         distributing the Company's products could have a material adverse
         effect on the Company's financial conditions and results of operations.

         The Company sells its products through distributors in the domestic
         (defined as U.S. and Canada) and the international marketplace. For the
         year ended December 31, 1996 and the nine months ended December 31,
         1995, net sales by region were as follows:


<TABLE>
<CAPTION>
                                                                                       YEAR              NINE MONTHS
                                                                                      ENDED                ENDED
                                                                                    DECEMBER 31,         DECEMBER 31,
                                                                                       1996                 1995
                                                                                    ---------            ----------
<S>                                                                                <C>                   <C>
                  North America                                                    $5,870,757            $2,870,560
                  South and Central America                                           292,721               289,909
                  Europe                                                              286,260               119,436
                  Middle East and Africa                                              140,627               106,822
                  Asia                                                              1,652,370               605,671
                                                                                    ---------            ----------
                                                                                   $8,242,735            $3,992,398
                                                                                   ==========            ==========
</TABLE>



14.      FAIR VALUE OF FINANCIAL INSTRUMENTS

         SFAS No. 107, Disclosures About Fair Value of Financial Instruments,
         requires management to disclose the estimated fair value of certain
         assets and liabilities defined by SFAS No. 107 as financial
         instruments.

         Financial instruments are generally defined by SFAS No. 107 as cash,
         evidence of ownership interest in equity, or a contractual obligation
         that both conveys to one entity a right to receive cash or other
         financial instruments from another entity and imposes on the other
         entity the obligation to deliver cash or other financial instruments to
         the first entity. At December 31, 1996, management believes that the
         carrying amounts of cash, accounts receivable, accounts payable and
         other current liabilities, and notes payable to bank approximate fair
         value because of the short maturity of these financial instruments.


                                      F-17



<PAGE>   52
                          MOTORVAC TECHNOLOGIES, INC.

                          EXHIBIT INDEX TO FORM 10-KSB

                      FOR THE YEAR ENDED DECEMBER 31, 1996




3.1  (1)      Amended and Restated Certificate of Incorporation.

3.2  (1)      Third Amended and Restated Bylaws, as amended.

4.1           Reference is made to Exhibits 3.1 and 3.2.

4.2  (1)      Specimen Stock Certificate.

10.1 (1)      Letter Agreement dated February 12, 1996 by and among the
              Registrant, Enviromotive, Inc. and International Turbo Center,
              Inc.

10.2 (1)+     1996 Stock Incentive Award Plan of Registrant.

10.3 (1)+     Form of 1996 Director Nonqualified Stock Option Agreement.

10.4 (1)+     Form of 1996 Employee Nonqualified Stock Option Agreement.

10.5 (1)+     1996 Director Stock Plan of Registrant.

10.6 (1)+     Amended and Restated Employment Agreement dated March 21, 1996
              between the Registrant and Allan T. Maguire.

10.7 (1)      Form of Consent to Amendment of Registration Rights Agreement and
              Stock Purchase Warrant and Waiver of Notice entered into
              between the Registrant and each of the holders of Stock Purchase
              Warrants to purchase Series B Preferred Stock.

10.8 (2)      Products Distribution Agreement dated May 1, 1996 by and between
              the Registrant and Sun Electric De Mexico, S.A. De C.V.

10.9 (1)      Transfer Agreement dated October 23, 1995 by and between
              CarbonClean International Ltd. and the Registrant.

10.10 (1)     Transfer Agreement dated October 23, 1995 by and between MIML and
              the Registrant.

10.11 (1)     Amended and Restated Secured Subordinated Promissory Note dated
              December 31, 1995 in the original principal amount of $1,040,000
              payable by the Registrant in favor of The WH & NC Eighteen
              Corporation.

10.12 (1)     Security Agreement dated August 3, 1995 by and between the
              Registrant and The WH & NC Eighteen Corporation.

10.13 (3)     First Amendment to Purchase Agreement dated September 30, 1996,
              by and among the Registrant, International Turbo Center, Inc.,
              and Enviromotive, Inc.


<PAGE>   53
10.14         Products Distribution Agreement dated December 1, 1996, by and
              between the Registrant and Snap-On Tools Japan K.K.

10.15         Products Distribution Agreement dated January 6, 1997, by and
              between the Registrant and China Motor-Vehicle Safety Appraisal
              and Inspection Center.

10.16 (1)     Products Distribution Agreement dated January 27, 1995 by and
              between the Registrant and DeCarbon Pty. Ltd.

10.17 (1)     Supplier Purchase Agreement dated April 10, 1995 by and between
              the Registrant and Snap-On Incorporated.

10.18 (1)     Exclusive Distribution Agreement dated April 10, 1995 by and
              between the Registrant and Snap-On Incorporated.

10.19 (1)     Products Distribution Agreement dated November 16, 1995 by and
              between the Registrant and Automotive Diagnostics.

10.20 (1)     Letter Agreement dated February 12, 1996 by and among the
              Registrant, Enviromotive, Inc., and International Turbo Center,
              Inc.

10.21 (1)     Standard Industrial Lease--Multi-Tenant dated November 29, 1995
              by and between Northern McFadden Limited Partnership, an Illinois
              limited partnership, and the Registrant.

10.22 (4)     Products Distribution Agreement dated March 28, 1996, by and
              between the Registrant and Cameo (QLD) Pty. Ltd.

10.23 (1)+    Employment Agreement dated October 24, 1994 by and between the
              Registrant and Lee William Melody, as amended as of November 3,
              1995.

10.24 (1)     Employment Agreement dated as of November 20, 1995 by and between
              the Registrant and Michael G. Arkell.

10.25 (1)     Offer Letter to Michael G. Hosch dated December 16, 1992 from the
              Registrant, as amended by Memorandum dated March 21, 1995.

10.26 (1)     Form of Indemnity Agreement entered into with each of the
              Registrant's officers and directors.

10.27 (1)     Amendment to Stockholders Voting Agreement dated March 8, 1996 by
              and among the Registrant, Erin Mills International Investment
              Corporation, George H. David and Robert G. Reese.

10.28 (1)     Purchase Agreement dated February 22, 1996, but made effective as
              of December 31, 1995, by and among the Registrant,
              International Turbo Center, Inc. and Enviromotive, Inc.

10.29 (1)     MotorVac Technologies, Inc. Cash Bonus Plan.

10.30 (1)     Letter Agreement dated April 5, 1996 between the Registrant and
              Shrader Packaging Co., Inc. amending the Exclusive Supply
              Agreement and granting a right of first refusal to the Registrant.

10.31         Settlement Agreement and Mutual Release dated January 6, 1997 by
              and between the Registrant, DeCarbon Australia Pty. Ltd. ,
              Carbon Clean Corporation Pty. Ltd., Carbon Tune Pty. Ltd., Chris
              Somas, Roydn Sweet and Jim Litis (collectively "DeCarbon").

<PAGE>   54
10.32         First Amendment and Modification to Settlement Agreement and
              Mutual Release by and between the Registrant and DeCarbon, dated
              January 4, 1997.

10.33         Second Amendment and Modification to Settlement Agreement and
              Mutual Release by and between the Registrant and DeCarbon, dated
              January 7, 1997.

10.34         Letter Agreement confirming settlement between the Registrant and
              Lee W. Melody on the one hand and Robert L. Fisher and ETCO on
              the other hand, dated March 14, 1997.

10.35 (3)     Letter Agreement dated September 15, 1996, by and between the
              Registrant and Automotive Diagnostics canceling the Products
              Distribution Agreement dated November 16, 1995, along with the
              Product Labeling Agreement.

10.36 (3)     Products Distribution Agreement dated September 15, 1996, by and
              between the Registrant and Cartek International, Inc.

10.37 (1)     Letter Agreement dated as of December 31, 1995 between the
              Registrant and EMIIC amending certain promissory notes and
              waiving certain defaults thereunder.

10.38         Settlement Agreement and Mutual Release dated March 27, 1997 by
              and between Lee W. Melody and the Registrant on the one side, and
              Robert L. Fisher and ETCO on the other.

11.1          Statement of Calculation of Net Loss Per Share and Supplementary
              Net Loss Per Share.

24.1          Power of Attorney.  Reference is made to page 32.

27.1          Financial Data Schedule in accordance with Article 5 of
              Regulation SX.
____________________________________

(1)           Previously filed as an exhibit to the Registration Statement on
              Form SB-2, as amended (No. 333-1866-LA), and incorporated herein
              by reference.

(2)           Previously filed as an exhibit to the Form 10-QSB for the period
              ended March 31, 1996, and incorporated herein by reference.

(3)           Previously filed as an exhibit to the Form 10-QSB for the period
              ended September 30, 1996, and incorporated herein by reference.

(4)           Previously filed as an exhibit to the Form 10-QSB for the period
              ended June 30, 1996, and incorporated herein by reference.

+  Indicates a management contract or compensatory plan or arrangement.