UNITED STATES 
SECURITIES AND EXCHANGE COMMISSION  WASHINGTON,
D.C. 20549


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|Form 10-Q                                                                       
|                                                                                 |                                                                                          |  | 
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|(MARK ONE)                                                                      
|                                                                                 |                                                                                         
|x                                                                                | QUARTERLY REPORT PURSUANT TO
 SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|                                                                                 |                                                                                         
|FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2009                               
|                                                                                 |                                                                                         
|OR                                                                              
|                                                                                 |                                                                                         
|o                                                                                | TRANSITION REPORT UNDER SECTION 13
 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934     
|                                                                                 |                                                                                         
|FOR THE TRANSITION PERIOD FROM __________________
 TO __________________________
|COMMISSION FILE NUMBER: 0-29192                                                 
|                                                                                
|                                                                                 |                                                                                          |  | 
|                                                                                
|PURADYN FILTER TECHNOLOGIES INCORPORATED                                        
|(Name of registrant as specified in its charter)                                

|                                                                                    |  |                                     
|----------------------------------------------------------------------------------- |  | ------------------------------------
|DELAWARE                                                                            |  | 14-1708544                          
|(State or other jurisdiction of incorporation or organization)                      |  | (I.R.S. Employer Identification No.)
|                                                                                    |  |                                     
|2017 HIGH RIDGE ROAD, BOYNTON BEACH, FL                                             |  | 33426                               
|(Address of principal executive offices)                                            |  | (Zip Code)                          
|                                                                                    |  |                                     
|(561)
 547-9499                                                                    
|(Registrants telephone number, including area code)                               
|                                                                                   
|NOT APPLICABLE                                                                     
|(Former name, former address and former fiscal year, if changed since
 last report)

| |  |  | 
| |  |  | 
| |  |  | 

Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.


Yes  x  No o


Indicate by check mark whether the registrant has submitted
electronically and posted on its corporate Web site, if any, every Interactive
Data File required to be submitted and posted pursuant to Rule 405 of
Regulation S-T (§ 232.405 of this chapter) during the preceding 12 (or for such
shorter period that the registrant was required to submit and post such files).


Yes o  No o


Indicate by check mark whether the registrant is a large accelerated
filer, an accelerated filer, a non-accelerated filer, or a smaller reporting
company. See the definitions of large accelerated filer, accelerated filer
and smaller reporting company in Rule 12b-2 of the Exchange Act.

|                                             |   |                            |  
|-------------------------------------------- | - | -------------------------- | -
|Large
 accelerated filer                     | o | Accelerated
 filer         | o
|Non-accelerated
 filer                       | o | Smaller
 reporting company | x
|(Do not
 check if smaller reporting company) |   |                            |  

Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act)


Yes o  No x


Indicated the number of shares outstanding of each of the issuers classes
of common stock, as of the latest practicable date. 42,815,380 shares of common
stock are issued and outstanding as of November 13, 2009.





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TABLE OF CONTENTS

|                                |  |                                                                                                                                |  |          
|------------------------------- |  | ------------------------------------------------------------------------------------------------------------------------------ |  | ---------
|                                |  |                                                                                                                                |  | Page
 No.
|                                |  |                                                                                                                                |  |          
|PART I. - FINANCIAL INFORMATION
|Item 1.                         |  | Financial
 Statements                                                                                                          |  |          
|                                |  | Condensed
 Consolidated Balance Sheet  As of September 30, 2009 (unaudited) and
 December 31, 2008                            |  | 3        
|                                |  | Condensed
 Consolidated Statements of Operations  Three months and nine months ended
 September 30, 2009 and 2008 (unaudited) |  | 4        
|                                |  | Condensed
 Consolidated Statements of Cash Flows  Nine months ended September 30, 2009
 and 2008 (unaudited)                  |  | 5        
|                                |  | Condensed
 Consolidated Statement of Stockholders Deficit  Nine months ended September 30, 2009 (unaudited)                  |  | 6        
|                                |  | Notes to
 Condensed Consolidated Financial Statements                                                                          |  | 7        
|Item 2.                         |  | Managements
 Discussion and Analysis of Financial Condition and Results of Operations.                                        |  | 15       
|Item 3.                         |  | Quantitative
 and Qualitative Disclosures About Market Risk.                                                                   |  | 26       
|Item 4                          |  | Controls
 and Procedures.                                                                                                      |  | 26       
|                                |  |                                                                                                                                |  |          
|PART II - OTHER INFORMATION    
|Item 1.                         |  | Legal
 Proceedings.                                                                                                            |  | 26       
|Item 1A.                        |  | Risk
 Factors.                                                                                                                 |  | 27       
|Item 2.                         |  | Unregistered
 Sales of Equity Securities and Use of Proceeds.                                                                  |  | 27       
|Item 3.                         |  | Defaults
 Upon Senior Securities.                                                                                              |  | 27       
|Item 4.                         |  | Submission
 of Matters to a Vote of Security Holders.                                                                          |  | 27       
|Item 5.                         |  | Other
 Information.                                                                                                            |  | 27       
|Item 6.                         |  | Exhibits.                                                                                                                      |  | 27       

OTHER PERTINENT INFORMATION

Our
web site is www.puradyn.com. The information which appears on our web site is
not part of this report.


When
used in this report, the terms Puradyn, the Company, we, our, and us
refers to Puradyn Filter Technologies Incorporated, a Delaware corporation, and
our subsidiaries.


CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION

Certain
statements in this report contain or may contain forward-looking statements
that are subject to known and unknown risks, uncertainties and other factors
which may cause actual results, performance or achievements to be materially
different from any future results, performance or achievements expressed or implied
by such forward-looking statements. These forward-looking statements were based
on various factors and were derived utilizing numerous assumptions and other
factors that could cause our actual results to differ materially from those in
the forward-looking statements. These factors include, but are not limited to,
our ability to operate as a going concern and to raise sufficient capital to
fund our operations, acceptance of the Companys products, the Companys
dependence on distributors and a few significant customers, risks associated
with international operations and international distribution and other factors.
Most of these factors are difficult to predict accurately and are generally
beyond our control. You should consider the areas of risk described in
connection with any forward-looking statements that may be made herein. Readers
are cautioned not to place undue reliance on these forward-looking statements
and readers should carefully review this report and our Annual Report on Form
10-K for the year ended December 31, 2008 in their entirety, including the
risks described in Part I. Item 1A. Risk Factors. Except for our ongoing
obligations to disclose material information under the Federal securities laws,
we undertake no obligation to release publicly any revisions to any
forward-looking statements, to report events or to report the occurrence of
unanticipated events. These forward-looking statements speak only as of the
date of this report, and you should not rely on these statements without also considering
the risks and uncertainties associated with these statements and our business.

2

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PART I - FINANCIAL INFORMATION

|        |                     
|------- | --------------------
|ITEM 1. | FINANCIAL STATEMENTS

Puradyn Filter Technologies IncorporatedCondensed Consolidated Balance Sheets
As of September 30, 2009 and December 31, 2008

|                                                                                                      |  |                                 |             |                               |   |             |  
|----------------------------------------------------------------------------------------------------- |  | ------------------------------- | ----------- | ----------------------------- | - | ----------- | -
|                                                                                                      |  | September
 30, 2009 (unaudited) |             | December
 31, 2008
 (audited) |  
|Assets                                                                                                |  |                                 |             |                               |   |             |  
|Current assets:                                                                                       |  |                                 |             |                               |   |             |  
|Cash and cash equivalents                                                                             |  | $                               | 96,086      |                               | $ | 116,802     |  
|Accounts receivable, net of allowance for uncollectible accounts of
 $49,227 and $22,970 respectively |  |                                 | 196,035     |                               |   | 182,660     |  
|Inventories                                                                                           |  |                                 | 1,049,193   |                               |   | 1,337,309   |  
|Prepaid expenses and other
 current assets                                                            |  |                                 | 117,978     |                               |   | 184,537     |  
|Total current assets                                                                                  |  |                                 | 1,459,292   |                               |   | 1,821,308   |  
|                                                                                                      |  |                                 |             |                               |   |             |  
|Property and equipment, net                                                                           |  |                                 | 135,561     |                               |   | 122,915     |  
|Deferred financing costs, net                                                                         |  |                                 | 5,033       |                               |   | 8,419       |  
|Other noncurrent assets                                                                               |  |                                 | 40,930      |                               |   | 40,930      |  
|Total Other Assets                                                                                    |  |                                 | 181,524     |                               |   | 194,453     |  
|                                                                                                      |  |                                 |             |                               |   |             |  
|                                                                                                      |  |                                 |             |                               |   |             |  
|Total assets                                                                                          |  | $                               | 1,640,816   |                               | $ | 1,993,572   |  
|                                                                                                      |  |                                 |             |                               |   |             |  
|Liabilities and stockholders deficit                                                                 |  |                                 |             |                               |   |             |  
|Current liabilities:                                                                                  |  |                                 |             |                               |   |             |  
|Accounts payable                                                                                      |  | $                               | 313,117     |                               | $ | 305,645     |  
|Accrued liabilities                                                                                   |  |                                 | 1,244,925   |                               |   | 1,148,536   |  
|Current portion of capital lease obligation                                                           |  |                                 | 2,850       |                               |   | 1,859       |  
|Deferred revenue                                                                                      |  |                                 | 84,806      |                               |   | 120,647     |  
|Total current liabilities                                                                             |  |                                 | 1,645,698   |                               |   | 1,576,687   |  
|                                                                                                      |  |                                 |             |                               |   |             |  
|Capital lease obligation, less current portion                                                        |  |                                 | 2,977       |                               |   | 5,280       |  
|Notes payable to
 stockholder                                                                         |  |                                 | 5,525,414   |                               |   | 6,367,702   |  
|Total Long Term Liabilities                                                                           |  |                                 | 5,528,391   |                               |   | 6,372,982   |  
|Total Liabilities                                                                                     |  |                                 | 7,174,089   |                               |   | 7,949,669   |  
|Commitments and Contingencies                                                                         |  |                                 |            |                               |   |            |  
|Stockholders deficit:                                                                                |  |                                 |             |                               |   |             |  
|Preferred stock, $.001 par value:                                                                     |  |                                 |             |                               |   |             |  
|Authorized shares  500,000                                                                           |  |                                 |             |                               |   |             |  
|None issued and outstanding                                                                           |  |                                 |            |                               |   |            |  
|Common stock, $.001 par value:                                                                        |  |                                 |             |                               |   |             |  
|Authorized shares  50,000,000                                                                        |  |                                 |             |                               |   |             |  
|Issued and outstanding  42,415,380 and 35,838,351 respectively                                       |  |                                 | 42,416      |                               |   | 35,839      |  
|Additional paid-in capital                                                                            |  |                                 | 45,202,893  |                               |   | 43,301,010  |  
|Deferred Compensation                                                                                 |  |                                 |            |                               |   | (118,736    | )
|Notes receivable from stockholders                                                                    |  |                                 | (790,210    | )                             |   | (966,531    | )
|Accumulated deficit                                                                                   |  |                                 | (50,136,898 | )                             |   | (48,469,757 | )
|Accumulated other
 comprehensive (loss)/income                                                        |  |                                 | 148,526     |                               |   | 262,078     |  
|Total stockholders deficit                                                                           |  |                                 | (5,533,273  | )                             |   | (5,956,097  | )
|Total liabilities and
 stockholders deficit                                                          |  | $                               | 1,640,816   |                               | $ | 1,993,572   |  

See accompanying notes to condensed consolidated financial
statements.

3

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Puradyn Filter Technologies IncorporatedCondensed Consolidated Statements of Operations 
For the Three Months and Nine Months Ended September 30, 2009 and 2008
(Unaudited)

|                                            |  |                                    |            |                                   |   |            |   |      |            |   |   |            |  
|------------------------------------------- |  | ---------------------------------- | ---------- | --------------------------------- | - | ---------- | - | ---- | ---------- | - | - | ---------- | -
|                                            |  | Three
 Months Ended
 September 30, |            | Nine
 Months Ended
 September 30, |  
|                                            |  | 2009                               |            | 2008                              |   | 2009       |   | 2008 |           
|                                            |  |                                    |            |                                   |   |            |   |      |            |   |   |            |  
|Net sales                                   |  | $                                  | 398,345    |                                   | $ | 597,398    |   | $    | 1,426,257  |   | $ | 2,152,604  |  
|                                            |  |                                    |            |                                   |   |            |   |      |            |   |   |            |  
|Costs and expenses:                         |  |                                    |            |                                   |   |            |   |      |            |   |   |            |  
|Cost of products sold                       |  |                                    | 429,904    |                                   |   | 538,171    |   |      | 1,407,842  |   |   | 1,805,037  |  
|Salaries and wages                          |  |                                    | 235,839    |                                   |   | 257,746    |   |      | 718,855    |   |   | 764,676    |  
|Selling and administrative                  |  |                                    | 226,721    |                                   |   | 398,002    |   |      | 670,478    |   |   | 881,680    |  
|                                            |  |                                    | 892,464    |                                   |   | 1,193,919  |   |      | 2,797,175  |   |   | 3,451,393  |  
|Loss from operations                        |  |                                    | (494,119   | )                                 |   | (596,521   | ) |      | (1,370,918 | ) |   | (1,298,789 | )
|                                            |  |                                    |            |                                   |   |            |   |      |            |   |   |            |  
|Other income (expense):                     |  |                                    |            |                                   |   |            |   |      |            |   |   |            |  
|Interest income                             |  |                                    | 147        |                                   |   | 824        |   |      | (175,747   | ) |   | 2,153      |  
|Interest expense                            |  |                                    | (39,771    | )                                 |   | (74,596    | ) |      | (120,476   | ) |   | (242,772   | )
|Total other expense, net                    |  |                                    | (39,624    | )                                 |   | (73,772    | ) |      | (296,223   | ) |   | (240,619   | )
|Loss before income taxes                    |  |                                    | (533,743   | )                                 |   | (670,293   | ) |      | (1,667,141 | ) |   | (1,539,408 | )
|Income tax expense                          |  |                                    |           |                                   |   |           |   |      |           |   |   |           |  
|                                            |  |                                    |            |                                   |   |            |   |      |            |   |   |            |  
|Net loss                                    |  | $                                  | (533,743   | )                                 | $ | (670,293   | ) | $    | (1,667,141 | ) | $ | (1,539,408 | )
|                                            |  |                                    |            |                                   |   |            |   |      |            |   |   |            |  
|Basic and diluted loss per
 common share    |  | $                                  | (.01       | )                                 | $ | (.02       | ) | $    | (.04       | ) | $ | (.05       | )
|                                            |  |                                    |            |                                   |   |            |   |      |            |   |   |            |  
|Weighted average common
 shares outstanding |  |                                    | 41,096,539 |                                   |   | 34,525,584 |   |      | 39,050,169 |   |   | 32,349,981 |  

See accompanying notes to condensed consolidated
financial statements.

4

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Puradyn Filter Technologies Incorporated
Condensed Consolidated Statements of Cash Flows
For the Nine Months Ended September 30, 2009 and 2008
(Unaudited)

|                                                                                                     |  |                                |            |      |   |            |  
|---------------------------------------------------------------------------------------------------- |  | ------------------------------ | ---------- | ---- | - | ---------- | -
|                                                                                                     |  | Nine Months EndedSeptember 30, |           
|                                                                                                     |  | 2009                           |            | 2008 |  
|Operating activities                                                                                 |  |                                |            |      |   |            |  
|Net loss                                                                                             |  | $                              | (1,667,141 | )    | $ | (1,539,408 | )
|Adjustments to reconcile net loss to net cash used in operating
 activities:                         |  |                                |            |      |   |            |  
|Depreciation and amortization                                                                        |  |                                | 30,111     |      |   | 49,236     |  
|Provision for bad debts                                                                              |  |                                | 26,257     |      |   | (6,849     | )
|Amortization of deferred financing costs included in interest expense                                |  |                                | 3,386      |      |   | 5,893      |  
|Provision for obsolete and slow moving inventory                                                     |  |                                | 11,461     |      |   | 18,845     |  
|Interest receivable from notes receivable from stockholders                                          |  |                                | 176,321    |      |   |           |  
|Compensation expense on stock-based arrangements with employees, consultants,
 investors and vendors |  |                                | 244,420    |      |   | 35,145     |  
|Compensation expense on stock-based arrangements with investors and
 directors                       |  |                                |           |      |   | 45,000     |  
|Changes in operating assets and liabilities:                                                         |  |                                |            |      |   |            |  
|Accounts receivable                                                                                  |  |                                | (39,632    | )    |   | 122,768    |  
|Inventories                                                                                          |  |                                | 276,655    |      |   | (151,662   | )
|Prepaid expenses and other current assets                                                            |  |                                | 66,559     |      |   | (38,809    | )
|Accounts payable                                                                                     |  |                                | 7,472      |      |   | (380,900   | )
|Accrued liabilities                                                                                  |  |                                | 96,389     |      |   | 131,141    |  
|Deferred revenues                                                                                    |  |                                | (35,841    | )    |   | 2,845      |  
|Net cash used in operating activities                                                                |  |                                | (803,583   | )    |   | (1,706,755 | )
|                                                                                                     |  |                                |            |      |   |            |  
|Investing activities                                                                                 |  |                                |            |      |   |            |  
|Purchases of property and equipment                                                                  |  |                                | (43,199    | )    |   | (23,791    | )
|Net cash used in investing activities                                                                |  |                                | (43,199    | )    |   | (23,791    | )
|                                                                                                     |  |                                |            |      |   |            |  
|Financing activities                                                                                 |  |                                |            |      |   |            |  
|Proceeds from sale of common stock                                                                   |  |                                | 1,682,758  |      |   | 1,720,000  |  
|Proceeds from notes payable to stockholder                                                           |  |                                | 270,712    |      |   |           |  
|Payment of notes payable to stockholder                                                              |  |                                | (1,013,000 | )    |   |           |  
|Payment of capital lease obligations                                                                 |  |                                | (1,312     | )    |   | (3,371     | )
|Net cash provided by financing activities                                                            |  |                                | 939,158    |      |   | 1,716,629  |  
|Effect of exchange rate changes on cash and cash equivalents                                         |  |                                | (113,092   | )    |   | 99,411     |  
|Net increase in cash and cash equivalents                                                            |  |                                | (20,716    | )    |   | 85,494     |  
|                                                                                                     |  |                                |            |      |   |            |  
|Cash and cash equivalents at beginning of period                                                     |  |                                | 116,802    |      |   | 112,270    |  
|                                                                                                     |  |                                |            |      |   |            |  
|Cash and cash equivalents
 at end of period                                                          |  | $                              | 96,086     |      | $ | 197,764    |  
|                                                                                                     |  |                                |            |      |   |            |  
|Supplemental cash flow information                                                                   |  |                                |            |      |   |            |  
|Cash paid for interest                                                                               |  | $                              | 114,951    |      | $ | 251,185    |  
|Noncash investing and financing activities                                                           |  |                                |            |      |   |            |  
|Expense associated with stock issued in private placement                                            |  | $                              | 55,010     |      |   |           |  
|Note Payables converted to stockholders equity                                                      |  | $                              | 100,000    |      | $ | 620,000    |  

See accompanying notes to condensed consolidated financial
statements.

5

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Puradyn Filter Technologies Incorporated 
Consolidated Statements of Changes in Stockholders Deficit
For the Nine Months Ended September 30, 2009 
(Unaudited)

|                                                             |  |              |  |        |                        |  |                              |                    |  |   |          |   |                                       |          |   |   |             |                                                  |   |                               |   |   |            |  
|------------------------------------------------------------ |  | ------------ |  | ------ | ---------------------- |  | ---------------------------- | ------------------ |  | - | -------- | - | ------------------------------------- | -------- | - | - | ----------- | ------------------------------------------------ | - | ----------------------------- | - | - | ---------- | -
|                                                             |  |              |  |        |                        |  |                              |                    |  |   |          |   | Notes
 Receivable
 From
 Stockholders |          |   |   |             | Accumulated
 Other
 Comprehensive
 Income (Loss) |   | Total
 Stockholders
 Deficit |  
|                                                             |  |              |  |        |                        |  | Additional
 Paid-in
 Capital |                    |  |   |          |   |                                       |          |   |   |            
|                                                             |  | Common Stock |  |        | Deferred
 Compensation |  |                              | AccumulatedDeficit |  |   |         
|                                                             |  | Shares       |  | Amount |                        |  |                              |                    |  |   |         
|Balance at December 31, 2008                                 |  | 35,838,351   |  | $      | 35,839                 |  | $                            | 43,301,010         |  | $ | (118,736 | ) | $                                     | (966,531 | ) | $ | (48,469,757 | )                                                | $ | 262,078                       |   | $ | (5,956,097 | )
|Foreign currency translation adjustment                      |  |             |  |        |                       |  |                              |                   |  |   |         |   |                                       |         |   |   |            |                                                  |   | (113,552                      | ) |   | (113,552   | )
|                                                             |  |              |  |        |                        |  |                              |                    |  |   |          |   |                                       |          |   |   |             |                                                  |   |                               |   |   |            |  
|Net loss                                                     |  |             |  |        |                       |  |                              |                   |  |   |         |   |                                       |         |   |   | (1,667,141  | )                                                |   |                              |   |   | (1,667,141 | )
|Total comprehensive loss                                     |  |             |  |        |                       |  |                              |                   |  |   |         |   |                                       |         |   |   |            |                                                  |   |                              |   |   | (1,780,693 | )
|                                                             |  |              |  |        |                        |  |                              |                    |  |   |          |   |                                       |          |   |   |             |                                                  |   |                               |   |   |            |  
|Stock issued for private placement (net)                     |  | 6,559,172    |  |        | 6,559                  |  |                              | 1,776,199          |  |   |         |   |                                       |         |   |   |            |                                                  |   |                              |   |   | 1,782,758  |  
|                                                             |  |              |  |        |                        |  |                              |                    |  |   |          |   |                                       |          |   |   |             |                                                  |   |                               |   |   |            |  
|Reserve accrued interest                                     |  |             |  |        |                       |  |                              |                   |  |   |         |   |                                       | 176,321  |   |   |             |                                                  |   |                               |   |   | 176,321    |  
|Issuance of shares and warrants to vendors                   |  | 17,857       |  |        | 18                     |  |                              | 94,232             |  |   | 118,736  |   |                                       |         |   |   |            |                                                  |   |                              |   |   | 212,986    |  
|Compensation expense associated with unvested option expense |  |             |  |        |                       |  |                              | 31,452             |  |   |         |   |                                       |         |   |   |            |                                                  |   |                              |   |   | 31,452     |  
|                                                             |  |              |  |        |                        |  |                              |                    |  |   |          |   |                                       |          |   |   |             |                                                  |   |                               |   |   |            |  
|Balance at September 30, 2009                                |  | 42,415,380   |  | $      | 42,416                 |  | $                            | 45,202,893         |  | $ |         |   | $                                     | (790,210 | ) | $ | (50,136,898 | )                                                | $ | 148,526                       |   | $ | (5,533,273 | )

See accompanying notes to condensed
consolidated financial statements.

6

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Puradyn Filter Technologies Incorporated
Notes to Condensed Consolidated Financial Statements
September 30, 2009
(Unaudited)

|   |                                                                     
|-- | --------------------------------------------------------------------
|1. | Basis of Presentation and Summary of Significant Accounting Policies

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with accounting principles generally accepted
in the United States for interim information and with the instructions to Form
10-Q and Regulation S-K. Accordingly, they do not include all of the
information and footnotes required by accounting principles generally accepted
in the United States for complete financial statements. In the opinion of
management, all adjustments consisting of a normal and recurring nature
considered necessary for a fair presentation have been included. Operating
results for the three-month and nine-month periods ended September 30, 2009 may
not necessarily be indicative of the results that may be expected for the year
ending December 31, 2009.

For further information, refer to Puradyn Filter Technologies
Incorporateds (the Company) consolidated financial statements and footnotes
thereto included in the Form 10-K for the year ended December 31, 2008.

Going Concern

The Companys financial statements have been prepared on the basis that
it will operate as a going concern, which contemplates the realization of
assets and satisfaction of liabilities in the normal course of business. The
Company has incurred net losses each year since inception and has relied on the
sale of its stock from time to time and loans from third parties and from
related parties to fund its operations.

These recurring operating losses, liabilities exceeding assets and the
reliance on cash inflows from an institutional investor and current stockholder
have led the Companys independent registered accounting firm Webb &
Company, P.A. to include a statement in its audit report relating to the
Companys audited consolidated financial statements for the year ended December
31, 2008 expressing substantial doubt about the Companys ability to continue
as a going concern.

The Company has been addressing the liquidity and working capital
issues and continues to raise additional capital with institutional and private
investors and current stockholders. Cost reductions were and continue to be
implemented by the Company, including acquiring alternative suppliers for raw
materials and manufacturing and reductions in manpower. The Company expects to
continue to see results from these reductions, as well as from other cost
reduction plans through the remainder of 2009. However, due to raw material
price increases and the recent economic environment, the Company has been able
to pass on only a portion of these costs as product price increases and has been
forced to absorb some of these increases. The Company does not expect this
increase will be offset by customer price increases until mid-year 2010.There can be no assurance that the
Company will be able to raise the additional capital needed or reduce the level
of expenditures in order to sustain operations.

Use of Estimates

The preparation of condensed consolidated financial statements in
conformity with accounting principles generally accepted in the United States
requires management to make estimates and assumptions that affect the amounts
reported in the condensed consolidated financial statements and accompanying
notes. Actual results could differ from those estimates.

Basic and Diluted Loss Per Share

FASB ASC 260, requires a dual presentation of basic and diluted
earnings per share. However, because of the Companys net losses, the effect of
outstanding stock options and warrants would be anti-dilutive and, accordingly,
is excluded from the computation of diluted loss per share. The number of such
shares excluded from the computation of loss per share totaled 6,123,880 for
the three-month and nine-month periods ended September 30, 2009 and 5,006,139
and 4,799,606 respectively for the three-month and nine-month periods ended
September 30, 2008.

7

---



Stock Compensation

The Company adopted FASB ASC 718 effective January 1, 2006 using the
modified prospective application method of adoption which requires us to record
compensation cost related to unvested stock awards as of December 31, 2005,
recognizing the amortized grant date fair value in accordance with provisions
of FASB ASC 718 on straight line basis over the service periods of each award.
We have estimated forfeiture rates based on our historical experience. Stock
option compensation expense for the periods ended September 30, 2008 and
September 30, 2009 have been recognized as a component of cost of goods sold
and general and administrative expenses in the accompanying Condensed
Consolidated Financial Statements

Stock options and warrants issued to consultants and other
non-employees as compensation for services provided to the Company are
accounted for based on the fair value of the services provided or the estimated
fair market value of the option or warrant, whichever is more reliably measurable
in accordance with FASB ASC 505 and FASB ASC 718, Accounting for Equity Investments That are Issued to Other Than
Employees for Acquiring or in Conjunction with Selling Goods or Services,
including related amendments and interpretations. The related expense is
recognized over the period the services are provided.

Inventories

Inventories are stated at the lower of cost or market using the first
in, first out (FIFO) method. Production costs, consisting of labor and
overhead, are applied to ending inventories at a rate based on estimated
production capacity and any excess production costs are charged to cost of
products sold. Provisions have been made to reduce excess or obsolete
inventories to their net realizable values.

Inventories consisted of the following at September 30, 2009 and December 31, 2008:

|                    |  |                    |           |                   |   |           |  
|------------------- |  | ------------------ | --------- | ----------------- | - | --------- | -
|                    |  | September 30, 2009 |           | December 31, 2008 |  
|Raw materials       |  | $                  | 999,565   |                   | $ | 946,429   |  
|Finished goods      |  |                    | 139,195   |                   |   | 505,039   |  
|Valuation allowance |  |                    | (89,567   | )                 |   | (114,159  | )
|Net Inventory       |  | $                  | 1,049,193 |                   | $ | 1,337,309 |  

Deferred Financing Costs

The Company capitalizes financing costs and amortizes them using the
straight-line method, which approximates the effective interest method, over
the term of the related debt. Amortization of deferred financing costs is
included in interest expense and totaled $1,007 and $2,105 for the three-months
ended September 30, 2009 and September 30, 2008 and $3,386 and $7,998 for the
nine-months ended September 30, 2009 and 2008, respectively. Accumulated
amortization of deferred financing costs as of September 30, 2009 and 2008 was
$676,117 and $670,626, respectively.

Revenue Recognition

The Company recognizes revenue from product sales to customers,
distributors and resellers when products that do not require further services
or installation by the Company are shipped, when there are no uncertainties
surrounding customer acceptance and when collectibility is reasonably assured
in accordance with FASB ASC 605, Revenue
Recognition in Financial Statements, as amended and interpreted.
Cash received by the Company prior to shipment is recorded as deferred revenue.
Sales are made to customers under terms allowing certain limited rights of
return and other limited product and performance warranties for which provision
has been made in the accompanying condensed consolidated financial statements.

Amounts billed to customers in sales transactions related to shipping
and handling, represent revenues earned for the goods provided and are included
in net sales. Costs of shipping and handling are included in cost of products sold.

8

---



Product Warranty Costs

As required by FASB ASC 460, Guarantors
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others, the Company is including the
following disclosure applicable to its product warranties.

The Company accrues for warranty costs based on the expected material
and labor costs to provide warranty replacement products. The methodology used
in determining the liability for warranty cost is based upon historical
information and experience. The Companys warranty reserve is calculated as the
gross sales multiplied by the historical warranty expense return rate.

The following table shows the changes in the aggregate product warranty
liability for the nine-months ended September 30, 2009:

|                                              |  |   |         |  
|--------------------------------------------- |  | - | ------- | -
|Balance as
 of December 31, 2008              |  | $ | 148,149 |  
|Less:
 Payments made                          |  |   | 5,277   |  
|Change in
 prior period estimate              |  |   | (10,653 | )
|Add:
 Provision for current period warranties |  |   | 54,393  |  
|Balance as
 of September 30, 2009             |  | $ | 197,166 |  

Comprehensive Income

FASB ASC 220, Reporting
Comprehensive Income establishes rules for reporting and displaying
of comprehensive income and its components. Comprehensive income is the sum of
net loss as reported in the consolidated statements of operations and other
comprehensive income transactions. Other comprehensive income transactions that
currently apply to the Company result from changes in exchange rates used in
translating the financial statements of its wholly owned subsidiary, Puradyn
Filter Technologies, Ltd. (Ltd). Comprehensive loss as of September 30, 2009
and 2008 is not shown net of taxes because the Companys deferred tax asset has
been fully offset by a valuation allowance.

Comprehensive loss consisted of the following for the three and nine
months ended September 30, 2009 and 2008:

|                                        |  |                                   |          |                                  |   |          |   |      |            |   |   |            |  
|--------------------------------------- |  | --------------------------------- | -------- | -------------------------------- | - | -------- | - | ---- | ---------- | - | - | ---------- | -
|                                        |  | Three Months Ended
 September 30, |          | Nine Months Ended
 September 30, |  
|                                        |  | 2009                              |          | 2008                             |   | 2009     |   | 2008 |           
|                                        |  |                                   |          |                                  |   |          |   |      |           
|Net loss                                |  | $                                 | (533,743 | )                                | $ | (670,293 | ) | $    | (1,667,141 | ) | $ | (1,539,408 | )
|                                        |  |                                   |          |                                  |   |          |   |      |            |   |   |            |  
|Other comprehensive income:             |  |                                   |          |                                  |   |          |   |      |            |   |   |            |  
|Foreign currency translation adjustment |  |                                   | 36,860   |                                  |   | 90,138   |   |      | (113,552   | ) |   | 92,509     |  
|Total other comprehensive income        |  |                                   | 36,860   |                                  |   | 90,138   |   |      | (113,552   | ) |   | 92,509     |  
|                                        |  |                                   |          |                                  |   |          |   |      |            |   |   |            |  
|Comprehensive loss                      |  | $                                 | (496,883 | )                                | $ | (580,155 | ) | $    | (1,780,693 | ) | $ | (1,446,899 | )

New Accounting
Standards

In June 2009, the FASB issued FASB ASC 860 Accounting for Transfers of
Financial Assets. FASB ASC 860 improves
the relevance, representational faithfulness, and comparability of the
information that a reporting entity provides in its financial statements about
a transfer of financial assets; the effects of a transfer on its financial
position, financial performance, and cash flows; and a transferors continuing
involvement, if any, in transferred financial assets. FASB ASC 860 is effective
as of the beginning of each reporting entitys first annual reporting period
that begins after November 15, 2009, for interim periods within that first
annual reporting period and for interim and annual reporting periods
thereafter. The Company is evaluating the impact the adoption of FASB ASC 860
will have on its financial statements.

9

---



In June 2009, the FASB issued FASB ASC 810 Consolidations.
FASB ASC 810 is effective as of the beginning of each reporting entitys first
annual reporting period that begins after November 15, 2009, for interim
periods within that first annual reporting period, and for interim and annual
reporting periods thereafter. The Company is evaluating the impact the adoption
of FASB ASC 810 will have on its financial statements.

In June 2009, the FASB issued FASB ASC 105 GAAP. The FASB Accounting
Standards Codification (Codification) will be the single source of
authoritative nongovernmental U.S. generally accepted accounting principles.
Rules and interpretive releases of the SEC under authority of federal
securities laws are also sources of authoritative GAAP for SEC registrants. ASC
105 is effective for interim and annual periods ending after September 15,
2009. All existing accounting standards are superseded as described in ASC 105.
All other accounting literature not included in the Codification is
nonauthoritative. The Company has updated references accordingly and it has no
affect on the financial position or results of operation.

In October 2009, the FASB issued Accounting Standards Update (ASU)
Number 2009-13, Revenue Recognition (ASC 605) Multiple-Deliverable Revenue
Arrangements a consensus of the FASB Emerging Issues Task Force. This ASU
establishes a new selling price hierarchy to use when allocating the sales
price of a multiple element arrangement between delivered and undelivered
elements. This ASU is generally expected to result in revenue recognition for
more delivered elements than under current rules and is required to be adopted
prospectively for new or materially modified agreements as of January 1, 2011.
The Company is evaluating the impact of this ASU, but does not expect adoption
to have a material impact on its financial statements.

|   |                                                  
|-- | -------------------------------------------------
|2. | Issues Affecting Liquidity and Managements Plans

The Companys financial statements have been prepared assuming that the
Company will continue as a going concern. The Company has sustained losses
since inception in 1987. Net cash used in operations decreased significantly,
from approximately $1,707,000 during the nine-months ended September 30, 2008
to approximately $804,000 during the same period in 2009, a reduction of
approximately $900,000. Although the Company was able to significantly reduce
their cash used in operations they continue to rely principally on private
equity funding, including the conversion of debt into stock, as well as
stockholder loans to fund its activities to date.

These recurring operating losses, liabilities exceeding assets and the
reliance on cash inflows from an institutional investor and current stockholder
led the Companys independent registered public accounting firm, Webb &
Company, P.A. to include a statement in its audit report relating to the
Companys audited consolidated financial statements for the year ended December
31, 2008 expressing substantial doubt about the Companys ability to continue
as a going concern.

The Company has been addressing the liquidity and working capital
issues and continues to raise additional capital with institutional and private
investors and current stockholders. Cost reductions were and continue to be
implemented by the Company including acquiring alternative suppliers for raw
materials and manufacturing and reductions in manpower. The Company expects to
continue to see results from these reductions, as well as other cost reduction
plans through 2009. However, due to raw material price increases and the recent
economic environment, the Company has been able to pass on only a portion of
these costs as product price increases and has been forced to absorb some of
these increases. The Company expects to be able to offset these costs by
consumer price increases in mid-year 2010.

10

---



The Company continues to address liquidity concerns because of a
decline in revenues in the 2009 periods of approximately 33% from the
comparable periods in 2008. As a result, cash flow from operations is
insufficient to cover our liquidity needs for the immediate future. During
2009, the Company has raised capital from the sale of its common stock in
private transactions and continues to explore financing availability and
options with investment bankers, funds, private sources, members of management
and existing shareholders. The Company has implemented measures to preserve its
ability to operate, including organizational changes, deferral of salaries,
reduction in personnel and renegotiating creditor and collection arrangement.
There can be no assurance that the Company will be able to raise the additional
capital needed or reduce the level of expenditures in order to sustain
operations.

On February 23, 2009, the stockholder amended the original loan
agreements to extend the payback dates to December 31, 2010. The original loan
agreements, dated March 28, 2002 and March 14, 2003, were due and payable on
December 31, 2003 and December 31, 2004. Previously, the stockholder waived the
funding requirement mandating maturity as such time as the Company raised an
additional $7.0 million over the $3.5 million previously raised in the
Companys private placement offering; or until such time as the Company is
operating within sufficient cash flow parameters, as defined, to sustain its
operations; or until a disposition of the Company occurs. As of September 30,
2009, the Company had drawn a total of $5.525 million of the available funds.

Based on an already existing significant orders and shipments, the
Company anticipates sales activity to be stronger in the last quarter of 2009
and cash flows to be a significant improvement over 2008. If additional capital
is not raised, budgeted sales levels are not achieved and/or significant
unanticipated expenditures occur, the Company will have to modify its business
plan, reduce or discontinue some of its operations or seek a buyer for part of
its assets to continue as a going concern through mid-2010. There can be no
assurance that the Company will be able to raise the additional capital needed
to continue as a going concern.

|   |             
|-- | ------------
|3. | Common Stock

On January 8, 2009 the Company extended again the expiration date by
six months for a loan of $123,750, interest bearing at a rate of 5.63% and
collateralized by 300,000 shares of common stock, made to a former employee of
the Company. The new expiration date of the loan was April 8, 2009. As the note
was not paid when due and is currently in default, the Company has exercised
its rights to the collateral and made demand for payment by filing a lawsuit
against the employee on July 7, 2009 for non-payment of three promissory notes,
each dated July 25, 2001

On May 1, 2009 the Company received proceeds of $100,000 from the sale
of 689,655 shares of common stock at a price of $0.145 per share and as part of
the offering, awarded 172,414 warrants to purchase one share of common stock at
an exercise price of $0.50 on or prior to May 1, 2014.

On May 7, 2009, the Company converted $100,000 previously received as a
stockholder loan in January 2009, into 555,555 shares of common stock at a
price of $.18 per share, the closing price of the Companys stock on May 6,
2009. In connection with the issuance of common stock, the Company issued
warrants to purchase 138,889 shares of common stock at a price of $.50, which
expire on May 6, 2014.

On May 8, 2009, the Company modified the exercise price of 100,000
warrants previously issued to Dom Telesco on February 3, 2009 from $1.25 to
$.50. These warrants were previously issued to Mr. Telesco as consideration for
a loan to the Company and the price of the warrants was modified to reflect the
current market price of other investments.

On July 17, 2009, the Company converted $100,000 received as a
stockholder loan into 370,370 shares of common stock at a price of $.27 per
share, the closing price of the Companys stock on July 17, 2009. In connection
with the issuance of common stock, the Company issued warrants to purchase
92,593 shares of common stock at a price of $.50, which expire on July 17,
2014.

On July 17, 2009 the Company received proceeds of $100,000 from the
sale of 370,370 shares of common stock at a price of $0.27 per share and as
part of the offering, awarded 92,593 warrants to purchase one share of common
stock at an exercise price of $0.50 on July 17, 2014.

Between August 1, 2009 and August 12, 2009, the Company received
proceeds of $700,000 from seven investors for the sale of 2,115,752 shares of
common stock at prices of $.31 and $.34 per share and as part of the offering,
awarded 211,575 warrants to purchase common stock at a price of $.50, which
expire in August 2014 (See Note 4).

11

---



On September 15, 2009, the Company received proceeds of $100,000 from
an investor for the sale of 333,333 shares of common stock at a price of $.30
per share and as part of the offering, awarded 33,333 warrants to purchase
common stock at a price of $.50, which expire September 15, 2014.

On November 6, 2009, the Company received proceeds of $100,000 from an
investor for the sale of 400,000 shares of common stock at a price of $.25 per
share and as part of the offering, awarded 40,000 warrants to purchase common
stock at a price of $.50, which expire November 6, 2014.

|   |              
|-- | -------------
|4. | Stock Options

During the three-month and nine-month periods ending September 30, 2009
the Company recognized compensation expense of approximately $102,000 and
$232,000, respectively. During the three-month and nine-month periods ended
September 30, 2008, the Company recognized compensation expense of
approximately $45,000, the majority of which was an expense associated with the
granting of warrants.

On October 1, 2008, the Company agreed to pay to Emerging Markets, LLC,
300,000 shares of commons stock priced at $0.325 plus 175,000 warrants with an
exercise price of $0.75 and 175,000 warrants with an exercise price of $1.25
and an expiration date for all warrants of October 1, 2013. During the
three-month and nine-month periods ending September 30, 2009, approximately
$40,014 and $118,736, respectively, of this expense were amortized.

On August 20, 2009, the Company awarded an investor 64,516 and 147,059
options respectively, to purchase 64,516 and 147,059 common shares,
respectively, at $.31 and $.34 per share, respectively, vesting through August
20, 2011 and expiring August 20, 2014. The Company recorded an offset against
the private offering proceeds, of approximately $55,000 related to this award
(See Note 3).

At September 30, 2009, approximately 4,158,056 warrants with an average
exercise price of $1.02 remain outstanding and were fully vested.

For the three-month and nine-month periods ended September 30, 2009,
the Company recorded stock-based compensation expense of $13,832 and $31,452,
related to unvested employee stock options. For the three-month and nine-month
periods ended September 30, 2008, the Company recorded stock-based compensation
expense of $14,492 and $35,145.

Stock options and warrants issued to consultants and other
non-employees as compensation for services provided to the Company are
accounted for based on the fair value of the services provided or the estimated
fair market value of the option or warrant. whichever is more reliably
measurable in accordance with FASB ASC 505 and FASB ASC 718, Accounting for Equity Investments That are Issued to
Other Than Employees for Acquiring or in Conjunction with Selling Goods or
Services. The related expense is recognized over the period the
services are provided.

A summary of the Companys stock option plans as of September 30, 2009,
and changes during the nine month period then ended is presented below:

|                                            |  |                                       |           |                                  |   |      | 
|------------------------------------------- |  | ------------------------------------- | --------- | -------------------------------- | - | ---- | 
|                                            |  | Nine Months Ended
 September 30, 2009 |          
|                                            |  | Number of Options                     |           | Weighted Average
 Exercise Price |  
|                                            |  |                                       |           |                                  |  
|Options
 outstanding at beginning of period |  |                                       | 1,767,900 |                                  | $ | 2.15 | 
|                                            |  |                                       |           |                                  |   |      | 
|Options
 granted                            |  |                                       | 299,575   |                                  |   | .31  | 
|Options
 cancelled                          |  |                                       | 90,000    |                                  |   | .89  | 
|Options
 expired                            |  |                                       | 11,650    |                                  |   | 1.47 | 
|Options at
 end of period                   |  |                                       | 1,965,825 |                                  | $ | 1.93 | 
|Options
 exercisable at end of period       |  |                                       | 1,067,500 |                                  | $ | 3.33 | 

12

---



A summary of the Companys stock option plans as of September 30, 2009,
and changes during the three month period then ended is presented below:

|                                            |  |                                        |           |                                  |   |      | 
|------------------------------------------- |  | -------------------------------------- | --------- | -------------------------------- | - | ---- | 
|                                            |  | Three Months Ended
 September 30, 2009 |          
|                                            |  | Number of Options                      |           | Weighted Average
 Exercise Price |  
|                                            |  |                                        |           |                                  |   |      | 
|Options
 outstanding at beginning of period |  |                                        | 1,719,250 |                                  | $ | 2.16 | 
|                                            |  |                                        |           |                                  |   |      | 
|Options
 granted                            |  |                                        | 246,575   |                                  |   | .32  | 
|Options
 exercised                          |  |                                        |          |                                  |   |     | 
|Options
 cancelled                          |  |                                        |          |                                  |   |     | 
|Options
 expired                            |  |                                        |          |                                  |   |     | 
|Options at
 end of period                   |  |                                        | 1,965,825 |                                  | $ | 1.93 | 
|Options
 exercisable at end of period       |  |                                        | 1,067,500 |                                  | $ | 3.33 | 

Changes in the Companys unvested options for the nine months ended
September 30, 2009 are summarized as follows:

|                                         |  |                                       |         |                                       |   |     | 
|---------------------------------------- |  | ------------------------------------- | ------- | ------------------------------------- | - | --- | 
|                                         |  | Nine Months Ended
 September 30, 2009 |        
|                                         |  | Number of Options                     |         | Nine Months Ended
 September 30, 2009 |  
|Options
 unvested at beginning of period |  |                                       | 838,750 |                                       | $ | .31 | 
|Options
 granted                         |  |                                       | 299,575 |                                       |   | .31 | 
|Options
 vested                          |  |                                       | 192,500 |                                       |   | .29 | 
|Options
 cancelled                       |  |                                       | 47,500  |                                       |   | .66 | 
|Options
 unvested at end of period       |  |                                       | 898,325 |                                       | $ | .28 | 

Changes in the Companys unvested options for the three months ended
September 30, 2009 are summarized as follows:

|                                         |  |                                        |         |                                  |   |     | 
|---------------------------------------- |  | -------------------------------------- | ------- | -------------------------------- | - | --- | 
|                                         |  | Three Months Ended
 September 30, 2009 |        
|                                         |  | Number of Options                      |         | Weighted Average
 Exercise Price |  
|Options
 unvested at beginning of period |  |                                        | 715,500 |                                  | $ | .26 | 
|Options
 granted                         |  |                                        | 246,575 |                                  |   | .32 | 
|Options
 vested                          |  |                                        | 63,750  |                                  |   | .32 | 
|Options
 cancelled                       |  |                                        |        |                                  |   |    | 
|Options
 unvested at end of period       |  |                                        | 898,325 |                                  | $ | .28 | 

| |                         |  |                     |           |                                                  |  |                                   |  |                     |      |                                 |  |           |  |   |      | 
| | ----------------------- |  | ------------------- | --------- | ------------------------------------------------ |  | --------------------------------- |  | ------------------- | ---- | ------------------------------- |  | --------- |  | - | ---- | 
| |                         |  | Options Outstanding |           | Options Exercisable                              | 
| | Range ofExercise
 Price |  | Number
 Outstanding |           | Remaining
 Average
 Contractual Life
 (In Years) |  | Weighted
 Average
 Exercise Price |  | Number
 Exercisable |      | WeightedAverage
 Exercise Price | 
| | $.21  $1.70            |  |                     | 1,577,825 |                                                  |  | 5.24                              |  | $                   | .50  |                                 |  | 679,500   |  | $ | .79  | 
| | 1.99  3.13             |  |                     | 88,000    |                                                  |  | 2.91                              |  |                     | 2.69 |                                 |  | 88,000    |  |   | 2.69 | 
| | 9.25                    |  |                     | 300,000   |                                                  |  | .75                               |  |                     | 9.25 |                                 |  | 300,000   |  |   | 9.25 | 
| | Totals                  |  |                     | 1,965,825 |                                                  |  | 4.88                              |  | $                   | 1.93 |                                 |  | 1,067,500 |  | $ | 3.33 | 

13

---



A summary of the Companys warrant activity as of September 30, 2009
and changed during the nine and three month periods then ended is presented below:

|                                                 |  |                                        |           |                            |   |      | 
|------------------------------------------------ |  | -------------------------------------- | --------- | -------------------------- | - | ---- | 
|                                                 |  | Nine
 Months Ended
 September 30, 2009 |          
|                                                 |  | Warrants                               |           | Weighted Average
 Exercise |  
|Warrants outstanding at the beginning of
 period |  |                                        | 3,214,072 |                            | $ | 1.25 | 
|Granted                                          |  |                                        | 1,093,983 |                            |   | .97  | 
|Exercised                                        |  |                                        |          |                            |   |      | 
|Expired                                          |  |                                        | 150,000   |                            |   | 2.00 | 
|Warrants outstanding at end of period            |  |                                        | 4,158,055 |                            | $ | 1.02 | 

|                                                 |  |                                         |           |                            |   |      | 
|------------------------------------------------ |  | --------------------------------------- | --------- | -------------------------- | - | ---- | 
|                                                 |  | Three
 Months Ended
 September 30, 2009 |          
|                                                 |  | Warrant                                 |           | Weighted Average
 Exercise |  
|Warrants outstanding at the beginning of
 period |  |                                         | 3,727,961 |                            | $ | 1.11 | 
|Granted                                          |  |                                         | 430,094   |                            |   | .50  | 
|Exercised                                        |  |                                         |          |                            |   |     | 
|Expired                                          |  |                                         |          |                            |   |     | 
|Warrants outstanding at end of period            |  |                                         | 4,158,055 |                            | $ | 1.02 | 

|                         |  |                      |           |                                                  |  |                                   |  |   |      | 
|------------------------ |  | -------------------- | --------- | ------------------------------------------------ |  | --------------------------------- |  | - | ---- | 
|                         |  | Warrants Outstanding |          
|Range of
 Exercise Price |  | Number
 Outstanding  |           | Remaining
 Average
 Contractual Life
 (In Years) |  | Weighted
 Average
 Exercise Price | 
|$.50  $.99              |  |                      | 1,268,983 |                                                  |  | 4.44                              |  | $ | .57  | 
|1.25                     |  |                      | 2,889,072 |                                                  |  | 3.34                              |  |   | 1.25 | 
|Totals                   |  |                      | 4,158,055 |                                                  |  | 3.67                              |  | $ | 1.02 | 



|   |                             
|-- | ----------------------------
|5. | Notes Payable to Stockholder

As of September 30, 2009, the Company had drawn $5.525 of the $6.1
million from the available line-of-credit, which is provided by a stockholder,
and a Board Member, of the Company (see Note 2). Amounts drawn bear interest at
a weighted average between two facilities, one is based on a minimum of 2.75%
or the prime rate minus one-half percent (3.25% as of September 30, 2009) and
the other is based on Libor plus 1.40 (1.65% as of September 30, 2009) payable
monthly and become due and payable on December 31, 2010, or upon a change in
control of the Company or consummation of any other financing over $7.0
million. Previously, this executive officer, director and stockholder waived
this funding requirement. On February 23, 2009, the maturity date of the
stockholder loan was extended from December 31, 2009 to December 31, 2010.

For the three-months ended September 30, 2009 and 2008, the Company
recorded approximately $35,000 and $68,000, respectively; and for the
nine-months ended September 30, 2009 and 2008, the Company recorded
approximately $113,000 and $243,000, respectively, of interest expense related
to the notes payable to stockholder, which is included in interest expense in
the accompanying condensed consolidated statements of operations. During the
three and nine months ended September 30, 2009, the Company was able to pay
down approximately $783,000 and $1,013,000, respectively, of the outstanding
credit line, which was reduced by drawings of approximately $40,000 and
$271,000, respectively, during the same periods.

14

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|   |                              
|-- | -----------------------------
|6. | Commitments and Contingencies

Sales to two customers individually accounted for approximately 28% and
approximately 11% (for a total 39%) of the net sales for the nine-months ended
September 30, 2009

|   |                  
|-- | -----------------
|7. | Subsequent Events

On November 6, 2009, the Company received proceeds of $100,000 from an
investor for the sale of 400,000 shares of common stock at a price of $.25 per
share and as part of the offering, awarded 40,000 warrants to purchase common
stock at a price of $.50, which expire November 6, 2014. The purchaser was an
accredited investor and the transaction was exempt from registration under the
Securities Act of 1933 in reliance on an exemption provided by Section 4(2) of
that act. We did not pay any commissions or finders fees and we are using the
proceeds for general working capital.

On November 12, 2009, the Company granted options to purchase 10,000
shares of common stock at an exercise price of $0.25 per share, vesting on
November 10, 2011 and expiring on September 22, 2014, to a Board of Director.

In accordance with the FASB Accounting Standards Codification 855 Subsequent Events (ASC 855), the Company
has evaluated events and transactions for potential recognition or disclosure
through November 13, 2009 the date the financial statements were issued.

|        |                                                                                       
|------- | --------------------------------------------------------------------------------------
|ITEM 2. | MANAGEMENTS
 DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Cautionary Statements Regarding Forward
Looking Information

Certain statements in this report contain or may contain
forward-looking statements that are subject to known and unknown risks,
uncertainties and other factors which may cause actual results, performance or
achievements to be materially different from any future results, performance or
achievements expressed or implied by such forward-looking statements. These
forward-looking statements were based on various factors and were derived
utilizing numerous assumptions and other factors that could cause the Companys
actual results to differ materially from those in the forward-looking
statements. These factors include, but are not limited to, the Companys
ability to operate as a going concern and to raise sufficient capital to fund
its operations, acceptance of the Companys products, the Companys dependence
on distributors and a few significant customers, risks associated with
international operations and international distribution and other factors. Most
of these factors are difficult to predict accurately and are generally beyond
our control. You should consider the areas of risk described in connection with
any forward-looking statements that may be made herein. Readers are cautioned
not to place undue reliance on these forward-looking statements and readers
should carefully review this report in its entirety. Except for the Companys
ongoing obligations to disclose material information under the Federal
securities laws, we undertake no obligation to release publicly any revisions
to any forward-looking statements, to report events or to report the occurrence
of unanticipated events. These forward-looking statements speak only as of the
date of this report and you should not rely on these statements without also
considering the risks and uncertainties associated with these statements and
our business.

Overview

General

Sales of the Companys products, the puraDYN® bypass oil filtration
system (the Puradyn) and
replaceable filter elements will depend principally upon end user demand for
such products and acceptance of the Companys products by original equipment
manufacturers (OEMs). The oil filtration industry has historically been
competitive and, as is typically the case with innovative products, the
ultimate level of demand for the Companys products is subject to a high degree
of uncertainty. Developing market acceptance for the Companys existing and
proposed products will require substantial marketing and sales efforts and the
expenditure of a significant amount of funds to inform customers of the
perceived benefits and cost advantages of its products. As a result of our
limited resources, to date we have not had adequate funds available to
undertake these necessary marketing efforts.

15

---



Currently no bypass oil filtration system has captured a substantial
share of the estimated recurring $15 billion potential market, based upon
figures supplied by The Rhein Report, a report issued by Rhein Associates Inc,
a diesel engine industry consulting, publishing and market research company. We
believe we are in a unique position to capitalize on the growing acceptance of
bypass oil filtration given that our product and our Company are positioned as,
including, but not limited to:

|  |                                                                                                                                                                                                                                                                                                                                                                                     
|- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | A competitively priced, value-added product based on an advanced,
 patented technology;                                                                                                                                                                                                                                                                                             
| | An alternative solution to the rising costs and national concerns
 over dependence on foreign oil; and                                                                                                                                                                                                                                                                              
| | Providing an operational maintenance solution to end users in
 conjunction with existing and reasonably foreseeable federal environmental
 legislation such as new regulation affecting diesel engines and diesel fuels,
 mandating cleaner diesel engines which first went into effect January 1,
 2007. Additional and more stringent federal legislation is anticipated in
 2010.

We focus our sales strategy on individual sales and distribution
efforts as well as on the development of a strong nationwide distribution
network that will not only sell but also install and support our product. We
currently have approximately 60 domestic and 35 international active
distributors. However there are additional potential distributors that
participate in other programs; such as Freightliner, Western Star, Paccar and
John Deere. While not all of these potential distributors actively promote our
products, all of these dealers have access to our product and have the
capability to sell our product

We continue to focus our sales and marketing efforts to target
industries more open to innovative methods to reduce oil maintenance operating
costs. These industries are searching for new and progressive ways, including
bypass oil filtration, to maintain their equipment.

This strategy includes focus on:

|  |                                                                                                                                                                            
|- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The expansion of existing strategic relationships we have with John
 Deere, Avis and others;                                                                               
| | Continued development and expansion of our distribution network with
 qualified distributors in order to establish a sales- and service-oriented
 nationwide infrastructure
| | Continuing to target existing and new industrial/construction
 equipment fleets and major diesel engine and generator set OEMs                                             
| | Creating customer pull-through, a sustained level of request for
 our product on the OEM level                                                                           
| | Converting
 customer evaluations into sales, both immediate and long term                                                                                                  

While this is a long-term and ongoing commitment, we believe we have
achieved a limited amount of industry acceptance based on recent
accomplishments:

|  |                                                                                                                                                                                                                                                                                         
|- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The November 2009 announcement that Puradyn has established yet
 another relationship in the oil and gas services industry and has received a
 purchase order for approximately 200 Puradynsystems for delivery that month.                                                             
|  |                                                                                                                                                                                                                                                                                         
| | The May 2009 announcement that a major oil drilling company,
 operating land drilling and offshore rigs in over 30 countries, has started a
 program to outfit its drilling platforms with the Puradyn systems. Worldwide equipment fleet of over 2,700
 has been targeted for retrofit.
|  |                                                                                                                                                                                                                                                                                         
| | The March 2009 announcement that the Company has entered into an
 exclusive sales representative agreement for the country of Nigeria and
 adjacent waters, effectively opening a new market for the Puradyn system.                                                                    
|  |                                                                                                                                                                                                                                                                                         
| | 2008 announcement that the Avis Budget Group is installing the Puradyn system as standard on its fleet
 of 300+ heavy duty buses. Avis is the first in the car rental industry to use
 bypass oil filtration.                                                                           
|  |                                                                                                                                                                                                                                                                                         
| | 2008 announcement that John Deere Forestry Division is
 factory-installing Puradyn
 systems in Joensuu, Finland on equipment to be utilized in Russia and other
 countries where high sulfur fuel is used.                                                                              

16

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|  |                                                                                                                                                                                                                                           
|- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 2008 announcement of initial and repeat orders received from the
 Foreign Military Sales program, the government method for selling U.S.
 defense equipment, services, and training, to supply the Puradyn system for the line haul fleet.
|  |                                                                                                                                                                                                                                           
| | U.S. Army contract received to supply the Puradyn system to outfit JERRV vehicles used in combat in
 Iraq and Afghanistan.                                                                                                                

We believe that the renewed interest shown in the technology of bypass
oil filtration as an economic alternative to significantly rising oil prices,
dependence upon foreign oil, with the added benefit of being environmentally
beneficial, will timely and favorably position the Company as a manufacturer of
a cost efficient green product.

We also believe that although industry acceptance will continue to grow
in the remainder of 2009, the impact of the global economy will continue to
affect our revenue levels during the fourth quarter of 2009; however, there can
be no assurance that any of our sales efforts or strategic relationships will
meet managements expectations or result in actual revenues. Even with the
above announcements, business revenue during the first and third quarters of
2009 were below management expectations, due to the lead-time involved in
manufacturing special order requirements.

The Companys sales effort not only involves educating the potential
customer on the benefits of our product, but also allowing the end-user to test
and evaluate the Puradyn system on
its fleet equipment. While set for a specific period of time, typically ranging
from three to twelve months, evaluations are often influenced by a number of
variables including equipment applications downtime or servicing, which may
extend the evaluation period. Consequently, the sales cycle can be relatively
long. Management believes that this evaluation period has shortened as our
products gain wider acceptance, support and usage from well-known end-users and
OEMs.

We believe international sales are especially well suited to our
product given that environmental controls are not as regulated in countries
outside North America. Certain applications representing a higher return on
investment are more prevalent in use outside of North America and end-users consequently
are more receptive to the total maintenance package, including the use of oil
analysis, which the Puradyn
system requires to verify oil condition. In the first nine months of 2009,
total international sales accounted for approximately 22% of the Companys
consolidated net sales as compared to 57% for the first nine months of 2008. As
discussed elsewhere herein, we believe that the decline in international sales
in the current fiscal year is attributable to the global economic uncertainty,
which we estimate have negatively impacted our sales for this year
approximately $1,020,000. Given the fact that our product saves money and
companies are looking to save costs as oil prices increase, we expect the
global economic uncertainly will continue to negatively affect our sales
revenues through part of the last quarter of 2009 and diminish thereafter

Optimizing our limited resources and obtaining sufficient capital will
be key to accomplishing our goals. We will need to remain focused on working
with OEMs, continue developing the independent distributors we have onboard and
maintain growth within the major accounts using our system. To accomplish these
tasks, we will need to obtain capital funding and add appropriate sales and
marketing support to be sure our distributors and customers are served. Subject
to the receipt of additional funding, we will be adding application engineers
and product engineers as we grow our OEM account list. A second application
engineer and product engineer will be needed as we add our third OEM and a new
major distributor. The expansion into the OEM area, even though it is very
demanding due to response time needed to meet their needs, is also rewarding in
the aspect that it provides a steady flow of material requirements for our
manufacturing area giving us more stability in manufacturing personnel, a
stronger supply chain with steady production, economies of scale and the
ability to better utilize our overhead with higher average material turn rates.

As described elsewhere herein, we continue to address our liquidity and
working capital issues as we continue to seek to raise additional capital from
institutional and private investors and current stockholders. Historically, we
have faced difficulties in raising adequate capital and we anticipate that
those efforts will continue given the uncertainties facing the capital markets
in the U.S. We also continue to implement cost reductions in an effort to
improve margins, including securing alternative suppliers for raw materials and
manufacturing and we anticipate these cost reductions will impact our results
of operations during the balance of 2009 and beyond. However, due to raw
material price increases and the recent economic environment, the Company has
been able to pass on only a portion of these costs as product price increases
and has been forced to absorb some of these increases. The Company does not
expect this increase to be offset by customer price increases until mid-year
2010. Although the Companys margins have declined throughout 2009 and the cost
of sales exceeded sales in the three-month period ending September 30, 2009,
this is attributable to the allocation of fixed and variable factory costs over
significantly fewer sales. The Company expects to achieve improved margins
beginning in the fourth quarter of 2009 and restore margins to 2008 levels by
mid-year 2010.

17

---



Going Concern

Our financial statements have been prepared on the basis that we will operate as a
going concern, which contemplates the realization of assets and satisfaction of
liabilities in the normal course of business. We have incurred net losses each
year since inception and have relied on the sale of our stock from time to time
and loans from third parties and from related parties to fund our operations.
These recurring operating losses, liabilities exceeding assets and the reliance
on cash inflows from an institutional investor and current stockholder have led
our independent registered public accounting firm Webb & Company P.A. to
include a statement in its audit report relating to ours audited consolidated
financial statements for the years ended December 31, 2008, December 31, 2007
and December 31, 2006 expressing substantial doubt about our ability to
continue as a going concern. Our ability to continue as a going concern is
dependent upon our ability to obtain the necessary financing to meet our
obligations and repay our liabilities when they become due and to generate
profitable operations in the future. We plan to continue to provide for our
capital requirements through the sale of equity securities, however, we have no
firm commitments from any third party to provide this financing and we cannot
assure you we will be successful in raising working capital as needed. There
are no assurances that we will have sufficient funds to execute our business
plan, pay our obligations as they become due or generate positive operating
results.

Critical Accounting Policies and Estimates

Our discussion and analysis of our financial condition and results of operations
are based upon our consolidated financial statements, which have been prepared
in accordance with accounting principles generally accepted in the United
States. The preparation of these financial statements requires us to make
estimates and judgments that affect the reported amounts of assets,
liabilities, revenues and expenses, and related disclosure of contingent assets
and liabilities. On an on-going basis, we evaluate our estimates, including
those related to product returns, bad debts, inventories, financing operations,
warranty obligations and contingencies and litigation. We base our estimates on
historical experience and on various other assumptions that are believed to be
reasonable under the circumstances, the results of which form the basis for
making judgments about the carrying values of assets and liabilities that are
not readily apparent from other sources. Actual results may differ from these
estimates under different assumptions or conditions.

We believe the following critical accounting policies affect us more significant judgments
and estimates used in the preparation of our consolidated financial statements.

Allowance for doubtful accounts

We maintain allowances for doubtful accounts for estimated losses resulting from the
inability of our customers to make required payments. If the financial
conditions of our customers were to deteriorate, resulting in an impairment of
their ability to make payments, additional allowances may be required. We
provide for potential uncollectible accounts receivable based on customer
specific identification and historical collection experience. If market
conditions decline, actual collection experience may not meet expectations and
may result in decreased cash flows and increased bad debt expense.

The policy for determining past due status is based on the contractual payment terms of
each customer, which is generally net 30 or net 60 days. Once collection
efforts by us and our collection agency are exhausted, the determination for
charging off uncollectible receivables is made.

18

---



Estimation of product warranty cost

We provide for the estimated cost of product warranties at the time revenue is recognized.
While we engage in product quality programs and processes, including actively
monitoring and evaluating the quality of our component suppliers, our warranty
obligation is affected by product failure rates, material usage and service
delivery costs incurred in correcting a product failure. Should actual product
failure rates, material usage or service delivery costs differ from our
estimates, revisions to the estimated warranty liability would be required.

Estimation of inventory obsolescence

We provide for estimated inventory obsolescence or unmarketable inventory in amounts equal
to the difference between the cost of inventory and the estimated market value
based upon assumptions about future demand and market conditions. If actual
market conditions are less favorable than those projected by management,
additional inventory write-downs may be required.

Impairment of long-lived assets

We periodically evaluate the recoverability of the carrying amount of our
long-lived assets under the guidelines of FASB ASC 360, Accounting for the
Impairment or Disposal of Long-Lived Assets. Factors that we consider in making
this evaluation include estimating the undiscounted net cash flows estimated to
result from the assets over their remaining useful life. Should our estimates
of these factors change, our results of operations and financial condition
could be adversely impacted.

Revenue recognition

Revenue is recognized when earned. Our revenue recognition policies are in compliance with
the provisions issued in FASB ASC 605, Revenue Recognition in Financial
Statements. Revenue from product sales to customers, distributors and resellers
is recorded when products that do not require further services or installation
us are shipped, when there are no uncertainties surrounding customer acceptance
and for which liability is reasonably assured. We provide for sales returns
based on an historical analysis of returns. The estimate is updated for current
return activity and the provision is adjusted accordingly. Should actual
returns exceed managements estimates, the provision may require further
adjustment and accordingly, net sales may decrease.

Product returns

Consistent with industry practices, we may accept limited product returns or provide other
credits in the event that a distributor holds excess inventory of our products.
During the three-months ended September 30, 2009 and September 30, 2008,
product returns totaled $9,055 and $16,353, respectively. During the nine-months
ended September 30, 2009 and 2008, product returns totaled $13,165 and $34,268,
respectively. Increased product returns during 2008, over 2007, was primarily
attributable to one customers excess inventory purchases acquired during 2007.
Our sales are made on credit terms, which vary depending on the nature of the
sale. We believe we have established sufficient reserves to accurately reflect
the amount or likelihood of product returns or credits and uncollectible
receivables. However, there can be no assurance that actual returns and
uncollectible receivables will not exceed our reserves.

Results of Operations for the Three-months Ended September 30, 2009
Compared to the Three-months Ended September 30, 2008

The following table sets forth the amount of increase or decrease
represented by certain items reflected in our condensed consolidated statements
of operations in comparing the three-months ended September 30, 2009 to the
three-months ended September 30, 2008:

|                           |  |                                   |      |      |   |        |   |   |      |  
|-------------------------- |  | --------------------------------- | ---- | ---- | - | ------ | - | - | ---- | -
|(in thousands)             |  | Three
 Months Ended September 30, |     
|                           |  | 2009                              |      | 2008 |   | Change |  
|Net sales                  |  | $                                 | 398  |      | $ | 597    |   | $ | (199 | )
|Costs and expenses:        |  |                                   |      |      |   |        |   |   |      |  
|Cost of products sold      |  |                                   | 430  |      |   | 538    |   |   | (108 | )
|Salaries and wages         |  |                                   | 236  |      |   | 258    |   |   | (22  | )
|Selling and administrative |  |                                   | 226  |      |   | 398    |   |   | (172 | )
|Total costs and expenses   |  |                                   | 892  |      |   | 1,194  |   |   | (302 | )
|                          
|Other (expense) income:    |  |                                   |      |      |   |        |   |   |      |  
|Interest income            |  |                                   |     |      |   | 1      |   |   | (1   | )
|Interest expense           |  |                                   | (40  | )    |   | (74    | ) |   | 34   |  
|Total other expense        |  |                                   | (40  | )    |   | (73    | ) |   | (33  | )
|Net loss                   |  | $                                 | (534 | )    | $ | (670   | ) | $ | 136  |  

19

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Net Sales

The
following table outlines details related to sales and sales returns and the
amount of increase or decrease reflected in net sales in comparing the three-months
ended September 30, 2009 to the three-months ended September 30, 2008:

|                             |  |                                  |     |      |   |        |   |   |      |  
|---------------------------- |  | -------------------------------- | --- | ---- | - | ------ | - | - | ---- | -
|(in
 thousands)              |  | Three Months Ended September 30, |    
|                             |  | 2009                             |     | 2008 |   | Change |  
|Gross sales                  |  | $                                | 397 |      | $ | 608    |   | $ | (211 | )
|Sales returns and allowances |  |                                  | 1   |      |   | (11    | ) |   | 12   |  
|Net Sales                    |  |                                  | 398 |      |   | 597    |   |   | (199 | )
|                             |  |                                  |     |      |   |        |   |   |      |  
|US domestic sales            |  |                                  | 273 |      |   | 287    |   |   | (14  | )
|US international sales       |  |                                  | 123 |      |   | 222    |   |   | (99  | )
|UK sales                     |  |                                  | 2   |      |   | 88     |   |   | (86  | )
|Net Sales                    |  | $                                | 398 |      | $ | 597    |   | $ | (199 | )

Net sales decreased by approximately $199,000 or 33% from approximately
$597,000 in 2008 to approximately $398,000 in 2009.

During the three-month period ending September 30, 2009, the cumulative
historical rate of returns sales returns increased from 3.50% to 3.54%
resulting in a credit to sales returns of $1,000. During the three-month period
ending September 30, 2008, the return rate remained at 3.88%. Overall,
historical return rates have continued to decline as improvements have been
made to the products.

Sales to three customers accounted for approximately $65,000, $53,000
and $38,000, or 16%, 13% and 10% (for a total of 39%) respectively of the
consolidated net sales for the three-months ended September 30, 2009. Sales to
three customers individually accounted for approximately 16%, 11% and 10% (for
a total 37%) of net sales for the three-months ended September 30, 2008.

The US international sales decreased approximately $99,000 or 45%, from
approximately $222,000 for the period ending September 30, 2008 to
approximately $123,000 for the period ending September 30, 2009. This decrease
is due almost entirely from the decline in sales from a single customer, which
has been significantly affected by the global economy. Their requirement for
our product still exists due to the use of fuels, which effect the oil
replacement intervals which should produce similar sales as in the past once
the economic conditions improve, although there can be no assurances.

The UK subsidiarys sales decreased by approximately $86,000 (approximately
98%), from approximately $88,000 to approximately $2,000 for the three-month
period ended September 30, 2009 compared to the three-month period ended
September 30, 2008. This decrease is primarily attributable to the decrease in
sales to two customers by approximately $40,000 and $39,000, respectively.
International sales totaled approximately $125,000 (31%) of the net
consolidated sales for the three-month period ended September 30, 2009 as
compared to approximately $310,000 (52%) for the comparable period in 2008.

20

---



Cost of Products Sold

Cost of products sold, as a percentage of sales, increased from
approximately 90% in 2008 to approximately 108% in 2009. The increase in cost
of goods sold as a percentage of sales is attributable to the significant
decrease in sales and allocation of fixed and variable factory costs over fewer
sales. There was an increase of approximately $18,000 attributable to increases
in inventory allowance, which was offset by a decrease in direct and indirect
factory wages and benefits of approximately $22,000, due to layoffs as well as
a freight expense decrease of approximately $13,000, due to lower sales
volumes.

Salaries and Wages

Salaries and wages decreased approximately $22,000, or approximately
9%. Approximately $13,000 of the decrease is due to an Engineering vacancy and
a warehouse reduction while approximately $7,000 of this decrease is the result
of the closing of the UK office closing in 2008. The Company anticipates the
warehouse reduction to remain through the end of 2009, while the Engineering
vacancy is temporarily filled.

Selling and Administrative Expenses

Selling and administrative expenses decreased by approximately
$172,000, or approximately 43%. This decrease is due to a decrease in exchange
rate losses, decreases in UK office expenses, bad debt expenses and
professional fees of approximately $118,000, $32,000, $28,000 and $19,000,
respectively. These decreases were partially offset by an increase in stock
based compensation expenses of approximately $40,000. The Company expects to
continue to see overall decreases in selling and administrative costs through
the remainder of 2009.

Interest Income

Interest income decreased slightly, less than $1,000. This decrease is
due to lower interest rates and earnings on the Companys checking accounts
balances.

Interest Expense

Interest expense decreased by approximately $34,000, or approximately
46%, as a result of a decrease in the interest rate and the outstanding balance
of the stockholder notes payable. The Company pays interest monthly on the
notes payable to stockholder at a weighted average of two facilities, one is
based on a minimum of 2.75% or prime rate less .5% and the other is based on
Libor plus 1.40, with rates reset as often as the Federal Reserve changes
interest rates. The weighted average interest rate of the two notes was 2.51%
as of September 30, 2009 as opposed to 4.77% as of September 30, 2008.

Results of Operations for the Nine-months
Ended September 30, 2009 Compared to the Nine-months Ended September 30, 2008

The following table sets forth the amount of increase or decrease
represented by certain items reflected in the our condensed consolidated
statements of operations in comparing the nine-months ended September 30, 2009
to the nine-months ended September 30, 2008:

21

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|                           |  |                                 |        |      |   |        |   |   |      |  
|-------------------------- |  | ------------------------------- | ------ | ---- | - | ------ | - | - | ---- | -
|(in
 thousands)            |  | Nine Months ended September 30, |       
|                           |  | 2009                            |        | 2008 |   | Change |  
|Net sales                  |  | $                               | 1,426  |      | $ | 2,153  |   | $ | (727 | )
|Costs and
 expenses:       |  |                                 |        |      |   |        |   |   |      |  
|Cost of products sold      |  |                                 | 1,408  |      |   | 1,805  |   |   | (397 | )
|Salaries and wages         |  |                                 | 719    |      |   | 765    |   |   | (46  | )
|Selling and administrative |  |                                 | 670    |      |   | 882    |   |   | (212 | )
|Total costs
 and expenses  |  |                                 | 2,797  |      |   | 3,452  |   |   | (655 | )
|Other income
 (expense):   |  |                                 |        |      |   |        |   |   |      |  
|Interest income            |  |                                 | (176   | )    |   | 2      |   |   | (178 | )
|Interest expense           |  |                                 | (120   | )    |   | (243   | ) |   | 123  |  
|Total other
 expense       |  |                                 | (296   | )    |   | (241   | ) |   | (55  | )
|                           |  |                                 |        |      |   |        |   |   |      |  
|Net loss                   |  | $                               | (1,667 | )    | $ | (1,540 | ) | $ | (237 | )

Net Sales

The following table outlines details related to sales and sales returns
and the amount of increase or decrease reflected in net sales in comparing the
nine-months ended September 30, 2009 to the nine-months ended September 30,
2008:

|                              |  |                                 |       |      |   |        |  |   |      |  
|----------------------------- |  | ------------------------------- | ----- | ---- | - | ------ |  | - | ---- | -
|(in
 thousands)               |  | Nine Months Ended September 30, |      
|                              |  | 2009                            |       | 2008 |   | Change | 
|Gross sales                   |  | $                               | 1,429 |      | $ | 2,134  |  | $ | (705 | )
|Sales
 returns and allowances |  |                                 | (3    | )    |   | 19     |  |   | (22  | )
|Net Sales                     |  |                                 | 1,426 |      |   | 2,153  |  |   | (727 | )
|                             
|US domestic
 sales            |  |                                 | 1,116 |      |   | 918    |  |   | 198  |  
|US
 international sales       |  |                                 | 239   |      |   | 577    |  |   | (338 | )
|UK sales                      |  |                                 | 71    |      |   | 658    |  |   | (587 | )
|                             
|Net Sales                     |  | $                               | 1,426 |      | $ | 2,153  |  | $ | (727 | )

Net sales decreased by approximately $727,000, or 34%, from
approximately $2,153,000 in 2008 to approximately $1,426,000 in 2009.

During the nine-month period ending September 30, 2009, the cumulative
historical rate of sales returns decreased from 3.87% to 3.54% resulting in an
expense of approximately $3,000. During the nine-month period ending September
30, 2008, the return rate decreased from 4.13% to 3.88%, resulting in a credit
to sales return of approximately $19,000. Overall, historical return rates have
continued to decline as improvements have been made to the products.

Sales to two customers individually accounted for approximately 28% and
approximately 11% (for a total 39%) and approximately 20% and approximately 16%
(for a total of 36%) of net sales for the nine-months ended September 30, 2009
and 2008 respectively.

The US domestic sales increased approximately $198,000. An increase in
sales to two customers, of approximately $400,000 and $27,000 respectively,
accounted for the majority of the increase and were offset by decreases in
sales among several customer accounts.

The US international sales decreased approximately $338,000 or 59%,
from approximately $577,000 for the period ending September 30, 2008 to
approximately $239,000 for the period ending September 30, 2009. This decrease
is due entirely from the decline in sales from a single international customer, which
has been significantly affected by the global economy.

22

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The UK subsidiarys
sales decreased by approximately $587,000 or 89%, from approximately $658,000
for the period ending September 30, 2008, to approximately $71,000 for the
period ending September 30, 2009. Sales to two of the UK subsidiarys customers
decreased by approximately $343,000 and $107,000, respectively, from
approximately $430,000 and $147,000, respectively for the period ending
September 30, 2008 to approximately $86,000 and $39,000, respectively for the
period ending September 30, 2009. We believe that the decline in the global
economy has contributed to this significant decline in our international sales
volume.

Cost of Products Sold

Cost of products sold, as a percentage of sales, increased from
approximately 84% in 2008 to approximately 99% in 2009. The increase is
attributable to the significant decrease in sales during the first and third
quarters of 2009 and allocation of fixed and variable factory costs over fewer
sales. Additionally, increases occurred in scrap expense, inventory allowance
and rent expenses of approximately $23,000, $22,000 and $13,000 respectively.
These increases were partially offset by decreases in direct and indirect labor
and freight expenses of approximately $101,000, $9,000, and $63,000
respectively.

Salaries and Wages

Salaries and wages decreased approximately $46,000, or approximately
6%. This decrease is the result of a decrease in salaries and wages of
approximately $20,000 generated in the UK office and approximately $11,000 due
to an Engineering vacancy for the period ending March 31, 2009. This decrease
was partially offset by additional salaries and wages expenses incurred in the
US office. The Company expects to see an overall decrease in expenses for the
year, however the Engineering vacancy has been temporarily filled.

Selling and Administrative Expenses

Selling and administrative expenses decreased by approximately $212,000
or approximately 24% from approximately $882,000 for the nine months ended
September 30, 2008 to approximately $670,000 for the nine months ended
September 30, 2009. This decrease was due to exchange rate gains, decreases in
UK office expenses, professional fees, sales and marketing and patent expenses
of approximately $254,000, $65,000, $42,000, $32,000 and $21,000, respectively.
These decreases were partially offset by increases in stock based compensation
and reserve for bad debt expenses of approximately $116,000 and $13,000
respectively. The Company anticipates expenses to continue to decline during
the remainder of the year.

Interest Income

Interest
Income decreased approximately $178,000. This decrease is attributable to a
reserve established against shareholder loan interest due that was previously
accrued on a principal balance of $756,250 at 5.63% beginning July 25, 2001.
The Company anticipates income to decline slightly for the remainder of the
year.

Interest Expense

Interest expense decreased by approximately $123,000, or approximately
51%, as a result of a decrease in the interest rate outstanding balance of the
stockholder notes payable. The Company pays interest monthly on the notes
payable to stockholder at prime rate less .5%, with rates reset as often as the
Federal Reserve changes interest rates, which was an average of 2.4% for the
nine months ended September 30, 2009 as opposed to an average of 4.8% for the
nine months ended September 30, 2008.

23

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Liquidity and Capital Resources

As of September 30, 2009, the Company had cash and cash equivalents of
approximately $96,000, as compared to approximately $117,000 at December 31,
2008. At September 30, 2009, we had negative working capital of approximately
$186,000 and our current ratio (current assets to current liabilities) was .89
to 1. At December 31, 2008 we had working capital of approximately $245,000 and
our current ratio was 1.16 to 1. The decrease in working capital and current
ratio is primarily attributable to decreases in inventory and prepaid expenses
of approximately $277,000 and $67,000 and increases in accrued liabilities of
approximately $96,000.

We have incurred
net losses each year since inception and at September 30, 2009 we had an
accumulated deficit of $50,136,898. Our net sales are not sufficient to fund
our operating expenses. Historically, we have relied on the sale of our stock
from time to time and loans from third parties and from related parties to fund
our operations. During 2008, we raised a total of $1.727 million in capital
from an institutional investor and current stockholders and during the nine
months ended September 30, 2009 we raised an additional $1.776 million. In
addition, as of September 30, 2009, we owe our CEO $5.53 million for funds he
has advanced to us from time to time for working capital. Interest expense on
this loan was approximately $113,000 for the nine months ended September 30,
2009.

We do not currently have any commitments for capital expenditures.
Currently, without additional equity investments, we expect our operating cash
flows will suffice through mid-year 2010. We are actively seeking additional
equity investments, however, it is possible we will be required to accelerate
our contingent plans to more aggressively reduce spending as described below.
The impact of the global economy has and will continue to affect our revenue
levels for the balance of 2009 and while we anticipate cash flows from 2009
sales activity to be stronger toward the end of the year, based on recent
orders. Our cash flows have significantly improved from 2008 and the capital
funding raised will be able to support operations, meet our working capital
needs and satisfy our obligations as they become due through 2009 and into
2010. In addition, as set forth above, we owe one of our directors $5.53
million which is due on December 31, 2010 or (i) at such time as we have raised
an additional $7 million over the $3.5 million raised in prior offerings, or
(ii) at such time as we are operating within sufficient cash flow parameters to
sustain operations, or (iii) until a disposition of our company, such as an
acquisition or merger, occurs. We do not have sufficient funds to pay this loan
when it becomes due and there are no assurances our director will extend the
due date. We continue to address liquidity concerns because of inadequate
revenue growth. As a result, cash flow from operations is insufficient to cover
our liquidity needs for the next twelve months of operations. We have
implemented measures to preserve our ability to operate, including
organizational changes, a reduction and/or deferral of salaries, reduction in
personnel and renegotiating creditor and collection arrangements. If budgeted
sales levels are not achieved and/or significant unanticipated expenditures
occur, or if we are not able to raise additional investment capital, we may
have to modify our business plan, reduce or discontinue some of our operations
or seek a buyer for part of our assets to continue as a going concern through
2010. There can be no assurance that we will be able to raise additional
capital or that sales will increase to the level required to generate
profitable operations to provide positive cash flow from operations. In that
event, it is possible that stockholders could lose their entire investment in
our company. These factors raise substantial doubt about our ability to
continue as a going concern.

Operating activities

For the nine-month period ended September 30, 2009 net cash used in
operating activities was approximately $804,000, which primarily resulted from
the net loss of approximately $1,667,000. The effect of the net loss on working
capital is offset by a decrease in inventories, shareholder receivables, and
prepaid expenses of approximately $277,000, $176,000 and $67,000 respectively
and increases in stock related compensation expense and accrued liabilities of
approximately $244,000 and $96,000, respectively.

Investing activities

For the nine months ending September 30, 2009 approximately $43,000
cash was used in investing activities, primarily related to computer and
software acquisitions.

24

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Financing activities

Net cash provided by financing activities was approximately $939,000
for the period, due to approximately 1,783,000 of net proceeds received from
private stock transactions issued for cash offset by a net reduction of
approximately $842,000 of the stockholder loan. This loan is a line of credit
made available to us by our President and CEO, who is also a member of our
Board of Directors and principal stockholder of our company. Approximately
$1,000,000 of the stock proceeds were received during the third quarter of
2009, with the remaining transactions occurring during the first five months of
the year, primarily from new investors. The majority of reductions in
stockholder loan occurred in August 2009, as proceeds were received from stock
transactions, and were paid to the credit facility for future borrowing
capacity.

Critical Accounting Policy

New Accounting Standards

In June 2009, the FASB issued ASC 860 Accounting for Transfers of
Financial Assets (SFAS 166). FASB ASC
860 improves the relevance, representational faithfulness, and comparability of
the information that a reporting entity provides in its financial statements
about a transfer of financial assets; the effects of a transfer on its
financial position, financial performance, and cash flows; and a transferors
continuing involvement, if any, in transferred financial assets. FASB ASC 860
is effective as of the beginning of each reporting entitys first annual
reporting period that begins after November 15, 2009, for interim periods
within that first annual reporting period and for interim and annual reporting
periods thereafter. The Company is evaluating the impact the adoption of FASB
ASC 860 will have on its financial statements.

In June 2009, the FASB issued FASB ASC 810 Consolidations.
FASB ASC 810 is effective as of the beginning of each reporting entitys first annual
reporting period that begins after November 15, 2009, for interim periods
within that first annual reporting period, and for interim and annual reporting
periods thereafter. The Company is evaluating the impact the adoption of FASB
ASC 810will have on its financial statements.

In June 2009, the FASB issued FASB ASC 105 GAAP. The FASB Accounting
Standards Codification (Codification) will be the single source of
authoritative nongovernmental U.S. generally accepted accounting principles.
Rules and interpretive releases of the SEC under authority of federal
securities laws are also sources of authoritative GAAP for SEC registrants.
FASB ASC 105 is effective for interim and annual periods ending after September
15, 2009. All existing accounting standards are superseded as described in FASB
ASC 105. All other accounting literature not included in the Codification is
nonauthoritative. The Company has updated references accordingly and it has no
affect on its financial position or results of operation.

In October
2009, the FASB issued Accounting Standards Update (ASU) Number 2009-13,
Revenue Recognition (ASC 605) Multiple-Deliverable Revenue Arrangements a
consensus of the FASB Emerging Issues Task Force. This ASU establishes a new
selling price hierarchy to use when allocating the sales price of a multiple
element arrangement between delivered and undelivered elements. This ASU is
generally expected to result in revenue recognition for more delivered elements
than under current rules and is required to be adopted prospectively for new or
materially modified agreements as of January 1, 2011. The Company is evaluating
the impact of this ASU, but does not expect adoption to have a material impact
on its financial statements.

Impact of Inflation

Inflation has not had a significant impact on our operations. However,
any significant decrease in the price for oil or labor, environmental
compliance costs, and engine replacement costs could adversely impact the end
users cost/benefit analysis as to the use of our products. The impact of
fluctuations in foreign currency has not been significant. The exchange rate,
the Great British pound to the U.S. dollar fluctuated from 1.4479 on December
31, 2008 to 1.5922 on September 30, 2009 as compared to 1.9973 on December 31,
2008 to 1.9489 on September 30, 2008.

25

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Off Balance Sheet Financing

None.

|        |                                                            
|------- | -----------------------------------------------------------
|ITEM 3. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
 MARKET RISK

Not applicable
for a smaller reporting company.

|        |                        
|------- | -----------------------
|ITEM 4. | CONTROLS AND PROCEDURES

Our management, which includes our CEO and our Chief Financial Officer,
have conducted an evaluation of the effectiveness of our disclosure controls
and procedures (as defined in Rule 13a-14(c) promulgated under the Securities
and Exchange Act of 1934, as amended) as of a date (the Evaluation Date) as
of the end of the period covered by this report. Our management does not expect
that our disclosure controls and procedures will prevent all error and all
fraud. A control system, no matter how well designed and operated, can provide
only reasonable, not absolute, assurance that the control systems objectives
will be met. Further, the design of a control system must reflect the fact that
there are resource constraints, and the benefits of controls must be considered
relative to their costs. Because of the inherent limitations in all control
systems, no evaluation of controls can provide absolute assurance that all
control issues and instances of fraud, if any, have been detected. These
inherent limitations include the realities that judgments in decision-making
can be faulty, and that breakdowns can occur because of simple error or mistake.
The design of any system of controls is based in part upon certain assumptions
about the likelihood of future events, and there can be no assurance that any
design will succeed in achieving its stated goals under all potential future
conditions.

As of the
Evaluation Date, our CEO and Chief Financial Officer concluded that we maintain
disclosure controls and procedures that are effective in providing reasonable
assurance that information required to be disclosed in our reports under the
Securities Exchange Act of 1934 is recorded, processed, summarized and reported
within the time periods prescribed by SEC rules and regulations, and that such
information is accumulated and communicated.

There have been no changes in our internal control over financial reporting
identified in connection with the evaluation that occurred during the last
fiscal quarter that has materially affected, or is reasonably likely to
materially affect, our internal control over financial reporting.

Part II. OTHER INFORMATION

|        |                   
|------- | ------------------
|ITEM 1. | LEGAL PROCEEDINGS.

On July 7, 2009 the Company filed a lawsuit in the Circuit Courts in
15th Judicial District in an for Palm Beach County, Florida, styled Puradyn
Filter Technologies, Inc. versus Richard C. Ford case number
502009CA023128XXXXMB. In this action against Mr. Ford, our former Chief
Executive Officer, the Company is alleging non-payment of three promissory
notes totaling $756,250 with interest at a rate of 5.63% per annum since July
25, 2001, the execution date of the notes. As of November 13, 2009 interest on
all three notes amounts to $353,796, for an aggregate amount owing of
$1,110,046. At the time of the execution of these promissory notes, Mr. Ford
was Chief Executive Officer of the Company and drafter of these instruments.
The Company is seeking payment of the promissory notes and accrued interest. On
August 7, 2009, Mr. Ford responded by filing a Motion to Disqualify the
Companys legal counsel, Gary E. Susser and request a staying action until such
time as the Company obtains new legal counsel. As of November 13, 2009, the
hearing for this motion has not been scheduled in court. On September 16, 2009
a hearing on Order to Show Cause occurred. On October 26, 2009 a ruling was
issued, denying the Companys request for custody of the collateral. On
November 5, 2009 Richard Ford filed a motion to stay proceeding pending payment
of documentary stamps and amendment of the complaint and relief from prior
orders relating to production of information pertaining to the sale of stock.
On November 5, 2009, the Company filed a Motion for Rehearing on Plaintiffs
Request for Possession to obtain custody of the collateral. This was heard on
November 12, 2009, and the Company is awaiting a ruling.

26

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On July 13, 2009, Richard C. Ford filed a demand for Arbitration, Case
No. 32 145 00573 09 with the American Arbitration Association, Commercial
Tribunal, claiming that his contract was terminated without cause and
commissions earned were unpaid. This case evolves from the contract between the
Company and R.C.Ford and Associates, dated January 1, 2009, which was
terminated on July 2, 2009. On August 25, 2009, the Company filed a Denial of
Claim, stating that all monies due were paid and contract was terminated. On
October 28, 2009 a preliminary hearing was held. On November 9, 2009, the
Company filed Respondents Factual Bases for Affirmative Defenses. A final
Arbitration Hearing was scheduled on April 21, 2010. On November 11, 2009,
Richard C. Ford withdrew his demand for arbitration.

|         |              
|-------- | -------------
|ITEM 1A. | RISK FACTORS.

Risk factors
describing the major risks to our business can be found under Item 1A, Risk
Factors, in our Annual Report on Form 10-K for the year ended December 31,
2008. There has been no material change in our risk factors from those
previously discussed in the Annual Report on Form 10-K.

|        |                                                             
|------- | ------------------------------------------------------------
|ITEM 2. | UNREGISTERED
 SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

On March 31, 2009 the Company awarded Mark Rodino 17,857 shares of
common stock, valued at $.28 per share for consultancy services on behalf of
the Company. The Company recorded an expense of approximately $5,000 for this
award in March 2009.

On September 15, 2009, the Company received proceeds of $100,000 from
an investor for the sale of 333,333 shares of common stock at a price of $.30
per share and as part of the offering, awarded 33,333 warrants to purchase
common stock at a price of $.50, which expire September 15, 2014. The purchaser
was an accredited investor and the transaction was exempt from registration
under the Securities Act of 1933 in reliance on an exemption provided by
Section 4(2) of that act. We did not pay any commissions or finders fees and
we are using the proceeds for general working capital.

On November 6, 2009, the Company received proceeds of $100,000 from an
investor for the sale of 400,000 shares of common stock at a price of $.25 per
share and as part of the offering, awarded 40,000 warrants to purchase common
stock at a price of $.50, which expire November 6, 2014. The purchaser was an
accredited investor and the transaction was exempt from registration under the
Securities Act of 1933 in reliance on an exemption provided by Section 4(2) of
that act. We did not pay any commissions or finders fees and we are using the
proceeds for general working capital.

|        |                                
|------- | -------------------------------
|ITEM 3. | DEFAULT UPON
 SENIOR SECURITIES

None

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

None

|        |                   
|------- | ------------------
|ITEM 5. | OTHER
 INFORMATION

None

|        |         
|------- | --------
|ITEM 6. | EXHIBITS

|     |                                                                   
|---- | ------------------------------------------------------------------
|31.1 | Rule
 13a-14(a)/15d-14(a) certification of Chief Executive Officer
|31.2 | Rule
 13a-14(a)/15d-14(a) certificate of Chief Financial Officer  
|32.1 | Section 1350
 certification of Chief Executive Officer            
|32.2 | Section 1350
 certification of Chief Financial Officer            

27

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SIGNATURES

Pursuant to
the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.

|                         |                                                          
|------------------------ | ---------------------------------------------------------
|                         | PURADYN
 FILTER TECHNOLOGIES INCORPORATED                
|                         |                                                          
|Date: November
 13, 2009 | By /s/
 Joseph V. Vittoria                               
|                         | Joseph V.
 Vittoria, Chairman and Chief Executive Officer
|                         |                                                          
|Date:
 November 13, 2009 | By /s/ Cindy
 Lea Gimler                                 
|                         | Cindy Lea
 Gimler, Chief Financial Officer               

28

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