Table of Contents





UNITED STATES
SECURITIES AND EXCHANGE COMMISSIONWASHINGTON, D.C. 20549

---

FORM 10-Q

---

(MARK ONE)

|                                                                                 |                                                                                         
|-------------------------------------------------------------------------------- | ----------------------------------------------------------------------------------------
|x                                                                                | QUARTERLY REPORT PURSUANT TO
 SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|                                                                                 |                                                                                         
|FOR THE QUARTERLY PERIOD ENDED MARCH 31, 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

(Exact 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


Indicate
the number of shares outstanding of each of the issuers classes of common
stock, as of the latest practicable date. 39,225,555
shares of common stock are issued and outstanding as of May 13, 2009.





---

TABLE OF CONTENTS

|                                 |  |                                                                                                            |  |         
|-------------------------------- |  | ---------------------------------------------------------------------------------------------------------- |  | --------
|                                 |  |                                                                                                            |  | Page No.
|PART I. - FINANCIAL
 INFORMATION
|Item 1.                          |  | Financial Statements                                                                                       |  |         
|                                 |  | Condensed Consolidated Balance Sheet  As of March 31, 2009
 (unaudited) and December 31, 2008             |  | 3       
|                                 |  | Condensed Consolidated Statements of Operations  Three months ended
 March 31, 2009 and 2008 (unaudited)  |  | 4       
|                                 |  | Condensed Consolidated Statements of Cash Flows  Three months ended
 March 31, 2009 and 2008 (unaudited)  |  | 5       
|                                 |  | Condensed Consolidated Statement of Stockholders Deficit  Three
 months ended March 31, 2009 (unaudited) |  | 6       
|                                 |  | Notes to Condensed Consolidated Financial Statements                                                       |  | 7       
|Item 2.                          |  | Managements Discussion and Analysis of Financial Condition and
 Results of Operations.                    |  | 14      
|Item 3.                          |  | Quantitative and Qualitative Disclosures About Market Risk.                                                |  | 22      
|Item 4T                          |  | Controls and Procedures.                                                                                   |  | 22      
|PART II - OTHER
 INFORMATION    
|Item 1.                          |  | Legal Proceedings.                                                                                         |  | 22      
|Item 1A.                         |  | Risk Factors.                                                                                              |  | 22      
|Item 2.                          |  | Unregistered Sales of Equity Securities and Use of Proceeds.                                               |  | 23      
|Item 3.                          |  | Defaults Upon Senior Securities.                                                                           |  | 23      
|Item 4.                          |  | Submission of Matters to a Vote of Security Holders.                                                       |  | 23      
|Item 5.                          |  | Other Information.                                                                                         |  | 23      
|Item 6.                          |  | Exhibits.                                                                                                  |  | 23      

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

---

Table of Contents

PART I - FINANCIAL INFORMATION

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

Puradyn Filter Technologies Incorporated
Condensed Consolidated Balance Sheets
As of March 31, 2009 and December 31, 2008

|                                                                                                       |  |                              |             |                     |   |             |  
|------------------------------------------------------------------------------------------------------ |  | ---------------------------- | ----------- | ------------------- | - | ----------- | -
|                                                                                                       |  | March
 31, 2009
 (Unaudited) |             | December
 31,
 2008 |  
|Assets                                                                                                 |  |                              |             |                     |   |             |  
|Current assets:                                                                                        |  |                              |             |                     |   |             |  
|Cash and cash equivalents                                                                              |  | $                            | 54,055      |                     | $ | 116,802     |  
|Accounts receivable, net of allowance for
uncollectible accounts of
 $32,584 and $22,970, respectively |  |                              | 153,026     |                     |   | 182,660     |  
|Inventories, net                                                                                       |  |                              | 1,378,387   |                     |   | 1,337,309   |  
|Prepaid expenses and other current assets                                                              |  |                              | 165,875     |                     |   | 184,537     |  
|Total current assets                                                                                   |  |                              | 1,751,343   |                     |   | 1,821,308   |  
|                                                                                                       |  |                              |             |                     |   |             |  
|Property and equipment, net                                                                            |  |                              | 111,112     |                     |   | 122,915     |  
|Other noncurrent assets                                                                                |  |                              | 40,930      |                     |   | 40,930      |  
|Deferred financing costs, net                                                                          |  |                              | 7,046       |                     |   | 8,419       |  
|Total other assets                                                                                     |  |                              | 159,088     |                     |   | 172,264     |  
|                                                                                                       |  |                              |             |                     |   |             |  
|                                                                                                       |  |                              |             |                     |   |             |  
|Total assets                                                                                           |  | $                            | 1,910,431   |                     | $ | 1,993,572   |  
|                                                                                                       |  |                              |             |                     |   |             |  
|Liabilities and stockholders deficit                                                                  |  |                              |             |                     |   |             |  
|Current liabilities:                                                                                   |  |                              |             |                     |   |             |  
|Accounts payable                                                                                       |  | $                            | 281,938     |                     | $ | 305,645     |  
|Accrued liabilities                                                                                    |  |                              | 1,141,043   |                     |   | 1,148,536   |  
|Current portion of capital lease
obligation                                                            |  |                              | 2,134       |                     |   | 1,859       |  
|Deferred revenue                                                                                       |  |                              | 109,267     |                     |   | 120,647     |  
|Total current liabilities                                                                              |  |                              | 1,534,382   |                     |   | 1,576,687   |  
|                                                                                                       |  |                              |             |                     |   |             |  
|Notes Payable - stockholder                                                                            |  |                              | 6,267,702   |                     |   | 6,367,702   |  
|Capital lease obligation, less current portion                                                         |  |                              | 4,609       |                     |   | 5,280       |  
|Total Long Term Liabilities                                                                            |  |                              | 6,272,311   |                     |   | 6,372,982   |  
|Total Liabilities                                                                                      |  |                              | 7,806,693   |                     |   | 7,949,669   |  
|                                                                                                       |  |                              |             |                     |   |             |  
|Commitments and contingencies                                                                          |  |                              |             |                     |   |             |  
|                                                                                                       |  |                              |             |                     |   |             |  
|Stockholders deficit:                                                                                 |  |                              |             |                     |   |             |  
|Preferred stock, $.001 par value:                                                                      |  |                              |             |                     |   |             |  
|Authorized shares  500,000; none issued and
outstanding                                               |  |                              |            |                     |   |            |  
|None issued and outstanding                                                                            |  |                              |             |                     |   |             |  
|Common stock, $.001 par value:                                                                         |  |                              | 37,981      |                     |   | 35,839      |  
|Authorized shares  50,000,000                                                                         |  |                              |             |                     |   |             |  
|Issued and outstanding  37,980,345 and
35,838,351 respectively                                        |  |                              |             |                     |   |             |  
|Additional paid-in capital                                                                             |  |                              | 43,980,307  |                     |   | 43,301,010  |  
|Deferred compensation                                                                                  |  |                              | (79,592     | )                   |   | (118,736    | )
|Notes receivable from stockholders                                                                     |  |                              | (966,531    | )                   |   | (966,531    | )
|Accumulated deficit                                                                                    |  |                              | (49,152,177 | )                   |   | (48,469,757 | )
|Accumulated other comprehensive income                                                                 |  |                              | 283,750     |                     |   | 262,078     |  
|Total stockholders deficit                                                                            |  |                              | (5,896,262  | )                   |   | (5,956,097  | )
|Total liabilities and stockholders deficit                                                            |  | $                            | 1,910,431   |                     | $ | 1,993,572   |  

See accompanying notes to condensed consolidated financial
statements.

3

---

Table of Contents

Puradyn Filter Technologies Incorporated
Condensed Consolidated Statements of Operations
For the Three Months Ended March 31, 2009 and 2008
(Unaudited)

|                                                              |  |                               |            |      |   |            |  
|------------------------------------------------------------- |  | ----------------------------- | ---------- | ---- | - | ---------- | -
|                                                              |  | Three Months Ended
 March 31, |           
|                                                              |  | 2009                          |            | 2008 |  
|                                                              |  |                               |            |      |   |            |  
|Net sales                                                     |  | $                             | 298,781    |      | $ | 763,425    |  
|                                                              |  |                               |            |      |   |            |  
|Costs and expenses:                                           |  |                               |            |      |   |            |  
|Cost of products sold                                         |  |                               | 360,491    |      |   | 625,329    |  
|Salaries and wages                                            |  |                               | 239,669    |      |   | 256,053    |  
|Selling and administrative                                    |  |                               | 342,628    |      |   | 262,398    |  
|                                                              |  |                               | 942,788    |      |   | 1,143,780  |  
|Loss from operations                                          |  |                               | (644,007   | )    |   | (380,355   | )
|                                                              |  |                               |            |      |   |            |  
|Other income (expense):                                       |  |                               |            |      |   |            |  
|Interest income                                               |  |                               | 177        |      |   | 733        |  
|Interest expense                                              |  |                               | (38,590    | )    |   | (90,853    | )
|Total other income (expense)                                  |  |                               | (38,413    | )    |   | (90,120    | )
|                                                              |  |                               |            |      |   |            |  
|Net loss before income tax expense                            |  |                               | (682,420   | )    |   | (470,475   | )
|Income tax expense                                            |  |                               |           |      |   |           |  
|Net loss                                                      |  | $                             | (682,420   | )    | $ | (470,475   | )
|                                                              |  |                               |            |      |   |            |  
|Basic and diluted loss per common share                       |  | $                             | (0.02      | )    | $ | (0.02      | )
|                                                              |  |                               |            |      |   |            |  
|Weighted average common shares outstanding, basic and
diluted |  |                               | 37,246,932 |      |   | 30,052,600 |  

See accompanying notes to condensed consolidated financial
statements.

4

---

Table of Contents

Puradyn Filter Technologies Incorporated
Consolidated Statements of Cash FlowsFor the Three Months Ended March 31, 2009 and 2008
(Unaudited)

|                                                                                                                             |  |                    |          |      |   |          |  
|---------------------------------------------------------------------------------------------------------------------------- |  | ------------------ | -------- | ---- | - | -------- | -
|                                                                                                                             |  | Three Months Ended |         
|                                                                                                                             |  | 2009               |          | 2008 |  
|Operating activities                                                                                                         |  |                    |          |      |   |          |  
|Net loss                                                                                                                     |  | $                  | (682,420 | )    | $ | (470,475 | )
|Adjustments to reconcile net loss to net cash used in operating
 activities:                                                 |  |                    |          |      |   |          |  
|Depreciation and amortization                                                                                                |  |                    | 11,980   |      |   | 17,338   |  
|Provision for bad debts                                                                                                      |  |                    | 9,614    |      |   | (19,961  | )
|Provision for obsolete and slow moving
inventory                                                                             |  |                    | 38,610   |      |   | (1,284   | )
|Amortization of deferred financing costs included in
interest expense                                                        |  |                    | 1,373    |      |   | 3,789    |  
|Deferred compensation                                                                                                        |  |                    | 39,144   |      |   |         |  
|Compensation expense on stock-based arrangements
with employees and
 vendors                                                 |  |                    | 98,663   |      |   | 9,355    |  
|Compensation expense on stock-based arrangements
with investors and
 directors                                               |  |                    |         |      |   | 45,000   |  
|Changes in operating assets and
liabilities:                                                                                 |  |                    |          |      |   |          |  
|Accounts receivable                                                                                                          |  |                    | 20,020   |      |   | (12,377  | )
|Inventories                                                                                                                  |  |                    | (79,689  | )    |   | (140,431 | )
|Prepaid expenses and other current assets                                                                                    |  |                    | 18,662   |      |   | (32,522  | )
|Accounts payable                                                                                                             |  |                    | (23,706  | )    |   | (150,037 | )
|Accrued liabilities                                                                                                          |  |                    | (7,493   | )    |   | (36,319  | )
|Deferred revenues                                                                                                            |  |                    | (11,380  | )    |   | 7,239    |  
|Net cash used in operating activities                                                                                        |  |                    | (566,622 | )    |   | (780,685 | )
|                                                                                                                             |  |                    |          |      |   |          |  
|Investing activities                                                                                                         |  |                    |          |      |   |          |  
|Purchases of property and equipment                                                                                          |  |                    |         |      |   | (1,853   | )
|Net cash used in investing activities                                                                                        |  |                    |         |      |   | (1,853   | )
|                                                                                                                             |  |                    |          |      |   |          |  
|Financing activities                                                                                                         |  |                    |          |      |   |          |  
|Proceeds from sale of common stock                                                                                           |  |                    | 582,758  |      |   | 324,000  |  
|Proceeds from exercise of stock options                                                                                      |  |                    |         |      |   |         |  
|Proceeds from issuance of notes payable to stockholder                                                                       |  |                    |         |      |   | 420,000  |  
|Payment of notes payable to stockholder                                                                                      |  |                    | (100,000 | )    |   |         |  
|Payment of capital lease obligations                                                                                         |  |                    | (396     | )    |   | (2,002   | )
|Net cash provided by financing activities                                                                                    |  |                    | 482,362  |      |   | 741,998  |  
|Effect of exchange rate changes on cash and cash
equivalents                                                                 |  |                    | 21,513   |      |   | 5,378    |  
|Net decrease in cash and cash equivalents                                                                                    |  |                    | (62,747  | )    |   | (35,162  | )
|                                                                                                                             |  |                    |          |      |   |          |  
|Cash and cash equivalents at beginning of period                                                                             |  |                    | 116,802  |      |   | 112,270  |  
|                                                                                                                             |  |                    |          |      |   |          |  
|Cash and cash equivalents at end of period                                                                                   |  | $                  | 54,055   |      | $ | 77,108   |  
|                                                                                                                             |  |                    |          |      |   |          |  
|Supplemental cash flow information:                                                                                          |  |                    |          |      |   |          |  
|Cash paid for interest                                                                                                       |  | $                  | 41,278   |      | $ | 124,527  |  
|Noncash Investing and Financing:                                                                                             |  |                    |          |      |   |          |  
|February 5, 2009 and March 24, 2008, Note Payable of $100,000 and
 $520,000, respectively, converted to stockholders equity |  | $                  | 100,000  |      | $ | 520,000  |  

See accompanying notes to condensed consolidated financial
statements.

5

---

Table of Contents

Puradyn Filter Technologies Incorporated
Consolidated Statements of Changes in Stockholders Deficit


|                                                             |  |              |            |        |                        |        |  |                              |            |  |   |          |                                  |   |          |   |   |             |                           |                                              |         |  |   |            |  
|------------------------------------------------------------ |  | ------------ | ---------- | ------ | ---------------------- | ------ |  | ---------------------------- | ---------- |  | - | -------- | -------------------------------- | - | -------- | - | - | ----------- | ------------------------- | -------------------------------------------- | ------- |  | - | ---------- | -
|                                                             |  |              |            |        |                        |        |  |                              |            |  |   |          |                                  |   |          |   |   |             |                           | Accumulated
 OtherComprehensiveIncome (Loss) |         |  |   |           
|                                                             |  |              |            |        |                        |        |  | Additional
 Paid-in
 Capital |            |  |   |          | NotesReceivableFrom Stockholders |   |          |   |   |             | TotalStockholdersDeficit |                                             
|                                                             |  | 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                      |  |              |           |        |                        |       |  |                              |           |  |   |         |                                  |   |         |   |   |            |                           |                                              | 21,672  |  |   | 21,672     |  
|                                                            
|Net loss                                                     |  |              |           |        |                        |       |  |                              |           |  |   |         |                                  |   |         |   |   | (682,420    | )                         |                                              |        |  |   | (682,420   | )
|Total comprehensive loss                                     |  |              |           |        |                        |       |  |                              |           |  |   |         |                                  |   |         |   |   |            |                           |                                              |        |  |   | (660,748   | )
|Stock issued for private placement                           |  |              | 2,124,137  |        |                        | 2,124  |  |                              | 580,634    |  |   |         |                                  |   |         |   |   |            |                           |                                              |        |  |   | 582,758    |  
|Issuance of
 shares and warrants to vendors                  |  |              | 17,857     |        |                        | 18     |  |                              | 94,232     |  |   | 39,144   |                                  |   |         |   |   |            |                           |                                              |        |  |   | 133,394    |  
|Compensation expense associated with unvested option
expense |  |              |           |        |                        |       |  |                              | 4,431      |  |   |         |                                  |   |         |   |   |            |                           |                                              |        |  |   | 4,431      |  
|                                                            
|Balance at March 31, 2009                                    |  |              | 37,980,345 |        | $                      | 37,981 |  | $                            | 43,980,307 |  | $ | (79,592  | )                                | $ | (966,531 | ) | $ | (49,152,177 | )                         | $                                            | 283,750 |  | $ | (5,896,262 | )

See accompanying notes to condensed consolidated financial
statements.

6

---

Table of Contents

Puradyn Filter Technologies Incorporated
Notes to Condensed Consolidated Financial Statements
March 31, 2009
(Unaudited)

|   |                                                                                     
|-- | ------------------------------------------------------------------------------------
|1. | Basis of Presentation, Going Concern 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 period ended March 31, 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 led the
Companys independent auditors 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 attempt 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 analyzing more efficient manufacturing
processes. The Company, until recently, had seen results from these reductions,
as well as from other cost reduction plans. However, due to raw material
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 raw material increases. A portion of this increase is
being offset by customer price increases effective January 1, 2009. 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

SFAS No. 128, Earnings Per Share,
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 5,356,972 and 4,026,114 for the three
months ended March 31, 2009 and 2008, respectively.

7

---

Table of Contents

Stock Compensation

The Company adopted SFAS 123R 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 SFAS 123R 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 March 31, 2008 and March 31, 2009
have been recognized as a component of cost of goods sold and general and
administrative expenses in the accompanying 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
SFAS 123 and EITF 96-18, 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 value.

Inventories consisted of the following at March 31, 2009 and December
31, 2008, respectively:

|                     |  |                |           |                   |  |           |  
|-------------------- |  | -------------- | --------- | ----------------- |  | --------- | -
|                     |  | March 31, 2009 |           | December 31, 2008 | 
|                     |  |                |           |                   |  |           |  
|Raw
 materials       |  |                | 1,147,944 |                   |  | 946,429   |  
|Finished
 goods      |  |                | 347,159   |                   |  | 505,039   |  
|Valuation
 allowance |  |                | (116,716  | )                 |  | (114,159  | )
|                     |  |                | 1,378,387 |                   |  | 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 $1,373 and $3,789 for the three-months
ended March 31, 2009 and 2008, respectively. Accumulated amortization of deferred
financing costs as of March 31, 2009 and 2008 was $674,103 and $666,416,
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 Staff Accounting Bulletin No. 104, Revenue Recognition in Financial Statements
(SAB 104), 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

---

Table of Contents

Product Warranty Costs

As required by FASB Interpretation No. 45, Guarantors Accounting and Disclosure Requirements
for Guarantees,
Including Indirect Guarantees of Indebtedness of Others (FIN 45),
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 three-months ended March 31, 2009:

|                                              |  |   |         |  
|--------------------------------------------- |  | - | ------- | -
|Balance as
 of December 31, 2008              |  | $ | 148,149 |  
|Less: payments made                           |  |   | (891    | )
|Change in prior period estimate               |  |   |        |  
|Add: Provision for current period
 warranties |  |   | 12,701  |  
|Balance as
 of March 31, 2009                 |  | $ | 159,959 |  

Comprehensive Income

SFAS No. 130, Reporting
Comprehensive Income (SFAS 130) 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 March 31, 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-months ended March 31, 2009 and
2008:

|                                         |  |                                |          |      |   |          |  
|---------------------------------------- |  | ------------------------------ | -------- | ---- | - | -------- | -
|                                         |  | Three Months Ended 
 March 31, |         
|                                         |  | 2009                           |          | 2008 |  
|                                         |  |                                |          |      |   |          |  
|Net loss                                 |  | $                              | (682,420 | )    | $ | (470,475 | )
|                                         |  |                                |          |      |   |          |  
|Other
 comprehensive loss:               |  |                                |          |      |   |          |  
|Foreign
 currency translation adjustment |  |                                | 21,672   |      |   | 1,713    |  
|Comprehensive
 loss                      |  | $                              | (660,748 | )    | $ | (468,762 | )

New
Accounting Standards

In
December 2007, the Financial Accounting Standards Board (FASB) issued SFAS No.
160, Noncontrolling Interests in Consolidated Financial Statements  an
amendment of ARB No. 51. This statement improves the relevance, comparability,
and transparency of the financial information that a reporting entity provides
in its consolidated financial statements by establishing accounting and
reporting standards that require; the ownership interests in subsidiaries held
by parties other than the parent and the amount of consolidated net income
attributable to the parent and to the noncontrolling interest be clearly
identified and presented on the face of the consolidated statement of income,
changes in a parents ownership interest while the parent retains its
controlling financial interest in its subsidiary be accounted for consistently,
when a subsidiary is deconsolidated, any retained noncontrolling equity
investment in the former subsidiary be initially measured at fair value,
entities provide sufficient disclosures that clearly identify and distinguish
between the interests of the parent and the interests of the noncontrolling
owners. SFAS No. 160 affects those entities that have an outstanding
noncontrolling interest in one or more subsidiaries or that deconsolidate a
subsidiary. SFAS No. 160 is effective for fiscal years, and interim periods
within those fiscal years, beginning on or after December 15, 2008. Early
adoption is prohibited. The adoption of this statement did not have a material
effect on the Companys financial statements.

9

---

Table of Contents

In
March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative
Instruments and Hedging Activities, an amendment of FASB Statement No. 133
(SFAS 161). This statement is intended to improve transparency in financial
reporting by requiring enhanced disclosures of an entitys derivative
instruments and hedging activities and their effects on the entitys financial
position, financial performance, and cash flows. SFAS 161 applies to all
derivative instruments within the scope of SFAS 133. Accounting for Derivative
Instruments and Hedging Activities (SFAS 133) as well as related hedged items,
bifurcated derivatives, and nonderivative instruments that are designed and
qualify as hedging instruments. Entities with instruments subject to SFAS 161
must provide more robust qualitative disclosures and expanded quantitative disclosures.
SFAS 161 is effective prospectively for financial statements issue for fiscal
years and interim periods beginning after November 15, 2008, with early
application permitted. The adoption of this statement did not have a material
effect on the Companys financial statements.

In
May 2008, the FASB issued SFAS No. 162, The Hierarchy of Generally Accepted
Accounting Principles. SFAS No. 162 identifies the sources of accounting
principles and provides entities with a framework for selecting the principles
used in preparation of financial statements that are presented in conformity
with GAAP. The current GAAP hierarchy has been criticized because it is
directed to the auditor rather than the entity, it is complex, and it ranks
FASB Statements of Financial Accounting Concepts, which are subject to the same
level of due process as FASB Statements of Financial Accounting Standards,
below industry practices that are widely recognized as generally accepted but
that are not subject to due process. The Board believes the GAAP hierarchy
should be directed to entities because it is the entity (not its auditors) that
is responsible for selecting accounting principles for financial statements
that are presented in conformity with GAAP. SFAS 162 is effective 60 days
following the SECs approval of PCAOB Auditing Standard No. 6, Evaluating
Consistency of Financial Statements (AS/6). The adoption of FASB 162 is not
expected to have a material impact on the Companys financial position.

In
May 2008, the FASB issued SFAS No. 163, Accounting for Financial Guarantee
Insurance Contracts-an interpretation of FASB Statement No. 60. Diversity
exists in practice in accounting for financial guarantee insurance contracts by
insurance enterprises under FASB Statement No. 60, Accounting and Reporting by
Insurance Enterprises. This results in inconsistencies in the recognition and
measurement of claim liabilities. This Statement requires that an insurance
enterprise recognize a claim liability prior to an event of default (insured
event) when there is evidence that credit deterioration has occurred in an
insured financial obligation. This Statement requires expanded disclosures
about financial guarantee insurance contracts. The accounting and disclosure
requirements of the Statement will improve the quality of information provided
to users of financial statements. SFAS 163 is effective for financial
statements issued for fiscal years beginning after December 15, 2008, and
interim periods within those fiscal years. The adoption of FASB 163 did not
have a material impact on the Companys financial position.

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

The
Companys financial statements have been prepared on the basis that it will
continue as a going concern, which contemplates the realization of assets and
satisfaction of liabilities in the normal course of business. The Company has
sustained losses since inception and used net cash in operations of
approximately $567,000 and $781,000 during the three-months ended March 31,
2009 and 2008, respectively. As a result, the Company has had 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
attempt 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. The
Company, until recently, had seen results from these reductions, as well as
from other cost reduction plans. However, due to raw material 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 raw material increases. A portion of this increase is being offset by
customer price increases effective January 1, 2009.

10

---

Table of Contents

The Company
continues 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 immediate future. The Company is in the process of aggressively
seeking to raise capital and is exploring 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 arrangements.
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.

Beginning
on March 28, 2002, the Company executed a binding agreement with one of its
stockholders, who is also its CEO and a Board member, to fund up to $6.1
million. The original loan agreements, dated March 28, 2002 and March 14, 2003,
were due and payable on December 31, 2003 and December 31, 2004.

On
February 2, 2004, executive officer, director and stockholder amended the
original loan agreements to extend the maturity dates to December 31, 2005 and
to waive the funding requirement mandating maturity terms until such time as
the Company has raised an additional $7.0 million over the $3.5 million 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.

In
April 2005, the maturity date of the loan agreement was extended to December
31, 2006. As consideration of this extension, this executive officer, director
and stockholder was granted an additional 100,000 common stock purchase
warrants at an exercise price equal to the closing market price of the
Companys stock on the date of grant. In March of 2006 and in subsequent
Marchs through 2009, the executive officer, director and stockholder extended
the maturity date of the loan agreement annually, which currently expires on
December 31, 2010. As of March 31, 2009, the Company had drawn a total
of $6.1 million of the available funds together with an additional $167,000.

The
Company anticipates increased cash flows from 2009 sales activity in the later
half of the year; however, additional cash will still be needed to support
operations. 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
2009. 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 is April 8, 2009. The note was not paid
when due and is currently in default. As of the date hereof, the Company has
not exercised its rights to the collateral or made any demand for payment.

During
February 2009 the Company received proceeds of $476,000 from the sale of
1,724,137 shares of common stock at $0.28 per share.

On
February 5, 2009, the Company converted $100,000 previously received in the
form of advances into purchases of 400,000 shares of common stock at $0.25 per
share. As part of the offering, the Company awarded 100,000 warrants to
purchase one share of common stock at an exercise price of $1.25 on or prior to
February 3, 2014.

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.

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

During the
three-month periods ended March 31, 2009 and March 31, 2008, the Company
recognized compensation expense of approximately $140,000 and $45,000,
respectively. 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 period ending March 31, 2009, approximately $39,000 of
this expense was amortized. On February 5, 2008, the Company recorded an
expense of $45,000 related to 225,000 warrants granted with an average exercise
price of $1.25 and an expiration of February 5, 2018. On March 4, 2009, the
Company awarded Mark Rodino 425,000 warrants to purchase 425,000 shares of
common stock at $.50 per share for consultancy services on behalf of the
Company. The warrants expire on March 3, 2014. The Company recorded an expense
of approximately $89,250 for this award in March 2009.

11

---

Table of Contents

At March
31, 2009, approximately 3,589,072 warrants with an average exercise price of
$1.13 remain outstanding and were fully vested.

For
the three months ended March 31, 2009 and March 31, 2008, respectively, the
Company recorded stock-based compensation expense of $4,431 and $9,355,
relating to unvested employee stock options.

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
SFAS 123 and EITF 96-18, 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 March 31, 2009, and changed during
the three month period then ended is presented below:

|                                            |  |                                    |           |                                  |   |      | 
|------------------------------------------- |  | ---------------------------------- | --------- | -------------------------------- | - | ---- | 
|                                            |  | Three Months Ended
 March 31, 2009 |          
|                                            |  | Number of Options                  |           | Weighted Average
 Exercise Price |  
|                                            |  |                                    |           |                                  |   |      | 
|Options outstanding at
 beginning of period |  |                                    | 1,767,900 |                                  | $ | 2.15 | 
|                                            |  |                                    |           |                                  |   |      | 
|Options granted                             |  |                                    | 15,000    |                                  |   | .35  | 
|Options exercised                           |  |                                    |          |                                  |   |     | 
|Options cancelled                           |  |                                    | 15,000    |                                  |   | 1.64 | 
|Options at end of period                    |  |                                    | 1,767,900 |                                  | $ | 2.14 | 
|Options exercisable at end
 of period       |  |                                    | 934,150   |                                  | $ | 3.79 | 

Changes in the Companys unvested options for the three months ended
March 31, 2009 are summarized as follows:

|                                         |  |                                     |         |                                   |   |     | 
|---------------------------------------- |  | ----------------------------------- | ------- | --------------------------------- | - | --- | 
|                                         |  | Three Months Ended 
 March 31, 2009 |        
|                                         |  | Number of Options                   |         | Weighted Average 
 Exercise Price |  
|Options unvested at
 beginning of period |  |                                     | 838,750 |                                   | $ | .31 | 
|Options granted                          |  |                                     | 15,000  |                                   |   | .35 | 
|Options vested                           |  |                                     | 16,250  |                                   |   | .37 | 
|Options cancelled                        |  |                                     | 3,750   |                                   |   | .33 | 
|Options unvested at end of
 period       |  |                                     | 833,750 |                                   | $ | .29 | 

|                           |               |                      |  |                                                      |  |                                      |      |                      |   |                                      |  |  |         |  |   |      | 
|-------------------------- | ------------- | -------------------- |  | ---------------------------------------------------- |  | ------------------------------------ | ---- | -------------------- | - | ------------------------------------ |  |  | ------- |  | - | ---- | 
|                           |               | Options
 Outstanding |  | Options
 Exercisable                                 | 
|Range
 of 
 Exercise Price |               | Number 
 Outstanding |  | Remaining
 
 Average 
 Contractual 
 Life (In Years) |  | Weighted
 
 Average 
 Exercise Price |      | Number 
 Exercisable |   | Weighted
 
 Average 
 Exercise Price | 
|                           | $.21
  $1.70 |                      |  | 1,363,400                                            |  |                                      | 5.68 |                      | $ | .55                                  |  |  | 539,650 |  | $ | .96  | 
|                           | 1.86
  4.50  |                      |  | 94,500                                               |  |                                      | 2.69 |                      |   | 2.67                                 |  |  | 94,500  |  |   | 2.67 | 
|                           | 8.50
  9.25  |                      |  | 300,000                                              |  |                                      | 1.25 |                      |   | 9.25                                 |  |  | 300,000 |  |   | 9.25 | 
|                           | Totals        |                      |  | 1,797,900                                            |  |                                      | 5.13 |                      | $ | 2.14                                 |  |  | 934,150 |  | $ | 3.79 | 

12

---

Table of Contents

A summary of the Companys warrant activity as of March 31, 2009 and
changed during the three month period then ended is presented below:

|                                                     |  |                             |           |       |   |      | 
|---------------------------------------------------- |  | --------------------------- | --------- | ----- | - | ---- | 
|                                                     |  | 2009                        |          
|Three
 months ended March 31, 2009                   |  | Weighted Average 
 Exercise |          
|                                                     |  | Options                     |           | Price |  
|                                                     |  |                             |           |       |   |      | 
|Warrants outstanding at the
 beginning of the period |  |                             | 3,189,072 |       | $ | 1.25 | 
|Granted                                              |  |                             | 525,000   |       |   | .64  | 
|Exercised                                            |  |                             |          |       |   |      | 
|Expired                                              |  |                             | 125,000   |       |   | 2.00 | 
|Warrants outstanding at end
 of period               |  |                             | 3,589,072 |       | $ | 1.13 | 

|                           |  |                       |           |                                                      |  |                                      |  |   |      | 
|-------------------------- |  | --------------------- | --------- | ---------------------------------------------------- |  | ------------------------------------ |  | - | ---- | 
|                           |  | Warrants
 Outstanding |          
|Range
 of 
 Exercise Price |  | Number 
 Outstanding  |           | Remaining
 
 Average 
 Contractual 
 Life (In Years) |  | Weighted
 
 Average 
 Exercise Price | 
|$.5
 0  $.99              |  |                       | 700,000   |                                                      |  | 3.49                                 |  | $ | .63  | 
|1.00  1.25                |  |                       | 2,889,072 |                                                      |  | 3.84                                 |  |   | 1.25 | 
|Totals                     |  |                       | 3,589,072 |                                                      |  | 3.81                                 |  | $ | 1.13 | 

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

As
of March 31, 2009, the Company had drawn all of the $6.1 million from the
available line-of-credit, which is provided by a stockholder, who is also the
Companys CEO 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 and the other is
based on Libor plus 1.40 (a weighted average of 2.35% as of March 31, 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.

During the
three-months ending March 31, 2009, the Company received an advance of $100,000
from a member of the Board, which was subsequently converted into common shares
in May 2009.

For the
three-months ended March 31, 2009 and 2008, the Company recorded approximately
$36,230 and $85,807, 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.

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

Sales to
two customers individually accounted for approximately 22% and 12% for the
three- months ended March 31, 2009.

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

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.

13

---

Table of Contents

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.

|        |                                                                                       
|------- | --------------------------------------------------------------------------------------
|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

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.

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 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 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 140 active distributors in the U.S. and internationally. The
number of distributors will constantly change as we add new distributors as
well as when OEMs come onboard with their distribution network.

14

---

Table of Contents

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, Western Star 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
 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.                                                                               
| |   |                                                                                                                                                                                                                                                                                          
| |  | 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 industry acceptance will continue to grow in 2009 and restore
revenues to their historical levels; 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 announcement,
business revenue during the first quarter of 2009 was below management expectation,
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.

15

---

Table of Contents

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 three months of 2009, total international sales accounted for
approximately 34% of the Companys consolidated net sales as compared to 55%
for the first three months of 2008. As discussed elsewhere herein, we believe
that the decline in international sales in the current fiscal year is
attributable to competition from a former employee in the U.K as well as the
global economic uncertainty, which we estimate have negatively impacted our
sales for this quarter approximately $115,000 and $350,000, respectively. 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 the second 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 obtain capital funding and add appropriate sales and marketing
support to be sure our distributors and customers are served. At this time, we
anticipate the need for at least two salespersons and one sale support person.
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. The expansion into the OEM area, even though it
is very demanding due to response need 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 costs reductions will impact our results
of operations during the balance of 2009 and beyond. We are also reviewing cost
of material increases, some of which were passed through to our customers as
product price increases beginning January 2009. These price increases were
generally limited to market conditions,
but will continue to be applied each January and were in the range of 4%
to 8%. Cost reductions were and continue to be implemented by the Company
including acquiring alternative suppliers for raw materials. The Company, until
recently, had seen results from these reductions, as well as from other cost
reduction plans. However, due to raw material 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 raw material
increases. A portion of this increase is being offset by customer price
increases effective January 1, 2009.

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.

16

---

Table of Contents

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.

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 SFAS No. 144, 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 SAB No. 104, 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.

17

---

Table of Contents

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 March 31, 2009 and March 31, 2008, product
returns totaled $3,463 and $20,174, respectively. Increased product returns
during 2008, was primarily attributable 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 March 31,
2009 Compared to the Three-months Ended March 31, 2008

The following table sets forth the amount of increase or decrease
represented by certain items reflected in the Companys condensed consolidated
statements of operations in comparing the three-months ended March 31, 2009 to
the three-months ended March 31, 2008:

|                              |  |                              |      |      |   |        |   |   |      |  
|----------------------------- |  | ---------------------------- | ---- | ---- | - | ------ | - | - | ---- | -
|(In
 thousands)               |  | Three Months Ended March 31, |     
|                              |  | 2009                         |      | 2008 |   | Change |  
|Net sales                     |  | $                            | 299  |      | $ | 763    |   | $ | (464 | )
|                              |  |                              |      |      |   |        |   |   |      |  
|Costs and
 expenses:          |  |                              |      |      |   |        |   |   |      |  
|Cost of products sold         |  |                              | 360  |      |   | 625    |   |   | (265 | )
|Salaries and wages            |  |                              | 240  |      |   | 256    |   |   | (16  | )
|Selling and administrative    |  |                              | 343  |      |   | 262    |   |   | 81   |  
|Total costs
 and expenses     |  |                              | 943  |      |   | 1,143  |   |   | (200 | )
|                              |  |                              |      |      |   |        |   |   |      |  
|Other
 (expense) income:      |  |                              |      |      |   |        |   |   |      |  
|Interest income               |  |                              |     |      |   | 1      |   |   | (1   | )
|                             
|Interest expense              |  |                              | (38  | )    |   | (91    | ) |   | 53   |  
|Total other
 (expense) income |  |                              | (38  | )    |   | (90    | ) |   | 52   |  
|Net loss                      |  | $                            | (682 | )    | $ | (470   | ) | $ | (212 | )

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 March 31, 2009 to the three-months ended March 31, 2008:

|                              |  |                              |     |      |  |        |  |  |      |  
|----------------------------- |  | ---------------------------- | --- | ---- |  | ------ |  |  | ---- | -
|(in
 thousands)               |  | Three Months Ended March 31, |    
|                              |  | 2009                         |     | 2008 |  | Change | 
|                              |  |                              |     |      |  |        |  |  |      |  
|Gross sales                   |  |                              | 309 |      |  | 716    |  |  | (407 | )
|Sales
 returns and allowances |  |                              | (10 | )    |  | 47     |  |  | (57  | )
|Net Sales                     |  |                              | 299 |      |  | 763    |  |  | (464 | )
|                              |  |                              |     |      |  |        |  |  |      |  
|US domestic sales             |  |                              | 199 |      |  | 342    |  |  | (143 | )
|US international sales        |  |                              | 36  |      |  | 157    |  |  | (121 | )
|UK sales                      |  |                              | 64  |      |  | 264    |  |  | (200 | )
|Net Sales                     |  |                              | 299 |      |  | 763    |  |  | (464 | )

18

---

Table of Contents

Net sales decreased by approximately $464,000 or 61% from approximately
$763,000 in 2008 to approximately $299,000 in 2009.

During the period ending March 31, 2008, the sales returns and
allowances decreased approximately $57,000 due to a decrease in the cumulative
historical rate of returns from 4.13% to 3.61%. Overall, historical return
rates have continued to decline as improvements have been made to the products.
During the period ended March 31, 2008, the return rate was 3.81% and the
company recorded approximately $10,000, or .3% of gross sales, in allowance for
sales returns.

Sales to two customers accounted for approximately 22% and 12%,
respectively, of the consolidated net sales for the three-months ended March
31, 2009. For the three-months ended March 31, 2008, sales to three customers
accounted for approximately 19%, 13% and 13%, respectively, of the consolidated
net sales. This decline is due to a decrease in sales to two customers, one of
which has placed substantial orders for delivery in May 2009.

The US international sales decreased approximately $121,000 or 77%,
from approximately $157,000 for the period ending March 31, 2008 to
approximately $36,000 for the period ending March 31, 2008. This decrease is
due entirely from the decline in sales from a single international customer,
which has been significantly affected by the global economy.

The UK subsidiarys sales decreased by approximately $200,000 or 76%,
from approximately $264,000 for the period ending March 31, 2008, to
approximately $64,000 for the period ending March 31, 2009. Sales to one of the
UK subsidiarys customers decreased by approximately $115,000, from
approximately $144,000 for the period ending March 31, 2008 to approximately
$28,000 for the period ending March 31, 2009. We believe that the
marketing of a competitive product to our customers by our former UK Managing
Director has contributed to a decline in its international sales volume.

Cost of Products Sold

Cost of products sold, as a percentage of sales, increased from
approximately 82% in 2008 to approximately 121% 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 $49,000 attributable to increases
in inventory allowance, which was partially offset by a decrease in direct and
indirect factory wages and benefits of approximately $18,000, due to layoffs.

Salaries and Wages

Salaries and wages decreased approximately $16,000, or 6%. This
decrease is the result of a decrease in salaries and wages of approximately
$4,000 generated in the UK office, since the office was closed during 2008, and
approximately $11,000 due to an Engineering vacancy for the period ending March
31, 2009.

Selling and Administrative Expenses

Selling and administrative expenses increased by approximately $81,000,
or 31%. This increase was due to increases in stock based compensation expense,
exchange rate losses and a reduction in bad debt of approximately $90,000,
$37,000, and $11,000, respectively. These increases were partially offset by
decreases in UK office expenses, selling and marketing costs, and patent
expenses of approximately $20,000, $16,000 and $15,000, respectively. The
decrease in UK office expenses is due to the closing of that office in 2008.

Interest Expense

Interest expense decreased by approximately $53,000, as a result of a
decrease in the interest rate on outstanding balance of the stockholder notes
payable. The Company pays interest monthly on the notes payable to stockholder
at the prime rate less one-half percent, which was a weighted average of 2.4%
as of March 31, 2009 as opposed to 5.7% as of March 31, 2008.

19

---

Table of Contents

Liquidity
and Capital Resources

As of March 31, 2009, the
Company had cash and cash equivalents of approximately $54,000, as compared to
approximately $117,000 at December 31, 2008. At March 31, 2009, we had working
capital of approximately $217,000 and our current ratio (current assets to
current liabilities) was 1.14 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 the increase in
inventory (approximately $80,000), a decrease in cash (approximately $63,000),
and a decrease in accounts in accounts payable (approximately $24,000) offset
by increases in inventory allowance (approximately $39,000), increase in
accounts receivable (approximately $20,000) and increases in prepaid expenses
(approximately $19,000).

We have incurred net losses each year since inception
and at March 31, 2009 we had an accumulated deficit of $49,152,177. 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 three months ended March 31, 2009 we raised an
additional $.5 million. In addition, as of March 31, 2009, we owe our CEO $6.25
million for funds he has advanced to us from time to time for working capital.
Interest expense on this loan was approximately $36,000 for the three months
ended March 31, 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 May 2009. 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. While we anticipate cash flows from 2009 sales activity, cash
will still be needed to support operations, meet our working capital needs and
satisfy our obligations as they become due. In addition, as set forth above, we
owe our CEO $6.25 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 CEO
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 its assets to continue as a going
concern through 2009. 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 three-month
period ended March 31, 2009 net cash used in operating activities was
approximately $567,000, which primarily resulted from the net loss of
approximately $682,000. The decrease in working capital is primarily
attributable to the increase in inventory (approximately $80,000), a decrease
in cash (approximately $63,000), and a decrease in accounts in accounts payable
(approximately $24,000) offset by increases in inventory allowance (approximately
$39,000), decrease in accounts receivable (approximately $20,000) and decreases
in prepaid expenses (approximately $19,000).

Investing
activities

For the three months ending March 31, 2009, no cash
was used in investing activities.

Financing
activities

Net cash provided by financing activities was
approximately $482,000 for the period, due to $583,000 of net proceeds received
from stock issued for cash offset by a $100,000 reduction of the stockholder
loan.

20

---

Table of Contents

New Accounting Standards

In December 2007, the
Financial Accounting Standards Board (FASB) issued SFAS No. 160,
Noncontrolling Interests in Consolidated Financial Statements  an amendment
of ARB No. 51. This statement improves the relevance, comparability, and
transparency of the financial information that a reporting entity provides in
its consolidated financial statements by establishing accounting and reporting
standards that require; the ownership interests in subsidiaries held by parties
other than the parent and the amount of consolidated net income attributable to
the parent and to the noncontrolling interest be clearly identified and
presented on the face of the consolidated statement of income, changes in a
parents ownership interest while the parent retains its controlling financial
interest in its subsidiary be accounted for consistently, when a subsidiary is
deconsolidated, any retained noncontrolling equity investment in the former
subsidiary be initially measured at fair value, entities provide sufficient
disclosures that clearly identify and distinguish between the interests of the
parent and the interests of the noncontrolling owners. SFAS No. 160 affects
those entities that have an outstanding noncontrolling interest in one or more
subsidiaries or that deconsolidate a subsidiary. SFAS No. 160 is effective for
fiscal years, and interim periods within those fiscal years, beginning on or
after December 15, 2008. Early adoption is prohibited. The adoption of this
statement did not have a material effect on the Companys financial statements.

In March 2008, the FASB
issued SFAS No. 161, Disclosures about Derivative Instruments and Hedging
Activities, an amendment of FASB Statement No. 133 (SFAS 161). This statement
is intended to improve transparency in financial reporting by requiring
enhanced disclosures of an entitys derivative instruments and hedging
activities and their effects on the entitys financial position, financial
performance, and cash flows. SFAS 161 applies to all derivative instruments
within the scope of SFAS 133. Accounting for Derivative Instruments and
Hedging Activities (SFAS 133) as well as related hedged items, bifurcated
derivatives, and nonderivative instruments that are designed and qualify as
hedging instruments. Entities with instruments subject to SFAS 161 must provide
more robust qualitative disclosures and expanded quantitative disclosures. SFAS
161 is effective prospectively for financial statements issue for fiscal years
and interim periods beginning after November 15, 2008, with early application
permitted. The adoption of this statement did not have a material effect on the
Companys financial statements.

In May 2008, the FASB
issued SFAS No. 162, The Hierarchy of Generally Accepted Accounting
Principles. SFAS No. 162 identifies the sources of accounting principles and
provides entities with a framework for selecting the principles used in
preparation of financial statements that are presented in conformity with GAAP.
The current GAAP hierarchy has been criticized because it is directed to the auditor
rather than the entity, it is complex, and it ranks FASB Statements of
Financial Accounting Concepts, which are subject to the same level of due
process as FASB Statements of Financial Accounting Standards, below industry
practices that are widely recognized as generally accepted but that are not
subject to due process. The Board believes the GAAP hierarchy should be
directed to entities because it is the entity (not its auditors) that is
responsible for selecting accounting principles for financial statements that
are presented in conformity with GAAP. SFAS 162 is effective 60 days following
the SECs approval of PCAOB Auditing Standard No. 6, Evaluating Consistency of
Financial Statements (AS/6). The adoption of FASB 162 is not expected to have a
material impact on our financial position.

In May 2008, the FASB
issued SFAS No. 163, Accounting for Financial Guarantee Insurance Contracts-an
interpretation of FASB Statement No. 60. Diversity exists in practice in
accounting for financial guarantee insurance contracts by insurance enterprises
under FASB Statement No. 60, Accounting and Reporting by Insurance Enterprises.
This results in inconsistencies in the recognition and measurement of claim
liabilities. This Statement requires that an insurance enterprise recognize a
claim liability prior to an event of default (insured event) when there is
evidence that credit deterioration has occurred in an insured financial
obligation. This Statement requires expanded disclosures about financial
guarantee insurance contracts. The accounting and disclosure requirements of
the Statement will improve the quality of information provided to users of
financial statements. SFAS 163 is effective for financial statements issued for
fiscal years beginning after December 15, 2008, and interim periods within
those fiscal years. The adoption of FASB 163 did not have a material impact on
our financial position

Impact of Inflation

Inflation has not had a
significant impact on the Companys operations. However, any significant decrease
in the price for oil or labor, environmental compliance costs, and engine
replacement costs could adversely impact the Companys end users cost/benefit
analysis as to the use of the Companys products. The impact of fluctuations in
foreign currency has been significant during the three-month period ended March
31, 2009. The exchange rate, the Great British pound to the U.S. dollar
fluctuated from 1.45 on December 31, 2008 to 1.42 on March 31, 2009 as compared
to 2.00 on December 31, 2007 to 2.00 on March 31, 2008.

21

---

Table of Contents

The financial statements
of the Companys foreign subsidiary have been translated into U.S. dollars in
accordance with SFAS No. 52, Foreign Currency Translation (SFAS 52). All
balance sheet accounts have been translated using the exchange rate in effect
at the balance sheet date. Income statement amounts have been translated using
an appropriately weighted average exchange rate for the year. The translation
gains and losses resulting from the changes in exchange rates during the
three-months ended March 31, 2009 and 2008 have been reported in accumulated
other comprehensive income, except for gains and losses resulting from the
translation of intercompany receivables and payables, which are included in
earnings for the period. During the three-month period ended March 31, 2009 and
2008, the Company recorded foreign currency exchange rate losses of
approximately $22,000 and approximately $2,000, respectively, which is included
in selling and administrative expenses in the accompanying consolidated
statements of operations.

Off Balance Sheet Financing

|                                                |                                                             
|----------------------------------------------- | ------------------------------------------------------------
|None.                                          
|                                                |                                                             
|ITEM 3.                                         | QUANTITATIVE AND
 QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
|                                                |                                                             
|Not applicable for a smaller reporting company.
|                                                |                                                             
|ITEM 4T.                                        | 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.

Based upon that
evaluation, our management has concluded that our disclosure controls and
procedures are effective for timely gathering, analyzing and disclosing the
information we are required to disclose in our reports filed under the
Securities Exchange Act of 1934, as amended.

There have been no
changes in our internal control over financial reporting 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.
|         |                   
|None.   
|         |                   
|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.

22

---

Table of Contents

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

During February 2009 the
Company received proceeds of $476,000 from the sale of 1,724,137 shares of
common stock at $0.28 per share to a single, unaffiliated investor. The investor
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. The Company did not incur commissions or fees related
to this transaction.

During December 2008, the
Company received an advance of $100,000 from Mr. Dom Telesco, a current
stockholder who is also a member of the Board of Directors, which was
subsequently converted into 400,000 shares of common stock at a conversion
price of $0.25 per share in February, 2009. As part of the offering, the
Company awarded 100,000 warrants to purchase common stock at an exercise price
of $1.25 on or prior to February 3, 2014. The investor 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.
The Company did not incur commissions or fees related to this transaction.

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 to an existing stockholder. 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. The investor 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. The Company did not incur commissions or fees related to this
transaction

During January 2009, the
Company received an advance of $100,000 from Mr. Dom Telesco, a current
stockholder who is also a member of the Board of Directors, which was
subsequently converted into 555,555 shares of common stock at a conversion
price of $.18 per share on May 7, 2009. As part of the offering, the Company
awarded warrants to purchase 138,889 shares of common stock at a price of $.50,
which expire on May 6, 2014. The investor 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. The Company did
not incur commissions or fees related to this transaction

|        |                                                      
|------- | -----------------------------------------------------
|ITEM 3. | DEFAULTS UPON SENIOR
 SECURITIES.                    
|        |                                                      
|None.  
|        |                                                      
|ITEM 4. | SUBMISSION OF MATTERS TO A
 VOTE OF SECURITY HOLDERS.

On March 4, 2009 the holders of a majority of the Companys issued and
outstanding common stock executed a written consent in lieu of a meeting
approving a Certificate of Amendment to its Certificate of Incorporation
increasing the number of authorized shares of its common stock from 40,000,000
shares to 50,000,000 shares, effective close of business on March 25, 2009. The
par value of the common stock did not change as a result of this charter
amendment. On or about March 5, 2009 the Company mailed a definitive
Information Statement on Schedule 14C to those stockholders who did not execute
the written consent approving the charter amendment.

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

On
May 8, 2009, the Company modified the exercise price of 100,000 warrants
previously issued to Mr. Dominic Telesco, a member of its Board of Directors,
on February 3, 2009 from $1.25 per share to $.50 per share. These warrants were
previously issued to Mr. Telesco as consideration for a loan to the Company. In
connection therewith, the Company will not recognize an expense during the
second quarter of 2009 as this modification relates to investor consideration.

|        |          
|------- | ---------
|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            

23

---

Table of Contents

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: May 14, 2009 | By /s/ Joseph V. Vittoria                                
|                   | Joseph V. Vittoria, Chairman and Chief Executive
 Officer
|                   |                                                          
|                   |                                                          
|Date: May 14, 2009 | By /s/ Cindy Lea Gimler                                  
|                   | Cindy Lea Gimler, Chief Financial Officer                

24

---