---

---

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


(Mark One)

---

Form 10-Q


---

|                                                                                 |                                                                                         
|-------------------------------------------------------------------------------- | ----------------------------------------------------------------------------------------
|x                                                                                | QUARTERLY REPORT PURSUANT TO
 SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|                                                                                 |                                                                                         
|For the
 quarterly period ended SEPTEMBER 30, 2010                              
|                                                                                 |                                                                                         
|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: 001-11991                                              

---

|                                                 
|-------------------------------------------------
|PURADYN FILTER TECHNOLOGIES
 INCORPORATED        
|(Name of registrant as
 specified in its charter)

|                                                                |                                     
|--------------------------------------------------------------- | ------------------------------------
|Delaware                                                        | 14-1708544                          
|(State or other jurisdiction
 of incorporation or organization) | (I.R.S. Employer Identification No.)
|                                                                |                                     
|2017 High Ridge Road,
 Boynton Beach, FL                        | 33426                               
|(Address of principal
 executive offices)                       | (Zip Code)                          

(561) 547-9499(Registrants telephone number, including area code)

Not Applicable(Former name, former
address and former fiscal year, if changed since last report)

---

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


Yes x No o


Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this
chapter) during the preceding 12 (or for such shorter period that the
registrant was required to submit and post such files). Yes o No o

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

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

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


Yes o No x


Indicated the number of shares outstanding of each of the issuers
classes of common stock, as of the latest practicable date. 46,050,076 shares of common stock are issued
and outstanding as of November 13, 2010.

---

---

---



TABLE OF CONTENTS

|                                 |                                                                                                                               |  |         
|-------------------------------- | ----------------------------------------------------------------------------------------------------------------------------- |  | --------
|                                 |                                                                                                                               |  | Page No.
|PART I. -
 FINANCIAL INFORMATION |                                                                                                                               | 
|Item 1.                          | Financial Statements                                                                                                          |  |         
|                                 | Condensed Consolidated Balance Sheets  As of September 30, 2010
 (unaudited) and December 31, 2009                           |  | 3       
|                                 | Condensed Consolidated Statements of Operations  Three months and
 nine months ended September 30, 2010 and 2009 (unaudited) |  | 4       
|                                 | Condensed Consolidated Statements of Cash Flows  Nine months ended
 September 30, 2010 and 2009 (unaudited)                  |  | 5       
|                                 | Condensed Consolidated Statement of Stockholders Deficit  Nine
 months ended September 30, 2010 (unaudited)                 |  | 6       
|                                 | Notes to Condensed Consolidated Financial Statements                                                                          |  | 7       
|Item 2.                          | Managements Discussion and Analysis of Financial Condition and
 Results of Operations.                                       |  | 15      
|Item 3.                          | Quantitative and Qualitative Disclosures About Market Risk.                                                                   |  | 24      
|Item 4                           | Controls and Procedures.                                                                                                      |  | 24      
|PART II - OTHER
 INFORMATION     |                                                                                                                               | 
|Item 1.                          | Legal Proceedings.                                                                                                            |  | 25      
|Item 1A.                         | Risk Factors.                                                                                                                 |  | 25      
|Item 2.                          | Unregistered Sales of Equity Securities and Use of Proceeds.                                                                  |  | 25      
|Item 3.                          | Defaults Upon Senior Securities.                                                                                              |  | 26      
|Item 4.                          | Removed and Reserved..                                                                                                        |  | 26      
|Item 5.                          | Other Information.                                                                                                            |  | 26      
|Item 6.                          | Exhibits.                                                                                                                     |  | 26      

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 history of losses and
 uncertainty that we will be able to continue as a going concern,                
| |  | our ability to generate
 net sales in an amount to pay our operating expenses,                             
| |  | our need for additional financing
 and uncertainties related to our ability to obtain these funds,         
| |  | our ability to repay the
 outstanding debt of $6.3 million at September 30, 2010 due our Chairman and
 CEO,
| |  | our reliance on sales to a
 limited number of customers,                                                   
| |  | our dependence on a
 limited number of distributors,                                                       
| |  | our ability to compete,                                                                                    
| |  | our ability to protect our
 intellectual property,                                                         
| |  | market overhang issues,
 and                                                                               
| |  | the application of Penny
 Stock Rules to the trading in our stock.                                         

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 our Annual Report on Form 10-K for the year ended December 31,
2009, including the risks described in Part I. Item 1A. Risk Factors, together
with our subsequent filings with the Securities and Exchange Commission in
their entirety. 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

---



PART I - FINANCIAL INFORMATION

ITEM
1. FINANCIAL STATEMENTS

Puradyn Filter Technologies Incorporated 
Condensed Consolidated Balance Sheets 
As of September 30, 2010 and December 31, 2009

|                                                                                                      |  |                                  |             |                    |   |             |  
|----------------------------------------------------------------------------------------------------- |  | -------------------------------- | ----------- | ------------------ | - | ----------- | -
|Assets                                                                                                |  | September
 30, 2010
 (Unaudited) |             | December
 31, 2009 |  
|Current assets:                                                                                       |  |                                  |             |                    |   |             |  
|Cash and cash equivalents                                                                             |  | $                                | 180,247     |                    | $ | 140,266     |  
|Accounts receivable, net of allowance for uncollectible accounts of
 $36,742 and $36,772 respectively |  |                                  | 408,164     |                    |   | 97,072      |  
|Inventories, net                                                                                      |  |                                  | 1,092,492   |                    |   | 851,069     |  
|Prepaid expenses and other current assets                                                             |  |                                  | 118,449     |                    |   | 115,074     |  
|Total current assets                                                                                  |  |                                  | 1,799,352   |                    |   | 1,203,481   |  
|Property and equipment, net                                                                           |  |                                  | 116,754     |                    |   | 132,856     |  
|Other noncurrent assets                                                                               |  |                                  | 77,961      |                    |   | 40,725      |  
|Deferred financing costs, net                                                                         |  |                                  | 2,516       |                    |   | 4,027       |  
|                                                                                                      |  |                                  |             |                    |   |             |  
|Total assets                                                                                          |  | $                                | 1,996,583   |                    | $ | 1,381,089   |  
|Liabilities and stockholders deficit                                                                 |  |                                  |             |                    |   |             |  
|Current
 liabilities:                                                                                 |  |                                  |             |                    |   |             |  
|Accounts payable                                                                                      |  | $                                | 317,116     |                    | $ | 177,032     |  
|Accrued liabilities                                                                                   |  |                                  | 1,283,849   |                    |   | 1,148,318   |  
|Current portion of capital lease obligation                                                           |  |                                  | 2,977       |                    |   | 3,271       |  
|Deferred revenue                                                                                      |  |                                  | 39,058      |                    |   | 73,336      |  
|Total current liabilities                                                                             |  |                                  | 1,643,000   |                    |   | 1,401,957   |  
|Notes Payable - stockholder                                                                           |  |                                  | 6,341,914   |                    |   | 5,710,414   |  
|Capital lease obligation, less current portion                                                        |  |                                  |            |                    |   | 1,989       |  
|Total Long Term Liabilities                                                                           |  |                                  | 6,341,914   |                    |   | 5,712,403   |  
|Total Liabilities                                                                                     |  |                                  | 7,984,914   |                    |   | 7,114,360   |  
|Commitments and contingencies                                                                         |  |                                  |             |                    |   |             |  
|Stockholders deficit:                                                                                |  |                                  |             |                    |   |             |  
|Preferred stock, $.001 par value:                                                                     |  |                                  |            |                    |   |            |  
|Authorized shares - 50,000; None issued and outstanding                                               |  |                                  |             |                    |   |             |  
|Common stock, $.001 par value:                                                                        |  |                                  | 46,011      |                    |   | 43,371      |  
|Authorized shares - 50,000,000                                                                        |  |                                  |             |                    |   |             |  
|Issued and outstanding  46,010,437 and 43,370,935 respectively                                       |  |                                  |             |                    |   |             |  
|Additional paid-in capital                                                                            |  |                                  | 45,987,417  |                    |   | 45,407,337  |  
|Notes receivable from stockholders                                                                    |  |                                  | (790,209    | )                  |   | (790,209    | )
|Accumulated deficit                                                                                   |  |                                  | (51,377,667 | )                  |   | (50,540,355 | )
|Accumulated other comprehensive income                                                                |  |                                  | 146,117     |                    |   | 146,584     |  
|Total stockholders deficit                                                                           |  |                                  | (5,988,331  | )                  |   | (5,733,272  | )
|Total liabilities and stockholders deficit                                                           |  | $                                | 1,996,583   |                    | $ | 1,381,089   |  

See accompanying notes to condensed consolidated financial
statements.

3

---



Puradyn Filter Technologies Incorporated 
Condensed Consolidated Statements of Operations 
For the Three Months and Nine Months Ended September 30, 2010 and 2009 
(Unaudited)

|                                                              |  |                                   |            |                                  |   |            |   |      |            |   |   |            |  
|------------------------------------------------------------- |  | --------------------------------- | ---------- | -------------------------------- | - | ---------- | - | ---- | ---------- | - | - | ---------- | -
|                                                              |  | Three
 Months Ended
 September 30 |            | Nine
 Months Ended
 September 30 |  
|                                                              |  | 2010                              |            | 2009                             |   | 2010       |   | 2009 |           
|                                                              |  |                                   |            |                                  |   |            |   |      |            |   |   |            |  
|Net sales                                                     |  | $                                 | 1,107,163  |                                  | $ | 398,345    |   | $    | 2,542,766  |   | $ | 1,426,257  |  
|                                                              |  |                                   |            |                                  |   |            |   |      |            |   |   |            |  
|Costs and
 expenses:                                          |  |                                   |            |                                  |   |            |   |      |            |   |   |            |  
|Cost of products sold                                         |  |                                   | 696,857    |                                  |   | 429,904    |   |      | 1,635,010  |   |   | 1,407,842  |  
|Salaries and wages                                            |  |                                   | 261,895    |                                  |   | 235,839    |   |      | 772,307    |   |   | 718,855    |  
|Selling and administrative                                    |  |                                   | 237,875    |                                  |   | 226,721    |   |      | 851,974    |   |   | 670,478    |  
|                                                              |  |                                   | 1,196,627  |                                  |   | 892,464    |   |      | 3,259,291  |   |   | 2,797,175  |  
|Loss from operations                                          |  |                                   | (89,464    | )                                |   | (494,119   | ) |      | (716,525   | ) |   | (1,370,918 | )
|                                                              |  |                                   |            |                                  |   |            |   |      |            |   |   |            |  
|Other
 income (expense):                                      |  |                                   |            |                                  |   |            |   |      |            |   |   |            |  
|Interest income                                               |  |                                   | 9          |                                  |   | 147        |   |      | 335        |   |   | (175,747   | )
|Interest expense                                              |  |                                   | (42,568    | )                                |   | (39,771    | ) |      | (121,123   | ) |   | (120,476   | )
|Total other expense, net                                      |  |                                   | (42,558    | )                                |   | (39,624    | ) |      | (120,787   | ) |   | (296,223   | )
|Loss before income taxes                                      |  |                                   | (132,023   | )                                |   | (533,743   | ) |      | (837,312   | ) |   | (1,667,141 | )
|Income tax expense                                            |  |                                   |           |                                  |   |           |   |      |           |   |   |           |  
|Net loss                                                      |  | $                                 | (132,023   | )                                | $ | (533,743   | ) | $    | (837,312   | ) | $ | (1,667,141 | )
|                                                              |  |                                   |            |                                  |   |            |   |      |            |   |   |            |  
|Basic and diluted loss per common share                       |  | $                                 | (0.003     | )                                | $ | (0.01      | ) | $    | (0.02      | ) | $ | (0.04      | )
|                                                              |  |                                   |            |                                  |   |            |   |      |            |   |   |            |  
|Weighted average commonshares outstanding (basic and diluted) |  |                                   | 45,533,367 |                                  |   | 41,096,539 |   |      | 44,465,956 |   |   | 39,050,169 |  

See accompanying notes to condensed consolidated financial
statements.

4

---



Puradyn Filter Technologies Incorporated 
Condensed Consolidated Statements of Cash Flows 
 For the Nine Months Ended September 30, 2010 and 2009 
(Unaudited)

|                                                                             |  |                                  |            |      |   |            |  
|---------------------------------------------------------------------------- |  | -------------------------------- | ---------- | ---- | - | ---------- | -
|                                                                             |  | Nine
 Months Ended September 30, |           
|                                                                             |  | 2010                             |            | 2009 |  
|Operating activities                                                         |  |                                  |            |      |   |            |  
|Net loss                                                                     |  | $                                | (837,312   | )    | $ | (1,667,141 | )
|Adjustments to reconcile net loss to net cash used in operating
 activities: |  |                                  |            |      |   |            |  
|Depreciation and amortization                                                |  |                                  | 33,752     |      |   | 30,111     |  
|Provision for bad debts                                                      |  |                                  | 25         |      |   | 26,257     |  
|Provision for obsolete and slow moving inventory                             |  |                                  | (39,860    | )    |   | 3,386      |  
|Amortization of deferred financing costs included in interest expense        |  |                                  | 1,511      |      |   | 11,461     |  
|Reserve on interest receivable from stockholders notes                      |  |                                  |           |      |   | 244,420    |  
|Compensation expense on stock-based arrangements with employees,             |  |                                  |            |      |   |            |  
|consultants, investors and vendors                                           |  |                                  | 137,619    |      |   | 176,321    |  
|Changes in operating assets and liabilities:                                 |  |                                  |            |      |   |            |  
|Accounts receivable                                                          |  |                                  | (311,117   | )    |   | (39,632    | )
|Inventories                                                                  |  |                                  | (201,563   | )    |   | 276,655    |  
|Prepaid expenses and other current assets                                    |  |                                  | (40,611    | )    |   | 66,559     |  
|Accounts payable                                                             |  |                                  | 140,083    |      |   | 7,472      |  
|Accrued liabilities                                                          |  |                                  | 135,531    |      |   | 96,389     |  
|Deferred revenues                                                            |  |                                  | (34,277    | )    |   | (35,841    | )
|Net cash used in operating activities                                        |  |                                  | (1,016,219 | )    |   | (803,583   | )
|Investing activities                                                         |  |                                  |            |      |   |            |  
|Purchases of property and equipment                                          |  |                                  | (17,649    | )    |   | (43,199    | )
|Net cash used in investing activities                                        |  |                                  | (17,649    | )    |   | (43,199    | )
|Financing activities                                                         |  |                                  |            |      |   |            |  
|Proceeds from sale of common stock                                           |  |                                  | 445,100    |      |   | 1,682,758  |  
|Proceeds from issuance of notes payable to stockholders                      |  |                                  | 631,500    |      |   | 270,712    |  
|Payment of notes payable to stockholder                                      |  |                                  |           |      |   | (1,013,000 | )
|Payment of capital lease obligations                                         |  |                                  | (2,284     | )    |   | (1,312     | )
|Net cash provided by financing activities                                    |  |                                  | 1,074,316  |      |   | 939,158    |  
|Effect of exchange rate changes on cash and cash equivalents                 |  |                                  | (467       | )    |   | (113,092   | )
|Net increase (decrease) in cash and cash equivalents                         |  |                                  | 39,981     |      |   | (20,716    | )
|Cash and cash equivalents at beginning of period                             |  |                                  | 140,266    |      |   | 116,802    |  
|Cash and cash equivalents at end of period                                   |  | $                                | 180,247    |      | $ | 96,086     |  
|Supplemental cash flow information:                                          |  |                                  |            |      |   |            |  
|Cash paid for interest                                                       |  | $                                | 161,966    |      | $ | 114,951    |  
|Noncash investing and financing activities:                                  |  |                                  |            |      |   |            |  
|Expense associated with stock issued in private placement                    |  | $                                | 7,000      |      | $ | 55,010     |  
|Note Payables converted to stockholders equity                              |  | $                                |           |      | $ | 100,000    |  

See accompanying notes to condensed consolidated financial
statements.

5

---



Puradyn Filter Technologies Incorporated 
Consolidated Statements of Changes in
Stockholders Deficit 
For the Nine Months Ended
September 30, 2010 
(Unaudited)

|                                                             |  |              |            |        |   |                               |  |                                        |            |                      |   |                                                   |   |                               |             |   |   |         |   |   |            |  
|------------------------------------------------------------ |  | ------------ | ---------- | ------ | - | ----------------------------- |  | -------------------------------------- | ---------- | -------------------- | - | ------------------------------------------------- | - | ----------------------------- | ----------- | - | - | ------- | - | - | ---------- | -
|                                                             |  |              |            |        |   | Additional
 Paid-in 
 Capital |  | Notes 
 Receivable
 from
 Stockholders |            | Accumulated
 Deficit |   | Accumulated 
 Other
 Comprehensive
 Income (Loss) |   | Total
 Stockholders
 Deficit |            
|                                                             |  | Common Stock |            |        |   |                               |  |                                       
|                                                             |  | Shares       |            | Amount |   |                               |  |                                        |            |                     
|                                                             |  |              |            |        |   |                               |  |                                        |            |                      |   |                                                   |   |                               |             |   |   |         |   |   |            |  
|Balance at December 31, 2009                                 |  |              | 43,370,935 |        | $ | 43,371                        |  | $                                      | 45,407,337 |                      | $ | (790,209                                          | ) | $                             | (50,540,355 | ) | $ | 146,584 |   | $ | (5,733,272 | )
|                                                             |  |              |            |        |   |                               |  |                                        |            |                      |   |                                                   |   |                               |             |   |   |         |   |   |            |  
|Foreign currency translation adjustment                      |  |              |            |        |   |                               |  |                                        |            |                      |   |                                                   |   |                               |             |   |   | (467    | ) |   | (467       | )
|                                                             |  |              |            |        |   |                               |  |                                        |            |                      |   |                                                   |   |                               |             |   |   |         |   |   |            |  
|Net loss                                                     |  |              |            |        |   |                               |  |                                        |            |                      |   |                                                   |   |                               | (837,312    | ) |   |        |   |   | (837,312   | )
|Total comprehensive loss                                     |  |              |            |        |   |                               |  |                                        |            |                      |   |                                                   |   |                               | (837,312    | ) |   | (467    | ) |   | (837,779   | )
|                                                            
|Stock issued for private placement                           |  |              | 2,329,502  |        |   | 2,330                         |  |                                        | 440,671    |                      |   |                                                   |   |                               |             |   |   |         |   |   | 443,000    |  
|                                                             |  |              |            |        |   |                               |  |                                        |            |                      |   |                                                   |   |                               |             |   |   |         |   |   |            |  
|Issuance of shares and warrants to vendors                   |  |              | 295,000    |        |   | 295                           |  |                                        | 59,805     |                      |   |                                                   |   |                               |             |   |   |         |   |   | 60,100     |  
|Exercise of stock options                                    |  |              | 15,000     |        |   | 15                            |  |                                        | 2,085      |                      |   |                                                   |   |                               |             |   |   |         |   |   | 2,100      |  
|Compensation expense associated with unvested option expense |  |              |            |        |   |                               |  |                                        | 77,519     |                      |   |                                                   |   |                               |             |   |   |         |   |   | 77,519     |  
|                                                             |  |              |            |        |   |                               |  |                                        |            |                      |   |                                                   |   |                               |             |   |   |         |   |   |            |  
|Balance at September 30, 2010                                |  |              | 46,010,437 |        | $ | 46,011                        |  | $                                      | 45,987,417 |                      | $ | (790,209                                          | ) | $                             | (51,377,667 | ) | $ | 146,117 |   | $ | (5,988,331 | )

See accompanying notes to condensed consolidated financial
statements.

6

---



Puradyn Filter Technologies Incorporated
Notes to Condensed Consolidated Financial
Statements
September 30, 2010
(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 and
nine-month periods ended September 30, 2010 may not necessarily be indicative
of the results that may be expected for the year ending December 31, 2010.

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, 2009.

Going Concern

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

These
recurring operating losses, liabilities exceeding assets and the reliance on
cash inflows from an institutional investor and current stockholder have led
the Companys independent registered 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, 2009
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. We also continue to implement cost reductions in an
effort to improve margins and anticipate these cost reductions will positively
impact our results of operations during the balance of 2010 and beyond. As an
ongoing measure, we review cost of material increases, some of which were
passed through to our customers as product price increases over the past few
years. Due to the declining economy affecting all of our end-users, management
elected not to increase product prices in the first three quarters of 2010;
however, we may revisit this issue at a later date in 2010 if the market
conditions are appropriate and raw material costs continue to increase.

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

Financial
Accounting Standards Board (FASB) ASC 260, 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 6,354,092 and
6,419,225 respectively for the three-month and nine-month periods ended
September 30, 2010 and 6,123,880 for the three-month and nine-month periods
ended September 30, 2009.

7

---



The Company
adopted FASB ASC 718, Compensation  Stock
Compensation, effective January 1, 2006 using the modified
prospective application method of adoption which requires us to record
compensation cost related to unvested stock awards as of December 31, 2005,
recognizing the amortized grant date fair value in accordance with provisions
of FASB ASC 718 on straight line basis over the service periods of each award.
We have estimated forfeiture rates based on our historical experience. Stock option
compensation expense for the periods ended September 30, 2010 and September 30,
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
FASB ASC 718 and FASB ASC 505 Equity,
including related amendments and interpretations. The related expense is
recognized over the period the services are provided.

Inventories

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

Inventories
consisted of the following at September 30, 2010 and December 31, 2009:

|                     |  |                    |           |                   |   |          |  
|-------------------- |  | ------------------ | --------- | ----------------- | - | -------- | -
|                     |  | September 30, 2010 |           | December 31, 2009 |  
|Raw
 materials       |  | $                  | 1,002,697 |                   | $ | 942,135  |  
|Work In
 Process     |  |                    | 23,702    |                   |   | -0-      |  
|Finished
 goods      |  |                    | 186,050   |                   |   | 68,164   |  
|Valuation
 allowance |  |                    | (119,370  | )                 |   | (159,230 | )
|                     |  | $                  | 1,093,078 |                   | $ | 851,069  |  

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 $503 and $1,007 for the three-months ended September 30, 2010 and
September 30, 2009 and $1,510 and $3,386 for the nine-months ended September
30, 2010 and 2009, respectively. Accumulated amortization of deferred financing
costs as of September 30, 2010 and 2009 was $678,634 and $676,117,
respectively.

Revenue Recognition

The Company
recognizes revenue from product sales to customers, distributors and resellers
when products that do not require further services or installation by the
Company are shipped, when there are no uncertainties surrounding customer
acceptance and when collectibility is reasonably assured in accordance with
FASB ASC 605, Revenue Recognition,
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.

Product Warranty Costs

As required
by FASB ASC 460, Guarantors Guarantees,
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.

8

---



The
following table shows the changes in the aggregate product warranty liability
for the nine months ended September 30, 2010:

|                                              |  |   |        |  
|--------------------------------------------- |  | - | ------ | -
|Balance as of December 31, 2009               |  | $ | 40,000 |  
|Less: Payments made                           |  |   | (2,236 | )
|Add: Provision for current period
 warranties |  |   | 2,088  |  
|Balance as of September 30, 2010              |  | $ | 39,853 |  

Comprehensive Income

FASB ASC
220, Comprehensive Income
establishes rules for reporting and displaying of comprehensive income and its
components. Comprehensive income is the sum of net loss as reported in the
consolidated statements of operations and other comprehensive income
transactions. Other comprehensive income transactions that currently apply to
the Company result from changes in exchange rates used in translating the
financial statements of its wholly owned subsidiary, Puradyn Filter
Technologies, Ltd. (Ltd.). Comprehensive loss as of September 30, 2010 and
2009 is not shown net of taxes because the Companys deferred tax asset has
been fully offset by a valuation allowance.

Comprehensive
loss consisted of the following for the three and nine months ended September
30, 2010 and 2009:

|                                         |  |                                    |          |                                   |   |          |   |      |          |   |   |            |  
|---------------------------------------- |  | ---------------------------------- | -------- | --------------------------------- | - | -------- | - | ---- | -------- | - | - | ---------- | -
|                                         |  | Three
 Months Ended
 September 30, |          | Nine
 Months Ended
 September 30, |  
|                                         |  | 2010                               |          | 2009                              |   | 2010     |   | 2009 |         
|                                         |  |                                    |          |                                   |   |          |   |      |          |   |   |            |  
|Net loss                                 |  |                                    | (132,023 | )                                 | $ | (533,743 | ) |      | (837,312 | ) | $ | (1,667,141 | )
|Other comprehensive income:              |  |                                    |          |                                   |   |          |   |      |          |   |   |            |  
|Foreign currency
 translation adjustment |  |                                    | 714      |                                   |   | 36,860   |   |      | (467     | ) |   | (113,552   | )
|Total other comprehensive
 income        |  |                                    | 714      |                                   |   | 36,860   |   |      | (467     | ) |   | (113,552   | )
|Comprehensive loss                       |  |                                    | (131,309 | )                                 | $ | (496,883 | ) |      | (837,779 | ) | $ | (1,780,693 | )

New Accounting Standards

In October
2009, the FASB (Financial Accounting Standards Board) issued an Accounting
Standard Update (ASU) No. 2009-13, which addresses the accounting for
multiple-deliverable arrangements to enable vendors to account for products or
services separately rather than as a combined unit and modifies the manner in
which the transaction consideration is allocated across the separately
identified deliverables. The ASU significantly expands the disclosure
requirements for multiple-deliverable revenue arrangements. The ASU will be
effective for the first annual reporting period beginning on or after June 15,
2010, and may be applied retrospectively for all periods presented or
prospectively to arrangements entered into or materially modified after the
adoption date. Early adoption is permitted, provided that the guidance is
retroactively applied to the beginning of the year of adoption. The Company
does not expect the adoption of ASU No. 2009-13 to have any effect on its financial
statements upon its required adoption on January 1, 2011.

In December
2009, the FASB issued ASU No. 2009-17, Improvements
to Financial Reporting by Enterprises Involved with Variable Interest Entities
(ASU 2009-17). ASU 2009-17 changes how a reporting entity determines when an
entity that is insufficiently capitalized or is not controlled through voting
(or similar rights) should be consolidated. The determination of whether a
reporting entity is required to consolidate another entity is based on, among
other things, the other entitys purpose and design and the reporting entitys
ability to direct the activities of the other entity that most significantly
impact the other entitys economic performance. ASU 2009-17 requires a number of
new disclosures, including additional disclosures about the reporting entitys
involvement with variable interest entities and any significant changes in risk
exposure due to that involvement. A reporting entity is required to disclose
how its involvement with a variable interest entity affects the reporting
entitys financial statements. ASU 2009-17 is effective at the start of a
reporting entitys first fiscal year beginning after November 15, 2009, or
January 1, 2010, for a calendar year-end entity. Based on the Companys
evaluation of ASU 2009-17, the adoption of this standard did not impact the
Companys consolidated financial statements.

9

---



In January
2010, FASB issued ASU No. 2010-06, Fair
Value Measurements and Disclosures (ASC Topic 820)  Improving Disclosures
About Fair Value Measurements. The ASU requires new disclosures
about transfers into and out of Levels 1 and 2 and separate disclosures about
purchases, sales, issuances, and settlements relating to Level 3 measurements.
It also clarifies existing fair value disclosures about the level of
disaggregation and about inputs and valuation techniques used to measure fair
value. The new disclosures and clarifications of existing disclosures are
effective for interim and annual reporting periods beginning after December 15,
2009, except for the disclosures about purchases, sales, issuances, and
settlements in the roll forward of activity in Level 3 fair value measurements.
Those disclosures are effective for fiscal years beginning after December 15,
2010, and for interim periods within those fiscal years. Other than requiring
additional disclosures, the adoption of this new guidance will not have a
material impact on the Companys consolidated results of operations and
financial position.

On February
24, 2010, the FASB issued an update to address certain implementation issues
related to Accounting Standards Codification, or ASC, 855-10-50, Subsequent EventsDisclosure, regarding an
entitys requirement to perform and disclose subsequent events procedures.
Effective upon its issuance, the update exempts Securities and Exchange
Commission registrants from disclosing the date through which subsequent events
have been evaluated. This update affected disclosure only and had no impact on
our consolidated financial position or consolidated results of operations.

In March
2010, the FASB issued ASU 2010-11, Derivatives and Hedging (Topic 815): Scope
Exception Related to Embedded Credit Derivatives. The amendments in this Update
are effective for each reporting entity at the beginning of its first fiscal
quarter beginning after June 15, 2010. Early adoption is permitted at the
beginning of each entitys first fiscal quarter beginning after issuance of
this Update. The Company does not expect the provisions of ASU 2010-11 to have
a material effect on the financial position, results of operations or cash
flows of the Company.

In August
2010, the FASB issued ASU 2010-22, Accounting for Various Topics - Technical
Corrections to SEC Paragraphs - An announcement made by the staff of the U.S.
Securities and Exchange Commission. This Accounting Standards Update amends
various SEC paragraphs based on external comments received and the issuance of
SAB 112, which amends or rescinds portions of certain SAB topics. The Company
does not expect the provisions of ASU 2010-22 to have a material effect on its
financial position, results of operation or cash flows.

In August 2010, the FASB issued ASU 2010-21, Accounting for Technical
Amendments to Various SEC Rules and Schedules: Amendments to SEC Paragraphs
Pursuant to Release No. 33-9026: Technical Amendments to Rules, Forms,
Schedules and Codification of Financial Reporting Policies. The Company does
not expect the provisions of ASU 2010-21 to have a material effect on its
financial position, results of operations or cash flows.

2.        Issues Affecting Liquidity and
Managements Plans

The
Companys financial statements have been prepared assuming that the Company
will continue as a going concern. The Company has sustained losses since
inception and used net cash in operations of $1,016,219 and $803,583 during the
nine months ended September 30, 2010 and 2009, respectively. As a result, the
Company has had to rely principally on private equity investments and
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, 2009
expressing substantial doubt as to the Companys ability to continue as a going
concern.

The Company
has been addressing the working capital issues and continues to attempt to
raise additional capital with institutional and private investors and current
stockholders. We also continue to implement cost reductions in purchasing raw
materials, overhead expenses and administrative expenses in an effort to
improve margins and operating efficiencies. We anticipate these costs
reductions will positively impact our results of operations during the balance
of 2010 and beyond.

10

---



The Company
continues to address liquidity concerns because of slow revenue growth. As a
result, cash flow from operations is insufficient to cover our liquidity needs
for the immediate future. The Company has continued the process of aggressively
seeking to raise capital and continues to explore financing availability and
options with investment bankers, funds, private sources, members of management
and existing shareholders. The Company has implemented measures to preserve its
ability to operate, including organizational changes, deferral of salaries,
reduction in personnel and renegotiating creditor and collection arrangements.
There can be no assurance that we 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, this 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 2010, the
executive officer, director and stockholder extended the maturity date of the
loan agreement annually, which currently expires on December 31, 2011. As of
September 30, 2010, the Company had drawn a total of $6,341,914 of the
available funds, net of repayments.

The Company
anticipates increased cash flows from 2010 sales activity; 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 2011. 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
5, 2010 the Company agreed to pay to Emerging Markets, LLC, 60,000 shares of
common stock valued at $0.23 per share plus 20,000 shares of the Companys
common stock payable at the end of each month while the agreement is in effect
during 2010. Pursuant to this agreement, on July 1, 2010, the Company issued
20,000 shares of common stock valued at $0.17 per share; on August 1, 2010 the
Company issued 20,000 shares of common stock valued at $0.26 per share; and on
September 1, 2010, the Company issued 20,000 shares of common stock valued at
$0.24 per share.

On July 7,
2010, the Company awarded a consultant 75,000 shares of common stock, which
were issued as restricted shares under SEC Rule 144 at a price of $0.18 for
legal services on behalf of the Company.

On July 9,
2010 the Company received proceeds of $100,000 from the sale of 571,429 shares
of common stock restricted under SEC Rule 144, at a price of $0.175 per share
and, as part of the offering, issued warrants to purchase 57,143 shares of
common stock at an exercise price of $0.50, which expire on July 9, 2015.

On July 20,
2010 the Company received proceeds of $50,000 from the sale of 303,030 shares
of common stock restricted under SEC Rule 144, at a price of $0.165 per share
and, as part of the offering, issued warrants to purchase 30,303 shares of
common stock at an exercise price of $0.50, which expire on July 20, 2015.

On July 21,
2010, the Company received proceeds of $50,000 from the sale of 304,878 shares
of common stock restricted under SEC Rule 144, at a price of $0.164 per share
and, as part of the offering, issued warrants to purchase 30,488 shares of
common stock at an exercise price of $0.50, which expire on July 21, 2015.

On July 30,
2010, the Company received proceeds of $50,000 from the sale of 253,807 shares
of common stock restricted under SEC Rule 144, at a price of $0.197 per share
and, as part of the offering, issued warrants to purchase 25,381 shares of
common stock at an exercise price of $0.50, which expire on July 30, 2015.

On August
4, 2010, the Company received proceeds of $50,000 from the sale of 210,084
shares of common stock restricted under SEC Rule 144, at a price of $0.238 per
share and, as part of the offering, issued warrants to purchase 21,008 shares
of common stock at an exercise price of $0.50, which expire on August 4, 2015.

11

---



On August
4, 2010, the Company received proceeds of $50,000 from the Companys Chairman
and CEO, for the sale of 210,084 shares of common stock restricted under SEC
Rule 144, at a price of $0.238 per share and, as part of the offering, issued
warrants to purchase 21,008 shares of common stock at an exercise price of
$0.50, which expire on August 4, 2015.

4.        Stock Options

During the
three-month and nine-month periods ended September 30, 2010, the Company
recognized compensation expense of $-0- and $34,438, respectively. During the
three-month and nine-month periods ending September 30, 2009 the Company
recognized compensation expense of approximately $102,000 and $232,000, respectively.

At
September 30, 2010, 4,558,975 warrants with an average exercise price of $0.97
remain outstanding and were fully vested.

For the
three-month and nine-month periods ended September 30, 2010, the Company
recorded stock-based compensation expense of $14,493 and $44,764, related to
unvested employee stock options. For the three-month and nine-month periods
ended September 30, 2009, the Company recorded stock-based compensation expense
of $13,832 and $31,452, related to unvested employee stock options.

Stock
options and warrants issued to consultants and other non-employees as
compensation for services provided to the Company are accounted for based on
the fair value
of the services provided or the estimated fair market value of the option or
warrant, whichever is more reliably measurable in accordance with FASB ASC 505,
Equity,and FASB ASC 718,Compensation  Stock Compensation. The
related expense is recognized over the period the services are provided.

A summary
of the Companys stock option plans as of September 30, 2010, and changes
during the nine month period then ended is presented below:

|                                           |  |                                        |           |                                   |  |      | 
|------------------------------------------ |  | -------------------------------------- | --------- | --------------------------------- |  | ---- | 
|                                           |  | Nine
 Months Ended
 September 30, 2010 |          
|                                           |  | Number
 of Options                     |           | Weighted
 Average
 Exercise Price | 
|                                           |  |                                        |           |                                   |  |      | 
|Options outstanding at beginning of period |  |                                        | 1,910,075 |                                   |  | 1.95 | 
|Options granted                            |  |                                        | 746,508   |                                   |  | 0.21 | 
|Options exercised                          |  |                                        | 15,000    |                                   |  | 0.14 | 
|Options expired                            |  |                                        | 350,000   |                                   |  | 8.30 | 
|Options cancelled                          |  |                                        | 165,000   |                                   |  | 0.47 | 
|Options at end of period                   |  |                                        | 2,126,583 |                                   |  | 0.42 | 
|Options exercisable at end of period       |  |                                        | 909,538   |                                   |  | 0.68 | 

A
summary of the Companys stock option plans as of September 30, 2010, and
changes during the three month period then ended is presented below:

|                                           |  |                                         |           |                                   |  |      | 
|------------------------------------------ |  | --------------------------------------- | --------- | --------------------------------- |  | ---- | 
|                                           |  | Three
 Months Ended
 September 30, 2010 |          
|                                           |  | Number
 of Options                      |           | Weighted
 Average
 Exercise Price | 
|Options outstanding at beginning of period |  |                                         | 1,931,583 |                                   |  | 1.85 | 
|Options granted                            |  |                                         | 550,000   |                                   |  | 0.21 | 
|Options expired                            |  |                                         | 310,000   |                                   |  | 8.97 | 
|Options cancelled                          |  |                                         | 45,000    |                                   |  | 0.33 | 
|Options at end of period                   |  |                                         | 2,126,583 |                                   |  | 0.42 | 
|Options exercisable at end of period       |  |                                         | 909,538   |                                   |  | 0.68 | 

12

---



Changes in
the Companys unvested options for the nine months ended September 30, 2010 are
summarized as follows:

|                                         |  |                                       |           |                                  |  |      | 
|---------------------------------------- |  | ------------------------------------- | --------- | -------------------------------- |  | ---- | 
|                                         |  | Nine Months Ended
 September 30, 2010 |          
|                                         |  | Number of Options                     |           | Weighted Average
 Exercise Price | 
|Options
 unvested at beginning of period |  |                                       | 857,075   |                                  |  | 0.28 | 
|Options
 granted                         |  |                                       | 746,508   |                                  |  | 0.21 | 
|Options
 vested                          |  |                                       | 275,288   |                                  |  | 0.30 | 
|Options
 cancelled                       |  |                                       | 111,250   |                                  |  | 0.33 | 
|Options
 unvested at end of period       |  |                                       | 1,217,045 |                                  |  | 0.23 | 

Changes in
the Companys unvested options for the three months ended September 30, 2010
are summarized as follows:

|                                        |  |                                         |           |                                   |  |      | 
|--------------------------------------- |  | --------------------------------------- | --------- | --------------------------------- |  | ---- | 
|                                        |  | Three
 Months Ended
 September 30, 2010 |          
|                                        |  | Number
 of Options                      |           | Weighted
 Average
 Exercise Price | 
|Options unvested at beginning of period |  |                                         | 831,583   |                                   |  | 0.26 | 
|Options granted                         |  |                                         | 550,000   |                                   |  | 0.21 | 
|Options vested                          |  |                                         | 143,288   |                                   |  | 0.34 | 
|Options cancelled                       |  |                                         | 21,250    |                                   |  | 0.25 | 
|Options unvested at end of period       |  |                                         | 1,217,045 |                                   |  | 0.23 | 

|                         |  |                     |           |                                                  |  |                                   |  |                     |      |                                   |  |         |  |  |      | 
|------------------------ |  | ------------------- | --------- | ------------------------------------------------ |  | --------------------------------- |  | ------------------- | ---- | --------------------------------- |  | ------- |  |  | ---- | 
|                         |  |                     |           |                                                  |  |                                   |  |                     |      |                                   |  |         |  |  |      | 
|                         |  | 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 | 
|$.14  $1.70             |  |                     | 2,078,583 |                                                  |  | 4.34                              |  |                     | 0.38 |                                   |  | 861,538 |  |  | 0.59 | 
|1.99  3.13              |  |                     | 48,000    |                                                  |  | 1.40                              |  |                     | 2.32 |                                   |  | 48,000  |  |  | 2.32 | 
|Totals                   |  |                     | 2,126,583 |                                                  |  | 4.01                              |  |                     | 0.42 |                                   |  | 909.538 |  |  | 0.68 | 

13

---



A summary
of the Companys warrant activity as of September 30, 2010 and changed during
the nine and three month periods then ended is presented below:

|                                                |  |                                        |           |       |  |      | 
|----------------------------------------------- |  | -------------------------------------- | --------- | ----- |  | ---- | 
|                                                |  | Nine Months Ended
 September 30, 2010  |          
|                                                |  | Weighted Average Exercise              |          
|                                                |  | Warrants                               |           | Price | 
|Warrants outstanding at the beginning of period |  |                                        | 4,426,025 |       |  | 0.99 | 
|Granted                                         |  |                                        | 232,950   |       |  | 0.50 | 
|Exercised                                       |  |                                        |          |       |  |     | 
|Expired                                         |  |                                        | 100,000   |       |  | 0.95 | 
|Warrants outstanding at end of period           |  |                                        | 4,558,975 |       |  | 0.97 | 
|                                                |  |                                        |           |       |  |      | 
|                                                |  | Three Months Ended
 September 30, 2010 |          
|                                                |  | Weighted Average Exercise              |          
|                                                |  | Warrants                               |           | Price | 
|Warrants outstanding at the beginning of period |  |                                        | 4,373,644 |       |  | 0.99 | 
|Granted                                         |  |                                        | 185,331   |       |  | 0.50 | 
|Exercised                                       |  |                                        |          |       |  |     | 
|Expired                                         |  |                                        |          |       |  |     | 
|Warrants outstanding at end of period           |  |                                        | 4,558,975 |       |  | 0.97 | 

|                         |  |                      |           |                                                   |  |                                     |  |   |      | 
|------------------------ |  | -------------------- | --------- | ------------------------------------------------- |  | ----------------------------------- |  | - | ---- | 
|                         |  | Warrants Outstanding |          
|Range of
 Exercise Price |  | Number
 Outstanding  |           | Remaining
 Average
 Contractual Life 
 (In Years) |  | Weighted 
 Average 
 Exercise Price | 
|$0.50
  $0.75           |  |                      | 1,769,903 |                                                   |  | 3.88                                |  | $ | 0.52 | 
|$1.25                    |  |                      | 2,789,072 |                                                   |  | 2.31                                |  |   | 1.25 | 
|Totals                   |  |                      | 4,558,975 |                                                   |  | 3.05                                |  | $ | 0.97 | 

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

As
of September 30, 2010, the Company had drawn all of the $6.3 million from the
available line-of-credit, which is provided by an executive officer, director,
and stockholder 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 2.64% as of June 30, 2010) payable monthly and become
due and payable on December 31, 2011, 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, 2010, the maturity date of the stockholder loan
was extended from December 31, 2010 to December 31, 2011.

For
the three months ended September 30, 2010 and 2009, the Company recorded
$41,154 and $37,366 respectively; and for the nine months ended September 30,
2010 and 2009, the Company recorded $116,833 and $112,727, 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 45% and approximately
13% (for a total 58%) of the net sales for the nine-months ended September 30,
2010.

14

---



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, its ability to satisfy its
obligations as they become due, 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

Our History

The
patents issued on the oil filtration system that evolved into the current Puradyn bypass oil filtration system were
issued in the early 1980s. In 1988, the Company was incorporated in Delaware
under the name Econology Systems, Inc. In 1990, the name was changed to T/F
Purifiner, Inc. In February 1998, the company changed its name from T/F Purifiner,
Inc. to Puradyn Filter Technologies Incorporated.

Our Product

Puradyn
Filter Technologies Incorporated designs, manufactures, markets and distributes
worldwide the pura DYN® bypass oil filtration system (the Puradyn)
for use with substantially all internal combustion engines and hydraulic
equipment that use lubricating oil. Working in conjunction with an engines
full-flow oil filter, the Puradyn system cleans oil by
continually removing solid, liquid and gaseous contaminants from the oil
through a sophisticated and unique filtration and evaporation process. For
engine lubricating oil, our filters incorporate an additive package. Because Puradyn-filtered lubricating oil is kept
in a continually clean state, our system has been used effectively to extend
oil-drain intervals and the time between engine overhauls. We are the exclusive
manufacturer of the disposable replacement filter elements (Element) for the Puradyn.

The
patented Puradyn bypass oil filtration system can be attached to
almost any engine and hydraulic system. The concept of bypass filtration is
similar to a dialysis machine that filters blood to rid it of impurities,
keeping the oil continually clean. Whenever the engine or machinery is
operating, the Puradyn is extracting from the oil
solid particles down to less than one micron (1/39 millionth of an inch), as
well as gaseous and liquid contaminants, while protecting the engine or
hydraulic equipment from harmful wear caused by contaminants in the oil.
Additive packages in which chemicals are added to the filtering media replenish
spent additives in the oil, helping to maintain the oils proper chemical
balance and viscosity.

All
Puradyn systems
are compatible with virtually all standard and synthetic oils on the market and
they work with engines using gasoline, diesel, propane or natural gas. The Puradyn system
cannot be used on engines that do not have a pressurized lubricating system,
and none of the products can be used on any engines that mix oil with fuel.
Potential savings are achieved from utilizing the Puradyn, which generally has a relatively short payback
period of, on average, six to 14 months, depending upon the application.

By
continually removing contaminants and replacing vital additives through a
patented time-release additive package to keep oil constantly clean, the Puradyn Element
substantially extends intervals between oil changes.

15

---



Sales

Sales
of the Companys products, 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 the future.

We
focus our sales strategy on direct 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
106 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.

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

| |                                   |                                                                                                                                                                                                              
| | --------------------------------- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | This strategy includes
 focus on:
| |                                  
| |                                  | The
 expansion of existing strategic relationships we have with John Deere, Avis,
 and others;                                                                                                               
| |                                  | Continued
 development and expansion of our distribution network with distributors who
 are trained by us and stock inventory 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; and                                                                                                       
| |                                  | Converting
 customer evaluations into sales, both immediate and long term.                                                                                                                                   

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

| |   |                                                                                                                                                                                                                                                                                                                                                                                                               
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | In
 the third quarter of 2010, we achieved record sales and order levels. The
 record-setting month of August 2010 marked the first time we recorded orders
 in excess of $800,000 in a single month.                                                                                                                                                                                                         
| |  | Increasing
 demand for our technology from industries in need of microfiltration for
 engines that run extended periods of time with high oil usage. These
 industries typically operate massive equipment with immense oil capacities
 and to our knowledge we are the only bypass oil filtration company providing
 this type of technology for engines and hydraulics using these large
 quantities of oil.
| |  | Increased
 activity in the open pit mining industry for large haul trucks carrying
 upwards of 250 tons of material from the mine face.                                                                                                                                                                                                                                                                       
| |  | Extended
 retrofit programs with domestic and international industrial service
 companies.                                                                                                                                                                                                                                                                                                                    

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, coupled with the added benefits of being
environmentally beneficial and a means to conserve oil, has timely and
favorably positioned the Company as a manufacturer of a cost efficient green
product.

16

---



Our
customers have found that bypass oil filtration technology affords the same
benefits of the claims made by alternative energy source providers  reduce
significant oil consumption and minimize a companys carbon footprint.

Recognizing
that a level of oil consumption is not 100% avoidable, we promote our
technology as environmentally-friendly in that it provides a practical and more
intelligent use of oil as opposed to the accepted norm of oil as a disposable
and infinite resource. By keeping engine and hydraulic oil continuously clean,
equipment runs at optimum efficiency and the oil can be kept in use, extending
the life of the oil several cycles.

Consequently,
the Puradyn system significantly
reduces maintenance costs by decreasing oil consumption, engine wear, and
certain other types of general maintenance as well as reducing environmental
concerns and costs associated with the storage and disposal of waste oil.

We
also believe that industry acceptance will continue to grow in the remainder of
2010 and in 2011 as evidenced by increased sales activity in the first nine
months of 2010; 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.

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 12 months, evaluations are often influenced by a number of
variables including equipment type and applications downtime or servicing,
which may extend the evaluation period. Consequently, the sales cycle can be
relatively long.

We
believe international sales are especially well suited to our product given
that much of the equipment is located in remote areas, therefore, due solely to
logistics of manpower resources and physically being able to reach the
equipment in a timely manner to perform the necessary oil related maintenance.
In addition, in certain countries, fuel and emission regulations are not as
stringent as in North America, causing engines to operate under more severe
conditions. Certain applications representing a higher and more immediate
return on investment are 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.

Our
focus on specific industries throughout 2009 continues to pay dividends through
the first nine months of 2010. These industries are demonstrating early signs
of recovery from the economys current situation, and we are beginning to
benefit from their recovery. We have also seen signs from our international
business of increasing activity and orders in the first three quarters of 2010.
Our activity with an OEMs has substantially increased in 2010 and should provide
benefits throughout 2011.

Optimizing
our limited resources and obtaining sufficient capital is 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 specific niche industries using our system. To accomplish these
tasks, we may need to obtain capital funding and add appropriate sales and
marketing support to be sure our distributors and customers are served. As a response
to our growing sales, in early 2010, we hired an additional sales person and
anticipate the need for at least one more sales person plus one sales support
person. We also added an applications engineer in the last quarter of 2009 and
will need a product engineer as we grow our OEM account list. The expansion
into the OEM area is rewarding in the aspect that it provides a steady flow of
material requirements for our manufacturing facility. Additionally, OEM
business allows us more stability in retaining trained 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.

We
continue to address our liquidity and working capital issues as we continue to
seek additional capital from institutional and private investors and current
stockholders. Historically, we have faced difficulties in raising adequate
capital and we anticipate that those difficulties will continue given the current
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. We have observed the
positive impact of these efforts on the current periods and anticipate these
costs reductions will continue to positively impact our results of operations
during the balance of 2010 and beyond.

17

---



Going Concern

Our
financial statements have been prepared on the basis that we will operate as a
going concern, which contemplates the realization of assets and satisfaction of
liabilities in the normal course of business. We have incurred net losses each
year since inception and have relied on the sale of our stock from time to time
and loans from third parties and from related parties to fund our operations.
At September 30, 2010 we had an accumulated deficit of $51,377,667. 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, 2009 and 2008 expressing
substantial doubt about our ability to continue as a going concern. Our ability
to continue as a going concern is dependent upon our ability to obtain the
necessary financing to meet our obligations and repay our liabilities when they
become due and to generate profitable operations in the future. We plan to
continue to provide for our capital requirements through the sale of equity
securities, however, we have no firm commitments from any third party to
provide this financing and we cannot assure you we will be successful in
raising working capital as needed. There are no assurances that we will have
sufficient funds to execute our business plan, pay our obligations as they
become due, or generate positive operating results.

Critical Accounting Policies and Estimates

Our
discussion and analysis of our financial condition and results of operations
are based upon our consolidated financial statements, which have been prepared
in accordance with accounting principles generally accepted in the United
States. The preparation of these financial statements requires us to make
estimates and judgments that affect the reported amounts of assets,
liabilities, revenues and expenses, and related disclosure of contingent assets
and liabilities. On an ongoing 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 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 our 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 continue to 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.

Inventory and estimation of inventory obsolescence

Inventories
are valued at the lower of cost or market using the first in, first out (FIFO)
method. Valuation allowances for obsolete and excess inventory and shrinkage
are also recorded. Such estimates are based on experience and the most recent
physical inventory results. The valuation allowances for obsolete and excess
inventory in multiple stages of processing, requires management judgment and
estimates that may impact the ending inventory valuation and valuation
allowances that may affect the reported gross margin for the period.

18

---



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

Impairment of long-lived assets

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

Revenue recognition

Revenue
is recognized when earned. Our revenue recognition policies are in compliance
with the provisions issued in FASB ASC 605, Revenue
Recognition. Revenue from product sales to customers, distributors
and resellers is recorded when products that do not require further services or
installation by us are shipped, when there are no uncertainties surrounding
customer acceptance and for which collectibility 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.

Results of Operations for the Three-months Ended September
30, 2010 Compared to the Three-months Ended September 30, 2009

The
following table sets forth the amount of increase or decrease represented by
certain items reflected in our condensed consolidated statements of operations
in comparing the three-months ended September 30, 2010 to the three-months
ended September 30, 2009:

|                           |  |                                   |           |      |   |          |   |   |         |  
|-------------------------- |  | --------------------------------- | --------- | ---- | - | -------- | - | - | ------- | -
|                           |  | Three
 Months Ended September 30, |          
|                           |  | 2010                              |           | 2009 |   | Change   |  
|Net sales                  |  | $                                 | 1,107,163 |      | $ | 398,345  |   | $ | 708,818 |  
|                           |  |                                   |           |      |   |          |   |   |         |  
|Costs and expenses:        |  |                                   |           |      |   |          |   |   |         |  
|Cost of products sold      |  |                                   | 696,853   |      |   | 429,904  |   |   | 266,953 |  
|Salaries and wages         |  |                                   | 261,895   |      |   | 235,839  |   |   | 26,056  |  
|Selling and administrative |  |                                   | 237,875   |      |   | 226,721  |   |   | 11,154  |  
|Total costs and expenses   |  |                                   | 1,196,627 |      |   | 892,464  |   |   | 304,163 |  
|                           |  |                                   |           |      |   |          |   |   |         |  
|Other (expense) income:    |  |                                   |           |      |   |          |   |   |         |  
|Interest income            |  |                                   | 9         |      |   | 147      |   |   | (138    | )
|Interest expense           |  |                                   | (42,568   | )    |   | (39,771  | ) |   | (2,797  | )
|Total other expense        |  |                                   | (42,559   | )    |   | (39,624  | ) |   | 2,935   |  
|Net loss                   |  | $                                 | (132,023  | )    | $ | (533,743 | ) | $ | 401,720 |  

19

---



Net
sales increased by 178% in the three months ended September 30, 2010 from the
comparable period in 2009. This increase was attributable primarily to one
customers increased purchases of approximately $700,000.

Sales
to two customers accounted for 73% and 6% (for a total of 79%) respectively of
the consolidated net sales for the three-months ended September 30, 2010. Sales
to three customers individually accounted for approximately 16%, 13% and 10%
(for a total 39%) of net sales for the three-months ended September 30, 2009.

Although
we anticipate sales in the fourth quarter of 2010 to be stronger than sales in
the comparative fourth quarter of 2009, we do not expect our fourth quarter
sales to have the same growth that we experienced in the three month period
ended September 30, 2010 when compared to the same period in 2009.

Cost of Products Sold

Cost
of products sold, as a percentage of sales, decreased from 108% for the three
months ended September 30, 2009 to 63% in the three months ended September 30,
2010. The decrease in cost of goods sold as a percentage of sales is primarily
attributable to the allocation of fixed and variable factory costs over higher
production during the period, a reduction in the reserve for slow moving parts
based on sales of those items and a reduction in warranty reserves based on
historical claims experience. Other factors contributing to an improved cost of
sales include lower scrap expenses, lower costs of raw materials, reduced
direct manufacturing payroll costs and elimination of temporary labor costs. We
anticipate that such cost savings and higher productivity will continue through
the balance of the year.

Salaries and Wages

Salaries
and wages increased by 11% during the three months ended September 30, 2010
from the comparable period in 2009. The increase resulted from two engineers
who were hired during 2009; one in August and the other in November and the
addition to our sales staff, hired March 2010 and a member of our production
team hired April, 2010. The increase in payroll expense was offset by the
departure of accounting personnel in April, 2010. Salaries and wages, as a
percentage of sales, were 23.6% for the three months ending September 30, 2010
and 59.2% for the three months ending September 30, 2009. Management
anticipates minimal hiring if the OEM and niche industry targets increase
sales. Otherwise, management does not anticipate any changes to our salaries
and wages at our current sales volume.

Selling and Administrative Expenses

Selling
and administrative expenses increased by 4.9% for the three months ended
September 30, 2010 from the comparable period in 2009. This increase is due to
a decrease in exchange rate losses and stock compensation, offset by increases
in professional fees, investor relations expenses and patent expenses. Although
the current period experienced a small increase in selling and administrative
expenses for the three months ended September 30, 2010 as compared to the same
period ended September 30, 2009, the Company expects to continue to see overall
decreases in selling and administrative costs through the remainder of 2010.
The following table lists the major categories of expenses included in Selling
and Administrative expenses:

|                            |  |                                   |         |      |   |         |   |   |         |  
|--------------------------- |  | --------------------------------- | ------- | ---- | - | ------- | - | - | ------- | -
|                            |  | Three
 Months Ended September 30, |        
|                            |  |                                   |         |      |   |         |  
|                            |  | 2010                              |         | 2009 |   | Change  |  
|Employee Benefits & Payroll |  | $                                 | 39,324  |      | $ | 32,247  |   | $ | 7,077   |  
|Travel & Marketing          |  |                                   | 43,423  |      |   | 34,252  |   |   | 9,171   |  
|Engineering                 |  |                                   | 15,482  |      |   | 12,258  |   |   | 3,224   |  
|Professional Fees           |  |                                   | 52,733  |      |   | 16,909  |   |   | 35,824  |  
|Investor Relations          |  |                                   | 13,535  |      |   | 401     |   |   | 13,134  |  
|Patent Expense              |  |                                   | 23,322  |      |   | 5,615   |   |   | 17,707  |  
|Stock Compensation          |  |                                   | 1,628   |      |   | 46,658  |   |   | (45,030 | )
|Bad Debts                   |  |                                   |        |      |   | (8,470  | ) |   | 8,470   |  
|Exchange (Gain)/Loss        |  |                                   |        |      |   | 36,699  |   |   | (36,699 | )
|Other Expenses              |  |                                   | 48,427  |      |   | 50,152  |   |   | (1,725  | )
|Total                       |  | $                                 | 237,875 |      | $ | 226,721 |   | $ | 11,154  |  

20

---



Interest Expense

Interest
expense increased by 7% for the three months ended September 30, 2010 from the
comparable period in 2009 as a result of additional borrowings on the
stockholder notes payable. The Company pays interest monthly on the notes
payable to a stockholder at a weighted average of two facilities, one is based
on a minimum of 2.75% or prime rate less .5% and the other is based on LIBOR
plus 1.40, with rates reset as often as the Federal Reserve changes interest
rates. The weighted average interest rate of the two notes was 2.60% as of
September 30, 2010 as opposed to 2.51% as of September 30, 2009.

Results of Operations for the Nine-months Ended September 30,
2010 Compared to the Nine-months Ended September 30, 2009

The
following table sets forth the amount of increase or decrease represented by
certain items reflected in our condensed consolidated statements of operations
in comparing the nine-months ended September 30, 2010 to the nine-months ended
September 30, 2009:

|                           |  |                                  |           |      |   |            |   |   |           |  
|-------------------------- |  | -------------------------------- | --------- | ---- | - | ---------- | - | - | --------- | -
|                           |  | Nine
 Months Ended September 30, |          
|                           |  |                                  |          
|                           |  | 2010                             |           | 2009 |   | Change     |  
|Net sales                  |  | $                                | 2,542,766 |      | $ | 1,426,257  |   | $ | 1,116,509 |  
|Costs and expenses:        |  |                                  |           |      |   |            |   |   |           |  
|Cost of products sold      |  |                                  | 1,635,010 |      |   | 1,407,842  |   |   | 227,168   |  
|Salaries and wages         |  |                                  | 772,307   |      |   | 718,855    |   |   | 53,452    |  
|Selling and administrative |  |                                  | 851,974   |      |   | 670,478    |   |   | 181,496   |  
|Total costs and expenses   |  |                                  | 3,259,291 |      |   | 2,797,175  |   |   | 462,116   |  
|Other (expense) income:    |  |                                  |           |      |   |            |   |   |           |  
|Interest income            |  |                                  | 335       |      |   | (175,747   | ) |   | 176,082   |  
|Interest expense           |  |                                  | (121,123  | )    |   | (120,476   | ) |   | (647      | )
|Total other expense        |  |                                  | (120,787  | )    |   | (296,223   | ) |   | 175,436   |  
|                          
|Net loss                   |  | $                                | (837,312  | )    | $ | (1,667,141 | ) | $ | 829,829   |  

Net Sales

Net
sales increased by 78% for the nine months ended September 30, 2010 from the nine
months ended September 30, 2009 which was attributable primarily to one
customers increased purchases as set forth above.

Sales
to three customers accounted for 45%, 13% and 8% (for a total of 66%)
respectively of the consolidated net sales for the nine months ended September
30, 2010. Sales to three customers individually accounted for approximately
32%, 13% and 8% (for a total 53%) of net sales for the nine months ended
September 30, 2009.

Cost of Products Sold

Cost
of products sold, as a percentage of sales, decreased from 99% for the nine
months ended September 30, 2009 to 54% for the comparable period in 2010. As
previously mentioned, the decrease in cost of goods sold as a percentage of
sales, is primarily attributable to the allocation of fixed and variable
factory costs over higher production during the period, a reduction in the
reserve for slow moving parts based on sales of those items and a reduction in
warranty reserves based on historical claims experience. Other factors
contributing to an improved cost of sales include lower scrap expenses, lower
costs of raw materials, reduced direct manufacturing payroll costs and
elimination of temporary labor costs. We anticipate that such cost savings and
higher productivity will continue through the balance of the year.

21

---



Salaries and Wages

Salaries
and wages increased 7% for the nine months ended September 30, 2010 from the
comparable period in 2009. As previously mentioned, the increase resulted from
two engineers who were hired during 2009; one in August and the other in
November and the addition to our sales staff, hired March 2010 and a member of
our production team hired April, 2010. The increase in payroll expense was
offset by the departure of accounting personnel in April, 2010. Salaries and
wages, as a percentage of sales, were 30.4% for the nine months ending
September 30, 2010 and 51.1% for the nine months ending September 30, 2009.
Management anticipates minimal hiring if the OEM and niche industry targets
increase sales. Otherwise, management does not anticipate any changes to our
salaries and wages at our current sales volume.

Selling and Administrative Expenses

Selling
and administrative expenses increased by 27% for the nine months ended
September 30, 2010 from the comparable period in 2009. This increase is due to
a decrease in exchange rate gains experienced in 2009 and increases in
professional fees, investor relations expenses and travel and marketing
expenses. Those increases were offset by a decrease in stock compensation expenses.
Although the current period experienced an increase in selling and
administrative expenses for the nine months ended September 30, 2010 as
compared to the same period ended September 30, 2009, the Company expects to
continue to see overall decreases in selling and administrative costs through
the remainder of 2010. Selling and Administrative Expenses for the nine months
ended September 30, 2009 without the exchange gain total $789,104. When this
amount is compared to Selling and Administrative expenses for the nine months
ended September 30, 2010 in the amount of $851,974, the increase represents an
8% higher amount over the same period in the prior year. The following table
lists the major categories of expenses included in Selling and Administrative
expenses:

|                             |  |                                  |         |      |   |          |   |   |          |  
|---------------------------- |  | -------------------------------- | ------- | ---- | - | -------- | - | - | -------- | -
|                             |  | Nine Months
 Ended September 30, |        
|                             |  |                                  |        
|                             |  | 2010                             |         | 2009 |   | Change   |  
|Employee Benefits &
 Payroll |  | $                                | 117,468 |      | $ | 90,553   |   | $ | 26,915   |  
|Travel & Marketing           |  |                                  | 179,917 |      |   | 107,707  |   |   | 72,210   |  
|Engineering                  |  |                                  | 49,298  |      |   | 22,005   |   |   | 27,293   |  
|Professional Fees            |  |                                  | 207,455 |      |   | 78,227   |   |   | 129,228  |  
|Investor Relations           |  |                                  | 46,730  |      |   | 1,126    |   |   | 45,604   |  
|Patent Expense               |  |                                  | 58,590  |      |   | 69,108   |   |   | (10,518  | )
|Stock Compensation           |  |                                  | 37,767  |      |   | 232,313  |   |   | (194,546 | )
|Bad Debts                    |  |                                  | 25      |      |   | 20,080   |   |   | (20,055  | )
|Exchange (Gain)/Loss         |  |                                  |        |      |   | (118,626 | ) |   | 118,626  |  
|Other Expenses               |  |                                  | 154,724 |      |   | 167,985  |   |   | (13,261  | )
|Total                        |  | $                                | 851,974 |      | $ | 670,478  |   | $ | 181,496  |  

Interest Income

Interest
income increased $176,082 for the nine months ended September 30, 2010 from the
comparable period in 2009. This increase is attributable to a reserve
established in 2009 against loan interest due from a shareholder that was
previously accrued on a principal balance of $756,250 at a rate of 5.63%, which
commenced July 25, 2001. We anticipate interest income to decline slightly for
the remainder of the year.

Interest Expense

Interest expense increased
$647 as a result of increased borrowing on the stockholder notes payable.

22

---



Liquidity and Capital Resources

Liquidity
is the ability of a company to generate adequate amounts of cash to meet its
needs for cash. As of September 30, 2010, we had cash and cash equivalents of
$180,247, as compared to $140,226 at December 31, 2009. At September 30, 2010,
we had working capital of $156,352 and our current ratio (current assets to
current liabilities) was 1.09 to 1. At December 31, 2009 we had negative
working capital of ($198,476) and our current ratio was 0.86 to 1. The increase
in working capital and our current ratio is primarily attributable to increases
in cash and accounts payable, offset by decreases in accounts receivable,
inventories and prepaid expenses.

We
have incurred net losses each year since inception and at September 30, 2010 we
had an accumulated deficit of $51,377,667. 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 2009, we raised a total of $1.983 million in
capital from an institutional investor and current stockholders and during the
nine months ended September 30, 2010 we raised an additional $452,100. In
addition, as of September 30, 2010, we owed our stockholder $6.3 million for
funds he has advanced to us from time to time for working capital under a line
of credit facility. During the nine months ending September 30, 2010, we drew
$631,500 under this credit line. We are materially dependent on this credit
line extended by our stockholder. Interest expense on this loan was $116,833
for the nine months ended September 30, 2010.

We
do not currently have any commitments for capital expenditures. Currently,
without additional equity investments, we expect our operating cash flows will
suffice through December 2010. While
we anticipate cash flows from 2010 sales activity, our operations continue to
require more cash than they produce. As a result of this deficiency, additional
cash will still be needed to support operations, meet our working capital needs
and satisfy our obligations as they become due. While we are actively seeking
additional equity investments, we have no firm commitments from any third
parties and there are no assurances we will be successful in attracting
additional capital. In addition, as set forth above, we owe our stockholder
$6.3 million which is due on December 31, 2011 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 the note holder
will extend the due date.

We
have implemented measures to preserve our ability to operate, including
organizational changes, a reduction and/or deferral of salaries, a net
reduction in personnel and renegotiating creditor and collection arrangements.
If we are not successful in raising additional capital in the near future, it
is possible we will be required to accelerate our contingent plans to more
aggressively reduce spending, including drastic reductions in our work force,
severe cutbacks in our production facilities and elimination of overhead costs
that do not contribute to our level of sales activity. If budgeted sales levels
are not achieved and/or significant unanticipated expenditures occur, or if we
are not able to raise additional investment capital, we may have to modify our
business plan, reduce or discontinue some of our operations or seek a buyer for
part of our assets to continue as a going concern through 2011. There can be no
assurance that we will be able to raise additional capital or that sales will
increase to the level required to generate profitable operations to provide
positive cash flow from operations. In that event, it is possible that
stockholders could lose their entire investment in our company. These factors
raise substantial doubt about our ability to continue as a going concern.

Operating activities

For
the nine-month period ended September 30, 2010 net cash used in operating
activities was $1,016,219, which primarily resulted from the net loss of
$837,312. The effect of the net loss on working capital is offset by an
increase in accounts payable in the amount of $140,083. Increases in
inventories, accounts receivables, and prepaid expenses were offset by
increases in stock related compensation expense to account for the remaining
balance change in working capital.

Investing activities

For
the nine months ending September 30, 2010, $17,649 in cash was used in
investing activities, primarily related to computer and software acquisitions.

23

---



Financing activities

Net
cash provided by financing activities was $1,074,316 for the period, due to
$445,100 of net proceeds received from private stock transactions issued for
cash and $631,500 of additional borrowings on the stockholder loan. This loan
is a line  of
credit made available to us by our President and CEO, who is also a member of
our Board of Directors and principal stockholder of our company.

Critical Accounting Policy

General

The
preparation of financial statements requires management to utilize estimates
and make judgments that affect the reported amounts of assets, liabilities,
revenues and expenses and related disclosure of contingent assets and
liabilities. These estimates are based on historical experience and on various
other assumptions that management believes to be reasonable under the
circumstances. The estimates are evaluated by management on an ongoing basis,
and the results of these evaluations form a basis for making decisions about
the carrying value of assets and liabilities that are not readily apparent from
other sources. Although actual results may differ from these estimates under
different assumptions or conditions, management believes that the estimates
used in the preparation of our financial statements are reasonable. The
critical accounting policies affecting our financial reporting are summarized
in Note 1 to the consolidated financial statements included elsewhere

Impact of Inflation

Inflation
has not had a significant impact on our operations. However, any significant
decrease in the price for oil or labor, environmental compliance costs, and
engine replacement costs could adversely impact our end users cost/benefit
analysis as to the use of our products. While we no longer have operations in
Great Britain, we maintain a small amount of cash on deposit in a bank account
related to Ltd.s previous operations and we continue to collect outstanding
accounts receivable. The impact of fluctuations in foreign currency has not
been significant. The exchange rate, the Great British pound to the U.S. dollar
fluctuated from 1.5928 on December 31, 2009 to 1.5809 on September 30, 2010 as
compared to 1.4479 on December 31, 2008 to 1.5922 on September 30, 2009.

Off Balance Sheet Financing

We
do not have any off-balance sheet arrangements that we are required to disclose
pursuant to these regulations. In the ordinary course of business, we enter
into operating lease commitments, purchase commitments and other contractual
obligations. These transactions are recognized in our financial statements in
accordance with generally accepted accounting principles in the United States.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK

Not
applicable for a smaller reporting company.

ITEM 4. CONTROLS AND PROCEDURES

Disclosure
Controls and Procedures

Our
management, which includes our CEO and our Vice President who serves as our
principal 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.

24

---



Based
on their evaluation as of the end of the period covered by this report, our CEO
and our Vice President who also serves as our principal financial officer have
concluded that our disclosure controls and procedures were effective such that
the information relating to our company, required to be disclosed in our
Securities and Exchange Commission reports (i) is recorded, processed,
summarized and reported within the time periods specified in SEC rules and
forms and (ii) is accumulated and communicated to our management, including our
Chief Executive Officer and our Vice President who serves as our principal
financial officer, to allow timely decisions regarding required disclosure as a
result of material weaknesses in our internal controls over financial
reporting.

Changes in Internal Control over Financial Reporting

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

Part II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS.

On
July 7, 2009 the Company filed a lawsuit in the Circuit Courts in 15th Judicial
District in an for Palm Beach County, Florida, styled Puradyn Filter
Technologies, Inc. versus Richard C. Ford case number 502009CA023128XXXXMB. In
this action against Mr. Ford, our former Chief Executive Officer, the Company
is alleging non-payment of three promissory notes totaling $756,250 with
interest at a rate of 5.63% per annum since July 25, 2001, the execution date
of the notes. As of November 13, 2009 interest on all three notes amounts to
$353,796, for an aggregate amount owing of $1,110,046. At the time of the
execution of these promissory notes, Mr. Ford was Chief Executive Officer of
the Company and these notes were drafted under Mr. Fords direction. The
Company is seeking payment of the promissory notes and accrued interest.

On
August 7, 2009, Mr. Ford responded by filing a Motion to Disqualify the
Companys legal counsel, Gary E. Susser and request a staying action until such
time as the Company obtains new legal counsel. On September 16, 2009 a hearing
on Order to Show Cause occurred. On October 26, 2009 a ruling was issued,
denying the Companys request for custody of the collateral. On November 5,
2009 Richard Ford filed a motion to stay proceeding pending payment of
documentary stamps and amendment of the complaint and relief from prior orders
relating to production of information pertaining to the sale of stock. On
November 5, 2009, the Company filed a Motion for Rehearing on Plaintiffs
Request for Possession to obtain custody of the collateral. This was heard on
November 12, 2009, and the Company is awaiting a ruling. On September 10, 2010,
Fords attorney filed a Motion to Withdraw from representation. On September
27, 2010 the Motion to Disqualify Attorney Susser was denied.

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, 2009. There has been no material change in our risk factors from those
previously discussed in the Annual Report on Form 10-K.

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

On
January 5, 2010 we agreed to pay to Emerging Markets, LLC, 60,000 shares of our
common stock valued at $0.23 per share plus 20,000 shares of our common stock
payable at the end of each month while the agreement is in effect during 2010.
Pursuant to this agreement, on July 1, 2010, we issued 20,000 shares of common
stock valued at $0.17 per share; on August 1, 2010 we issued 20,000 shares of
common stock valued at $0.26 per share; and on September 1, 2010, we issued
20,000 shares of common stock valued at $0.24 per share. The recipient was an
accredited investor and the issuances were exempt from registration under the
Securities Act of 1933 in reliance on an exemption provided by Section 4(2) of
that act.

On
July 7, 2010, the Company awarded a consultant 75,000 shares of common stock at
a price of $0.18 for legal services on behalf of the Company. The recipient was
an accredited or otherwise sophisticated investor who had such knowledge and
experience in business matters that he was capable of evaluating the merits and
risks of the prospective investment in our securities. The recipient had access
to business and financial information concerning our company. The securities
were issued in reliance on an exemption from registration provided by Section
4(2) of the Securities Act.

25

---



On
July 9, 2010 the Company received proceeds of $100,000 from the sale of 571,429
shares of common stock to purchasers at a price of $0.175 per share and, as
part of the offering, issued warrants to purchase 57,143 shares of common stock
at an exercise price of $0.50, which expire on July 9, 2015. The purchaser was
an accredited investor and the transaction was exempt from registration under
the Securities Act of 1933 in reliance on an exemption provided by Section 4(2)
of that act. We did not pay any commissions or finders fees and we are using
the proceeds for general working capital.

On
July 20, 2010 the Company received proceeds of $50,000 from the sale of 303,030
shares of common stock to purchasers at a price of $0.165 per share and, as
part of the offering, issued warrants to purchase 30,303 shares of common stock
at an exercise price of $0.50, which expire on July 20, 2015. The purchaser was
an accredited investor and the transaction was exempt from registration under
the Securities Act of 1933 in reliance on an exemption provided by Section 4(2)
of that act. We paid a commission of $3,500 on this transaction to a licensed
broker, Alfred Rapetti, and we are using the proceeds of this sale for general working capital.

On
July 21, 2010, the Company received proceeds of $50,000 from the sale of
304,878 shares of common stock to purchasers at a price of $0.164 per share
and, as part of the offering, issued warrants to purchase 30,488 shares of
common stock at an exercise price of $0.50, which expire on July 21, 2015. The
purchaser was an accredited investor and the transaction was exempt from
registration under the Securities Act of 1933 in reliance on an exemption
provided by Section 4(2) of that act. We paid a commission of $3,500 on this
transaction to a licensed broker, Alfred Rapetti, and we are using the proceeds of this sale for
general working capital.

On
July 30, 2010, the Company received proceeds of $50,000 from the sale of 253,807
shares of common stock to purchasers at a price of $0.197 per share and, as
part of the offering, issued warrants to purchase 25,381 shares of common stock
at an exercise price of $0.50, which expire on July 30, 2015. The purchaser was
an accredited investor and the transaction was exempt from registration under
the Securities Act of 1933 in reliance on an exemption provided by Section 4(2)
of that act. We did not pay any commissions or finders fees and we are using
the proceeds for general working capital.

On
August 4, 2010, the Company received proceeds of $50,000 from the sale of
210,084 shares of common stock to purchasers at a price of $0.238 per share
and, as part of the offering, issued warrants to purchase 21,008 shares of
common stock at an exercise price of $0.50, which expire on August 4, 2015. The
purchaser was an accredited investor and the transaction was exempt from
registration under the Securities Act of 1933 in reliance on an exemption
provided by Section 4(2) of that act. We did not pay any commissions or
finders fees and we are using the proceeds for general working capital.

On
August 4, 2010, the Company received proceeds of $50,000 from the Companys
Chairman and CEO, for the sale of 210,084 shares of common stock at a price of
$0.238 per share and, as part of the offering, issued warrants to purchase
21,008 shares of common stock at an exercise price of $0.50, which expire on
August 4, 2015. The purchaser was an accredited investor and the transaction
was exempt from registration under the Securities Act of 1933 in reliance on an
exemption provided by Section 4(2) of that act. We did not pay any commissions
or finders fees and we are using the proceeds for general working capital.

ITEM 3. DEFAULT UPON SENIOR SECURITIES

None

ITEM 4. (REMOVED AND RESERVED)

ITEM 5. OTHER INFORMATION

None

ITEM 6. EXHIBITS

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

26

---



SIGNATURES

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

|                        |  |                                                          
|----------------------- |  | ---------------------------------------------------------
|                        |  | PURADYN FILTER TECHNOLOGIES
 INCORPORATED                
|                        |  |                                                          
|Date: November 15, 2010 |  | By /s/ Joseph V. Vittoria                                
|                        |  | Joseph V. Vittoria,
 Chairman and Chief Executive Officer
|                        |  |                                                          
|Date: November 15, 2010 |  | By /s/ Alan J. Sandler                                   
|                        |  | Alan J. Sandler, Secretary
 to the Board,                
|                        |  | Vice President and
 principal financial officer          

27

---