UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
W ASHINGTON, D.C. 20549


| |           | 
| | --------- | 
|
| | Form 10-Q | 
| |           | 
|

(MARK ONE)

|                                             |                                                                                         
|-------------------------------------------- | ----------------------------------------------------------------------------------------
|x                                            | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
 EXCHANGE ACT OF 1934
|                                             |                                                                                         
|FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2009
|                                             |                                                                                         
|OR                                          
|                                             |                                                                                         
|o                                            | TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
 EXCHANGE ACT OF 1934     

|                                                                               
|-------------------------------------------------------------------------------
|FOR THE TRANSITION PERIOD FROM __________________ TO __________________________
|COMMISSION FILE NUMBER: 0-29192                                                

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

|                                                               |                                     
|-------------------------------------------------------------- | ------------------------------------
|DELAWARE                                                       | 14-1708544                          
|(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.)

|                                          |           
|----------------------------------------- | ----------
|2017 HIGH RIDGE ROAD, BOYNTON BEACH, FL   | 33426     
|(Address of
 principal executive offices) | (Zip Code)

|                                                                                    |                | 
|----------------------------------------------------------------------------------- | -------------- | 
|(561) 547-9499                                                                     
|(Registrants telephone number, including area code)                               
|                                                                                    |                | 
|                                                                                    | NOT APPLICABLE | 
|(Former name, former address and former fiscal year, if changed since
 last report)
|                                                                                   
|                                                                                   

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


Yes x No o


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


Yes o No o


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

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

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


Yes o No x


Indicated
the number of shares outstanding of each of the issuers classes of common
stock, as of the latest practicable date. 42,082,047 shares of
common stock are issued and outstanding as of August 12, 2009.





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TABLE OF CONTENTS

|                                |                                                                                                                         |  |         
|------------------------------- | ----------------------------------------------------------------------------------------------------------------------- |  | --------
|                                |                                                                                                                         |  | Page No.
|                               
|PART I. - FINANCIAL INFORMATION
|Item 1.                         | Financial Statements                                                                                                    |  |         
|                                | Condensed Consolidated Balance Sheet  As of June 30, 2009
 (unaudited) and December 31, 2008                           |  | 3       
|                                | Condensed Consolidated Statements of Operations  Three months and
 six months ended June 30, 2009 and 2008 (unaudited) |  | 4       
|                                | Condensed Consolidated Statements of Cash Flows  Six months ended
 June 30, 2009 and 2008 (unaudited)                  |  | 5       
|                                | Condensed Consolidated Statement of Stockholders Deficit  Six
 months ended June 30, 2009 (unaudited)                 |  | 6       
|                                | Notes to Condensed Consolidated Financial Statements                                                                    |  | 7       
|Item 2.                         | Managements Discussion and Analysis of Financial Condition and
 Results of Operations.                                 |  | 14      
|Item 3.                         | Quantitative and Qualitative Disclosures About Market Risk.                                                             |  | 23      
|Item 4T                         | Controls and Procedures.                                                                                                |  | 23      
|                                |                                                                                                                         |  |         
|PART II - OTHER
 INFORMATION   
|Item 1.                         | Legal Proceedings.                                                                                                      |  | 24      
|Item 1A.                        | Risk Factors.                                                                                                           |  | 24      
|Item 2.                         | Unregistered Sales of Equity Securities and Use of Proceeds.                                                            |  | 24      
|Item 3.                         | Defaults Upon Senior Securities.                                                                                        |  | 25      
|Item 4.                         | Submission of Matters to a Vote of Security Holders.                                                                    |  | 25      
|Item 5.                         | Other Information.                                                                                                      |  | 25      
|Item 6.                         | Exhibits.                                                                                                               |  | 25      

OTHER PERTINENT INFORMATION

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

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

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING
INFORMATION

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

2

---

PART I - FINANCIAL INFORMATION

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

Puradyn Filter Technologies Incorporated
Condensed Consolidated Balance Sheets
As of June 30, 2009 and December 31, 2008

|                                                                                                      |  |                            |             |                              |   |             |  
|----------------------------------------------------------------------------------------------------- |  | -------------------------- | ----------- | ---------------------------- | - | ----------- | -
|                                                                                                      |  | June
 30, 2009 (unaudited) |             | December
 31, 2008 (audited) |  
|Assets                                                                                                |  |                            |             |                              |   |             |  
|Current assets:                                                                                       |  |                            |             |                              |   |             |  
|Cash and cash equivalents                                                                             |  | $                          | 58,721      |                              | $ | 116,802     |  
|Accounts receivable, net of allowance for
uncollectible accounts of
 $62,549 and $22,970 respectively |  |                            | 455,030     |                              |   | 182,660     |  
|Inventories, net                                                                                      |  |                            | 1,146,967   |                              |   | 1,337,309   |  
|Prepaid and other current assets                                                                      |  |                            | 113,122     |                              |   | 184,537     |  
|Total current assets                                                                                  |  |                            | 1,773,840   |                              |   | 1,821,308   |  
|                                                                                                      |  |                            |             |                              |   |             |  
|Property and equipment, net                                                                           |  |                            | 109,411     |                              |   | 122,915     |  
|Deferred financing costs, net                                                                         |  |                            | 6,040       |                              |   | 8,419       |  
|Other noncurrent assets                                                                               |  |                            | 40,930      |                              |   | 40,930      |  
|Total Other Assets                                                                                    |  |                            | 156,381     |                              |   | 194,453     |  
|                                                                                                      |  |                            |             |                              |   |             |  
|Total assets                                                                                          |  | $                          | 1,930,221   |                              | $ | 1,993,572   |  
|                                                                                                      |  |                            |             |                              |   |             |  
|Liabilities and stockholders deficit                                                                 |  |                            |             |                              |   |             |  
|Current liabilities:                                                                                  |  |                            |             |                              |   |             |  
|Accounts payable                                                                                      |  | $                          | 351,030     |                              | $ | 305,645     |  
|Accrued liabilities                                                                                   |  |                            | 1,300,983   |                              |   | 1,148,536   |  
|Current portion of capital lease
obligation                                                           |  |                            | 2,484       |                              |   | 1,859       |  
|Deferred revenue                                                                                      |  |                            | 93,709      |                              |   | 120,647     |  
|Total current liabilities                                                                             |  |                            | 1,748,206   |                              |   | 1,576,687   |  
|                                                                                                      |  |                            |             |                              |   |             |  
|Notes Payable - stockholder                                                                           |  |                            | 6,268,414   |                              |   | 6,367,702   |  
|Capital lease obligation, less current portion                                                        |  |                            | 3,837       |                              |   | 5,280       |  
|Total Long Term Liabilities                                                                           |  |                            | 6,272,251   |                              |   | 6,372,982   |  
|Total Liabilities                                                                                     |  |                            | 8,020,457   |                              |   | 7,949,669   |  
|                                                                                                     
|Commitments and contingencies                                                                         |  |                            |            |                              |   |            |  
|                                                                                                     
|Stockholders deficit:                                                                                |  |                            |             |                              |   |             |  
|Preferred stock, $.001 par value:                                                                     |  |                            |            |                              |   |            |  
|Authorized shares  500,000; none issued and
outstanding                                              |  |                            |             |                              |   |             |  
|Common stock, $.001 par value:                                                                        |  |                            | 39,226      |                              |   | 35,839      |  
|Authorized shares  50,000,000                                                                        |  |                            |             |                              |   |             |  
|Issued and outstanding  39,225,555 and
35,838,351 respectively                                       |  |                            |             |                              |   |             |  
|Additional paid-in capital                                                                            |  |                            | 44,192,251  |                              |   | 43,301,010  |  
|Deferred compensation                                                                                 |  |                            | (40,014     | )                            |   | (118,736    | )
|Notes receivable from stockholders                                                                    |  |                            | (790,210    | )                            |   | (966,531    | )
|Accumulated deficit                                                                                   |  |                            | (49,603,155 | )                            |   | (48,469,757 | )
|Accumulated other comprehensive income                                                                |  |                            | 111,666     |                              |   | 262,078     |  
|Total stockholders deficit                                                                           |  |                            | (6,090,236  | )                            |   | (5,956,097  | )
|Total liabilities and stockholders deficit                                                           |  | $                          | 1,930,221   |                              | $ | 1,993,572   |  

See accompanying notes to condensed consolidated financial
statements.

3

---

Puradyn Filter Technologies Incorporated
Condensed Consolidated Statements of Operations
For the Three Months and Six Months Ended June 30, 2009 and 2008
(Unaudited)

|                                                                |  |                              |            |                            |   |            |   |      |            |   |   |            |  
|--------------------------------------------------------------- |  | ---------------------------- | ---------- | -------------------------- | - | ---------- | - | ---- | ---------- | - | - | ---------- | -
|                                                                |  | Three Months Ended
 June 30, |            | Six Months Ended
 June 30, |  
|                                                                |  | 2009                         |            | 2008                       |   | 2009       |   | 2008 |           
|                                                                |  |                              |            |                            |   |            |   |      |            |   |   |            |  
|Net sales                                                       |  | $                            | 729,131    |                            | $ | 791,781    |   | $    | 1,027,912  |   | $ | 1,555,206  |  
|                                                                |  |                              |            |                            |   |            |   |      |            |   |   |            |  
|Costs and expenses:                                             |  |                              |            |                            |   |            |   |      |            |   |   |            |  
|Cost of products sold                                           |  |                              | 617,447    |                            |   | 641,537    |   |      | 977,937    |   |   | 1,266,866  |  
|Salaries and wages                                              |  |                              | 243,347    |                            |   | 250,877    |   |      | 483,016    |   |   | 506,930    |  
|Selling and administrative                                      |  |                              | 101,129    |                            |   | 221,279    |   |      | 443,758    |   |   | 483,678    |  
|                                                                |  |                              | 961,923    |                            |   | 1,113,693  |   |      | 1,904,711  |   |   | 2,257,474  |  
|Loss from operations                                            |  |                              | (232,792   | )                          |   | (321,912   | ) |      | (876,799   | ) |   | (702,268   | )
|                                                                |  |                              |            |                            |   |            |   |      |            |   |   |            |  
|Other income (expense):                                         |  |                              |            |                            |   |            |   |      |            |   |   |            |  
|Interest income                                                 |  |                              | (176,071   | )                          |   | 595        |   |      | (175,894   | ) |   | 1,329      |  
|Interest expense                                                |  |                              | (42,115    | )                          |   | (77,323    | ) |      | (80,705    | ) |   | (168,176   | )
|Total other expense, net                                        |  |                              | (218,186   | )                          |   | (76,728    | ) |      | (256,599   | ) |   | (166,847   | )
|Loss before income taxes                                        |  |                              | (450,978   | )                          |   | (398,640   | ) |      | (1,133,398 | ) |   | (869,115   | )
|                                                               
|Income tax expense                                              |  |                              |           |                            |   |           |   |      |           |   |   |           |  
|                                                                |  |                              |            |                            |   |            |   |      |            |   |   |            |  
|Net loss                                                        |  | $                            | (450,978   | )                          | $ | (398,640   | ) | $    | (1,133,398 | ) | $ | (869,115   | )
|                                                                |  |                              |            |                            |   |            |   |      |            |   |   |            |  
|Basic and diluted loss per
 common share                        |  | $                            | (.01)      |                            | $ | (.01)      |   | $    | (.03)      |   | $ | (.03)      |  
|                                                               
|Weighted average common
 shares outstanding (basic and diluted) |  |                              | 38,764,732 |                            |   | 32,447,852 |   |      | 38,010,025 |   |   | 31,250,226 |  

See accompanying notes to
condensed consolidated financial statements.

4

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Puradyn Filter Technologies Incorporated
Consolidated Statements of Cash FlowsFor the Six Months Ended June 30, 2009 and 2008
(Unaudited)

|                                                                                                     |  |                           |            |      |   |            |  
|---------------------------------------------------------------------------------------------------- |  | ------------------------- | ---------- | ---- | - | ---------- | -
|                                                                                                     |  | Six Months Ended June 30, |           
|                                                                                                     |  | 2009                      |            | 2008 |  
|Operating activities                                                                                 |  |                           |            |      |   |            |  
|Net loss                                                                                             |  | $                         | (1,133,398 | )    | $ | (869,115   | )
|Adjustments to reconcile
 net loss to net cash used in operating activities:                         |  |                           |            |      |   |            |  
|Depreciation and
amortization                                                                        |  |                           | 21,500     |      |   | 34,498     |  
|Provision for bad
debts                                                                              |  |                           | 39,579     |      |   | (25,829    | )
|Provision for obsolete and slow
moving inventory                                                     |  |                           | 45,311     |      |   | 2,786      |  
|Amortization of deferred
financing costs included in interest expense                                |  |                           | 2,379      |      |   | 5,893      |  
|Deferred compensation                                                                                |  |                           | 78,723     |      |   |           |  
|Reserve on interest receivable
from stockholders notes                                              |  |                           | 176,321    |      |   |           |  
|Compensation expense on
stock-based arrangements with employees,
 consultants, investors and vendors |  |                           | 111,853    |      |   | 20,653     |  
|Compensation expense on
stock-based arrangements with investors and
 directors                       |  |                           |            |      |   | 45,000     |  
|Changes in operating assets and
liabilities:                                                         |  |                           |            |      |   |            |  
|Accounts receivable                                                                                  |  |                           | (311,949   | )    |   | (107,121   | )
|Inventories                                                                                          |  |                           | 145,030    |      |   | (91,353    | )
|Prepaid expenses and other
current assets                                                            |  |                           | 71,415     |      |   | (99,296    | )
|Accounts payable                                                                                     |  |                           | 45,385     |      |   | (258,676   | )
|Accrued liabilities                                                                                  |  |                           | 152,446    |      |   | 87,193     |  
|Deferred revenues                                                                                    |  |                           | (26,938    | )    |   | 3,969      |  
|Net cash used in operating
 activities                                                               |  |                           | (582,343   | )    |   | (1,251,398 | )
|                                                                                                    
|Investing activities                                                                                 |  |                           |            |      |   |            |  
|Purchases of property and
 equipment                                                                 |  |                           | (8,443     | )    |   | (14,487    | )
|Net cash used in investing
 activities                                                               |  |                           | (8,443     | )    |   | (14,487    | )
|                                                                                                    
|Financing activities                                                                                 |  |                           |            |      |   |            |  
|Proceeds from sale of common
 stock                                                                  |  |                           | 782,758    |      |   | 1,474,000  |  
|Proceeds from issuance of
 notes payable to stockholders                                             |  |                           | 713        |      |   |           |  
|Payment of notes payable to
 stockholder                                                             |  |                           | (100,000   | )    |   |           |  
|Payment of capital lease
 obligations                                                                |  |                           | (819       | )    |   | (2,002     | )
|Net cash provided by financing
 activities                                                           |  |                           | 682,652    |      |   | 1,471,998  |  
|Effect of exchange rate
 changes on cash and cash equivalents                                        |  |                           | (149,947   | )    |   | 5,840      |  
|Net (decrease) increase in
 cash and cash equivalents                                                |  |                           | (58,081    | )    |   | 211,953    |  
|                                                                                                    
|Cash and cash equivalents
 at beginning of period                                                    |  |                           | 116,802    |      |   | 112,270    |  
|                                                                                                    
|Cash and cash equivalents
 at end of period                                                          |  |                           | 58,721     |      | $ | 324,223    |  
|                                                                                                    
|Supplemental cash flow information:                                                                  |  |                           |            |      |   |            |  
|Cash paid for interest                                                                               |  | $                         | 77,862     |      | $ | 198,455    |  
|Noncash investing and financing activities:                                                          |  |                           |            |      |   |            |  
|Note Payables converted to
 stockholders equity                                                     |  | $                         | 100,000    |      | $ | 620,000    |  

See accompanying notes to
condensed consolidated financial statements.

5

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Puradyn Filter Technologies Incorporated 
Consolidated Statements of Changes in Stockholders DeficitFor the Six Months
Ended June 30, 2009 
(Unaudited)

|                                                             |  |              |            |        |   |        |  |                              |            |                        |   |                                       |   |                      |          |                                                  |   |                               |   |   |          |   |   |            |  
|------------------------------------------------------------ |  | ------------ | ---------- | ------ | - | ------ |  | ---------------------------- | ---------- | ---------------------- | - | ------------------------------------- | - | -------------------- | -------- | ------------------------------------------------ | - | ----------------------------- | - | - | -------- | - | - | ---------- | -
|                                                             |  |              |            |        |   |        |  | Additional
 Paid-in
 Capital |            | Deferred
 Compensation |   | Notes
 Receivable
 From
 Stockholders |   | Accumulated
 Deficit |          | Accumulated
 Other
 Comprehensive
 Income (Loss) |   | Total
 Stockholders
 Deficit |  
|                                                             |  |              |            |        |   |        |  |                              |            |                        |   |                                       |  
|                                                             |  | Common Stock |            |        |   |        |  |                              |           
|                                                             |  | Shares       |            | Amount |   |        |  |                              |            |                        |  
|Balance at December 31, 2008                                 |  |              | 35,838,351 |        | $ | 35,839 |  | $                            | 43,301,010 |                        | $ | (118,736                              | ) | $                    | (966,531 | )                                                | $ | (48,469,757                   | ) | $ | 262,078  |   | $ | (5,956,097 | )
|Foreign currency translation adjustment                      |  |              |           |        |   |       |  |                              |           |                        |   |                                      |   |                      |         |                                                  |   |                              |   |   | (150,412 | ) |   | (150,412   | )
|                                                             |  |              |            |        |   |        |  |                              |            |                        |   |                                       |   |                      |          |                                                  |   |                               |   |   |          |   |   |            |  
|Net loss                                                     |  |              |           |        |   |       |  |                              |           |                        |   |                                      |   |                      |         |                                                  |   | (1,133,398                    | ) |   |         |   |   | (1,133,398 | )
|Total comprehensive loss                                     |  |              |           |        |   |       |  |                              |           |                        |   |                                      |   |                      |         |                                                  |   |                              |   |   |         |   |   | (1,283,810 | )
|                                                             |  |              |            |        |   |        |  |                              |            |                        |   |                                       |   |                      |          |                                                  |   |                               |   |   |          |   |   |            |  
|Stock issued for private placement                           |  |              | 3,369,347  |        |   | 3,369  |  |                              | 779,388    |                        |   |                                      |   |                      |         |                                                  |   |                              |   |   |         |   |   | 782,757    |  
|                                                             |  |              |            |        |   |        |  |                              |            |                        |   |                                       |   |                      |          |                                                  |   |                               |   |   |          |   |   |            |  
|Reserve accrued interest                                     |  |              |           |        |   |       |  |                              |            |                        |   |                                      |   |                      | 176,321  |                                                  |   |                               |   |   |          |   |   | 176,321    |  
|Issuance of shares and warrants to vendors                   |  |              | 17,857     |        |   | 18     |  |                              | 94,232     |                        |   | 78,722                                |   |                      |         |                                                  |   |                              |   |   |         |   |   | 172,972    |  
|Compensation expense associated with unvested option
expense |  |              |           |        |   |       |  |                              | 17,621     |                        |   |                                      |   |                      |         |                                                  |   |                              |   |   |         |   |   | 17,621     |  
|                                                             |  |              |            |        |   |        |  |                              |            |                        |   |                                       |   |                      |          |                                                  |   |                               |   |   |          |   |   |            |  
|Balance at June 30, 2009                                     |  |              | 39,225,555 |        | $ | 39,226 |  | $                            | 44,192,251 |                        | $ | (40,014                               | ) | $                    | (790,210 | )                                                | $ | (49,603,155                   | ) | $ | 111,666  |   | $ | (6,090,236 | )

See accompanying notes to condensed consolidated financial
statements.

6

---

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

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

Basis of
Presentation

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

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

Going Concern

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

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

The Company
has been addressing the liquidity and working capital issues and continues to
attempt to raise additional capital with institutional and private investors
and current stockholders. Cost reductions were and continue to be implemented
by the Company, including acquiring alternative suppliers for raw materials and
analyzing more efficient manufacturing processes. The Company, until recently,
had seen results from these reductions, as well as from other cost reduction
plans. However, due to raw material increases and the recent economic
environment, the Company has been able to pass on only a portion of these costs
as product price increases and has been forced to absorb some raw material increases.
A portion of this increase is being offset by customer price increases
effective January 1, 2009. There can be no assurance that the Company will be
able to raise the additional capital needed or reduce the level of expenditures
in order to sustain operations.

Use of
Estimates

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

Basic and
Diluted Loss Per Share

SFAS No. 128, Earnings Per Share, requires a dual
presentation of basic and diluted earnings per share. However, because of the
Companys net losses, the effect of outstanding stock options and warrants
would be anti-dilutive and, accordingly, is excluded from the computation of
diluted loss per share. The number of such shares excluded from the computation
of loss per share totaled 5,447,211 and 4,799,606 for the three-month and
six-month period ended June 30, 2009 and 4,026,114 and 4,799,606 for the three
and six-month periods ended June 30, 2008.

7

---

Stock Compensation

The Company
adopted SFAS 123R effective January 1, 2006 using the modified prospective
application method of adoption which requires us to record compensation cost
related to unvested stock awards as of December 31, 2005, recognizing the
amortized grant date fair value in accordance with provisions of SFAS 123R on
straight line basis over the service periods of each award. We have estimated
forfeiture rates based on our historical experience. Stock option compensation
expense for the periods ended June 30, 2008 and June 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 SFAS 123 and
EITF 96-18, Accounting for Equity
Investments That are Issued to Other Than Employees for Acquiring or in
Conjunction with Selling Goods or Services, including related
amendments and interpretations. The related expense is recognized over the
period the services are provided.

Inventories

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

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

|                    |  |                |           |                    |   |           |  
|------------------- |  | -------------- | --------- | ------------------ | - | --------- | -
|                    |  | June
 30, 2009 |           | December
 31, 2008 |  
|Raw materials       |  | $              | 1,057,731 |                    | $ | 946,429   |  
|Finished goods      |  |                | 212,652   |                    |   | 505,039   |  
|Valuation allowance |  |                | (123,416  | )                  |   | (114,159  | )
|                    |  | $              | 1,146,967 |                    | $ | 1,337,309 |  

Deferred Financing Costs

The Company
capitalizes financing costs and amortizes them using the straight-line method,
which approximates the effective interest method, over the term of the related
debt. Amortization of deferred financing costs is included in interest expense
and totaled $1,007 and $2,105 the three-months ended June 30, 2009 and June 30,
2008 and $2,379 and $5,893 for the six-months ended June 30, 2009 and 2008,
respectively. Accumulated amortization of deferred financing costs as of June
30, 2009 and 2008 was $675,110 and $668,521, respectively.

Revenue
Recognition

The Company
recognizes revenue from product sales to customers, distributors and resellers
when products that do not require further services or installation by the
Company are shipped, when there are no uncertainties surrounding customer
acceptance and when collectibility is reasonably assured in accordance with
Staff Accounting Bulletin No. 104, Revenue
Recognition in Financial Statements (SAB 104), as amended and
interpreted. Cash received by the Company prior to shipment is recorded as
deferred revenue. Sales are made to customers under terms allowing certain
limited rights of return and other limited product and performance warranties
for which provision has been made in the accompanying condensed consolidated
financial statements.

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

Product Warranty
Costs

As required by
FASB Interpretation No. 45, Guarantors
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others (FIN 45), the Company is
including the following disclosure applicable to its product warranties.

8

---

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

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

|                                             |  |   |         |  
|-------------------------------------------- |  | - | ------- | -
|Balance as of
 December 31, 2008             |  | $ | 148,149 |  
|Less:
 Payments made                         |  |   | 2,399   |  
|Change in prior period estimate              |  |   | (4,797  | )
|Add: Provision for current period warranties |  |   | 39,126  |  
|Balance as of June 30, 2009                  |  | $ | 184,877 |  

Comprehensive Income

SFAS No. 130, Reporting
Comprehensive Income (SFAS 130) establishes rules for reporting and
displaying of comprehensive income and its components. Comprehensive income is
the sum of net loss as reported in the consolidated statements of operations
and other comprehensive income transactions. Other comprehensive income
transactions that currently apply to the Company result from changes in
exchange rates used in translating the financial statements of its wholly owned
subsidiary, Puradyn Filter Technologies, Ltd. (Ltd).
Comprehensive loss as of June 30, 2009 and 2008 is not shown net of taxes
because the Companys deferred tax asset has been fully offset by a valuation
allowance.

Comprehensive loss consisted of the following for the three and
six-months ended June 30, 2009 and 2008:

|                                        |  |                              |          |                             |   |          |   |      |            |   |   |          |  
|--------------------------------------- |  | ---------------------------- | -------- | --------------------------- | - | -------- | - | ---- | ---------- | - | - | -------- | -
|                                        |  | Three Months Ended
 June 30, |          | Six Months Ended 
 June 30, |  
|                                        |  | 2009                         |          | 2008                        |   | 2009     |   | 2008 |           
|                                        |  |                              |          |                             |   |          |   |      |            |   |   |          |  
|Net loss                                |  | $                            | (450,978 | )                           | $ | (398,640 | ) | $    | (1,133,398 | ) | $ | (869,115 | )
|                                        |  |                              |          |                             |   |          |   |      |            |   |   |          |  
|Other
 comprehensive income (loss):     |  |                              |          |                             |   |          |   |      |            |   |   |          |  
|Foreign currency translation adjustment |  |                              | (172,084 | )                           |   | 658      |   |      | (150,412   | ) |   | 2,371    |  
|                                        |  |                              |          |                             |   |          |   |      |            |   |   |          |  
|Comprehensive
 loss                     |  | $                            | (623,062 | )                           | $ | (397,982 | ) | $    | (1,283,810 | ) | $ | (866,744 | )

New Accounting Standards

In May
2009, the FASB issued SFAS No. 165 Subsequent Events (SFAS 165). SFAS 165
establishes general standards of accounting for and disclosure of events that
occur after the balance sheet date but before financial statements are issued
or are available to be issued. SFAS 165 sets forth (1) The period after the
balance sheet date during which management of a reporting entity should
evaluate events or transactions that may occur for potential recognition or
disclosure in the financial statements, (2) The circumstances under which an
entity should recognize events or transactions occurring after the balance
sheet date in its financial statements and (3) The disclosures that an entity
should make about events or transactions that occurred after the balance sheet
date. SFAS 165 is effective for interim or annual financial periods ending
after June 15, 2009. The adoption of this statement did not have a material
effect on the Companys financial statements.

In June
2009, the FASB issued SFAS No. 166 Accounting for Transfers of Financial
Assetsan amendment of FASB Statement No. 140 (SFAS 166). SFAS 166 improves
the relevance, representational faithfulness, and comparability of the
information that a reporting entity provides in its financial statements about a
transfer of financial assets; the effects of a transfer on its financial
position, financial performance, and cash flows; and a transferors continuing
involvement, if any, in transferred financial assets. SFAS 166 is effective as
of the beginning of each reporting entitys first annual reporting period that
begins after November 15, 2009, for interim periods within that first annual
reporting period and for interim and annual reporting periods thereafter. The
Company is evaluating the impact the adoption of SFAS 166 will have on its
financial statements.

9

---

In June
2009, the FASB issued SFAS No. 167 Amendments to FASB Interpretation No.
46(R) (SFAS 167). SFAS 167 improves financial reporting by enterprises
involved with variable interest entities and to address (1) the effects on
certain provisions of FASB Interpretation No. 46 (revised December 2003),
Consolidation of Variable Interest Entities, as a result of the elimination
of the qualifying special-purpose entity concept in SFAS 166 and (2) constituent
concerns about the application of certain key provisions of Interpretation
46(R), including those in which the accounting and disclosures under the
Interpretation do not always provide timely and useful information about an
enterprises involvement in a variable interest entity. SFAS 167 is effective
as of the beginning of each reporting entitys first annual reporting period
that begins after November 15, 2009, for interim periods within that first
annual reporting period, and for interim and annual reporting periods
thereafter. The Company is evaluating the impact the adoption of SFAS 167 will
have on its financial statements.

In June
2009, the FASB issued SFAS No. 168 The FASB Accounting Standards Codification
and the Hierarchy of Generally Accepted Accounting Principlesa replacement of
FASB Statement No. 162. The FASB Accounting Standards Codification
(Codification) will be the single source of authoritative nongovernmental
U.S. generally accepted accounting principles. Rules and interpretive releases
of the SEC under authority of federal securities laws are also sources of
authoritative GAAP for SEC registrants. SFAS 168 is effective for interim and
annual periods ending after September 15, 2009. All existing accounting
standards are superseded as described in SFAS 168. All other accounting
literature not included in the Codification is nonauthoritative.
The Company is evaluating the impact the adoption of SFAS 168 will have on its
financial statements.

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

The
Companys financial statements have been prepared assuming that the Company
will continue as a going concern. The Company has sustained losses since
inception in 1987 and used net cash in operations of approximately $582,000 and
$1,251,000 during the six-months ended June 30, 2009 and 2008, respectively. As
a result, the Company has had to rely principally on private equity funding,
including the conversion of debt into stock, as well as stockholder loans to
fund its activities to date.

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

The Company has been addressing the liquidity and working capital
issues and continues to attempt to raise additional capital with institutional
and private investors and current stockholders. Cost reductions continue to be
implemented by the Company including acquiring alternative suppliers for raw
materials and manufacturing and the Company expects to see results from these
reductions, as well as other cost reduction plans through 2009. Additionally,
the Company is reviewing cost of material increases, some of which were passed
through to its customers as product price increases beginning January 2009.

The Company continues to address liquidity concerns because of
inadequate revenue growth. As a result, cash flow from operations is
insufficient to cover our liquidity needs for the immediate future. The Company
is in the process of aggressively seeking to raise capital and is exploring
financing availability and options with investment bankers, funds, private
sources, members of management and existing shareholders. The Company has
implemented measures to preserve its ability to operate, including
organizational changes, a reduction and/or deferral of salaries, reduction in
personnel and renegotiating creditor and collection arrangements. There can be
no assurance that the Company will be able to raise the additional capital
needed or reduce the level of expenditures in order to sustain operations.

On February 23, 2009, the stockholder amended the original loan
agreements to extend the payback dates to December 31, 2010. The original loan
agreements, dated March 28, 2002 and March 14, 2003, were due and payable on
December 31, 2003 and December 31, 2004. Previously, the stockholder waived the
funding requirement mandating maturity as such time as the Company raised an
additional $7.0 million over the $3.5 million previously raised in the
Companys private placement offering; or until such time as the Company is
operating within sufficient cash flow parameters, as defined, to sustain its
operations; or until a disposition of the Company occurs. As of June 30, 2009,
the Company had drawn a total of $6.270 million of the available funds.

10

---

The
Company anticipates 2009 sales activity to be stronger toward the end of the
year, cash flows to be comparable to 2008 and realizes that additional cash may be
needed to support operations. If additional capital is not raised, budgeted
sales levels are not achieved and/or significant unanticipated expenditures
occur, the Company will have to modify its business plan, reduce or discontinue
some of its operations or seek a buyer for part of its assets to continue as a
going concern through 2009. There can be no assurance that the Company will be
able to raise the additional capital needed to continue as a going concern.

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

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

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

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

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

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

During the three-month periods ended June 30, 2009 and June 30, 2008,
the Company recognized compensation expense of approximately $46,000 and
$10,000, respectively. On October 1, 2008, the Company agreed to pay to
Emerging Markets, LLC, 300,000 shares of commons stock priced at $0.325 plus
175,000 warrants with an exercise price of $0.75 and 175,000 warrants with an
exercise price of $1.25 and an expiration date for all warrants of October 1,
2013. During the three-month period ending June 30, 2009, approximately $40,000
of this expense was amortized.

At June 30, 2009, approximately 3,727,961 warrants with an average
exercise price of $1.11 remain outstanding and were fully vested.

For
the three months ended June 30, 2009 and June 30, 2008, respectively, the
Company recorded stock-based compensation expense of $13,190 and $11,298,
relating to unvested employee stock options.

Stock
options and warrants issued to consultants and other non-employees as compensation
for services provided to the Company are accounted for based on the fair value
of the services provided or the estimated fair market value of the option or
warrant, whichever is more reliably measurable in accordance with SFAS 123 and
EITF 96-18, Accounting for Equity
Investments That are Issued to Other Than Employees for Acquiring or in
Conjunction with Selling Goods or Services. The related expense is
recognized over the period the services are provided.

A summary of the Companys stock option plans as of June 30, 2009, and
changed during the six-month period then ended is presented below:

|                                            |  |                                 |           |                                   |   |      | 
|------------------------------------------- |  | ------------------------------- | --------- | --------------------------------- | - | ---- | 
|                                            |  | Six Months Ended
 June 30, 2009 |          
|                                            |  | Number of Options               |           | Weighted Average 
 Exercise Price |  
|                                            |  |                                 |           |                                   |   |      | 
|Options outstanding at
 beginning of period |  |                                 | 1,767,900 |                                   | $ | 2.15 | 
|                                            |  |                                 |           |                                   |   |      | 
|Options granted                             |  |                                 | 53,000    |                                   |   | .24  | 
|Options expired                             |  |                                 | 11,650    |                                   |   | 1.47 | 
|Options cancelled                           |  |                                 | 90,000    |                                   |   | .89  | 
|Options at end of period                    |  |                                 | 1,719,250 |                                   | $ | 2.16 | 
|Options exercisable at end
 of period       |  |                                 | 1,003,750 |                                   | $ | 3.51 | 

11

---

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

|                                            |  |                                   |           |                                   |   |      | 
|------------------------------------------- |  | --------------------------------- | --------- | --------------------------------- | - | ---- | 
|                                            |  | Three Months Ended
 June 30, 2009 |          
|                                            |  | Number of Options                 |           | Weighted Average 
 Exercise Price |  
|                                            |  |                                   |           |                                   |   |      | 
|Options outstanding at
 beginning of period |  |                                   | 1,767,900 |                                   | $ | 2.14 | 
|                                            |  |                                   |           |                                   |   |      | 
|Options granted                             |  |                                   | 38,000    |                                   |   | .20  | 
|Options expired                             |  |                                   | 11,650    |                                   |   | 1.47 | 
|Options cancelled                           |  |                                   | 75,000    |                                   |   | .62  | 
|Options at end of period                    |  |                                   | 1,719,250 |                                   | $ | 2.16 | 
|Options exercisable at end
 of period       |  |                                   | 1,003,750 |                                   | $ | 3.51 | 

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

|                                         |  |                                 |         |                                  |   |     | 
|---------------------------------------- |  | ------------------------------- | ------- | -------------------------------- | - | --- | 
|                                         |  | Six Months Ended
 June 30, 2009 |        
|                                         |  | Number of Options               |         | Weighted Average
 Exercise Price |  
|Options unvested at
 beginning of period |  |                                 | 838,750 |                                  | $ | .31 | 
|Options granted                          |  |                                 | 53,000  |                                  | $ | .24 | 
|Options vested                           |  |                                 | 128,750 |                                  | $ | .27 | 
|Options cancelled                        |  |                                 | 47,500  |                                  | $ | .66 | 
|Options unvested at end of
 period       |  |                                 | 715,500 |                                  | $ | .26 | 

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

|                                         |  |                                   |         |                                  |   |     | 
|---------------------------------------- |  | --------------------------------- | ------- | -------------------------------- | - | --- | 
|                                         |  | Three Months Ended
 June 30, 2009 |        
|                                         |  | Number of Options                 |         | Weighted Average
 Exercise Price |  
|Options unvested at
 beginning of period |  |                                   | 833,750 |                                  | $ | .29 | 
|Options granted                          |  |                                   | 38,000  |                                  | $ | .20 | 
|Options vested                           |  |                                   | 112,500 |                                  | $ | .23 | 
|Options cancelled                        |  |                                   | 43,750  |                                  | $ | .69 | 
|Options unvested at end of
 period       |  |                                   | 715,500 |                                  | $ | .26 | 

|                           |  |                      |           |                                                  |  |                                   |  |                     |      |                                   |  |           |  |   |      | 
|-------------------------- |  | -------------------- | --------- | ------------------------------------------------ |  | --------------------------------- |  | ------------------- | ---- | --------------------------------- |  | --------- |  | - | ---- | 
|                           |  | Options
 Outstanding |           | Options
 Exercisable                             | 
|Range
 of 
 Exercise Price |  | Number 
 Outstanding |           | Remaining
 Average
 Contractual Life
 (In Years) |  | Weighted
 Average
 Exercise Price |  | Number
 Exercisable |      | Weighted
 Average
 Exercise Price | 
|$.21
  $1.70              |  |                      | 1,331,250 |                                                  |  | 5.41                              |  | $                   | .53  |                                   |  | 615,750   |  | $ | .84  | 
|1.99
  3.13               |  |                      | 88,000    |                                                  |  | 3.17                              |  |                     | 2.69 |                                   |  | 88,000    |  |   | 2.69 | 
|9.25                       |  |                      | 300,000   |                                                  |  | 1.00                              |  |                     | 9.25 |                                   |  | 300,000   |  |   | 9.25 | 
|Totals                     |  |                      | 1,719,250 |                                                  |  | 5.04                              |  | $                   | 2.16 |                                   |  | 1,003,750 |  | $ | 3.51 | 

12

---

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

|                                                |  |                                  |           |       |   |      | 
|----------------------------------------------- |  | -------------------------------- | --------- | ----- | - | ---- | 
|                                                |  | Six Months Ended 
 June 30, 2009 |          
|                                                |  | Weighted Average Exercise        |          
|                                                |  | Warrants                         |           | Price |  
|                                                |  |                                  |           |       |   |      | 
|Warrants outstanding at the beginning of period |  |                                  | 3,214,072 |       | $ | 1.25 | 
|Granted                                         |  |                                  | 663,889   |       |   | .61  | 
|Exercised                                       |  |                                  |          |       |   |      | 
|Expired                                         |  |                                  | 150,000   |       |   | 2.00 | 
|Warrants outstanding at end of period           |  |                                  | 3,727,961 |       | $ | 1.11 | 

|                                                 |  |                                    |           |       |   |      | 
|------------------------------------------------ |  | ---------------------------------- | --------- | ----- | - | ---- | 
|                                                 |  | Three Months Ended 
 June 30, 2009 |          
|                                                 |  | Weighted Average Exercise          |          
|                                                 |  | Warrants                           |           | Price |  
|                                                 |  |                                    |           |       |   |      | 
|Warrants outstanding at the
 beginning of period |  |                                    | 3,589,072 |       | $ | 1.13 | 
|Granted                                          |  |                                    | 138,889   |       |   | .50  | 
|Exercised                                        |  |                                    |          |       |   |     | 
|Expired                                          |  |                                    |          |       |   |     | 
|Warrants outstanding at end
 of period           |  |                                    | 3,727,961 |       | $ | 1.11 | 

|                           |  |                       |           |                                                      |  |                                    |  |   |      | 
|-------------------------- |  | --------------------- | --------- | ---------------------------------------------------- |  | ---------------------------------- |  | - | ---- | 
|                           |  |                       |           |                                                      |  |                                    |  |   |      | 
|                           |  | Warrants
 Outstanding |          
|Range
 of 
 Exercise Price |  | Number 
 Outstanding  |           | Remaining
 
 Average 
 Contractual 
 Life (In Years) |  | Weighted
 Average Exercise 
 Price | 
|$.50
  $.99               |  |                       | 838,889   |                                                      |  | 3.64                               |  | $ | .61  | 
|1.25                       |  |                       | 2,889,072 |                                                      |  | 3.59                               |  |   | 1.25 | 
|Totals                     |  |                       | 3,727,961 |                                                      |  | 3.60                               |  | $ | 1.11 | 

|   |                              
|-- | -----------------------------
|5. | Notes Payable to Stockholders

As
of June 30, 2009, the Company had drawn all of the $6.1 million from the
available line-of-credit, which is provided by a stockholder, and a Board
Member, of the Company (see Note 2). Amounts drawn bear interest at a weighted
average between two facilities, one is based on a minimum of 2.75% or the prime
rate minus one-half percent and the other is based on Libor plus 1.40 (a
weighted average of 2.41% as of June 30, 2009) payable monthly and become due
and payable on December
31, 2010, or upon a change in control of the Company or consummation of any
other financing over $7.0 million. Previously, this executive officer,
director and stockholder waived this funding requirement. On February 23, 2009,
the maturity date of the stockholder loan was extended from December 31, 2009
to December 31, 2010.

On May 7, 2009, the Company converted a $100,000 advance received from
a member of the Board into 555,555 common shares.

For the three-months ended June 30, 2009 and 2008, the Company recorded
approximately $39,000 and $71,000, respectively; and for the six-months ended
June 30, 2009 and 2008, the Company recorded approximately $75,000 and
$157,000, respectively, of interest expense related to the notes payable to
stockholder, which is included in interest expense in the accompanying
condensed consolidated statements of operations.

13

---

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

Sales to two customers individually accounted for approximately 36% and
approximately 12% (for a total 48%) of the net sales for the six-months ended
June 30, 2009.

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

On July 7, 2009 the Company filed a lawsuit
against former Chief Executive Officer, Richard C. Ford, 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 July 25,
2009 interest on all three notes amounts to $340,615, for an aggregate amount
owing of $1,096,865. At the time of the execution of these promissory notes,
Mr. Ford was Chief Executive Officer of the Company and drafter of these
instruments. Upon filing of the lawsuit, the Company has discontinued any form
of commercial relationship with Mr. Ford, who recently performed work for the
Company under a manufacturing representative agreement.

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

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

Between August 1, 2009 and August 12, 2009,
the Company received proceeds of $700,000 from seven investors for the sale of
2,115,752 shares of common stock at prices of $.31 and $.34 per share and as
part of the offering, awarded 211,575 warrants to purchase common stock at a
price of $.50, which expire in August 2019.

In preparing these financial statements, the
Company has evaluated events and transactions for potential recognition or
disclosure through August 13, 2009, the date the financial statements were issued.

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

Cautionary Statements Regarding Forward
Looking Information

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

Overview

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

14

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

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

We
focus our sales strategy on individual sales and distribution efforts as well
as on the development of a strong nationwide distribution network that will not
only sell but also install and support our product. We currently have approximately
140 active distributors in the U.S. and internationally. The number of
distributors will constantly change as we add new distributors as well as when
OEMs come onboard with their distribution network.

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

This strategy
includes focus on:

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

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

|  |                                                                                                                                                                                                                                                                                          
|- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The
 May 2009 announcement that a major oil drilling company, operating land
 drilling and offshore rigs in over 30 countries, has started a program to
 outfit its drilling platforms with the Puradyn systems. Worldwide equipment
 fleet of over 2,700 has been targeted for retrofit.
|  |                                                                                                                                                                                                                                                                                          
| | The
 March 2009 announcement that the Company has entered into an exclusive sales
 representative agreement for the country of Nigeria and adjacent waters,
 effectively opening a new market for the Puradyn system.                                                                    
|  |                                                                                                                                                                                                                                                                                          
| | 2008
 announcement that the Avis Budget Group is installing the Puradyn
 system as standard on its fleet of 300+ heavy duty buses. Avis is the first
 in the car rental industry to use bypass oil filtration.                                                                           
|  |                                                                                                                                                                                                                                                                                          
| | 2008
 announcement that John Deere Forestry Division is factory-installing Puradyn
 systems in Joensuu, Finland on equipment to be utilized in Russia and other
 countries where high sulfur fuel is used.                                                                               
|  |                                                                                                                                                                                                                                                                                          
| | 2008
 announcement of initial and repeat orders received from the Foreign Military
 Sales program, the government method for selling U.S. defense equipment,
 services, and training, to supply the Puradyn system for the line haul fleet.                                              
|  |                                                                                                                                                                                                                                                                                          
| | U.S.
 Army contract received to supply the Puradyn system to outfit JERRV vehicles
 used in combat in Iraq and Afghanistan.                                                                                                                                                              

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

15

---

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

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

We believe international sales are especially well suited to our
product given that environmental controls are not as regulated in countries
outside North America. Certain applications representing a higher return on
investment are more prevalent in use outside of North America and end-users
consequently are more receptive to the total maintenance package, including the
use of oil analysis, which the Puradyn system requires to verify oil condition.
In the first six months of 2009, total international sales accounted for
approximately 18% of the Companys consolidated net sales as compared to 55%
for the first six months of 2008. As discussed elsewhere herein, we believe
that the decline in international sales in the current fiscal year is
attributable to the global economic uncertainty, which we estimate have
negatively impacted our sales for this quarter approximately $670,000. Given
the fact that our product saves money and companies are looking to save costs
as oil prices increase, we expect the global economic uncertainly will continue
to negatively affect our sales revenues through part of the third quarter of
2009 and diminish thereafter.

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

As described elsewhere herein, we continue to address our liquidity and
working capital issues as we continue to seek to raise additional capital from
institutional and private investors and current stockholders. Historically, we
have faced difficulties in raising adequate capital and we anticipate that
those efforts will continue given the uncertainties facing the capital markets
in the U.S. We also continue to implement cost reductions in an effort to
improve margins, including securing alternative suppliers for raw materials and
manufacturing and we anticipate these costs reductions will impact our results
of operations during the balance of 2009 and beyond. We are also reviewing cost
of material increases, some of which were passed through to our customers as
product price increases beginning January 2009. These price increases were
generally limited to market conditions,
but will continue to be applied each January and were in the range of 4%
to 8%. Cost reductions were and continue to be implemented by the Company
including acquiring alternative suppliers for raw materials. The Company, until
recently, had seen results from these reductions, as well as from other cost
reduction plans. However, due to raw material increases and the recent economic
environment, the Company has been able to pass on only a portion of these costs
as product price increases and has been forced to absorb some raw material
increases. A portion of this increase was offset by customer price increases
effective January 1, 2009.

Going Concern

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

16

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Critical Accounting Policies and
Estimates

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

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

Allowance
for doubtful accounts

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

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

Estimation
of product warranty cost

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

Estimation
of inventory obsolescence

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

Impairment
of long-lived assets

We
periodically evaluate the recoverability of the carrying amount of our
long-lived assets under the guidelines of SFAS No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets. Factors that we consider in making
this evaluation include estimating the undiscounted net cash flows estimated to
result from the assets over their remaining useful life. Should our estimates
of these factors change, our results of operations and financial condition
could be adversely impacted.

17

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Revenue recognition

Revenue
is recognized when earned. Our revenue recognition policies are in compliance
with the provisions issued in SAB No. 104, Revenue Recognition in Financial
Statements. Revenue from product sales to customers, distributors and resellers
is recorded when products that do not require further services or installation
us are shipped, when there are no uncertainties surrounding customer acceptance
and for which liability is reasonably assured. We provide for sales returns
based on an historical analysis of returns. The estimate is updated for current
return activity and the provision is adjusted accordingly. Should actual
returns exceed managements estimates, the provision may require further
adjustment and accordingly, net sales may decrease.

Product returns

Consistent
with industry practices, we may accept limited product returns or provide other
credits in the event that a distributor holds excess inventory of our products.
During the three-months ended June 30, 2009 and June 30, 2008, product returns
totaled $646 and $11,136, respectively. Increased product returns during 2008,
was primarily attributable to one customers excess inventory purchases
acquired during 2007. Our sales are made on credit terms, which vary depending
on the nature of the sale. We believe we have established sufficient reserves
to accurately reflect the amount or likelihood of product returns or credits
and uncollectible receivables. However, there can be no assurance that actual
returns and uncollectible receivables will not exceed our reserves.

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

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

|                           |  |                              |      |      |   |        |   |   |      |  
|-------------------------- |  | ---------------------------- | ---- | ---- | - | ------ | - | - | ---- | -
|                           |  | Three
 Months Ended June 30, |     
|(In
 thousands)            |  | 2009                         |      | 2008 |   | Change |  
|Net sales                  |  | $                            | 729  |      | $ | 792    |   | $ | (63  | )
|Costs and
 expenses:       |  |                              |      |      |   |        |   |   |      |  
|Cost of products sold      |  |                              | 618  |      |   | 642    |   |   | (24  | )
|Salaries and wages         |  |                              | 243  |      |   | 251    |   |   | (8   | )
|Selling and administrative |  |                              | 101  |      |   | 221    |   |   | (120 | )
|Total costs
 and expenses  |  |                              | 962  |      |   | 1,114  |   |   | (152 | )
|                          
|Other
 (expense) income:   |  |                              |      |      |   |        |   |   |      |  
|Interest income            |  |                              | (176 | )    |   | 1      |   |   | (177 | )
|Interest expense           |  |                              | (42  | )    |   | (78    | ) |   | 36   |  
|Total other
 expense       |  |                              | (218 | )    |   | (77    | ) |   | (141 | )
|Net loss                   |  | $                            | (451 | )    | $ | (399   | ) | $ | (52  | )

Net Sales

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

|                              |  |                             |     |      |  |        |   |  |      |  
|----------------------------- |  | --------------------------- | --- | ---- |  | ------ | - |  | ---- | -
|                              |  | Three Months Ended June 30, |    
|(in
 thousands)               |  | 2009                        |     | 2008 |  | Change |  
|                              |  |                             |     |      |  |        |   |  |      |  
|Gross sales                   |  |                             | 723 |      |  | 809    |   |  | (86  | )
|Sales
 returns and allowances |  |                             | 6   |      |  | (17    | ) |  | 23   |  
|Net Sales                     |  |                             | 729 |      |  | 792    |   |  | (63  | )
|US domestic sales             |  |                             | 645 |      |  | 288    |   |  | 357  |  
|US international sales        |  |                             | 80  |      |  | 198    |   |  | (118 | )
|UK sales                      |  |                             | 4   |      |  | 306    |   |  | (302 | )
|Net Sales                     |  |                             | 729 |      |  | 792    |   |  | (63  | )

18

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Net sales decreased by approximately $63,000 or approximately 8% from
approximately $792,000 in the three months ending June 30, 2008 to
approximately $729,000 in the three months ending June 30, 2009.

During the three-month period ending June 30, 2009, the cumulative
historical rate of returns sales returns decreased from 3.81% to 3.50%
resulting in a credit to sales returns of $6,000. During the three-month period
ending June 30, 2008, the return rate increase from 3.61% to 3.88%. Overall,
historical return rates have continued to decline as improvements have been
made to the products.

Sales to one customer accounted for approximately $370,000, or 51% of
the consolidated net sales for the three-months ended June 30, 2009 and the
significant increase in US domestic sales. For the three-months ended June 30,
2008, sales to two customers accounted for approximately 29% and approximately 19%
(for a total of 48%) of the consolidated net sales.

The US international sales decreased approximately $118,000 or 60%,
from approximately $198,000 for the period ending June 30, 2008 to
approximately $80,000 for the period ending June 30, 2009. This decrease is due
entirely from the decline in sales from a single customer, which has been
significantly affected by the global economy. The requirement still exists due
to the use of fuels, which effect the oil replacement intervals which should
produce similar sales as in the past once the economic conditions improve,
although there can be no assurances.

The UK subsidiarys sales decreased by approximately $302,000
(approximately 99%), from approximately $306,000 to approximately $4,000 for
the three-month period ended June 30, 2009 compared to the three-month period
ended June 30, 2008. This decrease is primarily attributable to the decrease in
sales to two customers by approximately $228,000 and $40,000, respectively.
International sales totaled approximately $84,000 (12%) of the net consolidated
sales for the three-month period ended June 30, 2009 as compared to
approximately $504,000 (64%) for the comparable period in 2008.

Cost of Products Sold

Cost of products sold decreased by approximately $24,000, or 4%, from
approximately $642,000 in 2008 to approximately $618,000 in 2009. Cost of
products sold, as a percentage of sales, increased from approximately 81% in
2008 to approximately 85% in 2009. This increase is primarily attributable to
an increase in scrap expense and inventory allowance of approximately $15,000
and $8,000, respectively.

Salaries and Wages

Salaries and wages decreased approximately $8,000, or approximately 3%.
This decrease is the result of a decrease in salaries and wages of approximately
$12,000 generated in the UK office, as the office was closed during the period
ending June 30, 2009, This decrease was partially offset by additional salaries
and wages expenses incurred in the US office.

Selling and Administrative Expenses

Selling and administrative expenses decreased by approximately
$120,000, or approximately 54%. This decrease was due to exchange rate gains,
decreases in UK office expenses and professional fees of approximately
$173,000, $19,000, and $18,000, respectively. These decreases were partially
offset by increases in stock based compensation expenses, reserve for bad debt
and other expenses of approximately $41,000, $32,000 and $16,000, respectively.

Interest Income

Interest Income decreased approximately $176,000. This decrease is
attributable to a reserve established against shareholder loan interest due
that was previously accrued on a principal balance of $756,250 at 5.63%
beginning July 25, 2001.Interest Expense

Interest
expense decreased by approximately $35,000, or approximately 45%, as a result
of a decrease in the interest rate outstanding balance of the stockholder notes
payable. The Company pays interest monthly on the notes payable to stockholder
at prime rate less .5%, with rates reset as often as the Federal Reserve
changes interest rates, which was 2.4% as of June 30, 2009 as opposed to 4.5%
as of June 30, 2008.

19

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Results of Operations for the Six-months Ended June 30, 2009
Compared to the Six-months Ended June 30, 2008

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

|                           |  |                           |        |      |   |        |   |   |      |  
|-------------------------- |  | ------------------------- | ------ | ---- | - | ------ | - | - | ---- | -
|(in thousands)             |  | Six Months Ended June 30, |       
|                           |  | 2009                      |        | 2008 |   | Change |  
|Net sales                  |  | $                         | 1,028  |      | $ | 1,555  |   | $ | (527 | )
|                          
|Costs and expenses:        |  |                           |        |      |   |        |   |   |      |  
|Cost of products sold      |  |                           | 978    |      |   | 1,267  |   |   | (289 | )
|Salaries and wages         |  |                           | 483    |      |   | 507    |   |   | (24  | )
|Selling and administrative |  |                           | 444    |      |   | 483    |   |   | (39  | )
|Total costs and expenses   |  |                           | 1,905  |      |   | 2,257  |   |   | (352 | )
|Other income (expense):    |  |                           |        |      |   |        |   |   |      |  
|Interest income            |  |                           | (176   | )    |   | 1      |   |   | (177 | )
|Interest expense           |  |                           | (80    | )    |   | (168   | ) |   | 88   |  
|Total other expense        |  |                           | (256   | )    |   | (167   | ) |   | (89  | )
|Net loss                   |  | $                         | (1,133 | )    | $ | (869   | ) | $ | (264 | )

Net Sales

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

|                              |  |                           |       |      |  |        |  |  |      |  
|----------------------------- |  | ------------------------- | ----- | ---- |  | ------ |  |  | ---- | -
|(in
 thousands)               |  | Six Months Ended June 30, |      
|                              |  | 2009                      |       | 2008 |  | Change | 
|                             
|Gross sales                   |  |                           | 1,032 |      |  | 1,525  |  |  | (493 | )
|Sales
 returns and allowances |  |                           | (4    | )    |  | 30     |  |  | (34  | )
|Net Sales                     |  |                           | 1,028 |      |  | 1,555  |  |  | (527 | )
|                              |  |                           |       |      |  |        |  |  |      |  
|US domestic sales             |  |                           | 844   |      |  | 630    |  |  | 214  |  
|US international sales        |  |                           | 116   |      |  | 355    |  |  | (239 | )
|UK sales                      |  |                           | 68    |      |  | 570    |  |  | (502 | )
|Net Sales                     |  |                           | 1,028 |      |  | 1,555  |  |  | (527 | )

Net sales decreased
by approximately $527,000 or 34% from approximately $1,555,000 in 2008 to
approximately $1,028,000 in 2009.

During the six-month period ending June 30, 2009, the cumulative
historical rate of sales returns decreased from 3.87% to 3.50% resulting in an
expense of approximately $4,000. During the six-month period ending June 30,
2008, the return rate decreased from 4.13% to 3.88%, resulting in a credit to
sales return of approximately $30,000. Overall, historical return rates have
continued to decline as improvements have been made to the products.

Sales to two customers individually accounted for approximately 36% and
approximately 12% (for a total 48%) and approximately 24% and approximately 16%
(for a total of 40%) of net sales for the six-months ended June 30, 2009 and
2008 respectively.

20

---

The US domestic sales
increase approximately $214,000. An increase in sales to two customers, of
approximately $370,000 and $30,000 respectively, accounted for the majority of
the increase and were offset by small decreases in sales among several customer
accounts.

The US international
sales decreased approximately $239,000 or 67%, from approximately $355,000 for
the period ending June 30, 2008 to approximately $116,000 for the period ending
June 30, 2008. This decrease is due entirely from the decline in sales from a
single international customer, which has been significantly affected by the
global economy.

The UK subsidiarys sales
decreased by approximately $502,000 or 89%, from approximately $570,000 for the
period ending June 30, 2008, to approximately $68,000 for the period ending
June 30, 2009. Sales to two of the UK subsidiarys customers decreased by
approximately $336,000 and $98,000, respectively, from approximately $369,000
and $141,000, respectively for the period ending June 30, 2008 to approximately
$33,000 and $43,000, respectively for the period ending June 30, 2009. We
believe that the decline in the global economy has contributed to this
significant decline in our international sales volume.

Cost of
Products Sold

Cost of products sold
decreased by approximately $289,000, or 23%, from approximately $1,267,000 in
2008 to approximately $978,000 in 2009. Cost of products sold, as a percentage
of sales, increased from approximately 81% in 2008 to approximately 95% in
2009. The increase is attributable to the significant decrease in sales during
the first quarter of 2009 and allocation of fixed and variable factory costs
over fewer sales. Additionally, increases occurred in rent and warranty
expenses of approximately $21,000 and $8,000. These increases were partially
offset by decreases in direct and indirect labor, freight and scrap expense of
approximately $79,000, $23,000, $51,000 and $27,000 respectively.

Salaries
and Wages

Salaries and wages
decreased approximately $24,000, or approximately 5%. This decrease is the
result of a decrease in salaries and wages of approximately $16,000 generated
in the UK office and approximately $11,000 due to an Engineering vacancy for
the period ending March 31, 2009. This decrease was partially offset by additional
salaries and wages expenses incurred in the US office.

Selling
and Administrative Expenses

Selling and
administrative expenses decreased by approximately $39,000 or approximately 8%
from approximately $483,000 for the six months ended June 30, 2008 to approximately
$444,000 for the six months ended June 30, 2009. This decrease was due to
exchange rate gains, decreases in UK office expenses, professional fees, sales
and marketing and depreciation of approximately $136,000, $35,000, $31,000,
$16,000 and $12,000, respectively. These decreases were partially offset by
increases in stock based compensation expenses, reserve for bad debt and other
expenses of approximately $131,000, $42,000 and $16,000, respectively.

Interest
Income

Interest Income decreased
approximately $177,000. This decrease is attributable to a reserve established
against shareholder loan interest due that was previously accrued on a
principal balance of $756,250 at 5.63% beginning July 25, 2001

Interest
Expense

Interest expense
decreased by approximately $88,000, or approximately 52%, as a result of a
decrease in the interest rate outstanding balance of the stockholder notes
payable. The Company pays interest monthly on the notes payable to stockholder
at prime rate less .5%, with rates reset as often as the Federal Reserve
changes interest rates, which was an average of 2.4% for the six months ended
June 30, 2009 as opposed to an average of 5.2% for the six months ended June
30, 2008.

Liquidity
and Capital Resources

As of June 30, 2009, the
Company had cash and cash equivalents of approximately $59,000, as compared to
approximately $117,000 at December 31, 2008. At June 30, 2009, we had working
capital of approximately $26,000 and our current ratio (current assets to
current liabilities) was 1.01 to 1. At December 31, 2008 we had working capital
of approximately $245,000 and our current ratio was 1.16 to 1. The decrease in
working capital and current ratio is primarily attributable to the decrease in
accounts receivable (approximately $312,000), a decrease in cash (approximately
$58,000), and a decrease in accounts in accounts payable (approximately
$45,000) offset by increases in inventory allowance (approximately $45,000),
decrease in accounts receivable (approximately $312,000) and decreases in
prepaid expenses (approximately $71,000).

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We have incurred net
losses each year since inception and at June 30, 2009 we had an accumulated
deficit of $49,603,155. Our net sales are not sufficient to fund our operating
expenses. Historically, we have relied on the sale of our stock from time to
time and loans from third parties and from related parties to fund our
operations. During 2008, we raised a total of $1.727 million in capital from an
institutional investor and current stockholders and during the six months ended
June 30, 2009 we raised an additional $.783 million. During July and August
2009, we raised $0.6 million. In addition, as of June 30, 2009, we owe our CEO
$6.27 million for funds he has advanced to us from time to time for working
capital. Interest expense on this loan was approximately $75,000 for the six
months ended June 30, 2009.

We do not currently have
any commitments for capital expenditures. Currently, without additional equity
investments, we expect our operating cash flows will suffice through 2009. We are actively seeking additional equity
investments, however, it is possible we will be required to accelerate our
contingent plans to more aggressively reduce spending as described below. The
impact of the global economy will continue to affect our revenue levels for a
portion of the remainder of 2009 and while we anticipate cash flows from 2009
sales activity to be stronger toward the end of the year. Our cash flows will
to be comparable to 2008 and cash may still be needed to support operations,
meet our working capital needs and satisfy our obligations as they become due.
In addition, as set forth above, we owe one of our directors $6.27 million
which is due on December 31, 2010 or (i) at such time as we have raised an additional
$7 million over the $3.5 million raised in prior offerings, or (ii) at such
time as we are operating within sufficient cash flow parameters to sustain
operations, or (iii) until a disposition of our company, such as an acquisition
or merger, occurs. We do not have sufficient funds to pay this loan when it
becomes due and there are no assurances our director will extend the due date.
We continue to address liquidity concerns because of inadequate revenue growth.
As a result, cash flow from operations is insufficient to cover our liquidity
needs for the next twelve months of operations. We have implemented measures to
preserve our ability to operate, including organizational changes, a reduction
and/or deferral of salaries, reduction in personnel and renegotiating creditor
and collection arrangements. If budgeted sales levels are not achieved and/or
significant unanticipated expenditures occur, or if we are not able to raise
additional investment capital, we may have to modify our business plan, reduce or
discontinue some of our operations or seek a buyer for part of its assets to
continue as a going concern through 2009. There can be no assurance that we
will be able to raise additional capital or that sales will increase to the
level required to generate profitable operations to provide positive cash flow
from operations. In that event, it is possible that stockholders could lose
their entire investment in our company. These factors raise substantial doubt
about our ability to continue as a going concern.

Operating activities

For the six-month period
ended June 30, 2009 net cash used in operating activities was approximately
$582,000, which primarily resulted from the net loss of approximately
$1,133,000. The effect of the net loss on working capital is offset by a
decrease in accounts receivable (approximately $312,000), an increase in
accrued liabilities (approximately $152,000), a decrease in inventory
(approximately $145,000), and a decrease in prepaid expenses (approximately
$71,000).

Investing
activities

For the six months ending June 30, 2009, $8,000 cash
was used in investing activities.

Financing
activities

Net cash provided by
financing activities was approximately $683,000 for the period, due to $783,000
of net proceeds received from stock issued for cash offset by a $100,000
reduction of the stockholder loan.

Critical
Accounting Policy

New Accounting Standards

In May 2009, the FASB issued SFAS No. 165
Subsequent Events (SFAS 165). SFAS 165 establishes general standards of
accounting for and disclosure of events that occur after the balance sheet date
but before financial statements are issued or are available to be issued. SFAS
165 sets forth (1) The period after the balance sheet date during which
management of a reporting entity should evaluate events or transactions that
may occur for potential recognition or disclosure in the financial statements,
(2) The circumstances under which an entity should recognize events or
transactions occurring after the balance sheet date in its financial statements
and (3) The disclosures that an entity should make about events or transactions
that occurred after the balance sheet date. SFAS 165 is effective for interim
or annual financial periods ending after June 15, 2009. The adoption of this
statement did not have a material effect on the Companys financial statements.

22

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In June 2009, the FASB issued SFAS No. 166
Accounting for Transfers of Financial Assetsan amendment of FASB Statement
No. 140 (SFAS 166). SFAS 166 improves the relevance, representational
faithfulness, and comparability of the information that a reporting entity
provides in its financial statements about a transfer of financial assets; the
effects of a transfer on its financial position, financial performance, and
cash flows; and a transferors continuing involvement, if any, in transferred
financial assets. SFAS 166 is effective as of the beginning of each reporting
entitys first annual reporting period that begins after November 15, 2009, for
interim periods within that first annual reporting period and for interim and
annual reporting periods thereafter. The Company is evaluating the impact the
adoption of SFAS 166 will have on its financial statements.

In June 2009, the FASB issued SFAS No. 167
Amendments to FASB Interpretation No. 46(R) (SFAS 167). SFAS 167 improves
financial reporting by enterprises involved with variable interest entities and
to address (1) the effects on certain provisions of FASB Interpretation No. 46
(revised December 2003), Consolidation of Variable Interest Entities, as a
result of the elimination of the qualifying special-purpose entity concept in
SFAS 166 and (2) constituent concerns about the application of certain key
provisions of Interpretation 46(R), including those in which the accounting and
disclosures under the Interpretation do not always provide timely and useful
information about an enterprises involvement in a variable interest entity.
SFAS 167 is effective as of the beginning of each reporting entitys first
annual reporting period that begins after November 15, 2009, for interim
periods within that first annual reporting period, and for interim and annual
reporting periods thereafter. The Company is evaluating the impact the adoption
of SFAS 167 will have on its financial statements.

In June
2009, the FASB issued SFAS No. 168 The FASB Accounting Standards Codification
and the Hierarchy of Generally Accepted Accounting Principlesa replacement of
FASB Statement No. 162. The FASB Accounting Standards Codification
(Codification) will be the single source of authoritative nongovernmental
U.S. generally accepted accounting principles. Rules and interpretive releases
of the SEC under authority of federal securities laws are also sources of
authoritative GAAP for SEC registrants. SFAS 168 is effective for interim and
annual periods ending after September 15, 2009. All existing accounting
standards are superseded as described in SFAS 168. All other accounting
literature not included in the Codification is nonauthoritative. The Company is
evaluating the impact the adoption of SFAS 168 will have on its financial
statements.

Impact of Inflation

Inflation has not had a
significant impact on our operations. However, any significant decrease in the
price for oil or labor, environmental compliance costs, and engine replacement
costs could adversely impact the end users cost/benefit analysis as to the use
of our products. The impact of fluctuations in foreign currency has not been
significant. The exchange rate, the Great British pound to the U.S. dollar
fluctuated from 1.4479 on December 31, 2008 to 1.652on June 30, 2009 as
compared to 1.9973 on December 31, 2008 to 1.9954 on June 30, 2008.

Off Balance Sheet Financing

None.

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

Not applicable for a smaller reporting company.

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

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

23

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

There have been no
changes in our internal control over financial reporting 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 July 25,
interest on all three notes amounts to $340,615, for an aggregate amount owing
of $1,096,865. At the time of the execution of these promissory notes, Mr. Ford
was Chief Executive Officer of the Company and drafter of these instruments.
The Company is seeking payment of the promissory notes and accrued interest. On
August 7, 2009, Mr. Ford responded by filing a Motion to Disqualify the
Companys legal counsel, Gary E. Susser and request a staying action until such
time as the Company obtains new legal counsel.

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

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

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

In July 2009, the Company
received an advance totaling $100,000 from a member of the Board, which was
converted into 370,370 shares of common stock at a conversion price of $0.27
per share on July 17, 2009. As part of the offering the Company awarded
warrants to purchase 92,593 shares of common stock at a price of $0.50, which
expire July 17, 2014. As the investor was an accredited investor, the
transaction was exempt from registration under the Securities Act of 1933 in
reliance on an exemption provided by Section 4(2) of that act. The Company did
not incur commissions or fees related to this transaction

On July 17, 2009, the
Company received additional proceeds of $100,000 from the sale of 370,370
shares of common stock at a price of $0.27 per share from an accredited
investor, which was subsequently converted into 370,370 shares of common stock
at a conversion price of $0.27 per share. As part of the offering the Company
awarded warrants to purchase 92,593 shares of common stock at a price of $0.50,
which expire July 17, 2014. The investor was an accredited investor and the
transaction was exempt from registration under the Securities Act of 1933 in
reliance on an exemption provided by Section 4(2) of that act. The Company did
not incur commissions or fees related to this transaction.

Between August 1, 2009
and August 12, 2009 the Company received proceeds of $700,000 from six
investors for the sale of 2,115,752 shares of common stock as a price of $.31
and $.34 per share and as part of the offering, awarded 211,575 warrants to
purchase common stock at a price of $.50, which expire in August 2019. The
investors were accredited investors and the transactions were exempt from
registration under the Securities Act of 1933 in reliance on an exemption
provided by Section 4(2) of that act. The Company did not incur commissions or
fees related to this transaction

24

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

None

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

None

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

None.

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

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

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: August 13, 2009 | By /s/ Joseph V. Vittoria                                
|                      | Joseph V. Vittoria, Chairman and Chief Executive
 Officer
|                      |                                                          
|Date: August 13, 2009 | By /s/ Cindy Lea Gimler                                  
|                      | Cindy Lea Gimler, Chief Financial Officer                

25

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