UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C. 20549





FORM
10-Q




x
            QUARTERLY
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934





For
      the quarterly period ended September 30,
2009





o
            TRANSITION
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934





Commission
File Number:1-09478





PureSafe
Water Systems, Inc.


(Exact
name of registrant as specified in its charter)





Delaware
            86-0515678(State
      or other jurisdiction of incorporation or organization)
            (I.R.S.
      Employer Identification No.)25
      Fairchild Avenue - Suite 250, Plainview, New York
            11803(Address
      of principal executive offices)
            (Zip
      Code)





(516)
208-8250


(Registrant’s
telephone number,including area code)





Indicate
by check mark whether the registrant (1) filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12
months (or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days. Yes x  No
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 months (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.





Large
      accelerated filer  o
            Accelerated
      filer  oNon-accelerated
      filer  o
            Smaller
      reporting company  x





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





State the
number of shares outstanding of each of the issuer’s classes of common stock, as
of the latest practicable date. As of November 12, 2009, 268,908,545 shares of
common stock of the issuer were outstanding.










PART
I - FINANCIAL INFORMATION





Item
      1.
            Financial
      Statements.


PureSafe
Water Systems, Inc.


(A
Development Stage Company Commencing January 1, 2002)


Condensed
Consolidated Balance Sheets





September 30,
            
            
            December
      31,2009
            
            
            2008(Unaudited)ASSETSCurrent
      assetsCash
            
            $
            70,553
            
            
            $
            29,411Prepaid
      expenses and other current assets
            
            
            38,251
            
            
            
            53,890Total
      current assets
            
            
            108,804
            
            
            
            83,301Property
      and equipment, net of accumulated depreciation of $27,616 and $17,130,
      respectively
            
            
            112,591
            
            
            
            142,437Other
      assetsPatents
      and trademarks, net of accumulated amortization of $21,978 and $17,882,
      respectively
            
            
            70,506
            
            
            
            62,044Security
      deposit
            
            
            26,860
            
            
            
            26,860Total
      other assets
            
            
            97,366
            
            
            
            88,904Total
      Assets
            
            $
            318,761
            
            
            $
            314,642LIABILITIES
      AND STOCKHOLDERS' DEFICIENCYCurrent
      liabilitiesAccounts
      payable and accrued expenses
            
            $
            488,789
            
            
            $
            410,925Accrued
      compensation
            
            
            42,000
            
            
            
            155,000Accrued
      consulting and director fees
            
            
            138,000
            
            
            
            178,000Convertible
      notes payable to officer and director, including accrued interest of
      $12,449 and $12,171, respectively
            
            
            62,449
            
            
            
            186,891Convertible
      promissory note, including accrued interest of $3,959 and $208 and net of
      debt discount of $4,063 and $19,283 respectively
            
            
            49,896
            
            
            
            30,925Notes
      payable, including accrued interest of $276,473 and $269,833,
      respectively
            
            
            559,696
            
            
            
            553,056Fair
      value of warrants and options
            
            
            224,200
            
            
            
            121,100Fair
      value of embedded conversion options
            
            
            99,400
            
            
            
            164,900Accrued
      dividends payable
            
            
            190,328
            
            
            
            190,328Total
      current liabilities
            
            
            1,854,758
            
            
            
            1,991,125Notes
      Payable
            
            
            523,624
            
            
            
            -Total  Liabilities
            
            
            2,378,382
            
            
            
            1,991,125Stockholders'
      deficiencyPreferred
      stock, $.001 par value; 10,000,000 shares authorized; 184,144 shares
      issued and outstanding (liquidation preference of $2,565,175 and
      $2,483,950 as of September 30, 2009 and December 31, 2008,
      respectively)
            
            
            184
            
            
            
            184Common
      stock $.001 par value; 450,000,000 shares authorized; 268, 253,314 shares
      issued and 268, 248,914  shares outstanding as of September 30,
      2009 and 244,850,034 shares issued and 244,845,634 outstanding as of
      December 31, 2008
            
            
            268,252
            
            
            
            244,849Additional
      paid-in capital
            
            
            29,887,388
            
            
            
            28,528,973Treasury
      stock, at cost, 4,400 shares of common stock
            
            
            (5,768
            )
            
            
            (5,768
            )Subscription
      receivable (including accrued interest of $28,018 and $12,914,
      respectively)
            
            
            (365,218
            )
            
            
            (350,114
            )Accumulated
      deficit, including $17,312,863 and $15,563,011 of deficit accumulated
      during the development stage as of September 30, 2009 and December 31,
      2008, respectively
            
            
            (31,844,459
            )
            
            
            (30,094,607
            )Total
      stockholders’ deficiency
            
            
            (2,059,621
            )
            
            
            (1,676,483
            )Total
      Liabilities and Stockholders' Deficiency
            
            $
            318,761
            
            
            $
            314,642





See notes
to condensed consolidated financial statements


2


PureSafe
Water Systems, Inc.


(A
Development Stage Company Commencing January 1, 2002)


Condensed
Consolidated Statements of Operations





JanuaryThree
      Months Ended
            
            
            Nine
      Months Ended
            
            
            1,
      2002September 30,
            
            
            September 30,
            
            
            to
      September2009
            
            
            2008
            
            
            2009
            
            
            2008
            
            
            30, 2009Sales
            
            $
            --
            
            
            $
            --
            
            
            $
            --
            
            
            $
            --
            
            
            $
            471,290Costs
      and expenses (income) -Cost
      of sales
            
            
            --
            
            
            
            --
            
            
            
            --
            
            
            $
            --
            
            
            
            575,680Selling,
      general and administrative, including stock based compensation of $16,942
      and $149,504 for the three months ended September 30, 2009 and 2008 and
      $598,946 and $387,691 for the nine months ended September 30, 2009 and
      2008 and $3,271,640 for the period of January 1, 2002 to September 30,
      2009
            
            $
            252,000
            
            
            $
            477,604
            
            
            $
            1,546,798
            
            
            
            1,449,019
            
            
            
            10,470,725Non-dilution
      agreement termination costs
            
            
            --
            
            
            
            --
            
            
            
            --
            
            
            
            --
            
            
            
            2,462,453Research
      and development
            
            
            15,107
            
            
            
            90,062
            
            
            
            23,143
            
            
            
            255,987
            
            
            
            728,911Interest
      expense, including interest expense to a related party of $1,250 and $0
      for the three months ended September 30, 2009 and 2008, respectively and
      $9,583 and $0 for the nine months ended September 30, 2009 and 2008,
      respectively and $143,356 for period of January 1, 2002 to September 30,
      2009
            
            
            9,734
            
            
            
            7,282
            
            
            
            111,611
            
            
            
            78,507
            
            
            
            1,628,331Financing
      costs - extension of warrants
            
            
            --
            
            
            
            --
            
            
            
            --
            
            
            
            --
            
            
            
            74,700Interest
      expense - conversion provision
            
            
            --
            
            
            
            --
            
            
            
            --
            
            
            
            --
            
            
            
            113,000(Gain)
      loss on settlement of debt
            
            
            --
            
            
            
            --
            
            
            
            --
            
            
            
            (226,467
            )
            
            
            2,229,903Change
      in fair value of warrants and embedded conversion option
            
            
            (153,600
            )
            
            
            (733,200
            )
            
            
            68,300
            
            
            
            (28,000
            )
            
            
            (499,551
            )Total
      cost and expenses (income)
            
            
            123,241
            
            
            
            (158,252
            )
            
            
            1,749,852
            
            
            
            1,529,046
            
            
            
            17,784,152Net
      loss
            
            
            (123,241
            )
            
            
            158,252
            
            
            
            (1,749,852
            )
            
            
            (1,529,046
            )
            
            
            (17,312,862
            )Deemed
      dividend on preferred stock
            
            
            --
            
            
            
            --
            
            
            
            --
            
            
            
            --
            
            
            
            (2,072,296
            )Preferred
      stock dividends
            
            
            (27,075
            )
            
            
            (27,075
            )
            
            
            (81,225
            )
            
            
            (81,225
            )
            
            
            (807,348
            )Net
      loss attributable to common stockholders
            
            $
            (150,316
            )
            
            $
            131,177
            
            
            $
            (1,831,077
            )
            
            $
            (1,610,271
            )
            
            $
            (20,192,506
            )Basic
      and diluted net loss attributable to common stockholders per common
      share
            
            
            *
            
            
            
            *
            
            
            
            (0.01
            )
            
            
            (0.01
            )Weighted
      average number of common shares outstanding - basic and
      diluted
            
            
            249,941,712
            
            
            
            243,009,074
            
            
            
            250,126,857
            
            
            
            237,627,738


_____


*
            Less
      that $0.01.





See notes
to condensed consolidated financial statements


3


PureSafe
Water Systems, Inc.


(A
Development Stage Company Commencing January 1, 2002)


Condensed
Consolidated Statement of Stockholders’ Deficiency


(Unaudited)





Additional
            
            
            Treasury
            
            
            
            
            
            
            
            
            TotalPreferred
      Stock
            
            
            Common
      Stock
            
            
            Paid-In
            
            
            Stock
            
            
            Subscription
            
            
            Accumulated
            
            
            Stockholders’Shares
            
            
            Amount
            
            
            Shares
            
            
            Amount
            
            
            Capital
            
            
            at
      Cost
            
            
            Receivable
            
            
            Deficit
            
            
            DeficiencyBalance
      at December 31, 2008
            
            
            184,144
            
            
            $
            184
            
            
            
            244,850,034
            
            
            $
            244,849
            
            
            $
            28,528,973
            
            
            $
            (5,768
            )
            
            
            (350,114
            )
            
            $
            (30,094,607
            )
            
            $
            (1,676,483
            )Proceeds
      from sale of common stock and warrants:$0.0330
      per share – January 16, 2009
            
            
            --
            
            
            
            --
            
            
            
            757,576
            
            
            
            758
            
            
            
            24,242
            
            
            
            --
            
            
            
            --
            
            
            
            --
            
            
            
            25,000$0.0320
      per share – January 30, 2009
            
            
            --
            
            
            
            --
            
            
            
            1,562,500
            
            
            
            1,563
            
            
            
            48,437
            
            
            
            --
            
            
            
            --
            
            
            
            --
            
            
            
            50,000$0.0
      320 per share – February 09, 2009
            
            
            --
            
            
            
            --
            
            
            
            640,625
            
            
            
            641
            
            
            
            19,859
            
            
            
            --
            
            
            
            --
            
            
            
            --
            
            
            
            20,500$0.0
      299 per share – February 13, 2009
            
            
            --
            
            
            
            --
            
            
            
            1,672,241
            
            
            
            1,672
            
            
            
            48,328
            
            
            
            --
            
            
            
            --
            
            
            
            --
            
            
            
            50,000$0.0
      290 per share – February 17, 2009
            
            
            --
            
            
            
            --
            
            
            
            1,724,138
            
            
            
            1,724
            
            
            
            48,276
            
            
            
            --
            
            
            
            --
            
            
            
            --
            
            
            
            50,000$0.0
      410 per share – April 29, 2009
            
            
            --
            
            
            
            
            
            
            
            609,756
            
            
            
            610
            
            
            
            24,390
            
            
            
            --
            
            
            
            --
            
            
            
            --
            
            
            
            25,000$0.0
      440 per share – May 28, 2009
            
            
            --
            
            
            
            --
            
            
            
            568,182
            
            
            
            568
            
            
            
            24,432
            
            
            
            --
            
            
            
            --
            
            
            
            --
            
            
            
            25,000$0.0
      420 per share – June 3, 2009
            
            
            --
            
            
            
            --
            
            
            
            595,238
            
            
            
            595
            
            
            
            24,405
            
            
            
            --
            
            
            
            --
            
            
            
            --
            
            
            
            25,000$0.0600
      per share – June 17, 2009
            
            
            --
            
            
            
            --
            
            
            
            416,667
            
            
            
            416
            
            
            
            24,584
            
            
            
            --
            
            
            
            --
            
            
            
            --
            
            
            
            25,000$0.0
      700 per share – June 23, 2009
            
            
            --
            
            
            
            --
            
            
            
            714,286
            
            
            
            714
            
            
            
            49,286
            
            
            
            --
            
            
            
            --
            
            
            
            --
            
            
            
            50,000$0.0720
      per share – August 3, 2009
            
            
            --
            
            
            
            --
            
            
            
            277,778
            
            
            
            278
            
            
            
            19,722
            
            
            
            --
            
            
            
            --
            
            
            
            --
            
            
            
            20,000$0.0720
      per share – August 3, 2009
            
            
            --
            
            
            
            --
            
            
            
            694,444
            
            
            
            694
            
            
            
            49,306
            
            
            
            --
            
            
            
            --
            
            
            
            --
            
            
            
            50,000$0.0723
      per share – August 4, 2009
            
            
            --
            
            
            
            --
            
            
            
            1,369,863
            
            
            
            1,370
            
            
            
            98,630
            
            
            
            --
            
            
            
            --
            
            
            
            --
            
            
            
            100,000Common
      stock issued in repayment of debt:$0.0547
      per share – March 14, 2009
            
            
            --
            
            
            
            --
            
            
            
            500,000
            
            
            
            500
            
            
            
            26,868
            
            
            
            --
            
            
            
            --
            
            
            
            --
            
            
            
            27,368$0.039
      per share – April 17, 2009
            
            
            --
            
            
            
            --
            
            
            
            2,694,438
            
            
            
            2,694
            
            
            
            102,391
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            105,085$0.040
      per share – April 17, 2009
            
            
            --
            
            
            
            --
            
            
            
            2,605,548
            
            
            
            2,606
            
            
            
            101,613
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            104,219Common
      stock issued for services$0.0200
      per share – February 23, 2009
            
            
            --
            
            
            
            --
            
            
            
            1,000,000
            
            
            
            1,000
            
            
            
            19,000
            
            
            
            --
            
            
            
            --
            
            
            
            --
            
            
            
            20,000$0.041
      per share – April 17, 2009
            
            
            --
            
            
            
            --
            
            
            
            4,750,000
            
            
            
            4,750
            
            
            
            190,000
            
            
            
            --
            
            
            
            --
            
            
            
            --
            
            
            
            194,750$0.035
      per share – May 6, 2009
            
            
            --
            
            
            
            --
            
            
            
            250,000
            
            
            
            250
            
            
            
            8,500
            
            
            
            --
            
            
            
            --
            
            
            
            --
            
            
            
            8,750Accrued
      interest
            
            
            --
            
            
            
            --
            
            
            
            --
            
            
            
            --
            
            
            
            --
            
            
            
            --
            
            
            
            (15,104
            )
            
            
            --
            
            
            
            (15,104
            )Reclassification
      of warrants (to) from derivative liability,
      net -- --
            
            
            
            --
            
            
            
            --
            
            
            
            30,700
            
            
            
            --
            
            
            
            --
            
            
            
            --
            
            
            
            30,700Amortization
      of warrants and options for employees and non-employees
            
            
            
            
            
            
            
            
            
            375,446
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            375,446Net
      loss
            
            
            --
            
            
            
            --
            
            
            
            --
            
            
            
            --
            
            
            
            --
            
            
            
            --
            
            
            
            
            
            
            
            (1,749,852
            )
            
            
            (1,747,852
            )BALANCE
      – September 30, 2009
            
            
            184,144
            
            
            $
            184
            
            
            
            268,253,314
            
            
            $
            268,252
            
            
            $
            29,887,388
            
            
            $
            (5,768
            )
            
            $
            (365,218
            )
            
            $
            (31,844,459
            )
            
            $
            (2,059,621
            )


4


PureSafe
Water Systems, Inc.


(A
Development Stage Company Commencing January 1, 2002)


Condensed
Consolidated Statements of Cash Flow


(Unaudited)





JanuaryNine
      Months Ended
            
            
            1,
      2002September 30,
            
            
            to
      September2009
            
            
            2008
            
            
            30, 2008Cash
      Flows from Operating Activities:Net
      Loss
            
            $
            (1,749,852
            )
            
            $
            (1,529,046
            )
            
            $
            (17,312,862
            )Adjustments
      to reconcile net loss to net cash used in operating activities
      -Depreciation
            
            
            17,319
            
            
            
            8,649
            
            
            
            34,449Loss
      on sale of property and equipment
            
            
            8,177
            
            
            
            --
            
            
            
            8,177Amortization
      of patents
            
            
            4,096
            
            
            
            3,290
            
            
            
            20,596Interest
      expense - amortization of deferred financing
            
            
            --
            
            
            
            2,510
            
            
            
            22,530Stock
      based compensation
            
            
            598,946
            
            
            
            387,692
            
            
            
            3,271,640Interest
      expense - conversion provision
            
            
            -
            
            
            
            --
            
            
            
            113,000Stock
      subscription - interest receivable
            
            
            (15,104
            )
            
            
            (7,815
            )
            
            
            (28,018
            )Accretion
      of debt discount
            
            
            90,501
            
            
            
            67,900
            
            
            
            659,579Change
      in fair value of warrants and embedded conversion option
            
            
            68,300
            
            
            
            (28,000
            )
            
            
            (499,551
            )(Gain)
      loss on settlement of debt
            
            
            (226,467
            )
            
            
            2,229,903Non-dilution
      agreement termination cost
            
            
            --
            
            
            
            --
            
            
            
            2,462,453Inventory
      reserve
            
            
            --
            
            
            
            --
            
            
            
            159,250Write-off
      of stock subscription receivable
            
            
            --
            
            
            
            --
            
            
            
            21,800Financing
      costs - warrant extension
            
            
            --
            
            
            
            --
            
            
            
            74,700Change
      in assets and liabilities -Prepaid
      expenses and other current assets
            
            
            15,639
            
            
            
            12,598
            
            
            
            11,993Security
      deposit
            
            
            --
            
            
            
            (17,441
            )
            
            
            (17,441
            )Accounts
      payable, accrued expenses, accrued dividends, accrued compensation,
      accrued consulting and director fees, customer deposits and other current
      liabilities
            
            
            495,828
            
            
            
            (1,693
            )
            
            
            2,290,782Net
      Cash Used in Operation Activities
            
            
            (466,160
            )
            
            
            (1,327,823
            )
            
            
            (6,477,020
            )Cash
      Flows from Investing Activities:Purchase
      of property and equipment
            
            
            --
            
            
            
            (136,857
            )
            
            
            (159,567
            )Proceeds
      from sale of property and Equipment
            
            
            4,350
            
            
            
            --
            
            
            
            4,350Patent
      costs
            
            
            (12,558
            )
            
            
            (23,155
            )
            
            
            (66,429
            )Net
      Cash Used in Investing Activities
            
            
            (8,208
            )
            
            
            (160,012
            )
            
            
            (221,646
            )Cash
      Flows from Financing Activities:Reduction
      of stock subscription receivable
            
            
            --
            
            
            
            --
            
            
            
            65,700Proceeds
      from sale of preferred stock
            
            
            --
            
            
            
            --
            
            
            
            1,130,127Proceeds
      from sale of common stock
            
            
            515,500
            
            
            
            1,170,000
            
            
            
            4,376,060Proceeds
      from exercise of warrants
            
            
            --
            
            
            
            9,350
            
            
            
            9,350Proceeds
      from sale of common stock to be issued
            
            
            --
            
            
            
            --
            
            
            
            300,000Deferred
      financing costs
            
            
            --
            
            
            
            --
            
            
            
            (22,530
            )Proceeds
      from convertible promissory note
            
            
            --
            
            
            
            --
            
            
            
            850,000Proceeds
      from officers’ and directors’ loans
            
            
            --
            
            
            
            --
            
            
            
            300,000Repayment
      of notes payable
            
            
            --
            
            
            
            (69,314
            )
            
            
            (274,999
            )Net
      Cash Provided by Financing Activities
            
            
            515,500
            
            
            
            1,110,036
            
            
            
            6,733,708





(Continued
on following page)


5


PureSafe
Water Systems, Inc.


(A
Development Stage Company Commencing January 1, 2002)


Condensed
Consolidated Statements of Cash Flow


(Unaudited)


(Continued
From Previous Page)





JanuaryNine
      Months Ended
            
            
            1,
      2002September 30,
            
            
            to
      September2009
            
            
            2008
            
            
            30, 2009Net
      (Decrease) Increase in Cash
            
            
            41,142
            
            
            
            (377,799
            )
            
            
            35,042Cash
      at Beginning of Year
            
            
            29,411
            
            
            
            415,400
            
            
            
            35,511Cash
      at end of period
            
            $
            70,553
            
            
            $
            37,601
            
            
            $
            70,553SUPPLEMENTAL
      DISCLOSURE OF CASH FLOW INFORMATION:Cash
      paid during the year for -Interest
            
            $
            1,088
            
            
            $
            2,866
            
            
            $
            371,441NON-CASH
      INVESTING ACTIVITIES:Notes
      receivable for common stock issued
            
            $
            --
            
            
            
            337,200
            
            
            $
            337,200NON-CASH
      FINANCING ACTIVITIES:Compensation
      satisfied by issuance of common stock
            
            
            --
            
            
            
            --
            
            
            $
            55,250Common
      stock issued in satisfaction of liabilities
            
            $
            236,672
            
            
            $
            362,509
            
            
            $
            7,274,543Reclassification
      of derivative liabilities upon conversion of debt
            
            $
            86,400
            
            
            $
            77,700
            
            
            $
            587,566Reclassification
      of equity instruments to liabilities upon issuance of equity
      instruments
            
            
            55,700
            
            
            $
            --
            
            
            $
            55,700Cancellation
      of debt for no consideration
            
            
            --
            
            
            $
            --
            
            
            $
            1,327,321Conversion
      of current liabilities to notes payable
            
            $
            523,624
            
            
            $
            --
            
            
            $
            523,624





See notes
to condensed consolidated financial statements


6


PureSafe
Water Systems, Inc.


(A
Development Stage Company Commencing January 1, 2002)


Notes
to the Condensed Consolidated Financial Statements


(Unaudited)





NOTE 1: DESCRIPTION OF
BUSINESS.





PureSafe
Water Systems, Inc. (the "Company")  is a Delaware corporation engaged
in the design and development of its technology to be used in the
manufacture  and sale of water purification systems, the PureSafe(TM)
First Response Water System (the “PureSafe FRWS”), both within and outside of
the United States. The Company's corporate headquarters is located in Plainview,
New York.





NOTE
2: BASIS OF PRESENTATION AND ACCOUNTING POLICIES.





The
accompanying unaudited condensed financial statements have been prepared in
accordance with accounting principles generally accepted in the United States
for interim financial information. Accordingly, these interim financial
statements do not include all of the information and footnotes required for
annual financial statements. In the opinion of management, all adjustments
(consisting of normal recurring accruals) considered necessary to make the
financial statements not misleading have been included.





The
operating results for the three and nine months period ended September 30, 2009
are not necessarily indicative of the results that may be expected for the year
ending December 31, 2009. These financial statements should be read in
conjunction with the financial statements and footnotes thereto included in the
Company's Annual Report on Form 10-K for the year ended December 31, 2008, filed
with the Securities and Exchange Commission on April 15, 2009.





Use Of
Estimates





The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the reported amounts of assets, liabilities and
disclosures of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period.





The
Company bases its estimates on historical experience and on various assumptions
that are believed to be reasonable under the circumstances, the results of which
form the basis for making judgments about the carrying value of assets and
liabilities that are not readily apparent from other sources. The most
significant estimates, among other things, are used in accounting for the
valuation allowances for deferred income taxes, expected realizable values for
long-lived assets (primarily intangible assets) and contingencies, as well as
the recording and presentation of the Company’s common stock, preferred stock,
derivative liabilities, option and warrant issuances. Estimates and assumptions
are periodically reviewed and the effects of any material revisions are
reflected in the financial statements in the period that they are determined to
be necessary. Actual results could differ from those estimates and
assumptions.





Principles
of Consolidation




The
consolidated financial statements of PureSafe Water Systems, Inc. include
accounts of the Company and its wholly-owned subsidiary. Intercompany
transactions and balances are eliminated in consolidation.




Stock-Based
Compensation





The
Company reports stock-based compensation under Accounting Standard Codification
(“ASC”) 718 “Compensation – Stock Compensation”.  ASC 718 requires all
share-based payments to employees, including grants of employee stock options,
to be recognized in the consolidated financial statements based on their fair
values.





The
Company accounts for equity instruments issued to non-employees as compensation
in accordance with the provisions of ASC 718 , which require that each such
equity instrument is recorded at its fair value on the measurement date, which
is typically the date the services are performed.


7


The
Black-Scholes option valuation model is used to estimate the fair values of
options. The model includes subjective input assumptions that can materially
affect the fair value estimates. The model was developed for use in estimating
the fair value of traded options or warrants that have no vesting restrictions
and that are fully transferable. The expected volatility is estimated based on
the most recent historical period of time equal to the weighted average life of
the subject option.





NOTE
3: GOING CONCERN.





The
accompanying unaudited condensed financial statements have been prepared
assuming that the Company will continue as a going concern. The Company has
incurred recurring losses from operations, an accumulated deficit since its
inception of approximately $31,844,000 and $30,095,000 as of September 30, 2009
and December 31, 2008, respectively, and has a working capital deficiency of
approximately $1,746,000 and $1,908,000 as of  September 30, 2009 and
December 31, 2008, respectively. These conditions raise substantial doubt about
the Company's ability to continue as a going concern.





The
Company’s plans with respect to these matters include restructuring its existing
debt and raising additional capital through future issuances of stock and/or
debt.





In
September, 2009, the Company’s Chief Executive Officer and Chief Financial
Officer together with three of the Company’s consultants agreed to defer
$523,624 in compensation owed to them as of June 30, 2009 until January 2011. As
a result the Company issued in the aggregate notes payable of $523,624. The
notes mature in January 2011 and interest accrues at 10% per annum compounded
monthly. Accordingly the Company reclassified $523,624 from current liabilities
to long-term liabilities. On September 18, 2009, PureSafe Manufacturing &
Research Corporation (PSMR), a Delaware corporation was established. PSMR, a
wholly owned subsidiary by the Company will be the Manufacturing and Research
arm of the Company. The activity of PSMR has been nominal for the period
September 18, 2009 through September 30, 2009.  In October and
November, 2009 the company raised an aggregate $225,000 which includes $25,000
from each the Company’s Chief Executive Officer and Chief Financial Officer
through the issuance of debt instruments. The funds raised will be used as the
initial investment in PSMR and are earmarked for production purpose only. The
Company anticipates completing two commercial units by the end of 1st
quarter of 2010.  However the Company can give no assurance it will be
successful in completing these commercialized units.





The
Company is also seeking to raise an additional $10 million in the next nine
months to fund the following activities: the production of 30 commercialized
PureSafe FRWS units; submitting two commercialized units for all necessary
certifications; launching a marketing program for the PureSafe FRWS;
establishing a sales and marketing network; and concluding agreements with
strategic partners for international marketing and
manufacturing.





The
Company can give no assurance that such financing will be available on terms
advantageous to us, or at all. Should the Company not be successful in
obtaining the necessary financing to fund its operations, the Company would need
to curtail certain or all of its operational activities. The accompanying
unaudited condensed financial statements do not include any adjustments that
might be necessary should the Company be unable to continue as a going
concern.





NOTE
4: RECENT ACCOUNTING STANDARDS.




The FASB,
in June 2009, issued new accounting guidance that established the FASB
Accounting Standards Codification, ("Codification" or “ASC”) as the
single source of authoritative GAAP to be applied by nongovernmental
entities, except for the rules and interpretive releases of the SEC under
authority of federal securities laws, which are sources of authoritative
GAAP for SEC registrants.  The FASB will no longer issue new standards in
the form of Statements, FASB Staff Positions, or Emerging Issues Task Force
Abstracts; instead the FASB will issue Accounting Standards Updates. Accounting
Standards Updates will not be authoritative in their own right as they will only
serve to update the Codification. These changes and the Codification itself do
not change GAAP. This new guidance became effective for interim and annual
periods ending after September 15, 2009.  Other than the manner in which
new accounting guidance is referenced, the adoption of these changes did not
have a material effect on the Company’s consolidated financial
statements.


8


In March
2008, the FASB issued new accounting guidance under standard ASC Topic 815, on
Derivatives and Hedging which requires enhanced disclosures about how and why an
entity uses derivative instruments, how derivative instruments and related
hedged items are accounted under Topic 815 and its related interpretations, and
how derivative instruments and related hedged items affect an entity’s financial
position, results of operations and cash flows. This standard is effective for
fiscal years and interim periods beginning after November 15, 2008. . The
adoption of this pronouncement did not have an impact on the Company’s
consolidated financial position and results of operations.





In June
2008, the FASB issued new accounting guidance, under ASC Topic 260 on earnings
per share, related to the determination of whether instruments granted in
share-based payment transactions are participating securities. This guidance
clarifies that all outstanding unvested share-based payment awards that contain
rights to nonforfeitable dividends participate in undistributed earnings with
common shareholders. Awards of this nature are considered participating
securities and the two-class method of computing basic and diluted earnings per
share must be applied. This guidance is effective for financial statements
issued for fiscal years beginning on or after December 15, 2008, and
interim periods within those fiscal years. The adoption of this guidance did not
have a material effect on the Company’s consolidated financial
statements.





In June
2008, the FASB issued new accounting guidance, under ASC Topic 815 on
Derivatives and Hedging, as to how an entity should determine whether an
instrument, or an embedded feature, is indexed to an entity's own stock and
whether or not such instruments would be accounted for as equity or a derivative
liability. The adoption of this guidance can affect the accounting for warrants
and many convertible instruments with provisions that protect holders from a
decline in the stock price (or “down-round” provisions). For example, warrants
with such provisions will no longer be recorded in equity. Down-round provisions
reduce the exercise price of a warrant or convertible instrument if a company
either issues equity shares for a price that is lower than the exercise price of
those instruments or issues new warrants or convertible instruments that have a
lower exercise price. This guidance is effective for financial statements issued
for fiscal years beginning after December 15, 2008 and is applicable to
outstanding instruments as of the beginning of the fiscal year it is initially
applied. Early application is not permitted. The cumulative effect, if any, of
the change in accounting principle shall be recognized as an adjustment to the
opening balance of retained earnings.  The adoption of this guidance
did not have a material impact on the Company’s consolidated financial
statements.





In
May 2009, the FASB issued new accounting guidance, under ASC Topic 855 on
subsequent events, which 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. This guidance
was effective for interim and annual periods ending after June 15, 2009.
The adoption of this guidance did not have a material effect on the Company’s
consolidated financial statements.





In June
2009, the FASB issued new accounting guidance, under SFAS No. 166
“Accounting for Transfers of Financial Assets -- an amendment of FASB Statement
No. 140”. This standard has not yet been integrated into the Codification.
This guidance requires additional disclosures concerning a transferor’s
continuing involvement with transferred financial assets, eliminates the concept
of a “qualifying special-purpose entity” and changes the requirements for
derecognizing financial assets. This guidance is effective for fiscal years
beginning after November 15, 2009. The Company is currently evaluating the
impact that the adoption of this guidance will have on its consolidated
financial statements.





In June
2009, the FASB issued new accounting guidance, under SFAS No. 167
“Amendments to FASB Interpretation No. 46(R)”, which changes how a
reporting entity determines when an entity that is insufficiently capitalized or
is not controlled through voting (or similar rights) should be consolidated.
This standard has not yet been integrated into the Codification. The
determination of whether a reporting entity is required to consolidate another
entity is based on, among other things, the other entity’s purpose and design
and the reporting entity’s ability to direct the activities of the other entity
that most significantly impact the other entity’s economic performance. An
ongoing reassessment is required of whether a company is the primary beneficiary
of a variable interest entity. A reporting entity will be required to disclose
how its involvement with a variable interest entity affects the reporting
entity’s financial statements. This guidance is effective for fiscal years
beginning after November 15, 2009, and interim periods within those fiscal
years. Management is currently evaluating the requirements of this guidance and
has not yet determined the impact on the Company’s consolidated financial
statements.


9


In
August 2009, the FASB issued new accounting guidance, under ASC Topic 820
on fair value measurements and disclosures, on the measurement of liabilities at
fair value. The guidance provides clarification that in circumstances in which a
quoted market price in an active market for an identical liability is not
available, an entity is required to measure fair value using a valuation
technique that uses the quoted price of an identical liability when traded as an
asset or, if unavailable, quoted prices for similar liabilities or similar
assets when traded as assets. If none of this information is available, an
entity should use a valuation technique in accordance with existing fair
valuation principles. The Company adopted this guidance in the quarter ended
September 30, 2009 and there was no material impact on the consolidated
financial statements.





NOTE
5: NET LOSS PER SHARE OF COMMON STOCK





Basic
loss per share was computed using the weighted average number of outstanding
common shares. Diluted loss per share includes the effect of dilutive common
stock equivalents from the assumed exercise of options, warrants, convertible
preferred stock and convertible notes. Common stock equivalents were excluded in
the computation of diluted loss per share since their inclusion would be
anti-dilutive. Total shares issuable upon the exercise of warrants and
conversion of preferred stock and convertible promissory notes for the nine
months ended September 30, 2009 and 2008 were as follows:





September
      30,2009
            
            
            2008Warrants
            
            
            37,071,573
            
            
            
            28,792,376Convertible
      promissory notes
            
            
            4,218,053
            
            
            
            2,672,837Convertible
      preferred stock
            
            
            1,545,760
            
            
            
            1,587,760Total
            
            
            42,835,386
            
            
            
            33,052,973





NOTE
6: FAIR VALUE.





ASC 820
“Fair Value Measurements and Disclosures” defines fair value, establishes a
framework for measuring fair value and requires enhanced disclosures about fair
value measurements.  As defined in ASC 820, fair value is the price
that would be received to sell an asset or paid to transfer a liability in an
orderly transaction between market participants at the measurement date. The
Standard clarifies that the exchange price is the price in an orderly
transaction between market participants to sell an asset or transfer a liability
at the measurement date and emphasizes that fair value is a market-based
measurement and not an entity-specific measurement.





ASC 820
establishes the following hierarchy used in fair value measurements and expands
the required disclosures of assets and liabilities measured at fair
value:





•
            Level 1 – Inputs use quoted
      prices in active markets for identical assets or liabilities that the
      Company has the ability to
access.





•
            Level
      2 – Inputs use other inputs that are observable, either directly or
      indirectly. These inputs include quoted prices for similar assets and
      liabilities in active markets as well as other inputs such as interest
      rates and yield curves that are observable at commonly quoted
      intervals.





•
            Level
      3 – Inputs are unobservable inputs, including inputs that are available in
      situations where there is little, if any, market activity for the related
      asset or liability.





In
instances where inputs used to measure fair value fall into different levels in
the above fair value hierarchy, fair value measurements in their entirety are
categorized based on the lowest level input that is significant to the
valuation. The Company’s assessment of the significance of particular inputs to
these fair measurements requires judgment and considers factors specific to each
asset or liability.


10


Liabilities
measured at fair value on a recurring basis at September 30, 2009 are as
follows:





Quoted
      Prices in
              Active
      Markets for
              Identical Liabilities
              (Level
      1)
            
            
            Significant
              Other
              Observable
              Inputs
              (Level
      2)
            
            
            Significant
              Unobservable
              Inputs
              (Level 3)
            
            
            Balance
      at
              September
      30, 2009Embedded
      conversion feature
            
            $
            -
            
            
            $
            -
            
            
            $
            99,400
            
            
            $
            99,400Warrant
      and option  liability
            
            $
            -
            
            
            $
            -
            
            
            $
            224,200
            
            
            $
            224,200$
            -
            
            
            $
            -
            
            
            $
            323,600
            
            
            $
            323,600





Financial
assets are considered Level 3 when their fair values are determined using
pricing models, discounted cash flow methodologies or similar techniques and at
least one significant model assumption or input is unobservable. Our Level 3
liabilities consist of derivative liabilities associated with the convertible
debt that contains an indeterminable conversion share price and the tainted
warrants as the Company cannot determine if it will have sufficient authorized
common stock to settle such arrangements.





The
following table provides a summary of the changes in fair value, including net
transfers in and/or out, of all financial assets measured at fair value on a
recurring basis using significant unobservable inputs during the nine months
ended September 30, 2009





Embedded
                ConversionFeature
            
            
            Warrant
                and
      OptionLiability
            
            
            TotalBalance
      January, 1, 2009
            
            $
            164,900
            
            
            $
            121,100
            
            
            $
            286,000Included
      in income (expense)
            
            
            20,900
            
            
            
            47,400
            
            
            
            68,300Included
      in stockholder's equity
            
            
            (86,400)
            
            
            
            55,700
            
            
            
            (30,700)Transfers
      in and /or out of Level 3
            
            
            -
            
            
            
            -
            
            
            
            -Balance
      September  30, 2009
            
            $
            99,400
            
            
            $
            224,200
            
            
            $
            323,600





NOTE
7: STOCKHOLDERS' DEFICIENCY.





Debt





In March
2009, the Company issued 500,000 shares of Common Stock in settlement of $27,368
of accounts payable due a vendor.





Cash





During
the nine months ended September 30, 2009, for gross proceeds of $515,500 the
Company sold an aggregate of 11,603,294 shares of common stock and warrants to
purchase additional 2,320,663 shares of common stock at an exercise price
of $0.0348 to $0.0876.  The warrants have a term of three
years.





Services





During
the nine months ended September 30, 2009, the Company issued the following
securities of the Company as compensation for services rendered:





1.
            1,000,000
      shares of common stock to a consultant pursuant to the term of a
      consulting agreement entered into in October 2007.  The Company
      recorded $20,000 of stock-based compensation in connection with this
      issuance;


2.
            500,000
      shares of common stock and granted a five-year option to purchase an
      additional 500,000 shares of common stock to the Company’s director of
      production.  The option was made fully exercisable as of its
      grant date and has an exercise price of $0.041 per share.  Such
      stock and option were granted under the Company’s 2008 Equity Incentive
      Plan. The Company recorded stock-based compensations of $20,500 and
      $14,200, respectively;


3.
            250,000
      shares of common stock and granted a five-year option to purchase an
      additional 250,000 shares of common stock to the Company’s
      controller.  The option was made fully exercisable as of its
      grant date and has an exercise price of $0.041 per share.  Such
      stock and option were granted under the Company’s 2008 Equity Incentive
      Plan. The Company recorded stock-based compensations of $10,250 and
      $7,100, respectively


11


NOTE
8: RELATED PARTY TRANSACTIONS.





(a)
            In
      March 2007, the Company’s Chief Executive Officer and a former director
      each made loans of $50,000 to the Company. The loans pay simple interest
      at the rate of 10% per annum and were due and payable 120 days after
      funding. The loans from the Chief Executive Officer and the director carry
      an option that, if the loans were not repaid by June 14, 2007 and June 29,
      2007, respectively, such options would entitle the lenders to convert
      their debt into shares of Common Stock at a price equal to 50% of the
      average closing price of the Common Stock over the three previous business
      days preceding the date of demand for conversion is made. Under accounting
      guidance provide by ASC 815 “Derivatives and Hedging”, the conversion
      price of the loans did not have a determinable number of shares the loans
      could be settled in and as a result, have been presented as a derivative
      liability. Accordingly, the conversion option will be marked to market
      through earnings at the end of each reporting period.  As of
      September 30, 2009, the $50,000 loan and $12,860 of accrued interest owed
      to the former director is still outstanding.   In July 2009, the
      former director expressed that he would like the Company to pay him back
      the loan and accrued interest and did not want to convert the
      loan.





(b)
            On
      October 14, 2008, Leslie J. Kessler, the Company’s Chief Executive
      Officer, and Terry R. Lazar, the Company’s Chief Financial Officer each
      made loans of $50,000 to the Company. The loans accrue interest at
      the rate of 10% per annum.  In addition, the Company issued to
      each officer warrants to purchase 256,420 shares of common stock at an
      exercise price of $0.047 per share. The loans  are due and
      payable by or on October 14, 2009;  provided
      ,  however , each executive officer may, at the officer’s option
      and in lieu of conversion as set in the loan agreements, demand repayment
      of the loan amount plus all accrued and unpaid interest as of the date
      demand is received by the Company. The loans are evidenced by the
      promissory notes of the Company issued to the two officers which each
      contain a conversion clause that grant the officers, exercisable at the
      officer’s sole discretion, to convert the loan amount plus all accrued and
      unpaid interest due under the note into common stock at any
      time.  The conversion price is $0.039 per share, the closing
      market price of the common stock as of the funding date of the
      loans.





On
November 17, 2008, the Chief Executive Officer and the Chief Financial Officer
each made second loans of $50,000 to the Company.  The loans accrue
interest at the rate of 10% per annum.  In addition, in connection
with these second loans, the Company issued to each officer warrants to purchase
250,000 shares of common stock at an exercise price of $0.048 per
share.  The loans are due and payable by or on November 17,
2009,  provided ,  however , each of the officers may, at
the officer’s option and in lieu of conversion as set in the loan agreements,
demand repayment of the loan amount plus all accrued and unpaid interest as of
the date demand is received by the Company.  The loans are evidenced
by the promissory notes the Company issued to these two officers which contain a
conversion clause that grant each of the officers, exercisable at the officer’s
sole discretion, the right to convert the loan amount plus all accrued and
unpaid interest due under the note into common stock at any time.  The
conversion price is $0.04 per share, the closing market price of the common
stock as of the funding date of the loans.





The
Company accounted for the issuance of these convertible promissory notes in
accordance with ASC 815 “Derivatives and Hedging”. The gross proceeds from
the sale of the notes, $200,000, was recorded net of a discount of approximately
$78,800. The debt discounts consisted of approximately $11,200 related to
the fair value of the warrants and approximately $67,600 related to the fair
value of the embedded conversion options. The debt discounts are charged to
interest expense ratably over the term of the convertible
notes.





On April
17, 2009, the Chief Executive Officer and the Chief Financial Officer both made
demands to convert the then existing loan including accrued interest into the
Company’s common stock based on the term set forth in the October 14 and
November 17, 2008 promissory notes.  The Company issued 5,299,986
shares of common stock to the Chief Executive Officer and  the Chief
Financial Officer in connection of such conversions of total $200,000 debt
principal and $9,304 accrued interest.





(c)
            In
      April 2009, the Company granted the Company’s chief executive officer the
      right to receive a total of 4,000,000 shares of common stock, 2,000,000 of
      which were issued in April 2009 and the remaining 2,000,000 shares are
      issuable on January 1, 2010.  In addition to such stock grants,
      the officer was granted a five-year option to purchase an additional
      3,000,000 shares of common stock.  The option was made fully
      exercisable as of its grant date and has an exercise price of $0.041 per
      share.  Such stock and option are being issued and were granted
      under the Company’s 2008 Equity Incentive Plan.  The Company
      incurred stock-based compensation $82,000 and $84,900, respectively, in
      connection with such stock and option
grant.




12


(d)
            In
      April 2009, the Company granted the Company’s chief financial officer the
      right to receive a total of 4,000,000 shares of common stock, 2,000,000 of
      which were issued in April 2009 and the remaining 2,000,000 shares are
      issuable on January 1, 2010.  In addition to such stock grants, the
      officer was granted a five-year option to purchase an additional 3,000,000
      shares of common stock.  The option was made fully exercisable as of
      its grant date and has an exercise price of $0.041 per share.  Such
      stock and option are being issued and were granted under the Company’s
      2008 Equity Incentive Plan.  The Company incurred stock-based
      compensation $82,000 and $84,900, respectively, in connection with such
      stock and option grant.





(e)
            In
      April 2009, the Company granted the Company’s chief executive officer
      five-year warrants to purchase an aggregate 4,000,000 shares of common
      stock.  The warrants were made fully exercisable as of their
      grant date and have an exercise price of $0.041 per share.  The
      Company incurred stock-based compensation $113,200 in connection with the
      grant of such warrants.





(f)
            In
      May 2009, the Company issued 250,000 shares of common stock to a director
      in order to fulfill the Company’s obligation in connection with the
      appointment of the director effective March 14, 2008.  The
      Company incurred stock-based compensation of $8,750 in connection with
      such stock issuance.





NOTE
9: CREDIT RISK.





The
Company maintains cash deposits with financial institutions, which from time to
time may exceed federally insured limits. The Company has not experienced any
losses and believes it is not exposed to any significant credit risk with
respect to its cash deposits.





NOTE
10: NOTES PAYABLE





In
September, 2009, the Company entered into agreements with the Chief Executive
Officer and Chief Financial Officer together with three of the Company’s
consultants and vendors to defer a total of $523,624 in compensation owed to
them as of June 30, 2009 through January 2011.  In return, the Company
issued a promissory note to each of the three vendors and the CEO and CFO for
the deferment.  The notes mature in January 2011 and interest will be
accrued at 10% per annum compounded monthly. Accordingly, the Company reclassed
$523,624 from current liabilities to long term liabilities.




NOTE
11: CONTINGENCIES
 
 On June
21, 2009, the Company was served with a complaint filed in the Supreme
Court of the State of New York, County of Nassau, in which suit State
Farm Fire & Casualty Company is the plaintiff.  The suit is for
approximately $202,000 in damages, resulting from a fire that occurred on or
about December 16, 2008, allegedly as a result of a defective water cooler
sold either by the Company or by Water Splash LLC, to which the company had
sold its water cooler business and related liabilities in November
2001.  An amended complaint was filed on August 19, 2009, adding Water
Splash LLC as a defendant. The claim by State Farm is on the basis that, as the
insurance carrier, it is subrogated to the claim for damages of the owner of the
property where the fire allegedly started by reason of a defect in the
water cooler.  Under the complaint, alternative claims for damages are made
in negligence, breach of warranty, placing on the market a product in a
defective and unreasonably dangerous condition and not fit for its intended use,
failure to warn State Farm's subragor of the risks and defects associated with
the water cooler which were not discoverable by reasonable inspection, and
strict liability.  The Company does not believe that it has any
potential exposure by reason of this lawsuit and, in any event, any recovery by
the plaintiff would be covered under the Company’s existing liability insurance
policy.
  However,
the Company cannot provide assurance that the outcome of this matter will not
have a material effect on the Company’s financial condition or results of
operations.
  There is
no other pending litigation or claims of which we have knowledge.


NOTE
12: SUBSEQUENT EVENT





Management
has evaluated all subsequent events after the balance sheet date and through the
financial issuance date of November 16, 2009.





In the
4th quarter of 2009, the Company raised $25,000 through the sale of 659,631
shares of common stock and warrants to purchase additional 131,927 shares of
common stock at an exercise price of $0.0455.  The warrants have a
term of three years.





In the
4th
quarter of 2009, the Company raised $225,000 through the issuance of debt
instruments. The funds received include $25,000 each from the Company’s Chief
Executive Officer and Chief Financial Officer. Per the loan agreement, for each
loan received, the Company issued the creditor a convertible promissory note
which matures in one year. The note bears interest at the rate of 10% per annum.
Upon the occurrence of an Event of Default, the outstanding principal amount and
any accrued but unpaid interest hereon then bear interest until paid at the
greater of (a) 16%, or (b) the maximum legal rate of interest. The note contains
a conversion clause that gives the note holder the right, at the holder’s option
and at any time following the date of the note and prior to the maturity date,
to convert the principal balance of the note plus all accrued and unpaid
interest into a number of fully paid and non-assessable shares of the common
stock of the Company at the conversion price that is the closing market price of
the common stock as of the closing date. In addition to the promissory note, the
lender also receives a warrant certificate that entitles the lender to purchase
shares of common stock of the Company in an amount equal to 20% of the number
derived by dividing the loan amount by the conversion price. The per-share
exercise price for the warrant shares is 20% greater than the conversion price
as defined above. The holders have 5 years from the closing date to exercise the
warrants.


13


Item 2.
            Management’s Discussion and
      Analysis of Financial Condition and Results of
      Operations.





Introductory
Comment





The
following Management’s Discussion and Analysis of Financial Condition and
Results of Operations should be read in conjunction with our financial
statements and related notes contained elsewhere in this Quarterly Report on
Form 10-Q, as well as our audited financial statements and related notes at and
for the year ended December 31, 2008 contained in our Annual Report on Form 10-K
for the year ended December 31, 2008, filed with the Securities and Exchange
Commission (the “SEC”) on April 15, 2009.





Forward-looking
Statements





This
Quarterly Report on Form 10-Q contains forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933 (the “Securities Act”) and
Section 21E of the Securities Exchange Act of 1934 (the “Exchange
Act”).  To the extent that any statements made in this Form 10-Q
contain information that is not historical, these statements are essentially
forward-looking.  Forward-looking statements can be identified by the
use of words such as “expect,” “plan,” “will,” “may,” “anticipate,” “believe,”
“could,” “should,” “intend,” “estimate” and variations of such
words.  Forward-looking statements are subject to risks and
uncertainties that cannot be predicted or quantified and, consequently, actual
results may differ materially from those expressed or implied by such
forward-looking statements.  Such risks and uncertainties include,
without limitation:





•
            our
      ability to raise capital to finance our research and development and
      operations, when needed and on terms advantageous to
  us;





•
            our
      ability to manage growth, profitability and marketability of our
      products;





•
            general
      economic and business conditions;





•
            the
      effect on our business of recent credit-tightening throughout the United
      States and the world, especially with respect to federal, state, local and
      foreign government procurement agencies, as well as quasi-public,
      charitable and private emergency response
  organizations;





•
            the
      effect on our business of recently reported losses within the financial,
      banking and other industries and the effect of such losses on the income
      and financial condition of our potential
  clients;





•
            the
      impact of developments and competition within the industries in which we
      intend to compete;





•
            adverse
      results of any legal proceedings;





•
            the
      impact of current, pending or future legislation and regulation on water
      safety, including, but not limited to, changes in zoning and environmental
      laws and regulations within our target areas of
  operations;





•
            our
      ability to maintain and enter into relationships with suppliers, vendors
      and contractors of acceptable quality of goods and services on terms
      advantageous to us;





•
            the
      volatility of our operating results and financial
    condition;





•
            our
      ability to attract and retain qualified senior management personnel;
      and





•
            the
      other risks and uncertainties detailed in this Form 10-Q and, from time to
      time, in our other filings with the
SEC.





Readers
of this Quarterly Report on Form 10-Q should carefully consider such risks,
uncertainties and other information, disclosures and discussions which contain
cautionary statements identifying important factors that could cause our actual
results to differ materially from those provided in forward-looking
statements.  Readers should not place undue reliance on
forward-looking statements contained in this Form 10-Q.  We do not
undertake any obligation to publicly update or revise any forward-looking
statements we may make in this Form 10-Q or elsewhere, whether as a result of
new information, future events or otherwise.


14


Results
of Operations





Sales.We recorded
zero sales for the three months and nine month periods ended September 30, 2009
and 2008.





Until the
fourth quarter of 2001, we were engaged in the manufacture and marketing of
water coolers and water purification and filtration products.  In the
fourth quarter of 2001, such business was sold so that we could concentrate on
the further development, manufacturing and marketing of a line of water
purification systems.  In 2007, new management made a strategic
decision that the existing water filtration system had not produced any
significant sales.  New management further recognized that the
existing unit required significantly more engineering.  In 2007, we
signed a contract with Bircon Ltd., an Israeli-based engineering consulting
company, to design our new “PureSafe First Response Water System” (the “PureSafe
FRWS”) line of water decontamination systems.  In September 2009, we
set up PureSafe Manufacturing & Research Corporation, a Delaware corporation
that is wholly owned subsidiary of PureSafe Water Systems, Inc., to handle the
production and research.  We believe the PureSafe FRWS product will
result in our first significant sales since 2001.  We currently expect
to recognize the first sales of the PureSafe product in the 2nd quarter of
2010.  We will cease being a development stage enterprise at the time
of our recognition of significant revenue from sales of the PureSafe FRWS
product.





Cost of sales.  We
recorded zero cost of sales for the three months and nine months ended September
30, 2009 and 2008.




Selling, general and
administrative.  We incurred selling, general and
administrative expenses for the three months ended September 30, 2009 of
$252,000 compared to $477,604 for the same period in 2008, a $225,604 or 47%
decrease.  Most of the expenses have immaterial changes compared with
the same period in 2008 except stock-based compensation.  The
Stock-based compensation for the three months ended September 30, 2009 was
$16,942 compared with $149,504 for the same period in 2008, a decrease of
$132,562, or 89%.   The decrease in stock-based compensation is
60% of the total decrease in Selling, general and
administrative.  Consulting services for the three months ended
September 30, 2009 was $19,834 compared to $49,367 for the same period in 2008,
a $29,533 or 60% decrease.  The reason for the decrease in consultant
services fees is that we now recognize the consultant services from Bircon Ltd.
and Design and Project Development as part of Research & Development
expenses because of the nature of their services.  The decrease in
consultant services of $29,533 is 13% of the total decrease in Selling, general
and administrative.  Since we completed the prototype, we eliminated
outside labor that was stationed in Israel while prototype was being built in
Israel.  As a result, the total outside labor expenses for the three
months ended September 30, 2009 was $0, a decrease of $15,030 compared to the
same period in 2008.  The decrease in outside labor of $15,030 is 7%
of total decrease in Selling, general and administrative.




Selling,
general and administrative expenses for the nine months ended September 30, 2009
and 2008 were $1,546,798 and $1,449,019, respectively, a $97,779 or 7%
increase.  Although the increase in total selling, general and
administrative expenses is a relatively small amount, a further review of the
individual expenses reveals a few contributors that show substantial either
increase or decrease.  The audit and accounting fees decreased from
$172,694 to $94,045, a $78,649 or 84% decrease.  Legal fees increased
from $95,971 to $113,999, a $18,029 or 19% increase.  Consultant
services dropped $36,746 from $170,707 for the nine months ended September 30,
2008 to $133,961 for the same period in 2009.  The decrease in
consultant fees is the result of moving certain consultant fees to research
& development because of the nature of their services.  Outside
labor expenses for the nine months ended September 30, 2009 was $7,780, a
$25,443 or 77% decrease, compared to $33,223 incurred in the same period in
2008.  The reason for this drop, as explained in the previous section,
was the elimination an outside labor we hired in Israel while the prototype was
being built in Israel.  Marketing expense for nine months ended
September 30, 2009 was $176,639, compared to $76,292 in 2008, a $100,347 or 132%
increase.  The increase in marketing expense in 2009 was the result of
the shift in our focus from research and development to production, marketing
and sales since July 2008.  The rent and rent related expenses
increased $20,579 and was primarily due to the rent related taxes adjustment
accessed by the landlord.  Travel Expenses for the nine months ended
September 30, 2009 was $4,310, a $26,729 or 86% decrease, compared to $31,039
incurred in the same period in 2008.  The decrease in travel expenses
coincides with the completion of our prototype.  Since the prototype
was brought to United States from Israel in July 2008, the need for the
management team to travel to Israel as well as the need for our consultant
travel from Israel to United States decreased substantially.  The
salaries expenses including deferred compensation for the nine months ended
September 30, 2009 was 195,558, a $50,509 or 21% decrease compared to $246,067
incurred in the same period in 2008.  The main reason for the decrease
was that subsequent to October 2008 we no longer were required to pay severance
to a former employee.  We incurred $598,946 stock-based compensation
in 2009 and $387,691 in 2008, a $211,255 or 55% increase.  In the
2nd
quarter of 2009, the Company incurred $518,042 stock-based compensation from
issuing 5,000,000 shares of common stock and options and warrants to purchase
additional 10,750,000 shares of common stock to various
parties.


15


Research and
development.  The research and development expense for the
three months ended September 30, 2009 was $15,107,  compared with
$90,062 incurred in the same period of 2008, or a $74,955 or 83% decrease, and,
for the nine months ended September 30, 2009 and 2008 was $23,143 and $255,987,
respectively, a $232,844 or 91% decrease.  Since the completion
of  the prototype of PureSafe FRWS in July of 2008, we spent a lot
less funds in research and development and put more focus on commercialization
of the product, production and building marketing and sales model and
team.  Our director of production, with the collaboration
of  Hidell-Eyster International, is currently working on the
modifications of PureSafe FRWS from the original design shown in our prototype
to a commercialized product.  On September 18,
2009,  PureSafe Manufacturing & Research Corporation (PSMR), a
Delaware corporation was established.  PSMR, a wholly owned subsidiary
by the company will be the Manufacturing and Research arm for the
Company.  In October and November, 2009 the company raised an
aggregate $175,000 in convertible debt which include $25,000 from each the
Company’s Chief Executive Officer and Chief Financial Officer through debt
instruments.  The funds raised will be used as initial investment in
PSMR and are earmarked for production purpose only.  The Company
expects to complete two commercial units by the end of 1st
quarter of 2010.




Interest expense (non-debt discount
related) for the three months ended September 30, 2009 and 2008 was
$4,859 and $7,282, respectively and, for the nine months ended September 30,
2009 and 2008 was $21,111 and $78,507, respectively.




Debt discount related interest
expense for the three months ended September 30, 2009 and 2008 was $4,875
and $0, respectively,and for the nine months ended September 30, 2009 and 2008
was $90,500 and $0, respectively.  The debt discount related interest
expenses incurred in the first nine months of 2009 included a one-time $45,953
charge associated with the conversion of four promissory notes held by our Chief
Executive Officer and Chief Financial Officer in April 2009.




Change in fair value of warrants and
embedded conversion options for the three months ended September 30, 2009
and 2008 were ($153,600) and( $773,200)respectively, and for the nine months
ended September 30, 2009 and 2008 was $68,300 and( $28,000),
respectively.




For all
the above-stated reasons, the net income(loss) for three months ended September
30, 2009 and 2008 was ($123,241) and $158,252, respectively; and for nine months
ended September 30, 2009 and 2008 was ($1,749,852) and ($1,529,046),
respectively.





Liquidity
and Capital Resources





As of
September 30, 2009, we maintained a cash balance of $70,553 as compared to
$37,601 as of the same date in 2008.





Net cash
used in the operating activities in the nine months ended September 30, 2009 and
2008 was $466,150 and $1,327,823, respectively.  The primarily factors
in our use of approximately $862,000 less cash in the nine months ended
September 30, 2009 compared to the same period in 2008 were the
following:


a.
            We
      paid approximately $360,000 to Bircon Ltd for research and development for
      our prototype in the nine months ended September 30, 2008 and made no such
      payments in the same period of
2009;


b.
            Our
      Chief Executive Officer, Chief Financial Officer and some of our
      consultants agreed to defer their compensation since August 2008 so we can
      utilize the limited funds in a more productive
  way.





Net cash
used in capital expenditures in the nine months ended September 30, 2009 and
2008 was $8,208 and $160,012 respectively.   In 2008 we paid many
one-time expenditures includes leasehold improvements, furniture and fixtures,
equipments for the new headquarters and we also paid $23,155 in the first six
months of 2008 for the pending patent we applied for in 2008 for the technology
used on our PureSafe FRWS.  In 2009, we sold two trailers and received
$4,350 from the sales.  We also recorded $12,558 patent maintenance
fees we paid


16


In the
nine months ended September 30, 2009 and 2008, we raised $515,500 and $1,170,000
through sales of our common stock, respectively.  In the first quarter
of 2008, an investor exercised a warrant to purchase 110,000 shares of common
stock.  We received $9,350 from such transaction.   We
used $69,314 cash to repay notes payables in the first quarter of
2008.  From all the above activities, net cash provided by financing
activities for the first nine months of 2009 and 2008 was $515,000 and
$1,110,036, respectively.





As the
results of all activities above, we had a $41,142 net increase in cash for the
nine months ended September 30, 2009 and a $377,799 net decrease in cash for the
same period in 2008.





At
September 30, 2009, we had a working capital deficit of approximately
$1,746,000.   In September, 2009, our Chief Executive Officer and
Chief Financial Officer together with three consultants agreed to defer a total
of $523,624 in compensation owed to them as of June 30, 2009 till January
2011.  The deferment has helped to improve our working capital
deficit.  Absent fluctuations due to  market changes in our
outstanding detachable warrants, options and embedded conversion option
liabilities, we continue to suffer recurring losses from operations and have an
accumulated deficit since inception of approximately $31,844,000. These
conditions raise substantial doubt about our ability to continue as a going
concern.





Our plans
with respect to these matters include restructuring its existing debt and
raising additional capital through future issuances of stock and/or
debt.





In
September, 2009, our Chief Executive Officer and Chief Financial Officer
together with three consultants agreed to defer a total of $523,624 in
compensation owed to them as of June 30, 2009 until January 2011.  On
September 18, 2009,  PureSafe Manufacturing & Research Corporation
(PSMR), a Delaware corporation was established.  PSMR, a wholly owned
subsidiary will be the Manufacturing and Research arm of  our
company.  In October and November, 2009 we raised an aggregate of
$225,000 which includes $25,000 from each the Company’s Chief Executive Officer
and Chief Financial Officer through debt instruments.  The funds
raised will be used as initial investment in PSMR and is earmarked for
production purpose only.  The Company expects to complete two
commercial units by the end of 1st
quarter of 2010.





The
Company is also seeking to raise an additional $10 million in the next nine
months to fund the following activities: the production of 30 commercial
PureSafe FRWS units; submitting two commercial units for all necessary
certifications; launching a marketing program for the PureSafe FRWS;
establishing a sales and marketing network; and concluding agreements with
strategic partners for international marketing and
manufacturing.





The
Company can give no assurance that such financing will be available on terms
advantageous to us, or at all. Should the Company not be successful in
obtaining the necessary financing to fund its operations, the Company would need
to curtail certain or all of its operational activities.





Recent
Accounting Pronouncements





The FASB,
in June 2009, issued new accounting guidance that established the FASB
Accounting Standards Codification, ("Codification" or “ASC”) as the
single source of authoritative GAAP to be applied by nongovernmental
entities, except for the rules and interpretive releases of the SEC under
authority of federal securities laws, which are sources of authoritative
GAAP for SEC registrants.  The FASB will no longer issue new standards in
the form of Statements, FASB Staff Positions, or Emerging Issues Task Force
Abstracts; instead the FASB will issue Accounting Standards Updates. Accounting
Standards Updates will not be authoritative in their own right as they will only
serve to update the Codification. These changes and the Codification itself do
not change GAAP. This new guidance became effective for interim and annual
periods ending after September 15, 2009.  Other than the manner in which
new accounting guidance is referenced, the adoption of these changes did not
have a material effect on the Company’s consolidated financial
statements.





In June
2008, the FASB issued new accounting guidance, under ASC Topic 260 on earnings
per share, related to the determination of whether instruments granted in
share-based payment transactions are participating securities. This guidance
clarifies that all outstanding unvested share-based payment awards that contain
rights to nonforfeitable dividends participate in undistributed earnings with
common shareholders. Awards of this nature are considered participating
securities and the two-class method of computing basic and diluted earnings per
share must be applied. This guidance is effective for financial statements
issued for fiscal years beginning on or after December 15, 2008, and
interim periods within those fiscal years. The adoption of this guidance did not
have a material effect on the Company’s consolidated financial
statements.


17


In June
2008, the FASB issued new accounting guidance, under ASC Topic 815 on
Derivatives and Hedging, as to how an entity should determine whether an
instrument, or an embedded feature, is indexed to an entity's own stock and
whether or not such instruments would be accounted for as equity or a derivative
liability. The adoption of this guidance can affect the accounting for warrants
and many convertible instruments with provisions that protect holders from a
decline in the stock price (or “down-round” provisions). For example, warrants
with such provisions will no longer be recorded in equity. Down-round provisions
reduce the exercise price of a warrant or convertible instrument if a company
either issues equity shares for a price that is lower than the exercise price of
those instruments or issues new warrants or convertible instruments that have a
lower exercise price. This guidance is effective for financial statements issued
for fiscal years beginning after December 15, 2008 and is applicable to
outstanding instruments as of the beginning of the fiscal year it is initially
applied. Early application is not permitted. The cumulative effect, if any, of
the change in accounting principle shall be recognized as an adjustment to the
opening balance of retained earnings.  The adoption of this guidance
did not have a material impact on the Company’s consolidated financial
statements.





In
May 2009, the FASB issued new accounting guidance, under ASC Topic 855 on
subsequent events, which 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. This guidance
was effective for interim and annual periods ending after June 15, 2009.
The adoption of this guidance did not have a material effect on the Company’s
consolidated financial statements.





In June
2009, the FASB issued new accounting guidance, under SFAS No. 166
“Accounting for Transfers of Financial Assets -- an amendment of FASB Statement
No. 140”. This standard has not yet been integrated into the Codification.
This guidance requires additional disclosures concerning a transferor’s
continuing involvement with transferred financial assets, eliminates the concept
of a “qualifying special-purpose entity” and changes the requirements for
derecognizing financial assets. This guidance is effective for fiscal years
beginning after November 15, 2009. The Company is currently evaluating the
impact that the adoption of this guidance will have on its consolidated
financial statements.





In June
2009, the FASB issued new accounting guidance, under SFAS No. 167
“Amendments to FASB Interpretation No. 46(R)”, which changes how a
reporting entity determines when an entity that is insufficiently capitalized or
is not controlled through voting (or similar rights) should be consolidated.
This standard has not yet been integrated into the Codification. The
determination of whether a reporting entity is required to consolidate another
entity is based on, among other things, the other entity’s purpose and design
and the reporting entity’s ability to direct the activities of the other entity
that most significantly impact the other entity’s economic performance. An
ongoing reassessment is required of whether a company is the primary beneficiary
of a variable interest entity. A reporting entity will be required to disclose
how its involvement with a variable interest entity affects the reporting
entity’s financial statements. This guidance is effective for fiscal years
beginning after November 15, 2009, and interim periods within those fiscal
years. Management is currently evaluating the requirements of this guidance and
has not yet determined the impact on the Company’s consolidated financial
statements.





In
August 2009, the FASB issued new accounting guidance, under ASC Topic 820
on fair value measurements and disclosures, on the measurement of liabilities at
fair value. The guidance provides clarification that in circumstances in which a
quoted market price in an active market for an identical liability is not
available, an entity is required to measure fair value using a valuation
technique that uses the quoted price of an identical liability when traded as an
asset or, if unavailable, quoted prices for similar liabilities or similar
assets when traded as assets. If none of this information is available, an
entity should use a valuation technique in accordance with existing fair
valuation principles. The Company adopted this guidance in the quarter ended
September 30, 2009 and there was no material impact on the consolidated
financial statements.





Critical
Accounting Policies and Estimates





Our
financial statements are prepared in accordance with accounting principles
generally accepted in the United States of America. Preparation of the
statements in accordance with these principles requires that we make estimates,
using available data and our judgment, for such things as valuing assets,
accruing liabilities and estimating expenses. We are currently in development
stage as defined by Accounting Standard Codification (“ASC”) 915.  The
following is a list of what we believe are the most critical estimations that we
make when preparing our consolidated financial statements.


18


Stock-Based
Compensation





The
Company reports stock-based compensation under ASC 718.  ASC
718  requires all share-based payments to employees, including grants
of employee stock options, to be recognized in the consolidated financial
statements based on their fair values.





The
Company accounts for equity instruments issued to non-employees as compensation
in accordance with the provisions of ASC 718 and 505, , which require that each
such equity instrument is recorded at its fair value on the measurement date,
which is typically the date the services are performed.





The
Black-Scholes option valuation model is used to estimate the fair value of the
options or their equivalent granted. The model includes subjective input
assumptions that can materially affect the fair value estimates. The model was
developed for use in estimating the fair value of traded options or warrants
that have no vesting restrictions and that are fully transferable. The expected
volatility is estimated based on the most recent historical period of time equal
to the weighted average life of the options granted.





We have
issued equity instruments in the past to raise capital and as a means of
compensation to employees and for the settlement of debt.





Derivative
Financial Instruments





In
connection with the issuance of certain convertible promissory notes, the terms
of the convertible notes included an embedded conversion feature which provided
for a conversion of the convertible promissory notes into shares of our common
stock at a rate which was determined to be variable. We determined that the
conversion feature was an embedded derivative instrument pursuant to ASC 815
“Derivatives and Hedging”.





The
accounting treatment of derivative financial instruments requires that we record
the conversion option and related warrants at their fair values as of the
inception date of the convertible debenture agreements and at fair value as of
each subsequent balance sheet date. In addition, under the provisions of ASC
815, as a result of issuing the convertible promissory notes, we were required
to reclassify all other non-employee warrants and options as derivative
liabilities and record them at their fair values at each balance sheet date. Any
change in fair value was recorded as non-operating, non-cash income or expense
for each reporting period at each balance sheet date. We reassess the
classification of the instruments at each balance sheet date. If the
classification required under ASC 815 changes as a result of events during the
period, the contract is reclassified as of the date of the event that caused the
reclassification.





Income
taxes





We
account for income taxes under guidance provided by ASC 740 “Income Taxes” which
prescribes a recognition threshold and a measurement attribute for the financial
statement recognition and measurement of tax positions taken or expected to be
taken in a tax return. For those benefits to be recognized, a tax position must
be more-likely-than-not to be sustained upon examination by taxing authorities.
Differences between tax positions taken or expected to be taken in a tax return
and the benefit recognized and measured pursuant to the interpretation are
referred to as “unrecognized benefits.” A liability is recognized (or amount of
net operating loss carry forward or amount of tax refundable is reduced) for an
unrecognized tax benefit because it represents an enterprise’s potential future
obligation to the taxing authority for a tax position that was not recognized as
a result of applying the provisions of ASC 740.





In
accordance with ASC 740, interest costs related to unrecognized tax benefits are
required to be calculated (if applicable) and would be classified as “Interest
expense, net” in the consolidated statements of operations. Penalties would be
recognized as a component of “General and administrative expenses.”





Our
uncertain tax positions are related to tax years that remain subject to
examination by relevant tax authorities. We file income tax returns in the
United States (federal) and in various state and local jurisdictions. We are no
longer subject to federal, state and local income tax examinations by tax
authorities for years prior to 2004.


19


Item
      3.
            Quantitative
      and Qualitative Disclosures About Market
Risk.





This Item
is not applicable to smaller reporting companies.





Item
      4T.
            Controls
      and Procedures.





Evaluation
of Disclosure Controls and Procedures





Under the
supervision and with the participation of our management, including our Chief
Executive Officer and Chief Financial Officer, we have evaluated the
effectiveness of the design and operation of our disclosure controls and
procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) promulgated
under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), as
of the end of the period covered by this report. Based upon that evaluation, our
Chief Executive Officer and Chief Financial Officer have concluded that our
disclosure controls and procedures were effective as of the end of the period
covered by this report to provide reasonable assurance that information required
to be disclosed by us in reports that we file or submit under the Exchange
Act is recorded, processed, summarized and reported within the time periods
specified in the Securities and Exchange Commission’s rules and forms and that
such information is accumulated and communicated to our management, including
our Chief Executive Officer and Chief Financial Officer, to allow timely
decisions regarding required disclosure.





There
were no changes in the Company’s internal control over financial reporting
during the third fiscal quarter that have materially affected, or are reasonably
likely to materially affect, the Company’s internal control over financial
reporting.





A control
system, no matter how well conceived and operated, can provide only reasonable,
not absolute, assurance that the objectives of the control system are
met.  The design of any system of controls is also based in part on
certain assumptions regarding 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.  Given these and other inherent
limitations of control systems, there is only reasonable assurance that our
controls will succeed in achieving their stated goals under all potential future
conditions.





Changes
in Internal Control Over Financial Reporting





None





PART
II - OTHER INFORMATION





Item
      1.
            Legal
      Proceedings.





Reference
is hereby made to Item 3 of our Annual Report on Form 10-K, for the fiscal year
ended December 31, 2008, filed with the Securities and Exchange Commission on
April 15, 2009 (Commission File No.: 0-5418), and to the references made in such
Item, for a discussion of all material pending legal proceedings to which we are
a party.





On June
21, 2009, we were served with a complaint filed in the Supreme Court of the
State of New York, County of Nassau, in which suit State Farm Fire
& Casualty Company is the plaintiff.  The suit is for
approximately $202,000 in damages, resulting from a fire that occurred on or
about December 16, 2008, allegedly as a result of a defective water cooler
sold either by us or by Water Splash LLC, to which we had sold our water
cooler business and related liabilities in November 2001.  An amended
complaint was filed on August 19, 2009, adding Water Splash LLC as a defendant.
The claim by State Farm is on the basis that, as the insurance carrier, it is
subrogated to the claim for damages of the owner of the property where the fire
allegedly started by reason of a defect in the water cooler. 
Under the complaint, alternative claims for damages are made in negligence,
breach of warranty, placing on the market a product in a defective and
unreasonably dangerous condition and not fit for its intended use, failure to
warn State Farm's subragor of the risks and defects associated with the water
cooler which were not discoverable by reasonable inspection, and strict
liability.  We do not believe that it has any potential exposure by
reason of this lawsuit and, in any event, any recovery by the plaintiff would be
covered under our existing liability insurance policy.


However,
we cannot provide assurance that the outcome of this matter will not have a
material effect on our financial condition or results of
operations.
  There is
no other pending litigation or claims of which we have knowledge.


Item
      1A.
            Risk
      Factors.





This Item
is not applicable to smaller reporting companies.





Item
      2.
            Unregistered
      Sales of Equity Securities and Use of
Proceeds.





In the
three months ending September 30, 2009, we sold an aggregate 2,342,085 shares of
common stock and warrants to purchase an additional 468,421 shares of common
stock at an exercise price of $0.0864 to $0.0876 to multiple investors for total
proceeds of $170,000.





We
believe the issuances of the securities noted in this Item 2 were each exempt
from the registration requirements of the Securities Act of 1933, as amended
(the “Securities Act”), by reason of the exemption from registration granted
under Section 4(2) of the Securities Act due to the fact that the subject
issuance was a transaction not involving any public offering.


20


Item
      3.
            Defaults
      Upon Senior Securities.





None





Item
      4.
            Submission
      of Matters to a Vote of Security
Holders.





None.




Item
      5.
            Other
      Information.





None





Item
      6.
            Exhibits.




The
following exhibits are being filed as part of this Quarterly Report on Form
10-Q.





ExhibitNumber
            
            Exhibit Description31.1
            
            Rule
      13a-14(a)/15d-14(a) Certification of Principal Executive
      Officer.31.2
            
            Rule
      13a-14(a)/15d-14(a) Certification of Principal Financial
      Officer.32.1
            
            Section
      1350 Certification of Principal Executive Officer.32.2
            
            Section
      1350 Certification of Principal Financial Officer.10.1
            
            Loan
      Agreement


21


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.




Dated:  November
      16, 2009
            PureSafe
      Water Systems, Inc.By:
            /s/ Leslie J. KesslerLeslie
      J. KesslerChief
      Executive Officer(Duly
      Authorized Officer andPrincipal
      Executive Officer)By:
            /s/ Terry R. LazarTerry
      R. LazarChief
      Financial Officer(Duly
      Authorized Officer andPrincipal
      Financial Officer)






22