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

                                 --------------

                                   FORM 10-KSB
                                 --------------


[X]      ANNUAL REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT
         OF 1934

                  For the fiscal year ended: December 31, 2007

[ ]      TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES
         EXCHANGE ACT OF 1934

         For the transition period from: _____________ to _____________

                                 --------------

                    PURADYN FILTER TECHNOLOGIES INCORPORATED
                 ----------------------------------------------
                 (Name of small business issuer in its charter)

                                 --------------


         Delaware                       0-29192                 14-1708544
----------------------------          ------------          -------------------
(State or Other Jurisdiction          (Commission            (I.R.S. Employer
      of Incorporation)               File Number)          Identification No.)


               2017 High Ridge Road, Boynton Beach, Florida 33426
               --------------------------------------------------
               (Address of Principal Executive Office) (Zip Code)

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

                                       N/A
          -------------------------------------------------------------
          (Former name or former address, if changed since last report)

                                 --------------

           SECURITIES REGISTERED PURSUANT TO SECTION 12(B)OF THE ACT:

TITLE OF EACH CLASS                    NAME OF EACH EXCHANGE ON WHICH REGISTERED
-------------------                    -----------------------------------------
      NONE                                              NONE

           SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:

                     Common stock, par value $.001 per share
--------------------------------------------------------------------------------
                                (Title of Class)
                                 --------------

Check whether the issuer (1) has 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 [ ]

Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB.                                               [X]

Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Act).                                          Yes [ ]  No [X]

State issuer's revenue for its most recent fiscal year. $3,082,873.

State the aggregate market value of the voting and non-voting common equity held
by non-affiliates computed by reference to the price at which the common equity
was sold, or the average bid and asked price of such common equity, as of a
specified date within the past 60 days. The aggregate market value of the voting
stock held by non-affiliates computed at the closing price of $.31 Puradyn
Filter's common stock on March 25, 2008 is approximately $3,540,991.

Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date. As of March 27, 2008, there
were 31,786,352 shares of registrant's common stock outstanding, par value
$.001.

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<PAGE>

                                      INDEX

                                     PART I

ITEM 1.  DESCRIPTION OF BUSINESS...........................................   3

         Forward Looking Statements
         The Company
         Products
         Warranties
         Marketing
         Distribution
         Sales
         Manufacturing and Production
         Competition
         Intellectual Property
         Governmental Approval
         Engineering and Development
         Employees

ITEM 2.  DESCRIPTION OF PROPERTY...........................................   9

ITEM 3.  LEGAL PROCEEDINGS.................................................   9

ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS...............   9

                                    PART II

ITEM 5.  MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS AND
         SMALL BUSINESS ISSUER PURCHASES OF EQUITY SECURITIES..............  10

ITEM 6.  MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS........  11

         General
         Critical Accounting Policies and Estimates
         Results of Operations
         Liquidity and Capital Resources
         Impact of Inflation
         Quarterly Fluctuations
         Risk Factors Affecting Future Results of Operations

ITEM 7.  FINANCIAL STATEMENTS..............................................  18

ITEM 8.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
         FINANCIAL DISCLOSURES.............................................  18

ITEM 8A(T)CONTROLS AND PROCEDURES..........................................  18

ITEM 8B. OTHER INFORMATION.................................................  19

                                    PART III

ITEM 9.  DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
         COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT.................  20

ITEM 10. EXECUTIVE COMPENSATION............................................  24

ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
         AND MANAGEMENT AND RELATED STOCKHOLDER TRANSACTIONS...............  27

ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS,
         AND DIRECTOR INDEPENDENCE.........................................  28

ITEM 13. EXHIBITS..........................................................  29

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES............................  30


                                       2

<PAGE>

                                     PART I

The term "the Company", "Puradyn", "we", "us" or "our" refers to Puradyn Filter
Technologies Incorporated, unless the context otherwise implies. The term "Ltd."
and "Puradyn, Ltd" refers to the Company's subsidiary, Puradyn Filter
Technologies, Ltd., unless the context otherwise implies.

ITEM 1. DESCRIPTION OF BUSINESS

FORWARD LOOKING STATEMENTS

         This Annual Report on Form 10-KSB contains forward-looking statements
that involve substantial risks and uncertainties. Forward-looking statements can
be identified by the fact that they do not relate strictly to historical or
current facts. They use words such as "may", "will", "expect", "intend",
"anticipate", "believe", "estimate", "continue" and other similar words. You
should read statements that contain these words carefully because they discuss
our future expectations, making projections of our future results of operations
or our financial condition or state other "forward-looking" information.
Forward-looking statements involve known and unknown risks and uncertainties
which may cause the actual results, performance or achievements of our Company
to be materially different from those which may be expressed or implied by such
statements. The factors listed in the section entitled "Risk Factors Affecting
Future Results of Operations" in the section "Management's Discussion and
Analysis of Financial Condition and Results of Operations", as well as any other
cautionary language in this report, provide examples of risks, uncertainties and
events which may cause our actual results to differ materially from the
expectations we described in our forward-looking statements. Except as required
by law or regulation, we do not undertake any obligation to publicly update
forward-looking statements to reflect events or circumstances after the date on
which the statement is made or to reflect the occurrence of unanticipated
events.

OTHER PERTINENT INFORMATION

         You can learn more about the Company by visiting our website at
www.puradyn.com. Information on the website is neither incorporated into, nor a
part of, this report. We encourage you to read this and other reports filed by
the Company with the Securities and Exchange Commission. Puradyn will provide
you with a copy of any or all of these reports at no charge. Certain of our SEC
filings are available over the Internet at the SEC's web site at
http://www.sec.gov. You may also read and copy any materials the Company files
with the SEC at the SEC's Public Reference Room at 100 F Street, NE, Washington,
D.C. 20549, or call the SEC Public Reference Room to obtain information at
1-800-SEC-0330.

THE COMPANY

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

We operate through:

         o        Puradyn Filter Technologies Incorporated - parent company
         o        Puradyn Filter Technologies, Ltd. ("Ltd.", "Puradyn, Ltd")
                           Ltd. is a wholly owned subsidiary established in 2000
                           which primarily distributes and markets the Puradyn
                           system in countries outside North America, including
                           Europe, the Middle East, the former Soviet Union,
                           Scandinavia and South Africa through a network of
                           independent distributors.

PRODUCTS

         The core product, the patented Puradyn bypass oil filtration system, is
offered in two models, TF and PFT, and can be attached to almost any engine and
hydraulic systems. The concept of bypass filtration is similar to a dialysis
machine that filters blood to rid it of impurities, keeping the oil continually
clean. Whenever the engine or machinery is


                                       3
<PAGE>

operating, the Puradyn is extracting from the oil solid particles down to less
than one micron (1/39 millionth of an inch), as well as gaseous and liquid
contaminants, while protecting the engine or hydraulic equipment from harmful
wear caused by contaminants in the oil. Additive packages in which chemicals are
added to the filtering media replenish spent additives in the oil, helping to
maintain the oil's proper chemical balance and viscosity.

         The condition of the oil is monitored through use of a simple oil
analysis sample taken in lieu of a regularly scheduled maintenance oil change.
If the sample results, typically received in 5 to 7 days, show that the
condition of the oil is considered good for continued use, only the Puradyn
replacement element is to be changed - there is no need to change the oil if it
is clean.

         Consequently, the Puradyn significantly reduces maintenance costs by
decreasing oil consumption, engine wear and certain other types of general
maintenance as well as reducing environmental concerns and costs associated with
the storage and disposal of waste oil. These potential savings are achieved from
utilizing the Puradyn, which generally has a relatively short payback period of,
on average, nine to fourteen months.

         The Puradyn system is currently manufactured in six different sizes
suitable for placement on engines or equipment with oil sump capacities ranging
from 8 to 300 quarts. The later generation PFT model offers the same benefits
and features of the original TF model, with the added enhancements of easier
serviceability and the main component of the system being more
corrosion-resistant.

         All Puradyn systems are compatible with virtually all standard and
synthetic oils on the market and they work with engines using gasoline, diesel,
propane or natural gas. The Puradyn system cannot be used on engines that do not
have a pressurized lubricating system, and none of the products can be used on
any engines that mix oil with fuel.

         We also manufacture and distribute Elements for the Puradyn system.
Depending upon the application, we generally recommend that the Element be
replaced at the engine manufacturer's recommended/approved periodic oil change
interval or as oil analysis dictates. The type of Element used also depends upon
the specific type of engine or hydraulic application. A customer can change the
Element and take the required oil sample in approximately five to ten minutes.

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

         The Company has implemented patented and/or proprietary technology in
the filter Elements that provides several advantages including:

         o        An additive package in which pelletized chemicals are added to
                  the filtering media to replenish additives in the oil. This
                  additive package helps to maintain the oil's chemical balance
                  and viscosity. In 2006, the Company re-engineered the additive
                  package to be compatible with new oils designed to meet EPA
                  2007 on-highway exhaust emission standards, and be
                  simultaneously backwards-compatible with all older API diesel
                  lubrication oil service categories.

         o        CGP(R) Extended Life Filter Element containing a
                  patent-pending process for chemical grafting. This new
                  technology improves the attraction and retention of soot and
                  other solid contaminants to the packed cotton filter material.
                  CGP technology was developed over a three-year period
                  inclusive of laboratory and field-testing. Consolidated
                  results from across the country show that test vehicles
                  averaged more than 160,000 miles without the need for a
                  traditional oil change.

         o        Ease of maintenance: The filter Element can be replaced in a
                  matter of seconds.

         When the Element is changed, an insignificant amount of make-up oil is
added to replace any oil retained in the used Element or consumed during the
normal engine combustion process. The Company's performance warranties require
the user to change the Puradyn filter element and take a small sample of the oil
for submission to an oil-testing laboratory at the same intervals that the
original equipment manufacturer ("OEM") recommends for an oil change, or as oil
analysis dictates (See "Warranties"). The oil analysis allows end users to
monitor oil quality and, to some degree, engine condition and provides a trend
and timeline for both the Company and end user should a problem arise.

         The Puradyn has no moving parts and consequently requires no
significant ongoing maintenance. As long as Elements are changed at the
recommended intervals and other standard preventive maintenance procedures such
as


                                       4
<PAGE>

changing factory full flow and air filters and oil analysis are completed, the
Company believes the Puradyn will perform as designed........

         We are also distributor for the following companies:

         o        Honeywell Consumer Products Group, manufacturer of FRAM(R)
                  filters. We able to offer the full line of FRAM filters to our
                  distributors.

         o        MotorCheck(TM) On-Site Oil Analysis. The analyzer combines
                  optical emission and infrared oil analysis with optional
                  viscometer within a desktop-sized enclosure for fast, accurate
                  fluid analysis.

WARRANTIES

         The Puradyn carries a six-month 'money-back' performance guarantee, and
is currently warranted to the original user to be free of defects in material
and workmanship for five years with unlimited miles/hours, with a one-year
limited warranty on the heating element.

         For the Company's performance guarantee and warranties to remain in
effect, users must, among other things, maintain a record of the laboratory oil
analysis results. To date, there have been no material warranty claims, although
there can be no assurances that such a trend will continue.

         The Company has received letters from several OEMs including Deere &
Company, Detroit Diesel Corporation, Caterpillar, Inc., Ford Motor Company, Mack
Trucks, Inc., Cummins Engine Company, Inc., Daimler Corporation, which have all
stated that the installation and use of the Puradyn does not void their
manufacturer warranties unless an engine failure is attributed to the Puradyn.
Oil analysis is a standard industry practice endorsed by OEMs and various fleet
maintenance organizations and most engine manufacturers will accept oil analyses
as alternatives to their recommended oil change intervals.

MARKETING

         The Company's products are marketed to numerous industries including
marine, trucking, agricultural, bus, generator, construction, mining, industrial
and a multitude of hydraulic applications, and other users of engines or
equipment that utilize up to 50 weight oil for lubrication. Currently, the
Company's primary focus is on the industrial/construction, generator set,
marine, and OEM segments.

         Instead of traditional media advertising campaigns, the Company is
concentrating instead on direct sales contacts, trade shows, white papers and
other methods of demonstration, such as Internet-based marketing, to promote its
products, generate awareness and stimulate sales.

         Our products have achieved recognition from well-known sources,
including certification (in 1994) and re-certifications (in 1998 and 2003) by
the California Environmental Protection Agency's Department of Toxic Substances
as a `Pollution Prevention' technology. We believe that such recognition, as
well as our presence at national industry trade shows, have and will continue to
enable the Company to increase industry recognition of the Puradyn name and
products.

         We rely on management's ability to determine the existence and extent
of available markets for our product. Company management and consultants have
considerable sales and marketing backgrounds and devote a significant portion of
their time to sales-related activities.

         One of our marketing strategies is based on creating customer
`pull-through', a sustained level of request for our product on the OEM level
from end-users. To date, customer pull-through has resulted in a limited number
of our systems being factory-installed at individual Volvo Trucks, N.A., Mack,
Kenworth and Freightliner truck facilities.

         Taking a long-terms approach, management believes that federal
government entities and the U.S. military are markets that can be successfully
cultivated, based on the following:

         o        2007 National Stocking Number (NSN) assigned to a specific
                  Puradyn system kit to be installed on the U.S. Army's Mine
                  Protection Vehicle family.


                                       5
<PAGE>

         o        2006 final test results from the US Department of Energy,
                  which shows that the systems used in evaluation of the
                  benefits and cost analysis of bypass oil filtration, have
                  produced an estimated savings of 89% in oil usage and
                  purchases when used on heavy-duty diesel engines.
         o        2006 initial and subsequent 2007 and 2008 orders placed by the
                  U.S. Military to have them installed on new trucks supplied by
                  Freightliner LLC for foreign military sales.
         o        New five-year contract awarded in December 2004 from the
                  General Services Administration (GSA) for its Vehicular
                  Multiple Award Schedule, New Technologies, which simplifies
                  the procurement process for governmental agencies.

         The Company has established in-house investor relations and marketing
departments.

DISTRIBUTION

         We have formal distribution agreements with domestic and international
distributors wherein they are required to maintain minimum product inventory
levels, maintain a storefront and services bay(s), and retain access to
qualified technicians trained by our technical personnel in product installation
and service. All distributors must pay in a timely fashion, and with respect to
international distributors, the agreements typically establish the minimum
dollar amount of inventory to be purchased as well as shipping terms.

         The Company has warehouse distributors located throughout North
America. The remaining distributors are located primarily in South America,
England, Europe and Asia. These distributors purchase product directly from the
Company and sell to their existing or new customers. The Company will accept
returns of products that are defective at the time of sale to the distributor or
prove to be defective during the warranty period. Returns are subject to
specific conditions.

         As a significant portion of our products are sold to distributors and
end users for use on transportation vehicles, this could unfavorably affect our
overall exposure to credit risk as these customers could be affected by
potential economic or other conditions.

         Puradyn, Ltd. operates from the U.K. to generate distribution and sales
in Europe, the Middle East, the former Soviet Union, South Africa and
Scandinavia. There can be no assurance that such distributors will be successful
in introducing the Puradyn in their territories as they will face obstacles
similar to those the Company and its other distributors have encountered in
introducing an innovative technology in their territories. Ltd. has successfully
commenced or completed various evaluation programs, including those of two large
international generator manufacturers, four truck OEMs, one construction
equipment OEM and one diesel engine OEM. One of the world's largest OEMs of
medium-size power generators approved and began purchasing the Puradyn from Ltd.
in 2002.

SALES

DIRECT SALES

         The Company directly and/or with the assistance of its manufacturer's
representatives, distributors or other agents, markets its products directly to
OEMs, other distributors and national accounts. Typically larger customers, and
some smaller customers, require an evaluation period to operate the system on
their equipment. While set for a specific period of time, usually ranging from
three to twelve months, evaluations are often influenced by a number of
variables including equipment downtime or servicing which may extend the
evaluation period. Consequently, the sales period can be relatively long. We
believe this evaluation period will continue to be shortened as the Company's
products gain wider acceptance and support from well-known end users and OEMs.

         Currently, our products are being evaluated (in various stages of
progress) by numerous potential end users and existing customers including,
among others:

         o        A major engine OEM
         o        A major transmission OEM
         o        A road materials handling Company
         o        Two leading food companies
         o        The U.S. Military
         o        Two major long-haul carriers


                                       6
<PAGE>

         In December 2004 we were awarded a new five-year contract on the
Vehicular Multiple Award Schedule, New Technologies, which replaced the schedule
on which we had currently been. This enables us to offer our Puradyn system to
all federal government agencies. The new schedule allows easy access to our
products without the usual lengthy bid process to all federal agencies that
purchase vehicles, including construction equipment, medium and heavy trucks,
waste disposal vehicles, aerial lift vehicles and fire trucks. The contract
period is for five years from the date of the award (to December 2009) with
three five-year options.

         During 2007 and 2006 two customers together accounted for approximately
44% and 39%, respectively, of the Company's consolidated net sales. These two
customers individually accounted for greater than 10% each of net sales, or
approximately $769,000 and $417,000 and approximately $570,000 and $791,000,
respectively in 2006 and 2007.

         At December 31, 2007 there were five customers whose trade receivable
balances equaled or exceeded 5% of total receivables, representing approximately
24%, 10%, 8%, 8%, and 7% of total accounts receivable. The loss of business from
one or a combination of the Company's significant customers could adversely
affect its operations.

         The Company's sales are made on credit terms, which vary depending on
the nature of the sale. The Company believes it has established sufficient
reserves to accurately reflect the amount or likelihood of product returns or
credits and uncollectible receivables. However, there can be no assurance that
actual returns and uncollectible receivables will not exceed the Company's
recorded reserves.

         In 2007, sales to a customer with one of the nation's largest privately
held fleet of trucks and equipment, represented 18% of our consolidated net
sales.

         In 2002, after extensive testing, one of the world's largest
manufacturers of medium-size power generators purchased over $350,000 of
product. This customer accounted for 14% of our 2006 consolidated net sales and
26% of our 2007 consolidated net sales.

INTERNATIONAL SALES

         The Company, directly and/or with the assistance of commission-based
manufacturer's representatives, has established primarily non-exclusive
distributors in various countries, including Denmark, South Africa, Nigeria,
United Kingdom, Kuwait, United Arab Emirates, Thailand, Colombia, and others.
The ultimate success of these and other distributors depends upon, among other
things, their abilities to successfully introduce and sell the product in their
territories including obtaining local evaluations, establishing distribution and
other factors similar to those faced by the Company in the United States. Total
international sales amounted to approximately 51% and 53% of consolidated net
sales in 2007 and 2006, respectively.

MANUFACTURING AND PRODUCTION

         The Company purchases component parts for its Puradyn systems and
manufactures its entire line of filter Elements. The component parts are
assembled, packed and shipped from our facility in Boynton Beach, Florida.

         We currently source (i.e., purchase each raw material and component
part from a specific vendor) substantially all of our raw materials and
component parts from various vendors in the United States. Substantially all the
tools and dies used by certain of our vendors are owned by the Company. We have
researched alternative sources of supply and do not anticipate that the loss of
any single supplier would have a material long-term adverse effect on our
business, operations or financial condition.

         In January 2004, we received ISO 9001:2000 certification from the
International Organization for Standardization. ISO 9001:2000 is a series of
internationally accepted, multi-part quality management systems for
industry-wide standardization applied to manufacturing and service
organizations. Management believes this certification will reinforce recognition
of its tangible commitment to quality control from OEMs and other potential
large customers. The Company successfully completed subsequent surveillance
audits and in December 2007, completed its recertification audit to retain
9001:2000 certification.

COMPETITION

          Competitive bypass oil filters produced by other companies in varying
degrees address the issues of solid or liquid contaminant filtration through
centrifugal design, media filtration or evaporation. However, Puradyn believes
that it designs and manufactures the only bypass oil filtration system that
incorporates all of the following features:


                                       7
<PAGE>

         o        Filtering solid contaminants to below one micron, including
                  enhanced soot retention through the use of a patent-pending
                  process for chemical grafting;
         o        Effectively removing harmful gaseous and liquid contaminants
                  through a heated evaporation chamber;
         o        Replenishing the base additives;
         o        Maintaining oil viscosity

         In addition, the Puradyn system was the only bypass oil filtration
system designated by the California EPA as a `Pollution Prevention' technology
during the tenure of its program which has since been discontinued. The
certificate states in part, "The PURADYN(R) system has been shown to be an
effective means of extending engine oil change intervals without adversely
affecting engine wear or performance."

         Tests performed by a leading independent testing facility demonstrated
that the Puradyn system surpassed the capacity, efficiency and overall
performance of its leading competitors. Using our standard filter with
additives, the Puradyn system tested 92.05% efficient under the SAE HS806-95
(modified) standards for filter capacity and contaminant removal. Efficiency
reflects the ability to remove particles and other chemicals from the oil. While
efficiency is not necessarily a standard of comparison to other products, it
does demonstrate the filtering capability of the Puradyn unit.

         The use of our products reduces the need for maintenance services,
replacement parts, original oil sales and waste oil disposal.

INTELLECTUAL PROPERTY

         The Company owns patents for the Puradyn system; filter Elements, oil
flow meter, and two patents for technology which include a manifold type
full-flow filter/bypass filtration unit (side-by-side) in the U.S. and certain
other countries. The expiration dates of these patents range from May 2014 to
October 2016.

         In addition, we received patents from the United States Patent Office
and certain other countries for a filter Element containing an additive package
in which pelletized chemicals are added to the filtering media to replenish
additives in used oil. This is especially important on engines built since the
enactment of the Clean Air Act of 1992, which requires tighter specifications
for diesel engines.

         We applied for a provisional patent application for improved filtration
efficiency using CGP(R), a process for chemical grafting that can significantly
increase the life of the filter Element and further safely extend oil drain
intervals. There can be no assurance that such patents will withstand
competitive threats to their patentability or, in the case of the redesigned
Puradyn, be developed into commercially viable products.

         We have registered the product trademark "Puradyn" in the United States
and other countries where the "Purifiner" trademark was registered, and have
registered the product trademarks "CGP" and "Keep It Clean!" in the United
States.

GOVERNMENTAL INFLUENCE

         Our products typically do not require any governmental approvals. As
part of the certification process under the California Environmental Protection
Agency's Department of Toxic Substances in July 1994 and subsequent
re-certifications in July 1998 and August 2003, the Company obtained an
Executive Order issued by the State of California Air Resources Board stating
that the Puradyn does not reduce the effectiveness of applicable vehicle
pollution control systems, and may be installed on all 2002 and older model
vehicles with pressure oil systems.

         2007 emissions standards represented landmark regulations. Today,
catalytic converters and particulate traps in addition to using exhaust gas
recirculation (EGR) are required to meet these new emission standards. Due to
the after-treatment devices and their sensitivity to ash content, the oil
industry developed entirely new additive formulations removing any additives
that produced ash as a byproduct. In order to be compatible with the new oil
formulation, we developed an entirely new additive package for 2007. In
addition, this new additive package is backwards-compatible in that it is also
compatible with the pre-2007 oils. Both lab and field tests of the new additive
package have demonstrated excellent results.

         As more engine manufacturers move to these new methods, including EGR,
the oil is being subjected to more extreme conditions increasing the need for
finer filtration of contaminants such as soot; reduction of water and gaseous
contaminants, and constant replenishment of oil additives to combat oxidation
and acid.


                                       8
<PAGE>

         We believe that engine and truck manufacturers can capitalize on our
enhanced technology to remove soot from their oil to maintain their extended
drain intervals by operating on constantly clean oil.

EMPLOYEES

         At December 31, the Company had 25 employees, including 2 from Puradyn
Ltd., in the following areas:

         o        11 in manufacturing, assembly, quality control, warehousing
                  and shipping
         o        1 in purchasing
         o        2 in customer service
         o        2 in marketing and sales
         o        1 in technical support and installation assistance
         o        2 in engineering and development
         o        3 in finance
         o        2 in administrative positions
         o        1 in administration and sales

None of the employees are represented by a labor union.

ITEM 2. DESCRIPTION OF PROPERTY.

         In December 2002, the Company moved into new leased corporate
facilities within two miles of its former location, where substantially all of
the Company's operations are conducted, expanding from approximately 14,000 sq.
ft. to approximately 25,500 sq. ft. (5,000 sq. ft. for administration, 20,500
sq. ft. (versus former 10,000 sq. ft.) for manufacturing.) The lease term at the
new facility is for 68 months with a total lease obligation of approximately
$774,000. The Company is currently negotiating the renewal of this lease.

         In order to support its operations in Europe, Ltd. had a lease for
3,150 square feet in Devon, England, which extended through March 31, 2002,
whereupon it converted to a month-to-month basis for approximately $2,000 per
month. Due to anticipated increased sales activity, Ltd. moved to a 4,260 square
foot facility in Devon in September 2003. They assumed the existing lease, which
expired in August 2004. In September 2005, this lease was renewed with a term
that expires in September 2010.

ITEM 3. LEGAL PROCEEDINGS.

None

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

None


                                       9
<PAGE>

                                     PART II

ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS AND SMALL
BUSINESS ISSUER PURCHASES OF EQUITY SECURITIES.

         The Company common stock is included for quotation on the OTC Bulletin
Board under the symbol PFTI.

         As of December 31, 2007, there were approximately 297 stockholders of
record of the Company's stock. The closing bid price quoted on the OTC for the
Company's Common Stock at March 25, 2008 was $.31. The transfer agent for the
Company's common stock is Florida Atlantic Stock Transfer, Inc., 7130 Nob Hill
Road, Tamarac, Florida 33321.

         The Company has never declared or paid cash dividends on its common
stock. The Company presently intends to retain future earnings, if any, to
finance the expansion of its business and does not anticipate any cash dividends
will be paid in the foreseeable future. The future dividend policy will depend
on our earnings, capital requirements, expansion plans, financial condition and
other relevant factors.

         The following table indicates the high and low sales prices for the
quarterly periods in 2007 and 2006:

QUARTER ENDED           2007 SALES PRICE               2006 SALES PRICE
                    --------------------------     -------------------------
                        HIGH          LOW             HIGH          LOW
                    ------------- ------------     ------------ ------------
March 31                $0.96         $0.56            $1.90        $0.67
June 30                 $0.80         $0.40            $1.75        $1.00
September 30            $0.50         $0.30            $1.33        $0.90
December 31             $0.60         $0.32            $1.20        $0.55


                                       10
<PAGE>

RECENT SALES OF UNREGISTERED SECURITIES

         In December 2007, the Company received loans from two shareholders, who
were also members of the Board of Directors, in the amount of $100,000. During
the quarter ending March 31, 2008, the Company received additional loans from
the same shareholders, in the amount of $420,000. On March 24, 2008, $420,000 of
these loans were converted into 1,200,000 shares of common stock, 600,000 shares
issued to the Chief Executive Officer and a member of the Board of Directors,
respectively, at $.35 per share, the closing price as of the date of approval.
On March 26, 2008 a $100,000 loan from the Chief Executive Officer was converted
into 285,714 shares of common stock, at $.35 per share, the closing price as of
the date of approval. Inasmuch each of the investors had a preexisting
relationship with the issuer, are stockholders and/or are members of management,
are accredited and sophisticated investors, the issuance of the securities was
exempt from registration pursuant to Section 4(2) of the Securities Act of 1933.

ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS

General

         Sales of the Company's products will depend principally upon end user
demand for such products and acceptance of the Company's products by OEMs. The
oil filtration industry has historically been competitive and, as is typically
the case with innovative products, the ultimate level of demand for the
Company's products is subject to a high degree of uncertainty. Developing market
acceptance for the Company's existing and proposed products will require
substantial marketing and sales efforts and the expenditure of a significant
amount of funds to inform customers of the perceived benefits and cost
advantages of its products.

         Through industry data research, we have been able to identify the
potential applications where management believes market penetration is most
accessible. Currently no bypass oil filtration system has captured a substantial
share of the estimated recurring $15 billion potential market. We believe we are
in a unique position to capitalize on the growing acceptance of bypass oil
filtration given that our product and our Company are positioned as, including,
but not limited to:

         o        A competitively priced, value-added unique product based on an
                  advanced, patented technology
         o        An alternative solution to the rising costs and increasing
                  dependence on foreign oil
         o        Providing an operational maintenance solution to end users in
                  conjunction with existing and reasonably foreseeable federal
                  environmental applications

         We continue to incorporate the focus of our sales strategy on
individual sales and distribution efforts as well as on the development of a
strong nationwide distribution network that will not only sell but also install
and support our product.

         We also continue to focus our sales and marketing efforts to target
areas and issues specific to the bypass oil filtration industry, cultivating an
innovative outlook on oil maintenance, specifically, that oil does not need to
be changed on a regular basis if kept in a clean state


                                       11
<PAGE>

         This strategy includes focus on:

         o        The expansion of existing strategic relationships
         o        Development and expansion of our distribution network with
                  qualified distributors in order to establish a sales- and
                  service-oriented nationwide infrastructure
         o        Continuing to target existing and new industrial/construction
                  equipment fleets, marine applications, and major diesel engine
                  and generator set OEMs
         o        Creating customer 'pull-through', a sustained level of request
                  for our product on the OEM level
         o        Converting customer evaluations into sales, both immediate and
                  long term

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

         o        2007 announcement that a fleet of 100 trucks have exceeded 100
                  million miles without an oil-related oil change during the
                  coarse of an 8-year period using the Puradyn system.

         o        2007 announcement that initial orders have been placed for the
                  Puradyn oil filtration system by one of the largest global
                  providers of innovative mechanical solutions, technology, and
                  services for the oil and gas industry.

         o        2007 announcement that the Puradyn has been approved by
                  Cascade Sierra Solutions as a recommended product for
                  inclusion in its outreach centers, which proved information,
                  technology and products for transportation specialists geared
                  to conservation of oil and energy.

         o        2007 announcement that Wastequip, Inc., the leading
                  manufacturer of waste handling, recycling, and material
                  handling equipment has been named exclusive distributor of the
                  Puradyn in the waste industry.

         o        2006 announcement that the Puradyn has been approved for use
                  by one of the largest international diversified energy
                  resource companies for retrofit of equipment used at one of
                  its key coal mine facilities in the Southwestern U.S.

         o        2006 final results released by the U.S. Department of Energy
                  of a three-year evaluation (2002-2005) of the cost analysis
                  and benefits of bypass filtration technology show 89% oil
                  savings on heavy-duty diesel engines.

         o        2006 announcement that the U.S. Military has ordered the
                  Puradyn system installed on new trucks supplied by
                  Freightliner LLC for foreign military sales.

         o        2006 continued testing by the U.S. Military for use of the
                  PURADYN system on several other applications.

         We believe that industry acceptance resulting in sales will continue to
grow in 2008; however, there can be no assurance that any of our sales efforts
or strategic relationships will meet management's expectations or result in
actual revenues. Even with the above announcements, business revenue in 2007 was
below management expectation with only a $343,000 increase in Puradyn product
sales over 2006. Sales for Rentar units we distribute decreased $205,000 from
2006, which were the major factorsresulting in our total net sales showing only
a $10,000 net increase over 2006.

         The Company continues to make progress with major OEM's to substantiate
Puradyn's installation. We believe this will help build strong sales growth with
a concurrent reduction of the need for potential customers to test our systems
on their own equipment before a purchase decision is made. In addition, one of
our major customer's sales decreased because of the desire to first improve
their maintenance tracking system before resuming normal purchasing patterns of
the Puradyn.

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

         The Company utilizes its wholly owned subsidiary, Puradyn Filter
Technologies, Ltd. ("Ltd."), in the United Kingdom to sell the Company's
products in Europe, the Middle East and Africa.

         International sales are especially well suited to our product given
that environmental controls are not as regulated in countries outside North
America. Certain applications representing a higher return on investment are
more prevalent in use outside of North America and end-users consequently are
more receptive to the total maintenance package, including the use of oil
analysis, which the Puradyn system represents. In 2007, total international
sales accounted for 51% of the Company's consolidated net sales.

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


                                       12
<PAGE>

Bulletin (SAB) No. 104, Revenue Recognition in Financial Statements. Cash
received by the Company prior to shipment is recorded as deferred revenue. Sales
are made to certain customers under terms allowing certain limited rights of
return and other limited product and performance warranties for which provision
has been made in the accompanying financial statements. Management believes
based on past experience and future expectations that such limited return rights
and warranties will not have a material adverse effect on the Company's
financial statements.

Going Concern

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

         These recurring operating losses, liabilities exceeding assets and the
reliance on cash inflows from an institutional investor and current stockholder
have led the Company's independent registered public accounting firm Webb &
Company P.A. to include a statement in its audit report relating to the
Company's audited consolidated financial statements for the years ended December
31, 2007 and December 31, 2006 expressing substantial doubt about the Company's
ability to continue as a going concern.

         The Company has been addressing the liquidity and working capital
issues and continues to attempt to raise additional capital with institutional
and private investors and current stockholders. Cost reductions continue to be
implemented by the Company, including acquiring alternative suppliers for raw
materials. The company expects to see results from these reductions, as well as
other cost reduction plans through 2008. Additionally, the Company is reviewing
cost of material increases, some of which were passed through to its customers
as product price increases, beginning January, 2008.

Critical Accounting Policies and Estimates

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

         The Company believes the following critical accounting policies affect
its more significant judgments and estimates used in the preparation of its
consolidated financial statements.

Allowance for Doubtful Accounts

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

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

Estimation of Product Warranty Cost

         The Company provides for the estimated cost of product warranties at
the time revenue is recognized. While the Company engages in product quality
programs and processes, including actively monitoring and evaluating the quality
of its component suppliers, the Company's warranty obligation is affected by
product failure rates, material usage and service delivery costs incurred in
correcting a product failure. Should actual product failure rates, material


                                       13
<PAGE>

usage or service delivery costs differ from the Company's estimates, revisions
to the estimated warranty liability would be required.

Estimation of Inventory Obsolescence

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

Impairment of Long-Lived Assets

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

Revenue Recognition

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

Recent Accounting Pronouncements

         In June 2006, the Financial Accounting Standards Board ("FASB") issued
Interpretation No. 48 ("FIN 48"), "Accounting for Uncertainty in Income Taxes,"
which prescribes a recognition threshold and measurement attribute for the
financial statement recognition and measurement of a tax position taken or
expected to be taken in a tax return. In accordance with FIN 48, the Company
must adjust its financial statements to reflect only those tax positions that
are more-likely-than-not to be sustained as of the adoption date. The effective
date of FIN 48 for the Company is January 1, 2007. The adoption of FIN 48 has
not had a material impact on the Company's condensed consolidated financial
statements

         In September 2006, the FASB issued SFAS No. 157, "Fair Value
Measurements". SFAS No. 157 defines fair value as the price that would be
received to sell an asset or paid to transfer a liability in an orderly
transaction between market participants in the market in which the reporting
entity transacts. SFAS No. 157 applies whenever other standards require assets
or liabilities to be measured at fair value and does not expand the use of fair
value in any new circumstances. SFAS No. 157 establishes a hierarchy that
prioritizes the information used in developing fair value estimates. The
hierarchy gives the highest priority to quoted prices in active markets and the
lowest priority to unobservable data such as the reporting entity's own data.
SFAS No. 157 requires fair value measurements to be disclosed by level within
the fair value hierarchy. SFAS No. 157 is effective for fiscal years beginning
after November 15, 2007. The adoption of SFAS No. 157 is not expected to have a
material effect on the Company's financial statements.

         In February 2007, the Financial Accounting Standards Board (FASB)
issued SFAS No. 159, "The Fair Value Option for Financial Assets and Financial
Liabilities - Including an Amendment of FASB Statement No. 115". This statement
permits entities to choose to measure many financial instruments and certain
other items at fair value. Most of the provisions of SFAS No. 159 apply only to
entities that elect the fair value option. However, the amendment to SFAS No.
115 "Accounting for Certain Investments in Debt and Equity Securities" applies
to all entities with available-for-sale and trading securities. SFAS No. 159 is
effective as of the beginning of an entity's first fiscal year that begins after
November 15, 2007. Early adoption is permitted as of the beginning of a fiscal
year that begins on or before November 15, 2007, provided the entity also elects
to apply the provision of SFAS No. 157, "Fair Value Measurements". The adoption
of this statement is not expected to have a material effect on the Company's
financial statements.

         In December 2007, the Financial Accounting Standards Board (FASB)
issued SFAS No. 160, "Noncontrolling Interests in Consolidated Financial
Statements - an amendment of ARB No. 51". This statement improves the


                                       14
<PAGE>

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

Results of Operations

         The following table sets forth (amounts in thousands) the Company's
operating information for the years ended December 31, 2007 and 2006:

                                             (IN THOUSANDS)
                                                            INCREASE
                                    2007         2006      (DECREASE)
                                  -------      -------      --------

Net sales                         $ 3,083      $ 3,073      $    10

Operating costs and expenses:
  Cost of products sold             2,832        2,567          265
  Salaries and wages                1,075        1,348         (273)
  Selling and administrative        1,061        1,343         (282)
                                  -------      -------      -------
                                    4,968        5,258         (290)

Loss from operations               (1,885)      (2,185)        (300)

Other income (expense):
  Interest income                      33           50          (17)
  Interest expense                   (589)        (518)         (71)
                                  -------      -------      -------
Total other expense                  (556)        (468)         (88)

Net loss                          $(2,441)     $(2,653)     $  (212)
                                  =======      =======      =======

Year Ended December 31, 2007 Compared to Year Ended December 31, 2006

                                                                INCREASE
                                        2007          2006     (DECREASE)
                                       -------      -------     --------
        Gross sales                    $ 3,126      $ 3,046     $    80

        Sales returns & allowances         (43)          27         (70)

        Net Sales                      $ 3,083      $ 3,073     $    10


                                                                INCREASE
                                        2007          2006     (DECREASE)
                                       -------      -------     --------
        US domestic sales              $ 1,563      $ 1,425     $   138

        US international sales             353          815        (462)

        UK sales                         1,210          806         404

        Rentar sales (included above)       38          243        (205)

         NET SALES Although net sales increased marginally by approximately
$10,000 from approximately $3,073,000 in 2006 to approximately $3,083,000 in
2007, sales of Puradyn products actually increased $343,000. Sales of Rentar
units accounted for a decrease of approximately $205,000 in gross sales for 2007
as compared to 2006. Domestic sales generated from the U.S. operations increased
approximately $138,000 in 2007 as compared to 2006. The mix of product sold
continues to change as unit sales revenues have decreased slightly while filter
sales have increased more significantly. Initial indications show a
strengthening order backlog for the beginning of 2008.

         The increase in Sales Returns and Allowances for the year ending
December 31, 2007 was a result of a decrease during the year ending December 31,
2006 which was due to a reduction in the cumulative historical rate of returns.

         COST OF SALES Cost of sales increased by approximately $265,000 from
approximately $2,567,000 in 2006 to approximately $2,832,000 in 2007. The
increase is primarily due to expensing of scrap inventory and increases in raw
material costs. Cost of products sold, as a percentage of sales, increased from
84% in 2006 to 92% in 2007. The Company is offsetting these cost increases with
product price increases beginning January, 2008.

         SALARIES AND WAGES Salaries and wages decreased approximately $273,000
due to a net reduction of three employees, representing a decrease of
approximately $462,000, which was partially offset by cost of living salary
increases.


                                       15
<PAGE>

         SELLING AND ADMINISTRATIVE EXPENSES Selling and administrative expenses
decreased by approximately $281,000 from approximately $1,343,000 in 2006 to
approximately $1,062,000 in 2007. During 2007 the Company's expenses related to
stock compensation decreased approximately $329,000. These decreases were
primarily the result of extension of employee stock options, warrants issued to
employees/directors and amortization of warrants issued to investors, of
approximately $173,000, $101,000, and $66,000, respectively, all of which
occurred in 2006. During 2007 the Company incurred cost increases in Selling and
Marketing, Shareholder loans, Rent, and Patent expenses of approximately
$31,000, $21,000, $14,000 and $13,000 respectively.

         INTEREST INCOME Interest income decreased by approximately $17,000
primarily due to reserves established beginning October 1, 2007, against
shareholder loan interest that was previously accruing at approximately $12,000
per quarter.

         INTEREST EXPENSE Interest expense increased by approximately $71,000
from $518,000 in 2006 to $589,000 in 2007. The Company pays interest monthly on
the note payable to stockholder at the prime rate, which was 6.75% as of
December 31, 2007. Approximately $16,000 of this increase was attributable to
this credit line interest with a higher average principal balance offset by a
lower interest rate of 6.75% at December 31, 2007 as compared to a lower average
principal balance and a higher interest rate of 8.25% at December 31, 2006.
Approximately $87,000 of this increase is attributable to a reserve established
during the period ending June 30, 2007 against a shareholder loan receivable.
This increase was partially offset by a decrease of approximately $38,000
relating to a reduction of amortization of deferred finance costs.

Liquidity and Capital Resources

         The Company's consolidated financial statements have been prepared on
the basis that it will operate as a going concern, which contemplates the
realization of assets and satisfaction of liabilities in the normal course of
business. As such, the consolidated financial statements do not include any
adjustments that might be necessary if the Company is unable to continue as a
going concern. The Company has incurred net losses each year since inception and
has relied on the sale of its stock from time to time and loans from third
parties and from related parties to fund its operations.

         These recurring operating losses, liabilities exceeding assets and the
reliance on cash inflows from an institutional investor and current stockholder
have led the Company's independent auditors Webb & Company, P.A., to
include a statement in its audit report relating to the Company's audited
consolidated financial statements for the years ended December 31, 2007 and
December 31, 2006 expressing substantial doubt about the Company's ability to
continue as a going concern.

         The Company is currently addressing the liquidity and working capital
issues and is in the process of attempting to raise additional capital with
institutional and private investors and current stockholders. During 2007, the
Company raised a total of $1.475 million in capital from an institutional
investor and current stockholders.

         As of December 31, 2007, the Company had cash and cash equivalents of
approximately $112,000. For the year ended December 31, 2007, net cash used in
operating activities was approximately $1,809,000, which primarily resulted from
the net loss of approximately $2,441,000, combined with changes in working
capital amounts. Net cash used in investing activities was approximately $55,000
for purchases of property and equipment. Net cash provided by financing
activities was approximately $1,909,000 for the year, primarily due to proceeds
of $1,473,000 of funds from the sale of common stock to a private placement
investor, as well as an increase in shareholder loans of $411,000.

         Beginning on March 28, 2002, the Company had a binding agreement with
one of its stockholders, who is also a Board Member, to fund up to $6.1 million.
Amounts drawn bear interest at the prime rate per annum (6.75% at December 31,
2007) payable monthly and were to become due and payable on December 31, 2005,
or upon a change in control of the Company or consummation of any other
financing over $7 million. In April 2005, the repayment date was extended to
December 31, 2006. In March 2006, 2007 and 2008, respectively, the repayment
dates were further extended to December 31, 2007, December 31, 2008, and
December 31, 2009, respectively. In consideration for the stockholder entering
into this loan agreement, the Company has granted the stockholder a total of
475,000 common stock purchase warrants at an exercise price equal to the closing
market price of the Company's stock on the dates of grant. As of December 31,
2007, the Company had drawn all of the $6.150 million of the available funds.

         At December 31, 2007, the Company had working capital of approximately
$366,000 and its current ratio (current assets to current liabilities) was 1.20
to 1, as compared with working capital of approximately $692,000 and a current
ratio of 1.53 to 1 at December 31, 2006. The Company anticipates increased cash
flows from 2008 sales activity; however, additional cash will still be needed to
support operations and meet working capital needs. If


                                       16
<PAGE>

additional capital is not raised, budgeted sales levels are not achieved or
significant unanticipated expenditures occur, the Company will have to modify
its business plan, reduce or discontinue some of its operations or seek a buyer
for part of its assets to continue as a going concern through 2008. There can be
no assurance that the Company will be able to raise the additional capital or
that it will continue to operate as a going concern in which event investors
could lose their entire investment in the Company.

         While the Company believes it can attain profitable operations in the
future, there is no assurance that sales will increase to the level required to
generate profitable operations to provide positive cash flow from operations.

Impact of Inflation

         Inflation has not had a significant impact on the Company's operations.
However, any significant decrease in the price for oil or labor, environmental
compliance costs, and engine replacement costs could adversely impact the
Company's end users cost/benefit analysis as to the use of the Company's
products.

Quarterly Fluctuations

         The Company's operating results may fluctuate significantly from period
to period as a result of a variety of factors, including product returns,
purchasing patterns of consumers, the length of the Company's sales cycle to key
customers and distributors, the timing of the introduction of new products and
product enhancements by the Company and its competitors, technological factors,
variations in sales by product and distribution channel, and competitive pricing
and general economic conditions throughout the industrialized world.
Consequently, the Company's product revenues may vary significantly by quarter
and the Company's operating results may experience significant fluctuations.

Risk Factors Affecting Future Results of Operations

         The Company's future results of operations involve a number of risks
and uncertainties - many beyond our control - that could cause actual events or
results to be significantly different from those described in this document. The
following outlines a number of risks that could impact the Company's financial
condition and results of operations.

         o        Our ability to operate as a going concern.

         o        Our ability to raise capital to fund operations is limited.

         o        Potential for continuing losses and accumulated deficit
                  affects our outlook.

         o        Our products may not satisfy our customers' needs.

         o        Our product may not obtain market acceptance.

         o        We are dependent on distributors and a few significant
                  customers and their loss could have a significant adverse
                  impact on us.

         o        Competition may adversely affect our operations, specifically
                  alternative products designed by OEMs or in conjunction with a
                  third party.

         o        We market a limited number of related products, which makes us
                  vulnerable if our products do not gain market acceptance.

         o        There are risks associated with our international operations
                  and international distribution. Our foreign operations are
                  subject to a number of risks, including longer payment cycles,
                  unexpected changes in regulatory requirements, import and
                  export restrictions and tariffs, difficulties in staffing and
                  managing foreign operations, the burden of complying with a
                  variety of foreign laws, greater difficulty in accounts
                  receivable collection, potentially adverse tax consequences,
                  currency fluctuations, enforcing patent protection and
                  political and economic instability.

         o        Our intellectual property rights may not provide meaningful
                  protection for us.

         o        We will likely experience possible fluctuations in operating
                  results, which will expose us to greater uncertainties.


                                       17
<PAGE>

         o        Our product acceptance represents an educational and
                  behavioral change resulting in a relatively long sales cycle.

ITEM 7. FINANCIAL STATEMENTS

                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

                                                                            PAGE
                                                                            ----
Reports of Independent Registered Public Accounting Firm ...................  33

Consolidated Financial Statements:

     Consolidated Balance Sheet - December 31, 2007.........................  34

     Consolidated Statements of Operations -
         Years ended December 31, 2007 and 2006.............................  35

     Consolidated Statements of Changes in Stockholders' Deficit -
         Years ended December 31, 2007 and 2006.............................  36

     Consolidated Statements of Cash Flows -
         Years ended December 31, 2007 and 2006.............................  37

     Notes to Consolidated Financial Statements.............................  38

ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

NONE.

ITEM 8AT. CONTROLS AND PROCEDURES

         Our management, including our chief financial officer, assessed the
effectiveness of our internal control over financial reporting as of December
31, 2007. In making its assessment of internal control over financial reporting,
management used the criteria set forth by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO) in Internal Control--Integrated
Framework. Based on this evaluation, our management concluded that, as of
December 31, 2007, our internal control over financial reporting was effective
based on those criteria.


                                       18
<PAGE>

         This annual report does not include an attestation report of our
registered public accounting firm regarding internal control over financial
reporting. Our management's report was not subject to attestation by our
registered public accounting firm pursuant to temporary rules of the Securities
and Exchange Commission that permit us to provide only management's report in
this annual report.

         There have been no changes in our internal control over financial
reporting during our fourth fiscal quarter that has materially affected, or is
reasonably likely to materially affect, our internal control over financial
reporting.

ITEM 8B. OTHER INFORMATION

None.


                                       19
<PAGE>

                                    PART III

ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE
WITH SECTION 16(A) OF THE EXCHANGE ACT

         The following table sets forth the names, positions with the Company
and ages of the executive officers, significant employees and directors of the
Company and Ltd. Directors will be elected at the Company's Annual Meeting of
Stockholders and serve for one year or until their successors are elected and
duly qualified. In the absence of an Annual Meeting, the Board elects directors
based upon qualifications. Additionally, the Board elects officers and their
terms of office are, except to the extent governed by employment contract, at
the discretion of the Board.

Board of Directors and Executive Management

<TABLE>
<CAPTION>

NAME                              AGE     POSITION
-------------------------         ---     --------------------------------------------------------------------
<S>                               <C>     <C>
Joseph V. Vittoria                72      Chairman of the Board of Directors and Chief Executive Officer
Kevin G. Kroger                   56      President, Chief Operating Officer and Director
John S. Caldwell (2)              63      Director
Forrest D. Hayes (1), (2)         75      Director
Dominick Telesco                  78      Director
Charles W. Walton (1)             75      Director
Alan J. Sandler                   69      Vice President, Chief Administrative Officer and Corporate Secretary
Cindy Lea Gimler                  41      Chief Financial Officer
</TABLE>
----------
(1)      Audit Committee members
(2)      Compensation Committee members

JOSEPH V. VITTORIA was appointed to the Board of Directors and appointed as
Chairman on February 8, 2000. Mr. Vittoria was Chairman and Chief Executive
Officer of Travel Services International, Inc. where he served from 1998 to
2000. From 1987 to 1997, Mr. Vittoria served as Chairman and Chief Executive
Officer of Avis, Inc. and was President and Chief Operating Officer of Avis,
Inc. from 1982 to 1987. Mr. Vittoria also serves as Chairman of the Board of
Great Wolf Resorts and is a member of the Board of City Car Services, Inc.

KEVIN G. KROGER joined the Company July 3, 2000 as President and Chief Operating
Officer, and was appointed to the Board of Directors in November 2000, and was
also appointed to the Board of Puradyn, Ltd. in December 2000. Mr. Kroger was
with Detroit Diesel Corporation from 1989 to the time he joined the Company,
serving in various executive positions prior to his appointment in 1998 to the
position of Vice President and General Manager of Series 30/40 Product. From
1987 to 1989 he was Vice President of R.E.S. Leasing and of VE Corporation.
Prior to this, from 1971 to 1987, he held several management positions with
Caterpillar Corporation.

LIEUTENANT GENERAL (RETIRED) JOHN S. CALDWELL, Jr. was appointed to the Puradyn
Board of Directors on August 25, 2005 and serves as Chairman of the Compensation
Committee. General Caldwell served as the Army's top ranking officer for
Acquisition, Logistics and Technology when he retired in January 2004. In that
capacity, he was responsible to the Assistant Secretary for the direction and
oversight of the Army's Research, Development and Acquisition (RDA) programs
valued at approximately $20 billion per year. He was also Director of the
50,000-person Army Acquisition Workforce, responsible for personnel development
and training policy and key assignment recommendations. General Caldwell
currently works as Senior Vice-President of QSS Group, an IT services company
supporting Federal agencies. General Caldwell holds the degrees of Bachelor of
Science from the US Military Academy, West Point in New York, Master in
Mechanical Engineering from Georgia Institute of Technology in Atlanta, GA, and
the Industrial College of the Armed Forces.


                                       20
<PAGE>

FORREST D. HAYES was appointed to the Puradyn Board of Directors on November 10,
2005. Mr. Hayes is Chairman of the Audit Committee and a member of Compensation
Committee. Mr. Hayes served as Vice President and CFO of Wastequip, Inc., a
privately owned manufacturer of waste equipment in 1990 and 1991, and from 1992
to 2000, as a member of the Wastequip Board of Directors. Mr. Hayes was
President and CEO of Brittany Corporation, a privately owned manufacturer of
auto/truck parts from 1992 to 2000, and Vice-Chairman from 2000 through 2003.
Prior to this, Mr. Hayes served as a CPA with Arthur Andersen from 1954 to 1990
in various capacities including Managing Partner, of the Cleveland and
Cincinnati, Ohio offices. Currently serves on the boards of Polychem Corporation
and Brittany Stamping LLC.

DOMINICK TELESCO was appointed to the Puradyn Board of Directors on December 19,
2006. In addition to Puradyn, Mr. Telesco also serves on the Boards of Lydian
Private Bank, the Palm Beach United Way, and the Palm Beach County Cultural
Council. Mr. Telesco is Chairman of the Board of 3 Logistics Corporation and
Datelco, Inc. Mr. Telesco is also a member of the Board of Boxwood Association,
Inc.

CHARLES W. WALTON, PhD. was appointed to the Puradyn Board of Directors on
August 25, 2005 and is a member of the Audit Committee. Dr. Walton is Founder
and Chairman Emeritus of Wastequip, Inc., which he founded in 1989 with the goal
of consolidating the equipment segment of the waste management industry. As a
result of over twenty-five successful acquisitions and internal growth,
Wastequip is now the largest supplier of equipment in the industry with
approximately $500 million in sales and 34 manufacturing plants in North
America. It was recently purchased by Odyssey Investor Partners, a private
equity firm headquartered in New York. Prior to founding Wastequip, Dr. Walton
was President and Chief Executive Officer of Sudbury, Inc., a Fortune 500
diversified manufacturing company, which he co-founded in 1983. In 1987, he was
awarded the Dively Entrepreneurship Award by Case Western Reserve Weather head
School of Management and the Harvard Business School Club of Cleveland. Dr.
Walton holds the degrees of Bachelor of Science in Foreign Service and PhD. in
economics from Georgetown University, Washington, D.C.

ALAN J. SANDLER joined the Company in June 1998 as President, Chief Operating
Officer, Secretary, Chief Financial Officer, and Director. In January 2000, he
became Vice President and resigned from the positions of President and Chief
Operating Officer. In March 2001, he resigned as Chief Financial Officer. In
August 2001, Mr. Sandler resumed the position of Chief Financial Officer and
then resigned from the position in March 2002. From 1995 until 1997 Mr. Sandler
served as President and Chief Executive Officer to Hood Depot, Inc., a national
restaurant supply manufacturer/distributor. From 1979 to 1995 he was President
and Chief Executive Officer of Sandler & Sons Dental Supply Company, a regional
dental supply and equipment distributor. Previous to this position he was a Vice
President of Gardner Advertising Company, a national advertising agency. Mr.
Sandler was appointed as a Director of TF Purifiner Ltd. in 1999 through 2000.
Effective December 16, 2004 Mr. Sandler did not seek reelection to the Board of
Directors at the 2004 Annual Meeting of Stockholders in order to maintain a
balanced Board with regard to independence. He currently holds the positions of
Vice President, Chief Administrative Officer and Secretary to the Board.

CINDY LEA GIMLER previously held the position of Accounting Manager with the
Company from October 2003 through October 2004. In February, 2005 she was
appointed as Chief Financial Officer. In January, 2008, she was appointed
Secretary of Puradyn, Ltd. Prior to her employment with the Company, she served
as Controller of Bio-Engineered Supplements & Nutrition, Inc., a nutrition
products company, from October 2004 through February 2005. Ms Gimler also served
as CFO of Universal Jet Aviation, a private jet charter company, from August
2000 through July 2003 and as Accounting Manager for Singer Asset Finance Co.,
LLC from July 1999 through August 2000. From November 1989 through August 2000
she was employed as an Accountant and Financial Analyst for Oxbow Corporation,
an energy finance company. Ms. Gimler received a Masters of Business
Administration and a Bachelor of Business Administration from Florida Atlantic
University and is a CPA in the state of Florida.

DIRECTOR COMPENSATION

         Each member of the Board of Directors is automatically granted 5,000
options upon election or appointment as a new member of the Board of Directors.
Each director receives an additional 5,000 options at the close of each annual
meeting of stockholders or on the anniversary of their appointment to the Board.
Additionally, each director automatically received 2,500 options for each
committee of the Board on which the director serves. Options are granted at a
price equal to the fair market value of the stock on the date of grant, are
exercisable commencing two years following grant, and will expire five years
from the date of grant. In the event a person ceases to serve on the Board of


                                       21
<PAGE>

Directors, the outstanding options expire one year from the date of cessation of
service. The Board of Directors will administer the Directors' Plan.

The following table provides information concerning the compensation of our
Board members for their services as members of our Board of Directors for the
fiscal year ended December 31, 2007. The value of the warrant and options
described below were calculated in accordance with FAS 123 (R)

<TABLE>
<CAPTION>

------------------------------------------------------------------------------------------------------------------------------------
                                                       DIRECTOR COMPENSATION
------------------------------------------------------------------------------------------------------------------------------------
                           FEES                                 NON-EQUITY        NON-QUALIFIED    ALL OTHER
                           EARNED OR    STOCK      OPTION       INCENTIVE PLAN    DEFERRED         COMPENSATION        TOTAL ($)
NAME                       PAID IN      AWARDS     AWARDS       COMPENSATION      COMPENSATION     ($)                 (H)
(A)                        CASH ($)     ($)        ($)          ($)               EARNINGS ($)     (G)
                           (B)          (C)        (D)          (E)               (F)
------------------------------------------------------------------------------------------------------------------------------------
<S>                        <C>          <C>        <C>          <C>               <C>              <C>                 <C>
Joseph V. Vittoria         $      --    $   --     $     --     $           --    $          --    $         --        $     --
------------------------------------------------------------------------------------------------------------------------------------
Richard C. Ford (1)               --        --           --                 --               --              --              --
------------------------------------------------------------------------------------------------------------------------------------
Kevin G. Kroger                   --        --           --                 --               --              --              --
------------------------------------------------------------------------------------------------------------------------------------
John S. Caldwell (2)              --        --        3,750                 --               --              --           3,750
------------------------------------------------------------------------------------------------------------------------------------
Forrest D. Hayes (3)              --        --        5,000                 --               --              --           5,000
------------------------------------------------------------------------------------------------------------------------------------
Dominick Telesco(4)               --        --        1,650                 --               --              --           1,650
------------------------------------------------------------------------------------------------------------------------------------
Charles W. Walton(5)              --        --        3,750                 --               --              --           3,750
------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
----------
1        On September 7, 2007, Mr. Ford submitted his resignation as
         Vice-Chairman and member of the Board.

2        On October 10, 2007, Mr. Caldwell was granted options to purchase 7,500
         shares of our common stock at an exercise price of $0.37 per share,
         vesting on August 25, 2008 and expiring on August 25, 2011; and options
         to purchase 7,500 shares of our common stock at an exercise price of
         $0.37 per share, vesting on August 25, 2009 and expiring on August 25,
         2012.

3        On October 10, 2007, Mr. Hayes was granted options to purchase 10,000
         shares of our common stock at an exercise price of $0.37 per share,
         vesting on November 10, 2008 and expiring on November 10, 2011; and
         options to purchase 10,000 shares of our common stock at an exercise
         price of $0.37 per share, vesting November 10, 2009 and expiring on
         November 10, 2012.

4        On December 19, 2007 Mr. Telesco was granted options to purchase 5,000
         shares of our common stock at an exercise price of $0.47 per share,
         vesting on December 19, 2009 and expiring on December 16, 2012.

5        On October 10, 2007, Mr. Walton was granted options to purchase 7,500
         shares of our common stock at an exercise price of $0.37 per share,
         vesting on August 25, 2008 and expiring on August 25, 2011; and options
         to purchase 7,500 shares of our common stock at an exercise price of
         $0.37 per share, vesting on August 25, 2009 and expiring on August 25,
         2012.

COMMITTEES OF THE BOARD OF DIRECTORS

         We do not have a policy regarding the consideration of any director
candidates which may be recommended by our stockholders, including the minimum
qualifications for director candidates, nor has our Board of Directors
established a process for identifying and evaluating director nominees. We have
not adopted a policy regarding the handling of any potential recommendation of
director candidates by our stockholders, including the procedures to be
followed. Our Board has not considered or adopted any of these policies as we
have never received a recommendation from any stockholder for any candidate to
serve on our Board of Directors. We do not anticipate that any of our
stockholders will make such a recommendation in the near future. While there
have been no nominations of additional directors proposed, in the event such a
proposal is made, all members of our Board will participate in the consideration
of director nominees.

         Our Board of Directors has created both an Audit Committee and a
Compensation Committee.


                                       22
<PAGE>

Audit Committee

         During 2007, the audit committee of the board of directors was composed
of two independent directors. It operates under a written charter adopted by the
board of directors. The committee members are Forrest D. Hayes (Chairperson) and
Charles W. Walton.

         The Board has determined that Mr. Hayes satisfies the criteria as an
audit committee financial expert as established by the SEC under 407(d)(5) of
Regulation S-B. The audit committee met four times in 2007.

         The audit committee reviews our financial reporting process on behalf
of the board of directors. Management has the primary responsibility for the
financial statements and the reporting process including the system of internal
controls.

         In this context, the chairperson has met and held discussions with
management and the independent auditors. Management represented to the committee
that Puradyn's consolidated financial statements were prepared in accordance
with accounting principles generally accepted in the United States, and the
committee has reviewed and discussed the consolidated financial statements with
management and the independent auditors. The committee discussed with the
independent auditors matters required to be discussed by Statement on Auditing
Standards No. 61, Communication with Audit Committees, as amended.

         In addition, the committee has discussed with the independent auditors
the auditor's independence from the Company and its management, including the
matters in the written disclosures required by the Independence Standards Board
Standard No. 1, Independence Discussions with Audit Committees.

         The committee discussed with our independent auditors the overall scope
and plans for their respective audit. The committee meets with the independent
auditors with and without management present, to discuss the results of their
examinations, the evaluations of Puradyn's internal controls, and the overall
quality of our financial reporting.

         In reliance on the reviews and discussions referred to above, the
committee recommended to the board of directors, and the board has approved,
that the audited consolidated financial statements be included in Puradyn's Form
10-KSB for the year ended December 31, 2007, for filing with the Securities and
Exchange Commission.

Submitted by the audit committee of the Board of Directors:

                  Forrest D. Hayes          Charles W. Walton

Compensation Committee

         The compensation committee provides overall guidance for officer
compensation programs, including salaries and other forms of compensation
including all employee stock option grants and warrant grants to non-employees.
The compensation committee is comprised of board members John S. Caldwell as
chairperson, and Forrest D. Hayes. The compensation committee meets on an
as-needed basis and reports to the Board of Directors.

Beneficial Ownership Reporting Compliance

         Section 16 (a) of the Exchange Act requires the Company's directors and
executive officers, and persons who own more than ten percent (10%) of a
registered class of the Company's equity securities, to file with the Commission
initial reports of ownership and reports of changes in ownership of common stock
and other equity securities of the Company. Officers, directors and greater than
ten percent (10%) stockholders are required by Commission regulation to furnish
the Company with copies of all Section 16 (a) forms they file.

         To the Company's knowledge, based solely on a review of the copies of
such reports furnished to the Company and written representations that no other
reports were required, during the year ended December 31, 2007, the following
failed to meet the Section 16 (a) filing requirements applicable to its
officers, directors and greater than ten percent (10%) beneficial owners for
filing on a timely basis:

                  Charles W. Walton - 2 late filings, 2 late transactions

Code of Ethics

         We have adopted a code of ethics outlining business ethics and
conflicts of interest for all officers, directors and employees of the Company,
including procedures for prompt internal reporting of violations of the code to
the appropriate persons.


                                       23
<PAGE>

         You will find a copy of our code of ethics posted on our website at
http://www.puradyn.com under Investor Relations, or you may write to us at
Puradyn Investor Relations, 2017 High Ridge Road, Boynton Beach, FL 33426. Our
Code of Ethics applies to all directors, officers and employees. We will provide
a copy to you upon request at no charge.

ITEM 10. EXECUTIVE COMPENSATION

SUMMARY COMPENSATION TABLE

         The following table summarizes all compensation recorded by us in each
of the last two completed fiscal years for:

         o        our principal executive officer or other individual serving in
                  a similar capacity,
         o        our two most highly compensated executive officers as that
                  term is defined under Rule 3b-7 of the Securities Exchange Act
                  of 1934 other than our principal executive officer who were
                  serving as executive officers at December 31, 2007, and
         o        up to two additional individuals for whom disclosure would
                  have been required but for the fact that the individual was
                  not serving as an executive officer at December 31, 2007.

For definitional purposes in this annual report these individuals are sometimes
refered to as the "names executive officers." The value of the warrant and
options described below were calculated in accordance with FAS 123(R). During
each of fiscal 2006 and fiscal 2007, each named executive officer listed below
have deferred 50% of their base wages and/or annual increases. The amounts
included above reflect wages actually earned during the respective periods.

<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------------------
                           SUMMARY COMPENSATION TABLE
-----------------------------------------------------------------------------------------------------------------------------
NAME AND                                      STOCK      OPTION     NON-EQUITY        NONQUALIFIED   ALL OTHER
PRINCIPAL         YEAR    SALARY     BONUS    AWARDS     AWARDS     INCENTIVE PLAN    DEFERRED       COMPENSATION   TOTAL ($)
POSITION          (B)     ($)        ($)      ($)        ($)        COMPENSATION      COMPENSATION   ($)            (J)
(A)                       (C)        (D)      (E)        (F)        ($)               EARNINGS       (I)
                                                                    (G)               ($)
                                                                                      (H)
-----------------------------------------------------------------------------------------------------------------------------
<S>               <C>     <C>        <C>      <C>        <C>        <C>               <C>            <C>            <C>
Joseph V.
Vittoria (1)      2007    $     --   $   --   $     --   $     --   $           --    $         --   $         --   $      --
-----------------------------------------------------------------------------------------------------------------------------
                  2006          --       --         --         --               --              --             --          --
-----------------------------------------------------------------------------------------------------------------------------

-----------------------------------------------------------------------------------------------------------------------------
Richard Ford (2)  2006     196,575       --      6,300     85,750               --              --          9,743     298,368
-----------------------------------------------------------------------------------------------------------------------------

-----------------------------------------------------------------------------------------------------------------------------
Kevin Kroger (3)  2007     186,315       --         --         --               --              --         21,089     207,404
-----------------------------------------------------------------------------------------------------------------------------
                  2006     195,270       --      5,565         --               --              --         24,714     225,549
-----------------------------------------------------------------------------------------------------------------------------

-----------------------------------------------------------------------------------------------------------------------------
Alan Sandler (4)  2007     112,238       --         --         --               --              --             --     112,238
-----------------------------------------------------------------------------------------------------------------------------
                  2006     108,308       --      2,520         --               --              --             --     110,828
-----------------------------------------------------------------------------------------------------------------------------
</TABLE>
----------
(1)      On October 24, 2006, Mr. Vittoria, who is also the Chairman of our
         Board of Directors, was appointed by the Board of Directors to the
         position of Chief Executive Officer. Mr. Vittoria serves in that
         position on a non-salaried basis.

(2)      Mr. Ford served as our CEO through October, 2006. Mr. Ford's
         compensation for fiscal 2006 includes 6,000 shares of our common stock,
         with a value of $1.05 per share at the time of issuance, which were
         granted as additional compensation. In addition, on October 24, 2006,
         we extended the expiration of options previously awarded to Mr. Ford
         purchase an aggregate of 375,000 shares of our common stock with
         exercise prices ranging from $0.21 per share to $0.94 per share from
         November 30, 2006 to November 30, 2008. Pursuant to FAS 123(R) there
         was an expense of $85,750 to the Company as a result of this
         modification. All Other Compensation in the foregoing table represents
         the aggregate dollar amount of a car allowance received by Mr. Ford
         during fiscal 2006.

(3)      Mr. Kroger serves as our Chief Operating Officer. Mr. Kroger's
         compensation for fiscal 2006 includes 5,300 shares of our common stock
         with a value of $1.05 per share at the time of issuance. All Other
         Compensation in the foregoing table represents the aggregate dollar
         amount of a car allowance received by Mr. Kroger during each fiscal
         year as well as the amount of disability and life insurance premiums we
         pay on his behalf.

(4)      Mr. Sandler serves as our Chief Administrative Officer. Mr. Sandler's
         fiscal 2006 compensation includes 2,400 shares of our common stock with
         a value of $1.05 per share at the time of issuance.


                                       24
<PAGE>

EMPLOYMENT AGREEMENTS

         On July 3, 2000, the Company entered into an employment agreement, with
an initial term of three years, with Mr. Kroger, who serves as our President and
Chief Operating Officer. Thereafter, the contract was amended on December 23,
2002 and July 3, 2003. The contract provided for an annual salary of $166,000,
minimum bonuses of $50,000, $80,000 and $80,000, respectively, for the years
2000 through 2002, 300,000 qualified stock options, a one-year salary severance
clause and certain insurance and auto allowance compensations. On December 23,
2002, it was agreed that the President receive 100,000 shares of common stock in
lieu of the $80,000 bonus due to be paid. The addendum dated July 3, 2003 was a
one-year renewal of the original agreement.

         Mr. Vittoria, who has served as our Chief Executive Officer since
October 2006, is not a party to an employment agreement with the Company. He
receives no compensation and does not participate in any of the company's
insurance plans.

         Mr. Ford, who formerly served as our Chief Executive Officer, was not a
party to an employment agreement with the Company. His compensation was
determined by the Compensation Committee of our Board of Directors. The
Compensation Committee considered a number of factors in determining Mr. Ford's
compensation including the scope of his duties and responsibilities to our
company and the time he devotes to our business. The Compensation Committee did
not consult with any experts or other third parties in determining the amount of
Mr. Ford's compensation. During the fiscal year 2006 Mr. Ford's compensation
package included a base annual salary of $232,960, with approximately $128,960
deferred annually, and company provided car allowance, and insurance benefits.
Mr. Ford continues to be retained, on a consultant basis, with payments earned
on a draw against commission basis, earning a minimum draw of $31,200 plus
expenses.

         Mr. Sandler, who has served as our Chief Administrative Officer since
January 2000, was not a party to an employment agreement with the Company. His
compensation was determined by the Compensation Committee of our Board of
Directors. The Compensation Committee considered a number of factors in
determining Mr. Sandler's compensation including the scope of his duties and
responsibilities to our company and the time he devotes to our business. The
Compensation Committee did not consult with any experts or other third parties
in determining the amount of Mr. Sandler's compensation. During the fiscal year
2007 Mr. Sandler's compensation package included a base annual salary of
$112,000, with approximately $62,000 deferred annually, and company provided
insurance benefits. The amount of payable to Mr. Sandler can be increased at any
time upon the determination of the Compensation Committee of our Board of
Directors.

Incentive and Non-qualified Stock Option Plans

         The Board of Directors adopted the 2000 Non-Employee Directors' Plan
(the "Directors' Plan") on November 8, 2000 under which options to purchase
400,000 shares have been authorized for issuance. The Directors' Plan will
provide a means to attract and retain highly qualified persons to serve as
non-employee directors and advisory directors of the Company.

         Each member of the Board of Directors was automatically granted 5,000
options at the date of commencement of the Directors' Plan and on their initial
election as new members to the Board of Directors. Each director receives an
additional 5,000 options at the close of each annual meeting of stockholders.
Additionally, each director automatically receives 2,500 options for each
committee of the Board on which the director serves. Options are granted at a
price equal to the fair market value of the stock on the date of grant, are
exercisable commencing two years following grant, and will expire five years
from the date of grant. In the event a person ceases to serve on the Board of
Directors, the outstanding options expire one year from the date of cessation of
service. The Board of Directors will administer the Directors' Plan.

         The Company's 1999 Stock Option Plan (the "1999 Plan") and the 1996
Stock Option Plan (the "1996 Plan"), adopted on September 15, 1999 and amended
in June 2000, and July 31, 1996, respectively, will work to increase proprietary
interest in the Company of the employees, Board of Advisors, consultants, and
non-employee Directors and to align more closely their interests with the
interests of the Company's stockholders. The Plans will also maintain the
Company's ability to attract and retain the services of experienced and highly
qualified employees and non-employee directors.

         Under the 1999 Plan and 1996 Plan, the Company had reserved an
aggregate of 3,000,000 and 2,200,000 shares, respectively, of common stock for
issuance pursuant to options granted under the Plans ("Plan Options"). The Board
of Directors or a Committee of the Board of Directors (the "Committee") of the
Company will administer the Plans including, without limitation, the selection
of the persons who will be granted Plan Options under the Plans, the type of
Plan Options to be granted, the number of shares subject to each Plan Option and
the Plan Option price.

         Options granted under the 1996 and 1999 Plans may either be options
qualifying as incentive stock options ("Incentive options") under Section 422 of
the Internal Revenue Code of 1986, as amended, or options that do not so qualify
("Non-Qualified Options"). In addition, the Plans also allow for the inclusion
of a reload option provision ("Reload Option"), which permits an eligible person
to pay the exercise price of the Plan Option with shares of Common Stock owned
by the eligible person and receive a new Plan Option to purchase shares of
Common Stock equal in number to the tendered shares. Any Incentive Option
granted under the Plans must provide for an exercise price of not less than 100%
of the fair market value of the underlying shares on the date of such grant, but
the exercise price of any Incentive Option granted to an eligible employee
owning more than 10% of the Company's Common Stock must be at least 110% of such
fair market value as determined on the date of the grant. The term of each Plan
Option and the manner in which it may be exercised is determined by the Board of
the Directors or the Committee, provided that no Plan Option may be exercisable
more than 10 years after the date of its grant and, in the case of an Incentive
Option granted to an eligible employee owning more than 10% of the Company's
common stock, no more than five years after the date of the grant.

         The exercise price of Non-Qualified Options shall be determined by the
Board of Directors or the Committee and cannot be less than the par value of the
Company's Common Stock.


                                       25
<PAGE>

         The per share purchase price of shares subject to Plan Options granted
under the Plans may be adjusted in the event of certain changes in the Company's
capitalization, but any such adjustment shall not change the total purchase
price payable upon the exercise in full of Plan Options granted under the Plan.

         Officers, directors, key employees and consultants of the Company and
its subsidiaries (if applicable in the future) will be eligible to receive
Non-Qualified Options under the Plans. Only officers, directors and employees of
the Company who are employed by the Company or by any subsidiary thereof are
eligible to receive Incentive Options.

         All Plan Options are generally nonassignable and nontransferable,
except by will or by the laws of descent and distribution, and during the
lifetime of the optionee, may be exercised only by such optionee. If an
optionee's employment is terminated for any reason, other than his death or
disability or termination for cause, or if an optionee is not an employee of the
Company but is a member of the Company's Board of Directors and his service as a
Director is terminated for any reason, other than death or disability, the Plan
Option granted to him generally shall lapse to the extent unexercised on the
earlier of the expiration date or one year following the date of termination. If
the optionee dies during the term of his employment, the Plan Option granted to
him generally shall lapse to the extent unexercised on the earlier of the
expiration date of the Plan Option or the date one year following the date of
the optionee's death. If the optionee is permanently and totally disabled within
the meaning of Section 22 (c) (3) of the Internal Revenue Code of 1986, the Plan
Option granted to him generally lapses to the extent unexercised on the earlier
of the expiration date of the option or one year following the date of such
disability.

         The Board of Directors or the Committee may amend, suspend or terminate
the Plans at any time, except that no amendment shall be made which (i)
increases the total number of shares subject to the Plans or changes the minimum
purchase price therefore (except in either case in the event of adjustments due
to changes in the Company's capitalization), (ii) extends the term of any Plan
Option beyond ten years, or (iii) extends the termination date of the Plan.
Unless the Plans shall theretofore have been suspended or terminated by the
Board of Directors, the 1996 Plan shall terminate on July 31, 2006 and the 1999
Plan shall terminate on September 15, 2009. Any such termination of the Plans
shall not affect the validity of any Plan Options previously granted thereunder.

         As of December 31, 2007, under the Directors' Plan, options to purchase
85,000 shares of common stock were outstanding. As of December 31, 2007, under
the 1996 Plan, incentive stock options to purchase 108,232 shares of common
stock were outstanding and non-qualified options to purchase 394,418 shares of
common stock were outstanding and, under the 1999 Plan, incentive stock options
to purchase 1,099,250 shares of common stock were outstanding and non-qualified
options to purchase 80,000 shares of common stock were outstanding.

<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------------------------
                                          OUTSTANDING EQUITY AWARDS AT FISCAL YEAR END
----------------------------------------------------------------------------------- -------------------------------------------
                                  OPTION AWARDS                                                     STOCK AWARDS
----------------------------------------------------------------------------------- -------------------------------------------
                                                                                                        EQUITY      EQUITY
                                                                                                        INCENTIVE   INCENTIVE
                                                                                              MARKET    PLAN        PLAN
                                                                                    NUMBER    VALUE                 AWARDS:
                                             EQUITY                                 OF        OF        AWARDS:     MARKET OR
                                             INCENTIVE                              SHARES    SHARES    NUMBER OF   PAYOUT
                                             PLAN                                   OR        OR        UNEARNED    VALUE OF
                                             AWARDS:                                UNITS     UNITS     SHARES,     UNEARNED
             NUMBER OF      NUMBER OF        NUMBER OF                              OF        OF        UNITS OR    SHARES,
             SECURITIES     SECURITIES       SECURITIES                             STOCK     STOCK     OTHER       UNITS OR
             UNDERLYING     UNDERLYING       UNDERLYING                             THAT      THAT      RIGHTS      OTHER
             UNEXERCISED    UNEXERCISED      UNEXERCISED   OPTION                   HAVE      HAVE      THAT HAVE   RIGHTS THAT
             OPTIONS        OPTIONS          UNEARNED      EXERCISE    OPTION       NOT       NOT       NOT         HAVE NOT
NAME         (#)            (#)              OPTIONS       PRICE       EXPIRATION   VESTED    VESTED    VESTED      VESTED
             EXERCISABLE    UNEXERCISABLE    (#)           ($)         DATE         (#)       ($)       (#)         (#)
(A)          (B)            (C)              (D)           (E)         (F)          (G)       (H)       (I)         (J)
-------------------------------------------------------------------------------------------------------------------------------
<S>          <C>            <C>              <C>           <C>         <C>          <C>       <C>       <C>         <C>
Joseph V.
Vittoria     125,000                                       $   2.25     3/28/08
-------------------------------------------------------------------------------------------------------------------------------
             150.000                                           2.00     2/2/09
-------------------------------------------------------------------------------------------------------------------------------
             100,000                                            .95     4/13/10
-------------------------------------------------------------------------------------------------------------------------------
              80,000                                           1.25    11/15/11
-------------------------------------------------------------------------------------------------------------------------------

-------------------------------------------------------------------------------------------------------------------------------
Richard
Ford         100,000                                           0.21    11/30/08
-------------------------------------------------------------------------------------------------------------------------------
             100,000                                           0.56    11/30/08
-------------------------------------------------------------------------------------------------------------------------------
             175,000                                           0.94    11/30/08
-------------------------------------------------------------------------------------------------------------------------------

-------------------------------------------------------------------------------------------------------------------------------
Kevin
Kroger       100,000                                           1.70    01/10/13
-------------------------------------------------------------------------------------------------------------------------------
             300,000                                           9.25    07/03/10
-------------------------------------------------------------------------------------------------------------------------------

-------------------------------------------------------------------------------------------------------------------------------
Alan
Sandler           --                                             --          --
-------------------------------------------------------------------------------------------------------------------------------
</TABLE>


                                       26
<PAGE>

ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS.

         The following table sets forth certain information regarding the
Company's common stock beneficially owned on March 28, 2008 for (i) each
stockholder known by the Company to be the beneficial owner of five (5%) percent
or more of the Company's outstanding Common Stock, (ii) each of the Company's
named executive officers compensation, (iii) each of the Company's directors,
and (iv) all names executive officers and directors as a group. In general, a
person is deemed to be a "beneficial owner" of a security if that person has or
shares the power to vote or direct the voting of such security, or the power to
dispose or to direct the disposition of such security. A person is also deemed
to be a beneficial owner of any securities of which the person has the right to
acquire ownership within sixty (60) days. At March 28, 2007, there were
31,786,353 shares of Common Stock outstanding. The address of each of the
persons set forth below is 2017 High Ridge Road, Boynton Beach, Florida 33426,
except as otherwise noted.

                                                                    PERCENT OF
                                                                   COMMON STOCK
                                                      BENEFICIAL   BENEFICIALLY
NAME AND ADDRESS OR IDENTITY OF GROUP                 OWNERSHIP        OWNED
------------------------------------------            ----------   ------------
Quantum Industrial Partners LDC ("QIP") (1)           4,570,000        13.2
Glenhill Capital Management, LP (2)                   4,364,661        12.6
Richard C. Ford (3)                                   3,606,651        10.4
Joseph V. Vittoria (4)                                4,297,822        12.4
Dominick Telesco (5)                                  2,807,143         9.1
Kevin G. Kroger (6)                                   1,092,633         3.1
Alan J. Sandler (7)                                     318,392          -*
John S. Caldwell (8)                                     57,500          -*
Forrest D. Hayes (9)                                     10,000          -*
Charles W. Walton (10)                                  407,857         1.2
Cindy Lea Gimler (11)                                    54,000          -*
                                                      ----------   ------------
All Named Executive Officers and Directors as a
group (8 persons) (4)(5)(6)(7)(8)(9)(10)(11)          9,402,490        27.1%
----------
*        Less than 1%

(1)      Address is c/o Curacao Corporation Company, N.V., Kaya Flamboyan,
         Willenstad Curacao, Netherlands, Antilles.

(2)      Address is 598 Madison Avenue, 12th Floor, New York, NY 10022. Includes
         warrants to purchase 89,286 shares of common stock at $1.25 per share
         through October 1, 2011.

(3)      Includes options to purchase 100,000 shares of common stock at $.56 per
         share through November 30, 2008, options to purchase 100,000 shares at
         $.21 per share through November 30, 2008, and options to purchase
         175,000 shares at $.94 per share through November 30, 2008 and purchase
         of 1,666,667 shares of common stock at $0.30 on June 30, 2005.

(4)      Mr. Vittoria serves as Chairman of the Board of Directors and Chief
         Executive Officer of the Company. Includes five warrants to purchase
         125,000 shares of common stock at $2.25 through March 28, 2008, 150,000
         shares of common stock at $2.00 through February 2, 2009, 100,000
         shares of common stock at $.95 through April 14, 2010, 80,000 shares of
         common stock at $1.25 through November 15, 2011, and 150,000 shares of
         common stock at $1.25 through March 24, 2013, respectively. Includes
         purchase of 833,333 shares of common stock at $0.30 on June 30, 2005,
         833,333 shares of common stock at $0.30 on February 28, 2006 and
         214,286 shares of common stock at $.70 on August 23, 2007. Also
         includes the purchase of 600,000 shares of common stock at $.35 on
         March 24, 2008. The warrants to purchase 125,000 shares of common stock
         at $2.25 through March 28, 2008, are expected to expire.

(5)      Mr. Telesco serves as a Director. Includes purchase of 400,000 shares
         of common stock at $.70 on October 17, 2006, purchase of 600,000 shares
         of common stock at $.35 on March 24, 2008, 100,000 warrants to purchase
         common stock at $1.25 through October 1, 2011 and 150,000 warrants to
         purchase common stock at $1.25 through March 24, 2013. Does not include
         unvested options to purchase 5,000 shares of common stock at $.66 per
         share


                                       27
<PAGE>

         vesting December 19, 2008 and unvested options to purchase 5,000 shares
         of common stock at $.47 per share vesting December 19 2009.

(6)      Mr. Kroger is President, Chief Operating Officer, and a Director.
         Includes options to purchase 300,000 shares of common stock at $9.25
         through July 3, 2010; options to purchase 100,000 shares at $1.70
         through January 10, 2013; purchase of 20,000 shares of common stock at
         $7.50 on September 26, 2000; purchase of 333,333 shares of common stock
         at $0.30 on June 30, 2005 and purchase of 334,000 shares of common
         stock at $0.30 on February 28, 2006 and grant of 5,300 shares at $1.05
         on October 23, 2006.

(7)      Mr. Sandler serves as Vice President, Chief Administrative Officer and
         Secretary. Includes a grant of 2,400 shares at $1.05 on October 23,
         2006.

(8)      General Caldwell serves as a Director. Includes options to purchase
         5,000 shares of common stock each at $0.42 and 2,500 shares of common
         stock each at $0.66, through August 25, 2010 and November 30, 2010,
         respectively; Does not include unvested options to purchase 7,500
         shares at $0.37 through August 25, 2011; and unvested options to
         purchase 7,500 shares at $0.37 through August 25, 2012.

(9)      Mr. Hayes serves as a Director. Includes options to purchase 7,500
         shares of common stock at $1.00 through November 10, 2010 and options
         to purchase 2,500 shares of common stock at $0.68 through November 30,
         2010; does not include unvested options to purchase 10,000 shares at
         $0.37 through November 10, 2011; and unvested options to purchase
         10,000 shares at $0.37 through November 10, 2012.

(10)     Dr. Walton serves as a Director. Includes options to purchase 5,000
         shares of common stock each at $0.42 and 2,500 shares of common stock
         each at $0.68, through August 25, 2010 and November 30, 2010,
         respectively; does not include unvested options to purchase 7,500
         shares at $0.37 through August 25, 2011; and unvested options to
         purchase 7,500 shares at $0.37 through August 25, 2012. Also includes
         21,429 warrants issued October 13, 2006 to purchase common stock at
         $1.25 through October 1, 2011.

(11)     Ms. Gimler is Chief Financial Officer and Secretary of Puradyn, Ltd.
         Includes options to purchase 50,000 shares of common stock, issued
         February 25, 2005, at $.93 through February 28, 2015. Includes purchase
         of 2,000 shares at $.45 on August 23, 2007 and the purchase of 2,000
         shares at $.50 on November 21, 2007. Does not include unvested options
         to purchase 25,000 shares of common stock at $.40, which vesting begins
         September 26, 2008.

SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS

         The following table sets forth securities authorized for issuance under
equity compensation plans, including individual compensation arrangements, by us
under our Filter Technologies, Inc. Stock Option Plan and any compensation plans
not previously approved by our stockholders as of December 31, 2007.

<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------------------------
                                         NUMBER OF SECURITIES    WEIGHTED AVERAGE        NUMBER OF SECURITIES
                                         TO BE ISSUED UPON       EXERCISE PRICE OF       REMAINING AVAILABLE FOR
                                         EXERCISE OF             OUTSTANDING OPTIONS,    FUTURE ISSUANCE UNDER
                                         OUTSTANDING OPTIONS,    WARRANTS AND RIGHTS     EQUITY COMPENSATION PLANS
                                         WARRANTS AND RIGHTS     (B)                     (EXCLUDING SECURITIES
                                         (A)                                             REFLECTED IN COLUMN (A)) (C)
---------------------------------------------------------------------------------------------------------------------
<S>                                                   <C>                       <C>                        <C>
Plan category
---------------------------------------------------------------------------------------------------------------------

---------------------------------------------------------------------------------------------------------------------
Plans approved by our stockholders:
---------------------------------------------------------------------------------------------------------------------
1996 Stock Option Plan                                502,650                   $1.61                      1,697,350
---------------------------------------------------------------------------------------------------------------------
1999 Stock Option Plan                              1,179,250                    3.26                      1,820,750
---------------------------------------------------------------------------------------------------------------------
2000 Non-Employee Directors Plan                       85,000                     .48                        315,000
---------------------------------------------------------------------------------------------------------------------

---------------------------------------------------------------------------------------------------------------------
Plans not approved by our stockholders                      0                     N/A                            N/A
---------------------------------------- ----------------------- ----------------------- ----------------------------
</TABLE>

ITEM 12. CERTAIN RELATIONSHIPS, RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE.

         In July 2001, the Company received promissory notes from two of its
officers for the exercise of their vested stock options in the amount of
$875,256 and bearing interest of 5.63%. The principal and accrued interest are
due upon the earlier of the expiration of the original option periods, which
range from July 2008 to December 2009, or upon the


                                       28
<PAGE>

sale of the common stock acquired by the execution of the options. During 2007,
the Company recorded approximately $99,000 of interest reserves relating to
these shareholder notes.

         Beginning on March 28, 2002, the Company executed a binding agreement
with one of its stockholders, who is also a Board Member, to fund up to $6.1
million. Amounts drawn bear interest at the prime rate per annum (6.75% at
December 31, 2007) payable monthly and were to become due and payable on
December 31, 2005, or upon a change in control of the Company or consummation of
any other financing over $7 million. In April 2005, the maturity date was
extended to December 31, 2006 and then in March 2006, 2007 and 2008, the
maturity date was extended to December 31, 2007, December 31, 2008 and December
31, 2009, respectively. In consideration for the stockholder entering into this
loan agreement, the Company granted the stockholder a total of 475,000 common
stock purchase warrants at an exercise price equal to the closing market price
of the Company's stock on the dates of grant. As of December 31, 2007, the
Company had drawn the entire $6.10 million of the available funds and paid
approximately $454,000 in related interest.

DIRECTOR INDEPENDENCE

         John S. Caldwell, Forrest D. Hayes, Dominick Telesco and Charles W.
Walton qualify as "independent" directors as the term is used in Item
7(d)(3)(iv) of Schedule 14A of the Securities Exchange Act of 1934, as amended.

ITEM 13. EXHIBITS

Exhibits      Description of Documents

3.1           Amended and Restated Certificate of Incorporation of T/F Purifier,
              Inc. dated December 30, 1996 (2)

3.1(a)        Certificate of Amendment to Certificate of Incorporation dated
              February 3, 1998 (3)

3.2           Bylaws of T/F Purifier, Inc. (1)

3.3           Memorandum and Articles of Association of TV Purifier Ltd. (1)

4.1           Amendment No. 1 to Registration Rights Agreement (3)

10.1          1996 Stock Option Plan (1)

10.2          1999 Stock Option Plan (4)

10.3          2000 Non-Employee Directors' Plan (5)

10.4          2002 Audit Committee Charter (7)

10.9          Change in compensatory plan (8)

14.1          Code of Ethics (7)

23.1          Consent of Independent Registered Public Accounting Firm (6)

23.2          Consent of Independent Registered Public Accounting Firm (6)

31.1          Sarbanes-Oxley Act Section 302 Certification (6)

31.2          Sarbanes-Oxley Act Section 302 Certification (6)

32.1          Sarbanes-Oxley Act Section 906 Certification  (6)

32.2          Sarbanes-Oxley Act Section 906 Certification (6)


                                       29
<PAGE>

(1)      Incorporated by reference from the Exhibits to the company's Form 10-SB
         12B Registration Statement, as amended, as filed with the Securities
         and Exchange Commission.

(2)      Incorporated by reference from the Exhibit to the company's Form 8-K,
         January 9, 1997, as filed with the Securities and Exchange Commission.

(3)      Incorporated by reference from the Exhibit to the company's Form 8-KA,
         February 11, 1998, as filed with the Securities and Exchange
         Commission.

(4)      Incorporated by reference from Form S-8, September 15, 1999, as filed
         with the Securities and Exchange Commission

(5)      Incorporated by reference from Form 10-KSB, August 9, 2001, as filed
         with the Securities and Exchange Commission.

(6)      Filed herewith.

(7)      Incorporated by reference from the Exhibit to the company's Form 8-K,
         November 18, 2004, as filed with the Securities and Exchange
         Commission.

(8)      Incorporated by reference from the Exhibit to the company's Form 8-K,
         August 22, 2005, as filed with the Securities and Exchange Commission.

ITEM 14. PRINCIPAL ACCOUNTANTS FEES AND SERVICES

         The following table sets forth the aggregate fees billed to the Company
for the years ended December 31, 2007 by Webb and Company, and December 31, 2006
by Webb & Company and DaszkalBolton, the Company's principal accountants:

                                         2007        2006
                                       -------     -------
                Audit Fees             $29,638     $28,000
                Audit-Related Fees       9,718      22,500
                Tax Fees                    --          --
                All Other Fees              --       4,989

Audit Fees -- This category includes the audit of our annual financial
statements, review of financial statements included in our Form 10-QSB Quarterly
Reports and services that are normally provided by the independent auditors in
connection with engagements for those fiscal years. This category also includes
advice on audit and accounting matters that arose during, or as a result of, the
audit or the review of interim financial statements.

Audit-Related Fees -- This category consists of assurance and related services
by the independent auditors that are reasonably related to the performance of
the audit or review of our financial statements and are not reported above under
"Audit Fees." The services for the fees disclosed under this category include
consultation regarding our correspondence with the SEC and other accounting
consulting.

Tax Fees -- This category consists of professional services rendered by our
independent auditors for tax compliance and tax advice. The services for the
fees disclosed under this category include tax return preparation and technical
tax advice.

All Other Fees -- This category consists of fees for other miscellaneous items.

The Audit Committee of our Board of Directors has adopted a procedure for
pre-approval of all fees charged by our independent auditors. Under the
procedure, the Audit Committee approves the engagement letter with respect to
audit, tax and review services. Other fees are subject to pre-approval by the
Audit Committee, or, in the period between meetings, by a designated member of
Audit Committee. Any such approval by the designated member is disclosed to the
entire Audit Committee at the next meeting. The audit and tax fees paid to the
auditors with respect to fiscal year 2007 were pre-approved by the entire Audit
Committee.


                                       30
<PAGE>

                                   SIGNATURES

In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.

                                   Puradyn Filter Technologies Incorporated
                                                  (Registrant)


Date: March 28, 2008               By:  /s/ Joseph V. Vittoria
                                        ----------------------
                                            Joseph V. Vittoria
                                            Chairman and Chief Executive Officer

In accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
date indicated.

Date: March 28, 2008

By:    /s/ Joseph V. Vittoria
       ----------------------------------------------------------
       Joseph V. Vittoria
       Principal Executive Officer and Chairman of the Board

By:    /s/ Alan J. Sandler
       ----------------------------------------------------------
       Alan J. Sandler
       Vice President, Chief Administrative Officer and Secretary

By:    /s/ Cindy Lea Gimler
       ----------------------------------------------------------
       Cindy Lea Gimler, Chief Financial Officer
       Principal Financial and Accounting Officer

By:    /s/ Kevin G. Kroger
       ----------------------------------------------------------
       Kevin G. Kroger, President and Chief
       Operating Officer and Director

By:    /s/ John S. Caldwell
       ----------------------------------------------------------
       John S. Caldwell, Director

By:    /s/ Forrest D. Hayes
       ----------------------------------------------------------
       Forrest D. Hayes, Director

By:    /s/ Charles W. Walton
       ----------------------------------------------------------
       Charles W. Walton, Director

By:    /s/ Dominick Telesco
       ----------------------------------------------------------
       Dominick Telesco, Director


                                       31
<PAGE>

                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

                                                                          PAGE
                                                                          ----
Reports of Independent Registered Public Accounting Firm..................  33

Consolidated Financial Statements:

     Consolidated Balance Sheet - December 31, 2007.......................  34

     Consolidated Statements of Operations -
         Years ended December 31, 2007 and 2006...........................  35

     Consolidated Statements of Changes in Stockholders' Deficit -
         Years ended December 31, 2007 and 2006...........................  36

     Consolidated Statements of Cash Flows -
         Years ended December 31, 2007 and 2006...........................  37

     Notes to Consolidated Financial Statements...........................  38



                                       32
<PAGE>

             REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Board of Directors and Stockholders
Puradyn Filter Technologies Incorporated

         We have audited the accompanying consolidated balance sheet of Puradyn
Filter Technologies Incorporated (the Company) as of December 31, 2007, and the
related consolidated statements of operations, changes in stockholders' equity
(deficit) and cash flows for the two years then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.

         We conducted our audits in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audits to obtain reasonable assurance about whether the
financial statements are free of material misstatement. The Company has
determined that it is not required to have, nor were we engaged to perform, an
audit of its internal control over financial reporting. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the consolidated financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.

         In our opinion, the financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Puradyn
Filter Technologies Incorporated at December 31, 2007, and the results of their
operations and their cash flows for the two years then ended in conformity with
accounting principles generally accepted in the United States of America.

         The accompanying financial statements have been prepared assuming that
the Company will continue as a going concern. As discussed in Note 2, the
Company has suffered recurring losses from operations, its total liabilities
exceed its total assets, and it has relied on cash inflows from an institutional
investor and current stockholder. These conditions raise substantial doubt about
the Company's ability to continue as a going concern. Management's plans in
regards to these matters are also described in Note 2. The financial statements
do not include any adjustments that might result from the outcome of this
uncertainty.

                                                  /s/ Webb and Company, P.A.
                                                  --------------------------

Boynton Beach, Florida
March 10, 2008


                                       33
<PAGE>

                    PURADYN FILTER TECHNOLOGIES INCORPORATED

                           CONSOLIDATED BALANCE SHEET
                                DECEMBER 31, 2007
<TABLE>
<CAPTION>

Assets
Current assets:
<S>                                                                                  <C>
     Cash and cash equivalents                                                       $    112,270
     Accounts receivable, net of allowance for uncollectible accounts of $46,870          382,279
     Inventories, net                                                                   1,475,380
     Prepaid expenses and other current assets                                            181,648
                                                                                     ------------
Total current assets                                                                    2,151,577

Property and equipment, net                                                               162,838
Other noncurrent assets                                                                    40,930
Deferred financing costs, net                                                              18,522
                                                                                     ============
Total assets                                                                         $  2,373,867
                                                                                     ============
Liabilities and stockholders' deficit
Current liabilities:
     Accounts payable                                                                     594,372
     Accrued liabilities                                                                1,054,071
     Current portion of capital lease obligation                                            1,048
     Deferred revenues                                                                    136,169
                                                                                     ------------
Total current liabilities                                                               1,785,660

Capital lease obligation, less current portion                                              7,139

Notes Payable - stockholder                                                             6,250,000
                                                                                     ------------
Total Long Term Liabilities                                                             6,257,139
                                                                                     ------------
Total Liabilities                                                                       8,042,799

Commitments and contingencies                                                                  --

Stockholders' deficit:
     Preferred stock, $.001 par value:                                                         --
         Authorized shares - 500,000;
         None issued and outstanding
     Common stock, $.001 par value,                                                        29,401
         Authorized shares - 40,000,000;
         Issued and outstanding - 29,400,638
     Additional paid-in capital                                                        41,329,330
     Notes receivable from stockholders                                                (1,064,031)
     Accumulated deficit                                                              (45,825,210)
     Accumulated other comprehensive income                                              (138,422)
                                                                                     ------------
Total stockholders' deficit                                                            (5,668,932)
                                                                                     ------------
Total liabilities and stockholders' deficit                                          $  2,373,867
                                                                                     ============
</TABLE>


          See accompanying notes to consolidated financial statements.


                                       34
<PAGE>

                    PURADYN FILTER TECHNOLOGIES INCORPORATED

                      CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
                                                         YEAR ENDED DECEMBER 31
                                                         2007              2006
                                                     ------------      ------------
<S>                                                  <C>               <C>
Net sales                                            $  3,082,873      $  3,072,947

Costs and expenses:
     Cost of products sold                              2,831,560         2,566,572
     Salaries and wages                                 1,074,519         1,348,335
     Selling and administrative                         1,061,828         1,343,651
                                                     ------------      ------------
     Total operating costs                              4,967,907         5,258,558
                                                     ------------      ------------
Loss from operations                                   (1,885,034)       (2,185,611)

Other (expense) income:
     Interest income                                       32,516            50,413
     Interest expense                                    (588,583)         (518,265)
                                                     ------------      ------------
Total other expense                                      (556,067)         (467,852)
                                                     ------------      ------------
Income taxes                                                   --                --
                                                     ============      ============
Net loss                                             $ (2,441,101)     $ (2,653,463)
                                                     ============      ============
Basic and diluted loss per common share              $       (.09)     $       (.10)
                                                     ============      ============
Basic and diluted weighted average common shares
     Outstanding                                       28,322,903        25,385,294
                                                     ============      ============
</TABLE>


          See accompanying notes to consolidated financial statements.


                                       35
<PAGE>

                    PURADYN FILTER TECHNOLOGIES INCORPORATED

           CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' DEFICIT
<TABLE>
<CAPTION>
                                                                               NOTES                    ACCUMULATED
                                                               ADDITIONAL   ACCUMULATED                     OTHER        TOTAL
                                       COMMON STOCK  PAID-IN   RECEIVABLE      FROM       COMPREHENSIVE STOCKHOLDERS'
                                          SHARES      AMOUNT    CAPITAL     STOCKHOLDERS     DEFICIT    INCOME (LOSS)   DEFICIT
                                       ------------ --------- ------------ ------------- -------------- ------------- ------------
<S>                                    <C>          <C>       <C>          <C>           <C>            <C>           <C>
Balance at December 31, 2005           22,276,099   $  22,276 $ 37,078,716 $ (1,088,590) $ (40,730,646) $     13,398  $ (4,704,846)
Foreign currency
 translation adjustment                        --          --           --           --             --      (166,107)     (166,107)
Net loss                                       --          --           --           --     (2,653,463)           --    (2,653,463)
                                                                                                                      ------------
Total comprehensive loss                       --          --           --           --             --            --    (2,819,570)
Exercise of stock options                   5,000           5        2,595           --             --            --         2,600
Issuance of common stock
 in private Placement, net
 of issuance costs                      4,971,903       4,972    2,262,028           --             --            --     2,267,000
Issuance of warrants to
 nonemployee directors                         --          --        2,250           --             --            --         2,250
Issuance of warrants to
 employee/director                             --          --      100,500           --             --            --       100,500
Issuance of warrants to investors              --          --       66,492           --             --            --        66,492
Interest receivable related
 to notes receivable from stockholders         --          --           --      (48,066)            --            --       (48,066)
Compensation expense associated
 with option modification                      --          --      173,350           --             --            --       173,350
Stock options issued to employees              --          --       29,250           --             --            --        29,250
Stock options issued in lieu of
 compensation                              57,350          57       48,160           --             --            --        48,217
Compensation expense associated
 with unvested option awards                   --          --       11,190           --             --            --        11,190
                                       ----------   --------- ------------ ------------  -------------  ------------   -----------
Balance at December 31, 2006           27,310,352      27,310   39,774,531   (1,136,656)   (43,384,109)     (152,709)   (4,871,633)

Foreign currency translation
 adjustment                                    --          --           --           --             --        14,287        14,287
Net loss                                       --          --           --           --     (2,441,101)           --    (2,441,101)
                                                                                                                       -----------
Total comprehensive loss                       --          --           --           --             --            --    (2,426,814)
Exercise of stock options                  76,000          76       28,424           --             --            --        28,500
Issuance of common stock in private
 Placement, net of issuance costs       2,014,286       2,015    1,472,985           --             --            --     1,475,000
1Issuance of warrants to investors             --          --       34,200           --             --            --        34,200
Foregiveness of stockholder loans              --          --           --       21,506             --            --        21,506
Interest receivable related to notes
 receivable from stockholders                  --          --           --       51,119             --            --        51,119
Compensation expense associated with
 option modification                           --          --        1,202           --             --            --         1,202
Compensation expense associated with
 unvested option awards                        --          --       17,988           --             --            --        17,988
                                       ----------   --------- ------------ ------------  -------------  ------------   -----------
Balance at December 31, 2007           29,400,638   $  29,401 $ 41,329,330 $ (1,064,031) $ (45,825,210) $   (138,422)  $(5,668,932)
                                       ==========   ========= ============ ============  =============  ============   ===========
</TABLE>


          See accompanying notes to consolidated financial statements.


                                       36
<PAGE>

                    PURADYN FILTER TECHNOLOGIES INCORPORATED

                      CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
                                                                YEAR ENDED  DECEMBER 31,
                                                              ----------------------------
                                                                 2007             2006
                                                              -----------      -----------
OPERATING ACTIVITIES
<S>                                                           <C>              <C>
Net loss                                                      $(2,441,101)     $(2,653,463)
                                                              -----------      -----------
Adjustments to reconcile net loss to net cash used in
     operating activities:
     Depreciation and amortization                                 96,001          183,728
     Gain on sale of assets                                           578               --
     Provision for bad debts                                       (3,079)           8,398
     Provision for obsolete and slow moving inventory             (62,564)         (24,819)
     Amortization of deferred financing costs included in
         interest expense                                          22,227           48,899
     Interest receivable from stockholders' notes                  72,626          (48,066)
     Compensation expense on stock-based arrangements
         with employees and vendors                                19,190          213,790
     Compensation expense on stock-based arrangements
         with investors and directors                              34,200          169,242
     Changes in operating assets and liabilities:
         Accounts receivable                                      118,687          (83,245)
         Inventories                                             (140,360)         (65,856)
         Prepaid expenses and other current assets                 (7,633)          71,156
         Other noncurrent assets                                       --               --
         Accounts payable                                         277,656           46,326
         Accrued liabilities                                      168,617          167,644
         Deferred revenues                                         36,254           24,105
                                                              -----------      -----------
Net cash used in operating activities                          (1,808,701)      (1,942,161)

INVESTING ACTIVITIES
Proceeds from sale of property and equipment                        5,458               --
Purchases of property and equipment                               (60,878)         (39,455)
                                                              -----------      -----------
Net cash used in investing activities                             (55,420)         (39,455)

FINANCING ACTIVITIES
Proceeds from sale of common stock                              1,475,000        2,267,000
Proceeds from exercise of stock options                            28,500            2,600
Proceeds from notes payable to stockholder                      1,191,000          515,000
Payment of notes payable to stockholder                          (780,000)        (747,000)
Payment of capital lease obligations                               (5,931)          (4,987)
                                                              -----------      -----------
Net cash provided by financing activities                       1,908,569        2,032,613
Effect of exchange rate changes on cash and cash
     equivalents                                                   12,647         (151,379)
                                                              -----------      -----------
Net increase (decrease) in cash and cash equivalents               57,095         (100,382)
Cash and cash equivalents at beginning of period                   55,175          155,557
                                                              -----------      -----------
Cash and cash equivalents at end of period                    $   112,270      $    55,175
                                                              ===========      ===========
SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for interest                                        $   453,916      $   462,784

NONCASH INVESTING AND FINANCING ACTIVITIES

Common stock issued in settlement of accrued bonus            $        --      $    30,000
                                                              ===========      ===========
</TABLE>


          See accompanying notes to consolidated financial statements.


                                       37
<PAGE>


                    PURADYN FILTER TECHNOLOGIES INCORPORATED

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 2007

1. SIGNIFICANT ACCOUNTING POLICIES

Organization

Puradyn Filter Technologies Incorporated (the "Company"), a Delaware
corporation, is engaged in the manufacturing, distribution and sale of bypass
oil filtration systems under the trademark Puradyn(R) primarily to companies
with large fleets of vehicles and secondarily to original vehicle equipment
manufacturer aftermarket programs. The Company holds the exclusive worldwide
manufacturing and marketing rights for the Puradyn products pursuant to licenses
for two patents and through direct ownership of various other patents.

Puradyn Filter Technologies, Ltd. (Ltd.), a wholly owned subsidiary in the
United Kingdom, sells and distributes the Company's products in Europe, the
Middle East and certain African countries. The results of the operations of Ltd.
have been included in the Company's statements of operations since Ltd.'s
formation on June 1, 2000.

New Accounting Pronouncements

In June 2006, the Financial Accounting Standards Board ("FASB") issued
Interpretation No. 48 ("FIN 48"), "Accounting for Uncertainty in Income Taxes,"
which prescribes a recognition threshold and measurement attribute for the
financial statement recognition and measurement of a tax position taken or
expected to be taken in a tax return. In accordance with FIN 48, the Company
must adjust its financial statements to reflect only those tax positions that
are more-likely-than-not to be sustained as of the adoption date. The effective
date of FIN 48 for the Company is January 1, 2007. The adoption of FIN 48 has
not had a material impact on the Company's condensed consolidated financial
statements.

In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements"
("SFAS 157"), which clarifies the definition of fair value, establishes
guidelines for measuring fair value, and expands disclosures regarding fair
value measurements. SFAS 157 does not require any new fair value measurements
and eliminates inconsistencies in guidance found in various prior accounting
pronouncements. SFAS 157 will be effective for the Company on January 1, 2008.
The Company is currently evaluating the impact of adopting SFAS 157 on its
financial position, cash flow, and results of operations, and its adoption is
not expected to have a material effect on the Company's financial statements.

In February 2007, the Financial Accounting Standards Board (FASB) issued SFAS
No. 159, "The Fair Value Option for Financial Assets and Financial Liabilities -
Including an Amendment of FASB Statement No. 115". This statement permits
entities to choose to measure many financial instruments and certain other items
at fair value. Most of the provisions of SFAS No. 159 apply only to entities
that elect the fair value option. However, the amendment to SFAS No. 115
"Accounting for Certain Investments in Debt and Equity Securities" applies to
all entities with available-for-sale and trading securities. SFAS No. 159 is
effective as of the beginning of an entity's first fiscal year that begins after
November 15, 2007. Early adoption is permitted as of the beginning of a fiscal
year that begins on or before November 15, 2007, provided the entity also elects
to apply the provision of SFAS No. 157, "Fair Value Measurements". The adoption
of this statement is not expected to have a material effect on the Company's
financial statements.

In December 2007, the Financial Accounting Standards Board (FASB) issued SFAS
No. 160, "Noncontrolling Interests in Consolidated Financial Statements - an
amendment of ARB No. 51". This statement improves the relevance, comparability,
and transparency of the financial information that a reporting entity provides
in its consolidated financial statements by establishing accounting and
reporting standards that require; the ownership interests in subsidiaries held
by parties other than the parent and the amount of consolidated net income
attributable to the parent and to the noncontrolling interest be clearly
identified and presented on the face of the consolidated statement of income,
changes in a parent's ownership interest while the parent retains its
controlling financial interest in its subsidiary be accounted for consistently,
when a subsidiary is deconsolidated, any retained noncontrolling equity
investment in the former subsidiary be initially measured at fair value,
entities provide sufficient disclosures that clearly identify and distinguish
between the interests of the parent and the interests of the noncontrolling
owners. SFAS No. 160 affects those entities that have an outstanding
noncontrolling interest in one or more subsidiaries or that deconsolidate a
subsidiary. SFAS


                                       38
<PAGE>

No. 160 is effective for fiscal years, and interim periods within those fiscal
years, beginning on or after December 15, 2008. Early adoption is prohibited.
The adoption of this statement is not expected to have a material effect on the
Company's financial statements

Principles of Consolidation

The consolidated financial statements include the accounts of the Company and
its wholly owned subsidiary, Puradyn Filter Technologies, Ltd. All significant
intercompany transactions and balances have been eliminated.

Revenue Recognition

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

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

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 amounts reported in the consolidated financial
statements. Actual results could differ from those estimates.

Cash and Cash Equivalents

Cash and cash equivalents include all highly liquid investments with original
maturities of three months or less at the time of purchase. At December 31, 2007
and December 31, 2006, the Company did not have any cash equivalents.

Fair Value of Financial Instruments

The carrying amounts of cash and cash equivalents, accounts receivable, prepaid
expenses and other assets, accounts payable, accrued liabilities and notes
payable to stockholder approximate their fair values as of December 31, 2007
because of their short-term natures.

Accounts Receivable

Accounts receivable are recorded at fair value on the date revenue is
recognized. The Company provides allowances for doubtful accounts for estimated
losses resulting from the inability of its customers to repay their obligation.
If the financial condition of the Company's customers were to deteriorate,
resulting in an impairment of their ability to repay, additional allowances may
be required. The Company provides for potential uncollectible accounts
receivable based on specific customer identification and historical collection
experience adjusted for existing market conditions. If market conditions
decline, actual collection experience may not meet expectations and may result
in decreased cash flows and increased bad debt expense.

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

Inventories

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


                                       39
<PAGE>

Deferred Financing Costs

         The Company capitalizes financing costs and amortizes them using the
effective interest method over the term of the related debt. Amortization of
deferred financing costs is included in interest expense and totaled $22,227 and
$48,899 for the years ended December 31, 2007 and 2006, respectively.
Accumulated amortization of deferred financing costs as of December 31, 2007 was
$662,628.

Property and Equipment

Property and equipment are stated at cost. Depreciation and amortization are
provided using the straight-line method over the estimated useful lives of the
related assets, except for assets held under capital leases, for which the
Company records depreciation and amortization based on the shorter of the
asset's useful life or the term of the lease. The estimated useful lives of
property and equipment range from 3 to 5 years. Upon sale or retirement, the
cost and related accumulated depreciation and amortization are eliminated from
their respective accounts, and the resulting gain or loss is included in results
of operations. Repairs and maintenance charges, which do not increase the useful
lives of the assets, are charged to operations as incurred.

Impairment of Long-Lived Assets

Management assesses the recoverability of its long-lived assets when indicators
of impairment are present. If such indicators are present, recoverability of
these assets is determined by comparing the undiscounted net cash flows
estimated to result from those assets over the remaining life to the assets' net
carrying amounts. If the estimated undiscounted net cash flows are less than the
net carrying amount, the assets would be adjusted to their fair value, based on
appraisal or the present value of the undiscounted net cash flows.

Product Warranty Costs

In connection with the adoption of FIN 45, the Company is including the
following disclosure applicable to its product warranties.

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

The following table shows the changes in the aggregate product warranty
liability for the year ended December 31, 2007:

        Balance as of December 31, 2006                  $ 71,759
        Less: Payments made                               (10,895)
                Change in prior period estimate             1,397
        Add: Provision for current period warranties       27,548
                                                         --------
        Balance as of December 31, 2007                  $ 89,809
                                                         ========

Guarantees

In August 2003 the Company made a guarantee to its wholly owned subsidiary,
Puradyn Filter Technologies, Ltd., that it would provide cash for working
capital on an as needed basis for a minimum period of twelve months. The
guarantee



                                       40
<PAGE>

was provided as assurance that they will continue as a going concern for 2003.
This guarantee is excluded from the recognition and measurement provisions of
FIN 45, as it relates to a wholly owned consolidated subsidiary.

Comprehensive Income

SFAS No. 130, Reporting Comprehensive Income (SFAS 130) establishes rules for
reporting and displaying of comprehensive income and its components.
Comprehensive income is the sum of net loss as reported in the consolidated
statements of operations and other comprehensive income transactions as reported
in the consolidated statement of changes in stockholders' equity (deficit).
Other comprehensive income transactions that currently apply to the Company
result from changes in exchange rates used in translating the financial
statements of its wholly owned subsidiary, Ltd. Comprehensive income as of
December 31, 2007 and 2006 is not shown net of taxes because the Company's
deferred tax asset has been fully offset by a 100% valuation allowance.

Advertising Costs

Advertising costs are expensed as incurred. During the years ended December 31,
2007 and 2006, advertising costs incurred by the Company totaled approximately
$17,000 and $37,000, respectively, and are included in selling and
administrative expenses in the accompanying consolidated statements of
operations.

Engineering and Development

Engineering and development costs are expensed as incurred. During the years
ended December 31, 2007 and 2006, engineering and development costs incurred by
the Company totaled approximately $31,000 and $52,000, respectively, and are
included in selling and administrative expenses in the accompanying consolidated
statements of operations.

Foreign Currency Translation

The financial statements of the Company's foreign subsidiary have been
translated into U.S. dollars in accordance with SFAS No. 52, Foreign Currency
Translation (SFAS 52). All balance sheet accounts have been translated using the
exchange rate in effect at the balance sheet date. Income statement amounts have
been translated using an appropriately weighted average exchange rate for the
year. The translation gains and losses resulting from the changes in exchange
rates during 2007 and 2006 have been reported in accumulated other comprehensive
income, except for gains and losses resulting from the translation of
intercompany receivables and payables, which are included in earnings for the
period. During the years ended December 31, 2007 and 2006, the Company recorded
a foreign currency exchange rate gain of approximately $87,000 and a loss of
approximately $198,000, respectively, which is included in selling and
administrative expenses in the accompanying consolidated statements of
operations.

Income Taxes

The Company accounts for income taxes under SFAS No. 109, Accounting for Income
Taxes (SFAS 109). Deferred income tax assets and liabilities are determined
based upon differences between financial reporting and tax bases of assets and
liabilities and are measured using the enacted tax rates and laws that will be
in effect when the differences are expected to reverse.

Stock Option Plans

We adopted SFAS 123R effective January 1, 2006 using the modified prospective
application method of adoption which requires us to record compensation cost
related to unvested stock awards as of December 31, 2005 recognizing the
amortized grant date fair value in accordance with provisions of SFAS 123R on
straight line basis over the service periods of each award. We have estimated
forfeiture rates based on our historical experience. Stock option compensation
expense for the year ended December 31, 2007 has been recognized as a component
of cost of goods sold and general and administrative expenses in the
accompanying Consolidated Financial Statements.

In 2007 and 2006, respectively, 200,000 and 85,000 options were granted at fair
market value on the date of grant pursuant to the Stock Option Plan.

The Company leases its employees from a payroll leasing company. The Company's
leased employees meet the definition of employees as specified by FIN 44 for
purposes of applying SFAS 123R.


                                       41
<PAGE>

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

Credit Risk

The Company minimizes the concentration of credit risk associated with its cash
and cash equivalents by maintaining its cash and cash equivalents with high
quality federally insured financial institutions. However, cash balances in
excess of the FDIC insured limit of $100,000 are at risk. At December 31, 2007,
the Company did not have cash balance above the FDIC insured limit. The Company
performs ongoing evaluations of its significant trade accounts receivable
customers and generally does not require collateral. An allowance for doubtful
accounts is maintained against trade accounts receivable at levels which
management believes is sufficient to cover probable credit losses. There are
concentrations of credit risk with respect to trade receivables due to the
amounts owed by five customers at December 31, 2007 whose trade receivable
balances each represented approximately 24%, 10%, 8%, 8% and 7% for a total of
57% of total accounts receivable. The loss of business from one or a combination
of the Company's significant customers, or an unexpected deterioration in their
financial condition, could adversely affect the Company's operations.

Basic and Diluted Loss Per Share

The Company follows SFAS No. 128, Earnings Per Share (SFAS 128), which requires
a dual presentation of basic and diluted earnings per share. However, because of
the Company's net losses, the effects of stock options and warrants would be
anti-dilutive and, accordingly, are excluded from the computation of earnings
per share. The number of such shares excluded from the computations of diluted
loss per share totaled 3,636,543 in 2007 and 3,470,043 in 2006.

Reclassifications

Certain prior year amounts have been reclassified to conform to the current year
presentation.

2. ISSUES AFFECTING LIQUIDITY AND MANAGEMENT'S PLANS

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

These recurring operating losses, liabilities exceeding assets and the reliance
on cash inflows from an institutional investor and current stockholder have led
the Company's independent registered public accounting firm Webb & Company to
include a statement in its audit report relating to the Company's audited
consolidated financial statements for the year ended December 31, 2007
expressing substantial doubt about the Company's ability to continue as a going
concern.

The Company has been addressing the liquidity and working capital issues and
continues to attempt to raise additional capital with institutional and private
investors and current stockholders. Cost reductions were and continue to be
implemented by the Company, including acquiring alternative suppliers for raw
materials, and the company expects to see results from these reductions, as well
as other cost reduction plans through 2008. Additionally, the Company is
reviewing cost of material increases, which are expected to be passed through to
its customers as product price increases beginning January, 2008.

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

The Company has sustained losses since inception in 1987 and used net cash in
operations of approximately $1,809,000 and $1,942,000 during the years ended
December 31, 2007 and 2006, respectively. As a result, the Company has had to


                                       42
<PAGE>

rely principally on private equity funding, including the conversion of debt
into stock, as well as stockholder loans to fund its activities to date.

On February 2, 2004, the stockholder amended the original loan agreements to
extend the maturity dates to December 31, 2005 and to waive the funding
requirement mandating maturity terms until such time as the Company has raised
an additional $7.0 million over the $3.5 million raised in the Company's recent
private placement offering; or until such time as the Company is operating
within sufficient cash flow parameters, as defined, to sustain its operations;
or until a disposition of the Company occurs.

In April 2005, the maturity date of the loan agreement was extended to December
31, 2006. As consideration of this extension, this stockholder was granted an
additional 100,000 common stock purchase warrants at an exercise price equal to
the closing market price of the Company's stock on the date of grant. In March
2006, 2007 and 2008, the stockholder extended the maturity date of the loan
agreement to December 31, 2007, December 31, 2008 and December 31, 2009,
respectively.

The Company experienced a modest reduction in cash used in operations in 2007
and anticipates additional reductions in cash used in operations in 2008;
however, additional cash will still be needed to support operations. Management
believes that the commitments received from its stockholder, the funds received
from its recent current private placement offering, as well as cash from sales
and current working capital will be sufficient to sustain its operations at its
current level through May 2008. However, if budgeted sales levels are not
achieved and/or significant unanticipated expenditures occur, the Company may
have to modify its business plan, reduce or discontinue some of its operations
or seek a buyer for all or part of its assets to continue as a going concern
through 2008. There can be no assurance that the Company will be able to raise
the additional capital needed to continue as a going concern.

3. INVENTORIES

At December 31, 2007, inventories consisted of the following:


         Raw materials                                   $    780,979
         Finished goods                                       779,005
         Valuation allowance                                  (84,604)
                                                         ------------
                                                         $  1,475,380
                                                         ============

4. PREPAID EXPENSES AND OTHER CURRENT ASSETS

At December 31, 2007, prepaid expenses and other current assets consisted of the
following:

         Prepaid expenses                                $    101,857
         Deferred costs related to deferred revenue            79,791
                                                         ------------
                                                         $    181,648
                                                         ============

5. PROPERTY AND EQUIPMENT

At December 31, 2007, property and equipment consisted of the following:


         Machinery and equipment                         $  1,077,501
         Furniture and fixtures                               101,555
         Leasehold improvements                               122,622
         Website development                                   72,960
         Computer hardware and software                       119,262
                                                         ------------
                                                            1,493,900
         Less accumulated depreciation and amortization    (1,331,062)
                                                         ------------
                                                         $    162,838
                                                         ============

Depreciation and amortization expense of property and equipment for the years
ended December 31, 2007 and 2006 is $96,001 and $183,728, respectively, of which
approximately $18,000 and $126,000 is included in cost of products sold


                                       43
<PAGE>

and approximately $78,000 and $58,000 is included in selling and administrative
costs, respectively, in the accompanying consolidated statements of operations.

6. LEASES

The Company leases its office and warehouse facilities in Boynton Beach, Florida
under a long-term noncancellable lease agreement, which contains renewal options
and rent escalation clauses. A $235,000 security deposit was paid in 2002, which
will be refunded ratably on an annual basis over the first three years of the
lease term beginning on the last day of the first lease year, provided there has
been no Event of Default, as defined, by the Company. Of this amount, $66,667
was paid to the Company in November 2003, January 2005 and January 2006,
respectively. As of December 31, 2007, $34,970 is included in noncurrent assets
in the accompanying consolidated balance sheet. The total minimum lease payments
over the term of the lease aggregate approximately $774,000. The terms of the
lease include a period of free rent and scheduled annual rate increases. As
such, rent expense is recognized on a straight-line basis over the 68-month term
of the lease.

The Company leases a condominium in Ocean Ridge, Florida to provide
accommodations for Company use. The lease is renewable annually and is paid in
three installments.

The Company's wholly owned subsidiary, Ltd., rented office space in Devon,
England under a lease that extended through March 31, 2002 and was subsequently
extended on a month-to-month basis. In September 2003, Ltd. moved to new office
space by assuming the existing lease, which expired in August 2004 and was
renegotiated in September 2005 and expires in September 2010. Rent expense under
all operating leases for the years ended December 31, 2007 and 2006 totaled
approximately $314,000 and $274,000, respectively, of which approximately
$242,000 and $217,000 is included in cost of products sold and approximately
$72,000 and $57,000 is included in selling and administrative costs,
respectively, in the accompanying consolidated statements of operations.

In May 2007, the Company entered into a capital lease obligation for the
purchase of approximately $8,525 of office equipment, which is included in
property and equipment, net of approximately $995 of accumulated amortization,
in the accompanying consolidated balance sheet.

Future minimum lease commitments due for facilities and equipment leases under
noncancellable capital and operating leases at December 31, 2007 are as follows:

                                             CAPITAL      OPERATING
                                             LEASES        LEASES
                                            --------      ---------
2008                                        $  5,479      $149,524
2009                                           5,479        53,103
2010                                           5,479        39,282
2011                                           2,283
2012 and thereafter                               --
                                            --------      --------
Total minimum lease payments                $ 18,720      $241,909
                                            ========      ========
Less amount representing interest            (10,533)
                                            --------
Present value of minimum lease payments     $  8,187
                                            ========

7. ACCRUED LIABILITIES

At December 31, 2007, accrued liabilities consisted of the following:

Accrued wages and benefits                                 $  680,342
Accrued expenses relating to vendors and others                73,610
Deferral of straight-line rent expense                         16,790
Reclassified accounts receivable credit balances              138,016
Accrued warranty costs                                         89,809
Accrued interest payable relating to stockholder notes         55,504
                                                           ----------
                                                           $1,054,071
                                                           ==========


                                       44
<PAGE>

8. LONG-TERM DEBT

NOTES PAYABLE TO STOCKHOLDER

Beginning on March 28, 2002 the Company executed a binding agreement with one of
its stockholders, who is also a Board Member, to fund up to $6.1 million. Under
the terms of the agreements, the Company can draw amounts as needed to fund
operations. Amounts drawn bear interest at the prime rate per annum (6.75% at
December 31, 2007), payable monthly and were to become due and payable on
December 31, 2005 or upon a change in control of the Company or consummation of
any other financing over $7.0 million. In March 2006, March, 2007 and March
2008, the maturity date for the agreement was extended to December 31, 2007,
December 31, 2008 and December 31, 2009, respectively.

At December 31, 2007, the Company had drawn $6.1 million of the available funds.

During December 2007, the Company received $100,000 in shareholder loans, which
in March 2008 were converted to equity. In April 2005, the maturity date of the
agreement was extended from December 31, 2005 to December 31, 2006. As
consideration of this extension, this stockholder was granted an additional
100,000 common stock purchase warrants at an exercise price equal to the closing
market price of the Company's stock on the date of grant, for a period of five
years.

During the years ended December 31, 2007 and 2006, the Company incurred interest
expense of approximately $481,000 and $465,000, respectively, on its draws,
which is included in interest expense in the accompanying consolidated
statements of operations.

MATURITIES OF LONG-TERM OBLIGATIONS FOR FIVE YEARS AND BEYOND

Long-term obligations consisted of the following at December 31, 2007:

        Notes payable to stockholder     $ 6,250,000
        Capital lease obligation               8,187
                                         -----------
                                           6,258,187
        Less: current maturities              (1,048)
                                         -----------
                                         $ 6,257,139
                                         ===========

The minimum annual principal payments of notes payable and capital lease
obligations at December 31, 2007 were:

                           2008          $    1,048
                           2009           6,251,859
                           2010               3,270
                           2011               2,010
                                         ----------
                                         $6,258,187
                                         ==========

9. INCOME TAXES

The United States and foreign components of loss from continuing operations
before income taxes are as follows for the years ended December 31:

                                                         2007          2006
                                                     -----------   -----------
        United States                                $(2,455,387)  $(2,704,731)
        Foreign                                           14,286        51,268
        Intercompany elimination                              --            --
                                                     -----------   -----------
Loss from continuing operations before income taxes  $(2,441,101)  $(2,653,463)

The significant components of the Company's net deferred tax assets are as
follows for the years ended December 31:

                                                     2007              2006
                                                 ------------      ------------
     Deferred tax assets:
     Net operating loss carryforwards            $ 14,163,096      $ 13,214,958
     Depreciation and amortization                     78,177            73,200
     Accrued expenses and reserves                     58,801            77,795
     Impairment loss                                   78,304            78,304
     Compensatory stock options and warrants           57,354            57,354
     Capital Loss Carryover                            40,630            40,632
     Other                                             16,917            18,829
                                                 ------------      ------------
Total deferred tax assets                          14,493,279        13,561,072
Valuation allowance                               (14,493,279)      (13,561,072)
                                                 ------------      ------------
Net deferred tax assets                          $         --      $         --
                                                 ============      ============


                                      45
<PAGE>

SFAS 109 requires a valuation allowance to reduce the deferred tax assets
reported if, based on the weight of the evidence, it is more likely than not
that some portion or all of the deferred tax assets will not be realized. After
consideration of all the evidence, both positive and negative, management has
determined that a full valuation allowance of $14,493,279 against its net
deferred taxes is necessary as of December 31, 2007. The change in valuation
allowance for the years ended December 31, 2007 and 2006 is $932,207 and
$1,024,603 respectively.

At December 31, 2007, the Company had approximately $38,990,150 of U.S. net
operating loss carryforwards remaining, which expire beginning in 2022. The
Company will record the benefit of approximately $1,355,000 of the net operating
loss carryforwards through additional paid-in capital if and when the net
operating loss carryforwards are utilized, as such amounts relate to the
unrecognized tax benefit from stock option exercises.

As a result of certain ownership changes, the Company may be subject to an
annual limitation on the utilization of its U.S. net operating loss
carryforwards pursuant to Section 382 of the Internal Revenue Code. A study to
determine the effect, if any, of this change, has not been undertaken.

A reconciliation of the Company's income taxes to amounts calculated at the
federal statutory rate is as follows for the years ended December 31:

                                                           2007        2006
                                                          ------       -----
        Federal statutory taxes                           (34.00)%    (34.00)%
        State income taxes, net of federal tax benefit     (3.63)      (3.63)
        Nondeductible items                                 0.16        0.16
        Change in valuation allowance                      38.39       38.21
        Other                                               (.92)        .74
                                                          ------       -----
                                                              --%         --%
                                                          ======       =====

10. COMMITMENTS AND CONTINGENCIES

INVESTMENT BANKING AGREEMENTS

On April 24, 2006, the Company entered into a one-year non-exclusive agreement
with CapitalLink, L.C., an investment banking firm, to assist in additional
financing. The company agreed to pay a fee of 7% of gross proceeds received by
the Company as a result of services performed under the contract, as well as
reimbursement of pre-approved out of pocket expenses. There were no fees
incurred and the company exercised its option not to renew the agreement.

On July 10, 2006, the Company entered into a maximum 90-day agreement with TN
Capital Equities, Ltd., a subsidiary of TerraNova Capital Partners, Inc., and
investment banking firm, to assist the Company in obtaining additional
financing. The company agreed to pay a fee of 10% of the gross proceeds received
by the Company as a result of services performed under the contract, as well as
reimbursement of pre-approved out of pocket expenses. There were no fees
incurred and the company exercised its option not to renew the agreement.

11. STOCK OPTIONS

The Company has three stock option plans, one adopted in 1996 and amended in
July 1997 (the "1996 Option Plan"), one adopted in September 1999 and amended in
June 2000 (the "1999 Option Plan"), and one adopted on November 8, 2000 (the
"Directors' Plan"). The 1996 Option Plan provides for the granting of up to
2,200,000 options, the 1999 Option Plan provides for the granting of up to
3,000,000 options and the Directors' Plan provides for the granting of up to
400,000 options.


                                       46
<PAGE>

Both the 1996 and 1999 Plan provide for the granting of both incentive and
non-qualified stock options to key personnel, including officers, directors,
consultants and advisors to the Company, at the discretion of the Board of
Directors. Each plan limits the exercise price of the options at no less than
the quoted market price of the common stock on the date of grant. The option
term is determined by the Board of the Directors or the Compensation Committee,
provided that no option may be exercisable more than 10 years after the date of
its grant and, in the case of an Incentive Option granted to an eligible
employee owning more than 10% of the Company's common stock, no more than five
years after the date of the grant. Generally, under the 1996 and 1999 plans,
options to employees vest over four years at 25% per annum, except for certain
grants to employees that vest 50% upon grant with remaining amounts over two
years at 25% per annum.

The Directors' Plan provides for the granting of non-qualified options to
members of the Board of Directors at exercise prices not less than the quoted
market price of the common stock on the date of grant and options expire five
years from the date of grant. In the event a person ceases to serve on the Board
of Directors, the outstanding options expire one year from the date of cessation
of service. Such options may be exercised commencing two years from the date of
grant.

On May 11, 2006, the Company extended the expiration date of 270,000 fully
vested stock options for an employee who left the Company and previously had
options extended through September 30, 2006. The Company's Stock Option Plan
permits an employee to exercise their stock options for up to one month after
their termination date, at which time they expire. The exercise price of the
options ranges from $1.72 to $1.75. In accordance with FIN 44, the Company
compared the options' intrinsic value on the modification date to the original
intrinsic value on the date of grant. The Company recorded approximately $88,000
of compensation expense related to this modification, which was included in the
consolidated statement of operations for the year ending December 31, 2006.

On October 20, 2006, the Company extended the expiration date of 375,000 fully
vested stock options for an employee who left the Company in October 2006. The
Company's Stock Option Plan permits an employee to exercise their stock options
for up to one month after their termination date, at which time they expire. The
exercise price of the options ranges from $.21 to $.94. In accordance with FIN
44, the Company compared the options' intrinsic value on the modification date
to the original intrinsic value on the date of grant. The Company recorded
approximately $86,000 of compensation expense related to this modification,
which was included in the consolidated statement of operations for the year
ending December 31, 2006.

On May 23, 2007 the Company extended the expiration date of 11,650 vested stock
options for a terminated employee who left the company in May, 2005. The
exercise price of the options ranges from $.38 to $2.15. In accordance with SFAS
123, incremental compensation cost was recognized in an amount equal to the
excess of the fair value of the modified award over the fair value of the
original award immediately before the modification. The Company recorded
approximately $1,202 of compensation expense related to this modification, which
was included in the consolidated statement of operations for the year ended
December 31, 2007.

During each of 2007 and 2006, 55,000 and 5,000 respectively, of options were
issued to non-employee Directors.

Additional information concerning the activity in the three option plans is as
follows:

<TABLE>
<CAPTION>
                                                       2007                         2006
                                            --------------------------   -------------------------
                                                                                         WEIGHTED
                                                                                          AVERAGE
                                                                                         EXERCISE
                                                                           OPTIONS        PRICE
                                            ----------      ---------     ---------      ---------
<S>                                          <C>            <C>           <C>            <C>
Outstanding, beginning of year               1,880,400      $    3.10     2,152,070      $    3.18
     Granted                                   200,000            .40       135,000            .96
     Exercised                                 (76,000)           .38        (5,000)           .52
     Cancelled                                (130,000)          4.28      (159,000)          2.83
     Expired                                  (107,500)          5.86      (242,670)          3.73
                                            ----------      ---------     ---------      ---------
Outstanding, end of year                     1,766,900           2.65     1,880,400           3.10
                                            ==========                    =========
Exercisable, end of year                     1,505,650      $    3.03     1,708,650      $    3.30
                                            ==========                    =========
Options available for future grant, end
     of year                                 2,135,750                    2,168,250
                                            ==========                    =========
</TABLE>


                                       47
<PAGE>

Summarized information with respect to options outstanding under the three
option plans at December 31, 2007 is as follows:

<TABLE>
<CAPTION>
                                 OPTIONS OUTSTANDING                            OPTIONS EXERCISABLE
                        ------------------------------------------          ---------------------------
                                      REMAINING
                                       AVERAGE
                                     CONTRACTUAL       WEIGHTED                            WEIGHTED
        RANGE OF          NUMBER       LIFE (IN        AVERAGE                NUMBER        AVERAGE
     EXERCISE PRICE     OUTSTANDING     YEARS)      EXERCISE PRICE          EXERCISABLE  EXERCISE PRICE
     --------------     -----------  -----------    --------------          -----------  --------------
<S> <C>                  <C>             <C>             <C>                   <C>          <C>
    $ .21 - $1.70        1,218,400       5.56            $ .84                 957,150      $ .92
     1.86 -  4.50          198,500       4.03             2.39                 198,500       2.39
     8.50 -  9.25          350,000       1.59             9.14                 350,000       9.14
                        ----------       -----           -----               ---------      -----
           Totals        1,766,900       4.97            $2.65               1,505,650      $3.03
                         =========       ====            =====               =========      =====
</TABLE>

Summarized information with respect to options outstanding under the three
option plans at December 31, 2006 is as follows:

<TABLE>
<CAPTION>
                                 OPTIONS OUTSTANDING                            OPTIONS EXERCISABLE
                        ------------------------------------------          ---------------------------
                                      REMAINING
                                       AVERAGE
                                     CONTRACTUAL       WEIGHTED                            WEIGHTED
        RANGE OF          NUMBER       LIFE (IN        AVERAGE                NUMBER        AVERAGE
     EXERCISE PRICE     OUTSTANDING     YEARS)      EXERCISE PRICE          EXERCISABLE  EXERCISE PRICE
     --------------     -----------  -----------    --------------          -----------  --------------

<S>                      <C>             <C>             <C>                 <C>            <C>
    $ .21 - $1.70        1,171,900       6.2             $ .89               1,020,525      $ .88
     1.86 -  4.50          246,000       4.0              2.42                 225,625       2.42
     8.50 -  9.25          462,500       2.1              9.07                 462,500       9.07
                         ---------       ----            -----               ---------      -----
           Totals        1,880,400       4.43            $3.10               1,708,650      $3.30
                         =========       ====            =====               =========      =====
</TABLE>

12. COMMON STOCK

On January 30, 2006, the Company issued 40,000 shares of common stock, at $.75
per share, to an employee in lieu of a cash bonus that was previously accrued
and deferred.

On February 26, 2006, the Company received cash proceeds of $910,000 from five
accredited investors for the purchase of 3,033,333 shares of common stock at
$0.30 per share. The purchase price of $0.30, previously agreed upon and
approved by the Board of Directors, was discounted approximately 20% as part of
the June 2005 Equity Placement Offering, wherein these five investors funded 50%
of their total predetermined contribution at that time. The 2005 funds were
contributed with the understanding that the 50% balance of investment would be
priced at the same purchase price as the initial

On September 14, 2006, the Company issued a confidential private placement
offering, with a purchase price of $0.70 per share of common stock. Each four
shares purchased will entitle the purchaser to receive common stock purchase
warrants to purchase one share of common stock at an exercise price of $1.25 on
or prior to October 1, 2011. As of December 31, 2006, the Company had received
gross proceeds of approximately $1.357 million for an aggregate of 1,938,570
shares of common stock.

In June 2007, the Company received cash proceeds of $975,000 from an accredited
investor for the purchase of 1,300,000 shares of common stock at $0.75 per share
as part of a private offering.

In August 2007, the Company converted $500,000 previously received in the form
of advances into purchases of 714,286 shares of common stock at $0.70 per share.


                                       48
<PAGE>

13. WARRANTS

At December 31, 2007 and 2006, 1,869,643 and 1,594,643 shares, respectively, of
common stock have been reserved for issuance under outstanding warrants. All of
the warrants are fully vested and have expiration dates ranging from March 28,
2007 to December 19, 2016. Information concerning the Company's warrant activity
is as follows:

<TABLE>
<CAPTION>
                                                       2007                2006
                                              -------------------  ------------------
                                                  WEIGHTED AVERAGE    WEIGHTED AVERAGE
                                                      EXERCISE            EXERCISE
                                              -------------------  ------------------
                                               OPTIONS      PRICE  OPTIONS      PRICE
                                              ---------     -----  ---------    -----
<S>                                           <C>           <C>      <C>        <C>
Outstanding, at the beginning of year         1,589,643     $ .99    955,000    $1.53
     Granted                                    380,000     $1.25    634,643     1.25
     Exercised                                       --        --         --       --
     Expired                                    100,000      4.05         --       --
                                              ---------     -----  ---------    -----
Outstanding, at the end of year               1,869,643     $1.25  1,589,643    $ .99
                                              =========     =====  =========    =====
</TABLE>

In consideration of the stockholder loan agreement (Item 12), the Company has
granted the stockholder a total of 475,000 common stock purchase warrants at an
exercise price equal to the closing market price of the Company's stock on the
dates of grant. On March 28, 2002, the Company recorded a deferred charge of
$318,000. The deferred charge was initially amortized over the commitment period
and subsequently revised to include the repayment period, as amended. During the
years ended December 31, 2007 and 2006, the Company had amortized approximately
$6,000 and $29,000 of such costs, respectively, which are included in interest
expense in the accompanying consolidated statements of operations.

On March 14, 2003, the Company recorded a deferred charge of $212,500. The
deferred charge is being amortized over the repayment period of 21.5 months.
During the years ended December 31, 2007 and 2006, the Company had amortized
approximately $4,000 and $79,000 respectively, which is included in interest
expense in the accompanying 2005 consolidated statement of operations.

On December 15, 2004, the Company extended the life of a director's warrants by
one year. The expiration date of the warrant was extended from December 2004 to
December 2005. The fair value of the modified warrant was estimated at the date
of grant using a Black-Scholes option pricing model and the difference in the
fair value of the old award and the new award was estimated to be $20,000.

During June and July 2005, the Company received cash proceeds of 1.48 million
from the sale of 4,820,664 shares of common stock from a private placement
offering. The funds were used for corporate purposes and to reduce the
outstanding principle balance of the notes payable to stockholder. Additionally,
warrants in the amount of 400,000 and 80,000 were offered to two separate
participants in the private placement at a price of $0.80 per each share of
common stock with an exercise date of June 17, 2006, and an expiration date of
June 17, 2008. During 2006 and 2005, respectively, the Company recorded an
expense of $66,492 and $79,908.

As part of the September 14, 2006 private placement offering, the Company
granted to investors 643,643 warrants to purchase one share of common stock at
an exercise price of $1.25 on or prior to October 1, 2011.

In June 2007, the Company received cash proceeds of $975,000 from an accredited
investor for the purchase of 1,300,000 shares of common stock at $0.75 per share
as part of a private offering. As part of the offering, the Company awarded
380,000 warrants to purchase one share of common stock at an exercise price of
$1.25 on or prior to August 23, 2017.

14. MAJOR CUSTOMERS

During 2007 and 2006, two customers together accounted for approximately 44% and
39%, respectively, of the Company's net sales. In 2007, there were two customers
that individually accounted for greater than 10% of net sales, or approximately
$791,000 and $570,000, while in 2006 there were two customers that individually
accounted for greater than 10% of net sales, or approximately $769,000 and
$417,000. There were five customers at December 31, 2007, whose trade receivable
balances equaled or exceeded 5% of total receivables, representing approximately
24%, 10%, 8%, 8% and 7% respectively, of total accounts receivable. The loss of
business from one or a combination of the Company's significant customers could
adversely affect its operations.


                                       49
<PAGE>

15. GEOGRAPHIC INFORMATION

The Company has two lines of product, which it manufactures and distributes from
its locations in the United States and the United Kingdom. Information with
respect to sales activity and long-lived assets (consisting entirely of property
and equipment) in the United States and United Kingdom is as follows:

                                      YEAR ENDED DECEMBER 31
                                     ------------------------
                                        2007          2006
                                     ----------    ----------
        Net sales:
          United States              $1,873,017    $2,266,816
          United Kingdom              1,209,856       806,131
                                     ----------    ----------
                                     $3,082,873    $3,072,947
                                     ==========    ==========

        Long-lived assets by area:
         United States               $  153,139
         United Kingdom                   9,699
                                     ----------
                                     $  162,838
                                     ==========

16. SUBSEQUENT EVENTS

In February 2008, the Company received cash proceeds of $324,000 from an
accredited investor for the purchase of 900,000 shares of common stock at $0.36
per share. As part of the offering, the Company awarded 225,000 warrants to
purchase one share of common stock at an exercise price of $1.25 on or prior to
February 5, 2018. This same investor had previously purchased 1.3 million shares
of common stock in a June 2007 private offering priced at $0.75 per share,
bringing the total shares of Puradyn common stock purchased by this investor to
2,200,000.

On February 18, 2008, the Company entered into a Master Distributor Agreement
with Filter Solutions Ltd (FSL), whereby FSL assumes distributorship for the
United Kingdom, Mainland Europe and Ireland. The contract contains minimum
purchase requirements and shall have an initial term of five years. The Company
expects that under this agreement FSL will absorb the majority of expenses
attributable to the Puradyn, Ltd United Kingdom office.

On March 7, 2008, the repayment date of the stockholder loan was extended from
December 31, 2008 to December 31, 2009.

During the quarter ending March 31, 2008, the Company received shareholder loans
totaling $420,000.

On March 24, 2008, the Company converted $420,000 previously received in the
form of advances into purchases of 1,200,000 shares of common stock at $0.35 per
share. The purchases resulted in the issuance of 300,000 warrants to purchase
one share of common stock at an exercise price of $1.25 on or prior to March 19,
2013.

On March 26, 2008, the Company converted $100,000 received in the form of
advance into the purchase of 285,714 shares of common stock at $.35 per share
and the issuance of 71,429 warrants to purchase one share of common stock at an
exercise price of $1.25 on or prior to March 20, 2013.


                                       50