U.S. SECURITIES AND EXCHANGE COMMISSION
                              WASHINGTON D.C. 20549
                                   FORM 10-KSB
(Mark one)
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
    1934

                   For the fiscal year ended December 31, 1998

[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
    OF 1934 (No Fee Required)

         For the transition period from ______________ to ______________
                         Commission file number 0-29192

       Puradyn Filter Technologies, Incorporated (formerly T/F Purifiner, Inc.)
--------------------------------------------------------------------------------
                 (Name of small business issuer in its charter)

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

3020 High Ridge Road, Suite 100, Boynton Beach, Florida           33426
--------------------------------------------------------     ------------------
(Address of principal executive offices)                       (Zip Code)

Issuer's telephone number (561) - 547-9499

Securities registered under Section 12(b) of the Exchange Act:

    Title of each class               Name of each exchange on which registered

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

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

Securities registered under Section 12(g) of the Exchange Act:

                          Common Stock, $.001 par value
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                                (Title of class)

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                                (Title of class)

Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act 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 the 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 ]

State issuer's revenues for its most recent fiscal year.  $708,028

State the aggregate market value of the voting stock held by non-affiliates
computed by reference to the price at which the stock was sold, or the average
bid and asked prices of such stock, as of a specified date within the past 60
days.

Common stock, par value $.001 per share ("Common Stock"), was the only class of
voting stock of the Registrant outstanding on March 19, 1999. Based on the
closing price of the Common Stock quoted on the OTC Bulletin Board as reported
on March 19, 1999 ($.8125), the aggregate market value of the 1,700,520 shares
of the Common Stock held by the persons other than officers, directors and
persons known to the Registrant to be the beneficial owner (as that term is
defined under the rules of the Securities and Exchange Commission) of more than
five percent of the Common Stock on that date was approximately $1,381,000. By
the foregoing statements, the Registrant does not intend to imply that any of
these officers, directors or beneficial owners are affiliates of the Registrant
or that the aggregate market value, as computed pursuant to rules of the
Securities and Exchange Commission, is in any way indicative of the amount which
could be obtained for such shares of Common Stock.

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<PAGE>

                         (ISSUERS INVOLVED IN BANKRUPTCY
                     PROCEEDINGS DURING THE PAST FIVE YEARS)

Check whether the issuer has filed all documents and reports required to be
filed by Section12, 13 or 15(d) of the Exchange Act after the distribution of
securities under a plan confirmed by a court. Yes _____ No _____

                   (APPLICABLE ONLY TO CORPORATE REGISTRANTS)

State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date: March 19, 1999: 5,223,493.

This report contains a total of 67 pages.


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<PAGE>
                                     PART I

The term "Company" refers to Puradyn Filter Technologies, Incorporated (formerly
known as T/F Purifiner, Inc.) and T/F Systems, Inc., as described more fully
below, unless the context otherwise implies.


ITEM 1.    DESCRIPTION OF BUSINESS
           -----------------------

         Other than historical and factual statements, the matters and items
discussed in this Annual Report on Form 10K-SB are forward-looking statements
that involve risks and uncertainties. Actual results of the Company may differ
materially from the results discussed in the forward-looking statements. Certain
factors that could contribute to such differences are discussed with the
forward-looking statements throughout this report.

Recent Events and Strategy
--------------------------

         In late March 1998, several key employees and Directors were either
terminated or resigned from their positions with the Company. These individuals
included the Company's Executive Officer, who was also a Director, Vice
Presidents of Sales and Marketing, and Technology, its Controller and two
members of the Board of Directors. The Company's Board of Directors is now
comprised of Richard C. Ford, the Chairman, and Alan J. Sandler, President of
the Company.

         At or about the same time, the Company curtailed its operations and
reduced its remaining workforce to key personnel. These actions were taken for a
number of reasons, but primarily to reduce the amount of cash required to
maintain operations of the Company. Richard C. Ford, a shareholder and Chairman
of the Board of Directors of the Company, loaned the Company $150,000 in May and
June, 1998. In August, 1998, the Company entered into a Revolving Note
Agreement, guaranteed by Mr. Ford, with its bank for $250,000 which was revised
in January, 1999, to $350,000. In March, 1999, Mr. Ford agreed to guarantee an
addition of $175,000 to the bank Revolving Note Agreement. The Company believes
it needs additional financing and continues to seek sources of such additional
financing. There can be no assurance that such financing or other alternatives,
such as selling the Company, will be accomplished. Without further financing it
is unlikely that the Company will be able to sustain operations.

         At December 31, 1998, the Company had approximately $497,000 in current
liabilities to various trade and other creditors. Many of these creditors
continue to provide services to the company or have indicated a willingness to
restructure the payment of these obligations or defer for the current time
payment of these obligations. However, one creditor, who claims to be owed
approximately $72,000, has initiated suit against the Company which the Company
is seeking to defend, in part, on what is believed to be excessive charges
alleged by this creditor. At January 31, 1999, the Company failed to make a
scheduled installment payment of $105,512 on a note payable to a former
shareholder. The note holder declared the note agreement to be in default and
claimed immediate payment of the balance due totaling $294,756. There can be no

                                       3
<PAGE>

assurances that trade creditors will continue to provide service to the Company
or that other creditors and debt holders will refrain from initiating lawsuits
against the Company in the future.

         As the Purifiner has had limited acceptance in the marketplace, the
Company's strategy has been to obtain product credibility by disproving the
long-held conviction that oil must be changed regularly in accordance with
manufacturers' recommended guidelines. Gradually, the credibility of the
Purifiner and the concept of extended oil replacement intervals is becoming more
readily accepted. The Company believes that this increasing acceptance is due to
successful third-party testing of the product, awards and other recognition the
Purifiner has received and the increased awareness of consumers as well as
vehicle, engine and oil companies that oil, if kept continually clean, will have
a significantly longer, useful life resulting in significant cost and
environmental benefits. As an example, the Company recently obtained the results
from Vulcan Chemicals, a division of Vulcan Materials Company, a customer whose
truck equipped with the Company's Purifiner traveled 616,000 miles without an
oil change and whose engine parts showed no appreciable wear over that period.
The oil report showed all measurement levels to be normal.

         The Company is currently working with certain original equipment
manufacturers ("OEM's") to enable them to evaluate the benefits of the Purifiner
with the goal of obtaining their approval of the Purifiner and eventually to
install the Purifiner on their products at their factories under either the
Purifiner brand or a private label name, and distribute the product throughout
their dealer networks (See "Marketing"). These OEM's are mindful of the
significant competitive benefits of extended drain intervals and the
environmental and related regulatory considerations of the use of an oil
purification system such as the Purifiner.

         Currently, the Company is refocusing its new distribution network and
direct sales activities, primarily in the heavy-duty truck marketplace,
primarily in the United States, although it does have some international
distributors to which it allocates limited amounts of resources. The Company
also formed a foreign joint venture effective January 1, 1996, to market the
Purifiner through Europe, the Middle East, the former Soviet Union, Egypt, and
South Africa. (See "Distribution" for recent events related to this joint
venture). In the future, the Company plans to expand its distribution channels
worldwide, as well as the number of market segments on which it focuses.

         The Company had employed direct sales personnel to help establish and
service its aftermarket distributors and to directly sell its products to
certain major national accounts. Additionally, the Company employed technical
and installation personnel to assist customers in analyzing the benefits of the
Purifiner through oil analysis, as well as answering technical questions and
assisting with the training and installation on the use of the Purifiner. In the
future, the Company may also consider additional joint ventures to manufacture
and/or market its products in various parts of the world.

                                       4
<PAGE>

         The Company believes that business, economic, competitive,
environmental and governmental factors are now converging to provide fertile and
opportunistic conditions for achieving profitable business outcomes. One such
example of a noteworthy development was a video the company commissioned in
mid-December 1998 of an engine teardown of a Vulcan Chemicals Company truck with
an M-11 Cummins engine equipped with a Purifiner filter unit that went 616,000
miles without a single oil change. The engine wear and oil analysis reports
stated the engine parts and oil were well within specifications and normal.
Because the content of this video provides validation and assurance of the
Purifiner's benefits to end-users, it has been a catalyst for establishing sales
opportunities with numerous prospects since the beginning of 1999, and the
Company believes it will also assist in the search for long term financing
commitments from institutions or investor groups. The Company has developed an
in-depth business plan and renewed its comprehensive search for such financing.

         Management believes the favorable response from potential customers
will result in improved sales in 1999, however, there can be no assurance such
improvements will occur. Also, there can be no assurance that the Company will
be able to successfully implement its strategies. Furthermore, management
believes it will need additional financing in 1999. In the absence of obtaining
sufficient additional financing, increasing revenues, and cooperation from trade
vendors and debt holders, the Company may be unable to sustain operations.

Risk Factors
------------

Potentialfor Continuing Losses; Accumulated Deficit; Explanatory Paragraph in
Independent Auditors' Report

         Prior to 1993, the Company was engaged in limited sales activities.
Consequently, the Company has had a limited operating history upon which an
evaluation of the Company's prospects and performance can be made. The Company's
prospects must be considered in light of risks, expenses, difficulties and
delays frequently encountered in connection with the formation and early phase
of operation of a new business, the development and commercialization of new
products based on innovative technology and the high level of competition in the
industry in which the Company operates. The Company has had significant losses
in each year of its operations. In addition, the Company has an accumulated
deficit, which amounted to approximately $10,876,000 as of December 31, 1998. It
is likely that significant losses will continue until such time, if ever, as the
Company is able to generate a level of revenue sufficient of offset these
continuing early-phase expenditures. There can be no assurance that the Company
will be able to successfully implement its business strategy, that its revenues
will increase in the future or that it will ever be able to achieve profitable
operations.

         The Company's independent auditors have included an explanatory
paragraph in their report on the Company's financial statements stating that the
Company's recurring operating losses and negative cash flows from operating
activities raise substantial doubt about its ability to continue as a going
concern.

                                       5
<PAGE>

Dependence on Significant Customers

         During 1998, eighteen of the Company's customers accounted for
approximately 50% of the Company's revenues, and one customer accounted for 10%
of the Company's revenues. Termination of the arrangements with any of these
significant customers could have a material adverse effect on the Company's
financial condition or operations. There can be no assurance that the Company
will retain any or all of these customers or, if such customers are not
retained, that the Company would be able to attract and retain new customers to
replace the revenues currently generated by these significant customers.

Uncertainty of Product and Technology Development; Technological Factors

         The Company has not completed development and testing of certain of its
proposed products and proposed enhancements to its products, some of which are
still in the planning stage or in relatively early stages of development. The
Company's success will depend in part upon the ability of its proposed products
to meet targeted performance and cost objectives, and will also depend upon
their timely introduction into the marketplace. The Company will be required to
commit considerable time, effort and resources to finalize development of its
proposed products and product enhancements. Although the Company anticipates
that the development of its products and technology will be successfully
concluded, its product development efforts are subject to all of the risks
inherent in the development of new products and technology (including
unanticipated delays, expenses and difficulties, as well as the possible
insufficiency of funding to complete development). There can be no assurance as
to when, or whether, such product development efforts will be successfully
completed. In addition, there can be no assurance that the Company's products
will satisfactorily perform the functions for which they are designed, that they
will meet applicable price or performance objectives or that unanticipated
technical or other problems will not occur which would result in increased costs
or material delays in their development. There can be no assurance that, despite
testing by the Company and by current and potential end users, problems will not
be found in new products after the commencement of commercial shipments,
resulting in loss of or delay in market acceptance.

Limited Marketing Activity; Uncertainty of Market Acceptance

         The Company has only recently commenced limited marketing and sales
activities relating to its products and has limited financial, personnel and
other resources to undertake extensive marketing, sales and advertising
activities. To date, the Company has generated limited revenues from the sale of
its products, which have achieved only limited market acceptance. Demand for the
Company's products and the Company's proposed products will depend principally
upon consumer demand for the Purifiner. 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 consumers
of the benefits and cost advantages of its products and achieve name
recognition. There can be no assurance that the Company will be able to
penetrate existing markets on a wide scale basis or position its products to
appeal to mainstream consumer markets or that any marketing efforts undertaken
by the Company will result in increased demand for or market acceptance of the
Company's existing and proposed products. The Company relies, and intends to
continue to rely, in part, on arrangements with third parties for the marketing

                                       6
<PAGE>

of its products, including arrangements with distributors and other strategic
partners. There can be no assurance that they or the company will be able to
successfully market the Company's products or that their efforts will result in
any significant increase in revenues.

Dependence on Suppliers

         A substantial portion of the Company's products' component parts are
manufactured by various suppliers for assembly by the Company. The Company
believes its relationships with its suppliers are satisfactory and that
alternative suppliers are available if relationships falter or existing
suppliers are unable to keep up with the Company's requirements. However, there
can be no assurance that the Company's current or future suppliers will be able
to meet the Company's requirements on commercially reasonable terms or within
scheduled delivery times. An interruption of the Company's arrangements with
suppliers could cause a delay in the production of the Company's products for
timely delivery to distributors and customers. The absence of suitable
manufacturing arrangements would have a material adverse effect on the Company's
operations.

Dependence on Distributors

         The Company currently sells a portion of its products through
distributors for resale to other distributors or customers, and is dependent to
some extent upon acceptance of its products by such distributors, customers and
their active marketing and distribution efforts relating to the Company's
products. Most of the distributors to whom the Company sells it products,
including those that are contractually obligated to purchase the Company's
products in order to maintain their distribution territories, could discontinue
carrying the Company's products at any time. Due to increasing competition,
distributors are increasingly in a stronger position to negotiate favorable
terms of sale, including price discounts and product return policies. There can
be no assurance that the Company will be able to increase or maintain its
distribution, and as a result, the Company's operating results could be
adversely affected.

Competition; Technological Obsolescence

         Although there is limited competition in the electric mobile oil
purification system market, the market for full-flow oil filters, in general,
and by-pass oil filters, in particular, is characterized by intense competition.
To the extent that the Company's products reduce oil consumption, full-flow oil
filter sales and disposal costs and extend engine life, the Company's products
compete with, or affect the sales of, many well established companies. These
companies have substantially greater financial, technical, personnel and other
resources than the Company and have established reputations for success in the
development, licensing and sale of their products and technology. Certain of
these competitors have the financial resources necessary to enable them to
withstand substantial price competition or downturns in their markets. In
addition, certain companies may be expected to develop technologies or products
which may be functionally similar to some or all of those being developed by the

                                       7
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Company. Industry standards with respect to the markets for the technology and
products being developed by the Company may be characterized as evolving, which
often results in product obsolescence or short product life cycles. Accordingly,
the ability of the Company to compete will depend on its ability to complete
development and introduce into the marketplace in a timely manner its proposed
products and technology, to continually enhance and improve such products and
technology, to adapt its proposed products to be compatible with specific
products manufactured by others, and to successfully develop and market new
products and technology. There can be no assurance that the Company will be able
to compete successfully, that its competitors or future competitors will not
develop technologies or products that render the Company's products and
technology obsolete or less marketable or that the Company will be able to
successfully enhance its proposed products or technology or adapt them
satisfactorily.

Dependence on Key Personnel

         The success of the Company will be largely dependent on the efforts of
the members of the management of the Company. The Company has not as yet entered
into employment agreements with various members of the management of the
Company, and there can be no assurance that such persons will continue their
employment with the Company. The loss of the services of one or more of such key
personnel would have a material adverse effect on the Company's ability to
maximize its use of its products and technologies or to develop related products
and technologies. The success of the Company also in dependent upon its ability
to hire and retain additional qualified executive, engineering and marketing
personnel. There can be no assurance that the Company will be able to hire or
retain such necessary personnel. The Company does not presently have "key man"
life insurance with respect to members of its management.

Product Concentration

         Although the Company has taken steps to broaden its product offerings,
sales of the Purifiner and related products and enhancements are expected to
continue to account for a substantial portion of the Company's sales for the
foreseeable future. Future growth will depend upon acceptance of the Purifiner
by a broader group of customers. Failure to achieve broader acceptance would
have a material adverse effect on the Company's financial condition and results
of operations. In addition, any factors adversely affecting the Purifiner, such
as the introduction of superior products or shifts in the needs of the
marketplace, would have a material adverse effect on the Company's financial
condition and results of operations.

Significant Outstanding Payables

         At December 31, 1998, the Company owed approximately $497,000 in
current liabilities to various trade creditors. The inability to obtain credit
on commercially reasonable terms, or at all, resulting in an interruption of
supplies or services, would have a material adverse effect on the Company's
operations.

                                       8
<PAGE>

Risks Associated With Proposed International Operations and International
Distribution

         The Company may enter joint ventures with foreign partners, and the
Company has already entered into one joint venture at this time. Although there
can be no assurances that this will occur on a large scale, if they were to
occur, such operations would be 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 and political and economic instability.
Additionally, the protection of intellectual property of the Company may be more
difficult to enforce outside of the United States. In the event that the Company
is successful in expanding its international operations, the imposition of
exchange or price controls or other restrictions on foreign currencies could
materially affect the Company's business, operating results and financial
condition.

         Part of the company's sales are made through distributors in foreign
countries. Sales through these distribution channels are also subject to a
number of risks, including unexpected changes in regulatory requirements, import
and export restrictions and tariffs, and currency fluctuations and political and
economic instability.

Product Protection, Expiration of Patents and Patents Pending Infringement

         The Company's success is heavily dependent upon its proprietary
technology. The Company relies on a combination of contractual rights, patents,
trade secrets, trademarks, non-disclosure agreements and technical measures to
establish and protect its proprietary rights.

         There can be no assurance that the steps taken by the Company to
protect its proprietary rights will be adequate to prevent misappropriation of
the technology or independent development by others of products with features
based upon, or otherwise similar to, those of the Company's products. In
addition, although the Company believes that its technology has been
independently developed and does not infringe on the proprietary rights of
others, there can be no assurance that the Company's technology does not and
will not so infringe or that third parties will not assert infringement claims
against the Company in the future. In the case of infringement, the Company
would, under certain circumstances, be required to modify its products or obtain
a license. There can be no assurance that the Company would be able to do either
in a timely manner or upon acceptable terms and conditions, and such failure
could have a material adverse effect on the Company. In addition, there can be
no assurance that the Company will have the resources to defend a patent
infringement or other proprietary rights infringement action.

         One patent licensed by the Company expired in September 1998 and the
other patent under this license, used in a small number of the Company's
products, will expire in June, 2008. The Company has patents for a redesigned
Purifiner, the basis for the next generation of the Purifiner products, and the
TFP Filter Plus which have been issued in the United States and certain other
foreign countries in 1997, a U.S. patent for its new oil flow meter and a U.S.
patent issued in 1998 on another method of introducing additives into the oil.

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<PAGE>

These patents expire from May, 2014 to October, 2016. There can be no assurance
that such patents withstand competitive threats to their patentability or, in
the case of the redesigned Purifiner, be developed into commercially viable
products. The expiration of these patents may have an adverse competitive effect
on the Company and there can be no assurance that the patents pending for these
new products in various foreign countries will be issued or that they will
provide meaningful proprietary protection.

Possible Fluctuations in Operating Results

         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, distributors and other strategic partners, 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. Consequently, the Company's
product revenues may vary significantly by quarter, and the Company's operating
results may experience significant fluctuations.

Limited Market for the Company's Securities

         There is currently only a limited trading market for the Common Stock
of the Company. The Common Stock of the Company trades on the OTC Bulletin Board
under the symbol "PFTI", which is a limited market and subject to substantial
restrictions and limitations in comparison to the NASDAQ System. While the
Company expects to apply for inclusion of its Common Stock on NASDAQ (Small Cap)
at such time as its securities comply with applicable criteria for inclusion,
there can be no assurance the Company's Common Stock will ever qualify for
inclusion within the NASDAQ System or that more than a limited market will ever
develop for its Common Stock.

Certain Legal Proceedings

         Certain legal matters that may present risks to the Company relating to
patent infringements, license agreements and other claims can be found below in
"Item 3, Legal Proceedings".


Introduction
------------

         The Company owns the rights to manufacture, market and distribute
worldwide the Purifiner(R), a bypass oil purification system for use with
substantially all internal combustion engines, generators and other types of
equipment that use lubricating oil. The Purifiner cleans oil by continually
removing solid and liquid contaminants from the oil through a sophisticated and
unique filtration and evaporation process. The Purifiner has been used
successfully to substantially extend oil-drain intervals and to extend the time
between engine overhauls to up to three times longer than traditional intervals.
The Company also manufactures (with one exception) and sells disposable
replacement filter elements ("Elements") for the Purifiner.

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<PAGE>

         By keeping the oil continually clean, the Purifiner effectively extends
engine life and dramatically reduces new oil purchases as well as maintenance
time and the costs and environmental concerns involved in the storage and
disposal of waste oil. In addition, according to customer statements, extensive
testing done by Southwest Research Institute (an independent third party testing
laboratory) on an improved heavy duty engine oil that supports improved fuel
efficiency from the use of this new oil, and the growing industry recognition
that operating an engine with cleaner oil will reduce engine energy losses due
to friction, wear, and oil viscosity fluctuations, the Company believes that end
users will experience improved fuel economy.

Background and Formation of Puradyn Filter Technologies, Incorporated
---------------------------------------------------------------------

         The patents issued on the oil purification system that, after further
development, has evolved into the current Purifiner units, were issued in the
early 1980's. The owners of such patents attempted to market and sell the
original system under various other tradenames, but were not successful. The
factors to which that could be attributed, include (a) the failure of potential
customers to understand the importance or possibility of continually clean oil
and belief that extended drain interval could be practical; (b) lack of consumer
awareness of the importance of the environmental benefits inherent in the
Purifiner; (c) the absence of acceptance and endorsement by engine and vehicle
manufacturers; (d) general disbelief that the product would perform as claimed
and could provide benefits in a cost-effective manner; (e) inadequate
capitalization, and (f) limited management experience.

        In 1987, T/F Systems, Inc., a Delaware corporation ("Systems") , of
which Richard C. Ford and Willard H. Taylor (deceased) were equal stockholders,
obtained certain limited distribution rights to the Purifiner in several states
from Refineco Manufacturing Company, Inc. ("Refineco"), then located in Oakland
Park, Florida (Byron Lefebvre, currently an employee of the Company, was then
the President of Refineco). In 1988, Systems obtained an option to acquire the
exclusive manufacturing and marketing rights to the Purifiner in the event
Refineco, and subsequently, Purifiner Distribution Corporation of Chicago,
Illinois, were unable to meet their commitments to supply Purifiners to Systems.
As a result of a default, and a failure of the manufacturer to meet this supply
commitment, Systems obtained the worldwide manufacturing and marketing rights to
the Purifiner in 1990.

         In February 1988, Puradyn Filter Technologies, Incorporated (formerly
T/F Purifiner, Inc.) was incorporated in Delaware under the name "Econology
Systems, Inc." On October 16, 1990, the name was changed to "T/F Purifiner,
Inc." The Company was inactive until 1991, when it obtained the distribution and
marketing rights to the Purifiner by virtue of an assignment from Systems (at
the time owned equally by Messrs. Ford and Taylor). However, System's ownership
of the rights to the Purifiner were contested in court by other third parties
who were also manufacturing and marketing a device similar to the Purifiner and
using the Purifiner trademark. Eventually, the court ruled in favor of Systems
with respect to its manufacturing and marketing rights, and in May 1993 all
appeals by the other parties were exhausted. During the period of this

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litigation, the Company continued to market the Purifiner, but success was
limited due to various factors including the pending litigation and the actions
by these other parties in the marketplace.

         Prior to December 31, 1995, Puradyn Filter Technologies, Incorporated
("Puradyn"), was the exclusive distributor and Systems was the exclusive
manufacturer of the Purifiner. On December 31, 1995, in exchange for any claims
Puradyn had in the delay damage award, Puradyn purchased all operating assets
and assumed all operating liabilities of Systems, except for (a) any benefits
and/or liabilities related to a delay damage judgment awarded in December 1994
against the other parties discussed above, and (b) liabilities related to
certain stockholder advances made to Systems by Ford and Taylor. Accordingly,
Puradyn currently owns all manufacturing and marketing rights previously owned
by Systems.

         Prior to Mr. Taylor's death in May 1993, Mr. Taylor and Mr. Ford had
each contributed equal amounts of working capital to the Company and each owned
50% of the issued and outstanding capital stock. Following Mr. Taylor's death,
despite Mr. Ford's subsequent investments in the Company, the business
activities and growth of the Company had been hampered by, among other things,
insufficient capital. Commencing in early 1996 through January 1998, the Company
has raised net proceeds of approximately $6.6 million through the issuance of
debt or equity securities to finance its operations. The Company is continuing
to incur operating losses, which has resulted in cash flow difficulties and the
continuing need for additional financing. The inability of the Company to obtain
adequate financing when needed, will have a material adverse effect on the
Company, including requiring the Company to significantly curtail or cease its
operations.

         On February 4, 1998, the Company filed a Certificate of Amendment to
its Certificate of Incorporation which changed its name from T/F Purifiner, Inc.
to Puradyn Filter Technologies Incorporated.

Products
--------

         The Purifiner Oil Purification System dramatically extends the life of
lubricating oil in gas and diesel engines as well as hydraulic fluid used in
industrial machinery. The core product, the Purifiner, can be attached to any
engine. In essence, it works like a dialysis machine that filters blood to rid
it of impurities, so it keeps the oil in engines continually clean. Whenever the
engine or machinery is operating, the Purifiner is extracting from the oil solid
particles down to less than one micron (1/39 millionth of an inch), as well as
liquid contaminants (water, fuel and antifreeze). As the Purifiner dramatically
extends the useful life of the oil, it also protects engines from the harmful
wear caused by contaminants in oil. As dirty, damaging oil does not come in
contact with the engine, the result is less down time for maintenance and longer
engine life. Further, not only are oil purchases drastically reduced, but as
used hydraulic fluids are recovered and no waste oil is generated, the need for
and cost of disposal decline dramatically.

                                       12
<PAGE>

         Thus, the Purifiner reduces maintenance costs by decreasing oil
consumption, engine wear, increased fuel economy, and the necessity for
overhauls and certain other types of general maintenance. All these savings are
achieved from utilizing the Purifiner which has a relatively short payback
period, which in some cases is less than one year. Accordingly, the Purifiner
achieves great savings and, therefore, increased profits for its end users.

         The Purifiner is manufactured in six different sizes suitable for
placement on engines or equipment with oil sump capacities ranging from 5 to 240
quarts. The Purifiner also can be used in multiples for larger oil sumps.
Qualified personnel can usually install the Purifiner on engines and other
equipment in approximately 1 1/2 to 2 hours.

         The Company also has developed and sells a Hydraulic Batch System
("HBS") which is mounted on a hand cart for mobility. The HBS was developed to
clean 55-gallon drums of used hydraulic oils, which substantially reduces oil
purchases as well as the high costs of storing and disposing of used oil in
compliance with environmental regulations. The HBS consists primarily of two
60-quart Purifiners, a preheater, a pump and other miscellaneous parts.

         All Purifiners are compatible with virtually all standard and synthetic
oils on the market and they work with engines using gasoline, diesel, propane or
natural gas. Except for the HBS, the Purifiner cannot be used on engines without
a pressurized lubricating system, and neither can be used on an outboard boat
motor, which mixes oil with the fuel.

         The Purifiner consists of a canister that can be mounted on the
firewall, fender well, frame of a vehicle or on other convenient locations,
depending on the particular application. The canister inlet is connected either
to the engine's oil-pressure sending unit or, for hydraulic applications, a
pressure line. The outlet is connected to the sump. The canister houses the
Element and an evaporation chamber heated by an enclosed heating element. Under
pressure from the engine or equipment, engine oil enters the canister via a
metering jet that regulates the flow of oil to approximately three and six
gallons per hour, depending on the size of the Purifiner. The oil passes slowly
through the Element, where solid contaminants in the oil are trapped. The
Element includes compacted long-strand natural cotton fibers that retain solid
particles as small as approximately one micron. A conventional paper oil filter
will typically remove particles down to 15-30 microns. According to a paper
published by the Society of Automotive Engineers in its SAE Paper No. 660081,
dated January 1966, "filtering the used oil through a 5-micron filter did not
significantly reduce the wear rate; however, when the oil was filtered through a
1 micron filter, there was a significant reduction." The natural cotton
filtering media in the Element also absorbs water, traps sulfur and neutralizes
the acids which are left in the oil by conventional paper filters. The slow rate
at which the oil passes through the Element helps ensure maximum contaminant
retention.

         After filtration the oil flows slowly over the diffuser plate located
in the dry-heated evaporation chamber where it is heated to a temperature of
approximately 200 degrees Fahrenheit (slightly higher on the HBS model) to

                                       13
<PAGE>

enable the removal of the liquid contaminants including water, fuel and coolant.
The stainless steel heating element is sealed in aluminum and, for safety is,
completely isolated from direct contact with the oil. The liquid contaminants
are evaporated and then vented out of the Purifiner before they can recondense
in the oil. These gases and water vapor are vented back into the induction
system and are consumed in the combustion process or vented to atmosphere. (On
hydraulic applications, the water vapor is vented into the atmosphere.) The
cleaned oil then flows back to the hydraulic sump or engine crankcase via
gravity. These processes continue whenever the equipment or engine is operating.

         The Company also manufactures and distributes its replacement Elements
for the Purifiner with the exception of the TF8SP. The Company generally
recommends that the Element be replaced at the engine manufacturer's
recommended/approved periodic oil change interval (with one exception for one
model currently used for gasoline applications only, the Company generally
recommends that the Element be replaced every ten thousand miles or 250 hours
when used for gasoline powered automobiles and vans or as oil analysis
dictates). The Company recently introduced a U.S. patent approved oil-flow meter
which enables the user to visually confirm that the oil is flowing through the
Purifiner. The useful life of oil and the Element is dependent on several
factors, including the quality of the oil used, type of fuel, condition of
engine, and the type and operating environment of the equipment. Accordingly,
the change intervals mentioned above may vary. Elements can be changed and an
oil sample taken in approximately five to fifteen minutes by the customer.

        The Company estimates that the current cost of an oil and full
flow-filter change (assuming a person does not do the oil change himself or
herself) is approximately $100 or more for heavy duty trucks. The cost varies
depending on, among other things, the type of engine and application, labor and
oil costs, and costs of waste oil disposal. Depending on the size of the
Purifiner Element, the current suggested prices for retail end-users of the
Elements range from approximately $9.10-30.00 and the cost of an oil analysis
purchased through the Company currently costs approximately $8.50 per sample.

        The Company has recently received patents from the United States Patent
Office and certain other countries for a new Element (the "TFP Filter Plus"), in
which pelletized chemicals are added to the filtering media. The chemicals are
antioxidants which will reduce the amount of oxidation, stabilize the alkalinity
and further help reduce the acid build-up of the oil. This is especially
important on new engines built since enactment of the Clean Air Act of 1992,
which requires tighter specifications for diesel engines. As these engines
consume less oil, the amount of makeup oil that is added, which also replenishes
the consumed additives in older engines, has decreased. The TFP Filter Plus
helps compensate for this factor.

        When the Element is changed, make-up oil is added to replace any oil
retained in the used Element or consumed in the normal engine combustion
process. The Company's performance warranties for product used in the United
States and Canada requires the user to take a small sample of the used oil for
submission to an oil testing laboratory at the same intervals that the OEM

                                       14
<PAGE>

recommends/approves for an oil change, but at least once a year. (See
"Warranties.") The Purifiner has an oil sample valve to expedite the taking of
the oil sample. The current customer cost of testing an oil sample ranges up to
approximately $8.50. The cost of an oil sample may exceed $8.50 in certain
foreign countries.

         Users must maintain a record of the laboratory oil analysis results in
order for the Company's warranties to remain in effect. Management believes that
the risk of losing the Purifiner's warranties encourages customers to complete
the oil analysis and replace Elements in a timely manner, making the Purifiner
more effective and stimulating recurring Element sales. The oil analysis also
helps the Company monitor customer satisfaction, and should a problem arise with
a particular application, the Company and the customer can work together to
address the problem and find a solution on a timely basis. Finally, oil analysis
has been analogized to blood samples for humans, in that through proper analysis
other problems occurring within the engine or equipment, apart from oil
contamination, can be diagnosed and corrected before incurring significant
problems. To date, there have been no material warranty claims, although there
can be no assurances that such a trend will continue. Due to the sometimes
prohibitive cost of oil analyses and generally more frequent
recommended/approved oil change intervals for engines used in certain countries
outside the United States and Canada, primarily due to the poorer quality of oil
and fuel used, not all performance warranties for Purifiner products (whether
offered by the Company or by the Company's distributors) used outside the United
States and Canada require oil analyses at the OEM recommended/approved oil
change intervals.

         The Purifiner has no moving parts and consequently requires no
significant ongoing maintenance. The Purifiner has an in-line pre-strainer to
prevent the metering jet from becoming clogged by large contaminant particles.
As long as the Elements are changed at the recommended/approved intervals, and
other standard preventive maintenance procedures are performed, the Company
believes that the Purifiner will perform as designed. Purifiners used for
hydraulic applications do not require as frequent Element changes since
hydraulic oil applications typically do not contain the level of contaminants as
other oil applications. In order to maintain the Company's performance
warranties, users must, among other things, change the full flow filters once a
year or every 50,000 to 60,000 miles or 1500 hours, depending on the particular
application of the Purifiner. The cost of changing a full flow filter is part of
the cost of an oil change, as discussed above.

         The Company has received acknowledgments from Deere & Company, Detroit
Diesel Corporation, Caterpillar, Inc., Ford Motor Company, Mack Trucks, Inc.,
Cummins Engine Company, Inc., Chrysler Motors Corporation, Mercedes Benz of
North American, Inc. and others, who have all stated that the installation and
use of the Purifiner does not void their manufacturer's warranties. Most engine
manufacturers will accept oil analyses as alternatives to their recommended oil
change intervals. Management believes that the existence of other longer-life
oils in the marketplace which allow for extended oil drains has been and will
continue to exert continuing pressure on the use of oil analysis as an

                                       15
<PAGE>

acceptable alternative to engine manufacturer's recommended oil change
intervals, as will the cost, environmental and other benefits obtained from
extended oil drain intervals.

Marketing
---------

         The Company' s products are eventually expected to be marketed to
numerous market segments, including trucking, marine, agricultural, bus,
recreational vehicle, generator, construction, mining, industrial and hydraulic
applications, and other users of engines or equipment that utilize up to 50
weight oil for lubrication. Currently, the primary focus is on the on-highway
segment.

         To date, the Company has not expended any material amounts to advertise
its products in the marketplace and has relied upon editorials, trade shows and
other methods to promote its products. However, the Company has expended
material amounts in its selling efforts. Starting in 1994 and subsequently, the
Company's products have achieved recognition from well-known sources, including
(i) certification (in 1994) and recertification (in 1998) by the California
Environmental Protection Agency's Department of Toxic Substances as a "Pollution
Prevention Technology", (ii) receipt of the State of Florida' s 1995 Governor' s
New Product Award (Small Business Category), (iii) receipt of the National
Society of Professional Engineers 1996 New Product Award "for innovative use of
engineering principals and materials, improved function and savings in use and
benefit to the national economy" (Small Business Category) ; and (iv) receipt of
the World Trade Center's (Ft. Lauderdale, Florida) 1996 Award for Outstanding
Achievement in International Trade (Manufacturing) . Management believes that
such recognition has and will continue to enable the Company to increase the
credibility and acceptance of its products.

         In February 1996, the Purifiner gained the support of the American
Oceans Campaign ("AOC"), a not-for-profit organization devoted to ensuring the
earth's waters are kept free of contamination and pollution. Management believes
that the association with AOC and similar groups will be a cost-effective way to
promote the Purifiner and increase its sales. However, no assurance can be given
that such associations will be successful in promoting the Company's products.

         In April 1996, the Company made arrangements to help facilitate
retrofit sales of the product at the end user level through Leasing Services,
Incorporated ("LSI") , with principal offices located in Solana Beach,
California and Boston, Massachusetts, a national leasing company that will
provide lease financing to certain of the Company's users, subject to normal
credit considerations with respect to the user. Many customers have found the
up-front cost of purchasing the Purifiner to be prohibitive for large scale
retrofits. Lease financing will enable the user to immediately benefit from
reduced maintenance expenses and to pay for the Purifiner from such savings over
variable terms. The Company has no written agreement with LSI, receives no
consideration from LSI and merely provides its customers with LSI's brochure
which explains LSI's services.

         With this arrangement, the Company and its distributor network are able
to provide to its customers a complete product package that includes the
Purifiner, installation assistance and third party financing. Management

                                       16
<PAGE>

believes the ability to provide a turnkey program should provide the Company
with a competitive edge. However, no assurance can be given that this approach
will result in increased revenues to the Company and to date this arrangement
with LSI has not resulted in any material increase in revenues.

         The Company relies on management's ability to determine the existence
and extent of available markets for its product. Company management and
consultants had considerable sales and marketing backgrounds and devoted a
significant portion of their time to sales related activities. The Company has
marketed its products at various national trade shows, including the
International Truck Show in Las Vegas, Nevada, Mid-America Truck Show in
Louisville, Kentucky, the Maintenance Council Show in Nashville, Tennessee, the
ConAgra Show in Las Vegas, Nevada and others.

         Management believes that the ultimate success of its product will
depend on the approval of and sales directly to OEMs and through their
distribution networks. A number of international and domestic engine and truck
OEMs are currently evaluating the Company' s products, such as Mack Trucks,
Navistar, Peterbilt and Kenworth Trucks (trucks), and Detroit Diesel Corporation
(engines). There can be no assurance that these or other OEMs will accept the
Company's products for original placement on their equipment or directly approve
the use of the Purifiner with their equipment. To date, the Company's customers
have requested that the Purifiners be installed at a Volvo USA factory (North
Carolina), Navistar International factory and a Mack Truck factory on a very
limited number of vehicles.

Distribution
------------

         The Company currently distributes its products through several channels
under the Purifiner trademark. To date, purchasers of the Company's products
have included USF Dugan, Carroll's Foods, Cyprus Bagdad Corporation, Dade County
Schools, Fort Worth Carriers, Coca Cola Enterprises, Sysco Foods, Vulcan
Chemicals and others.

         The Company currently does not have written distribution agreements
with its smaller domestic and Canadian distributors, however the Company did
require these domestic and Canadian distributors to make an initial purchase of
a minimum dollar amount of the Company's Products. All distributors (domestic
and foreign) must pay in a timely fashion. With substantially all its
international distributors, the Company has entered into written distribution
agreements which typically memorialize the minimum dollar amount or units to be
purchased and the shipping terms.

         The Company has warehouse distributors located in the United States and
Canada, primarily in the heavy-duty trucking industry. The remaining
distributors are located primarily in South America, England (See
"Distribution") and the Far East. These distributors purchase product directly
from the Company and sell to their existing or new customers. Late in 1997, the
Company decided to curtail the use of substantially all U.S. manufacturers

                                       17
<PAGE>

representatives, except for one primarily industrial agent in the Mid-Central
U.S., whose job it was to establish and service warehouse distributors and
introduce the Company's products to selected fleets. These responsibilities are
now performed primarily by direct employees. The Company does utilize
manufacturers representatives in the recreational vehicle market, and in Canada,
to enable the Company's personnel to focus its efforts on the US on-highway
segment. The Company pays its manufacturer's representatives negotiated
commission rates, depending on the level of services provided. The
manufacturer's representative contracts can be canceled by either party on 30 to
60 days notice.

        During 1998, 18 customers accounted for approximately 50% of the
Company's net sales, and one customer accounted for approximately 10% of Company
net sales. There are no assurances that each or all of these customers will
continue to do business with the Company and the loss from one or a combination
of the Company's significant customers could have a material adverse affect on
the Company's revenues.

        TF Purifiner Ltd. Pursuant to a joint venture agreement (the "Centrax
Agreement") dated December 18, 1995 (but effective January 1, 1996), the Company
became a stockholder in TF Purifiner Ltd. ("Ltd."), an English company limited
by shares and formed under England's Company's Act 1985. The other stockholders
and parties to the agreement include Centrax, Ltd., the Barr family (the "Barr
Family" who includes Messrs. Richard H.H. Barr, C. Robert Barr, the Chief
Executive Officer of Centrax, and Richard A. Barr), and Albert N. Davies, of
Devon, England (who is not an affiliate of Centrax or the Barr Family). Centrax,
located in Devon, England, had sales of approximately $87 million for 1997 from
its worldwide activities in power generation and specialist aero-engine
components. The principal stockholders of Centrax include Richard H. H. Barr, C.
Robert Barr and Richard A. Barr (the Barr Family), who are also directors of
Centrax.

        Ltd.'s primary purpose is to market and establish distribution for the
Purifiner throughout Europe, the Middle East, the former Soviet Union, Egypt and
South Africa (the "Territory"). In this regard, the Company has granted to Ltd.
its rights under existing licenses, trademarks, and patents with respect to
existing products and its rights with respect to future products to allow for
the marketing and distribution of the products in the Territory. Ltd. also had
the option to manufacture the products based upon market acceptance and other
factors which it exercised in 1997.

         Puradyn owns approximately 45% of Ltd. and has a 50% voting interest,
however, the Board of Directors is controlled by Centrax representatives.
Forty-five (45%) percent is owned by Centrax and the remaining approximately 10%
is owned by Mr. Davies. Puradyn is not obligated to fund any of the operations
of Ltd. which, pursuant to the Centrax Agreement, may be provided (i) by
borrowings by Ltd. from a bank; (ii) from Centrax; or (iii) from the Barr
Family. Such borrowings or guarantees by the Barr Family or Centrax shall be
made until such time as Ltd. is self-funding. If the Barr Family does not fund
Ltd.'s operations, the Company has the right to take back Ltd.'s manufacturing,
marketing and distribution rights, as well as any patent and trademark rights

                                       18
<PAGE>

assigned or to be assigned to Ltd. by the Company for this Territory. To date,
Ltd. is negotiating to establish, and/or has established distributors or has
taken over the servicing of existing Company distributors in various countries,
including the United Kingdom, Italy, France, Turkey, the Czech and Slovak
Republics, Norway, Denmark, Bahrain, The Netherlands, Sweden, Hungary, Republic
of Ireland, Poland, Finland, Spain and Portugal. There can be no assurance that
such distributors will be successful in introducing the Purifiner 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. Further, there can be no assurance that Ltd's other 45% owner
(Centrax), which is responsible for the ultimate funding of Ltd., will continue
to fund Ltd.'s operations; discontinuing such funding could have a material
adverse effect on the Company's operations in this Territory. Ltd. has also
commenced or completed various Purifiner evaluation programs, including those on
a large United Kingdom ("U.K.") based fleet. This U.K. test was recommended by a
large international engine manufacturer and has been successfully completed,
however, this fleet has decided not to purchase the Purifiner, even though the
engine company has approved its use.

         Centrax has filed patents pending on a product consisting of a full
flow and bypass oil filter, all housed in one Purifiner unit, as well as a
side-by-side full-flow and Purifiner bypass filter design. These patent pending
products were designed primarily for original equipment placement by OEMs. The
Company is commencing to negotiate with Centrax regarding the
ownership/licensing of these pending patents and the rights to distribute these
products within and outside the Territory. There can be no assurance that such
negotiations can be successfully completed. The Company has the right to
distribute any new products developed by Ltd. everywhere other than the
Territory. Additionally, the Company is negotiating with Centrax concerning
other matters, including the possible discontinuation of the joint venture with
Centrax. The ultimate outcome of the negotiations cannot be determined at this
time.


Navistar International Dealers
------------------------------

         In 1995, the Company entered into aftermarket programs with Navistar in
the United States and Canada as part of its agreement to provide Navistar
dealers with the Company's product line. The aftermarket program has provided
the Company with the opportunity to be invited to participate in Navistar trade
fairs, but that program is not part of any written agreement between the Company
and Navistar. However, the Company's Products are included in Navistar's catalog
programs for the United States and for Canada which are sent to Navistar
dealers. Finally, the Company may be given the opportunity to participate in
advertising programs initiated by Navistar, but to date has only done so on a
limited basis in Canada. These aftermarket programs are administered by Navistar
and, to date, have not resulted in a significant number of new Navistar dealers
purchasing Product from the Company.

         Navistar is the first major truck manufacturer that has agreed to an
aftermarket program with the Company. Management plans to work with other truck
manufacturers, in addition to Navistar, to establish additional aftermarket
programs. No assurance can be made that such programs will be established or if

                                       19
<PAGE>

established that they will be successful. No assurance can be given that these
sales efforts will result in significant sales for the Company.

Sales
-----

        Direct Sales. The Company directly and/or with the assistance of its
manufacturer's representatives, warehouse distributors or other agents markets
its products directly to national accounts. Typically these larger customers,
and some smaller customers, have required an evaluation period, usually ranging
from three to twelve months, to ensure that the Company's products perform as
advertised. Management believes that this evaluation period will continue to be
shortened as the Company's products gain wider acceptance and support from
well-known customers and OEM's, such as Ford Motor Company, Perkins Engine
Company and others.

         Currently, the Company' s products are being evaluated by numerous
potential end users, including Ford Motor Co., Detroit Diesel, Mack Truck, Salem
Leasing, Kinsley Construction, McKee Foods Arlington ISD, USF Bestway, Edison
Chouset, Long Horn Idealease, City of Austin, HEB Grocer Co., Kirkland Crane,
Texas Department of Transportation, Silver State Disposal, Walmart and others.
There can be no assurance that such evaluations will be successful and, even if
successful, that they will result in sales for the Company.

         In July 1995, the Company's products were issued National Stocking
Numbers by the General Services Administration pursuant to a contract which
expired in June 1998. The Company is currently negotiating a new contract which
the Company expects to receive by July 1, 1999. The Company believes this will
enable the Company to more efficiently sell its products to the U.S. Government
and its agencies.

         Recent sales efforts by the Company have resulted in the following:
Contract negotiations with North Carolina and Florida school districts for
Puradyn unit installation to their buses; product purchases of approximately 400
units by Metro Dade County during 1999; a major waste hauler has given approval
for use of Puradyn units and has provided the Company with contacts for each of
its locations; negotiations are in process with an agency of a large state for
specification of Puradyn units as an option for their vehicles; a large truck
manufacturer has begun tests with Puradyn units; a major transit system in the
United States recently agreed to begin an extensive test of Puradyn units
lasting into 1999; a major utility (sixth largest in the United States) has
begun testing Puradyn units; a large metropolitan dairy has begun testing
Puradyn units; a major Canadian industry association has begun testing Puradyn
units for its members; and other numerous evaluations are in progress that
management feels should close during 1999.

         International Sales. The Company directly and/or with the assistance of
commission based manufacturer's representatives have primarily non-exclusive
distributors in various countries, including Australia, Thailand, Colombia,
Panama, Pakistan, China, Hong Kong, Brazil and other countries. The majority of
these distributorships were established in 1995 and later; therefore, the
ultimate success of these and the other distributors depends upon, among other

                                       20
<PAGE>

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.
The Company's sales to its Asia/Pacific distributors in 1998 was $14,000
($200,000 in 1997) and has been adversely affected by the weakened local
economies of these nations and future sales to these distributors are expected
to be adversely effected due to these continuing economic problems.
Additionally, sales to Ltd. in 1998 were only $4,000 versus $55,000 in 1997
which has decreased as a result of Ltd. commencing its own manufacturing
operation. Finally, sales to South America in 1998 amounted to $81,000 versus
$151,000 in 1997. Due to focus by the Company on the US marketplace and other
factors, it is anticipated that sales in this and other international regions
may be difficult to increase in 1999. See "TF Purifiner Ltd." There can be no
assurance that the Company's international distributors will be successful in
distributing the Company's products in their territories.

Manufacturing and Production.
----------------------------

         The Company subcontracts for the manufacture of component parts for its
Purifiners and manufactures substantially all of its Elements. The component
parts are assembled, packed and shipped from the Company's facility in Boynton
Beach, Florida.

         The Company currently single sources (i.e. purchases each raw material
and component part from a specific vendor) substantially all of its raw
materials and component parts from various vendors in the United States.
Substantially all the tools and dies used by certain of the Company's vendors
are owned by the Company. The Company believes that there are alternative
sources of supply, and the Company does not anticipate that the loss of any
single supplier would have a material long term adverse effect on its business,
operations or financial condition. However, as the Company is currently
experiencing cash difficulties, it is especially subject to the possibility, on
the short term, that a critical unpaid vendor will cease doing business with the
Company. Management intends, subsequent to obtaining sufficient financing and as
its volume of sales increase, to obtain additional tooling and dies and to
upgrade certain of its existing manufacturing equipment and may expand its
vendor network for the purpose of limiting its exposure to its single source
suppliers. However, there can be no assurances that its volume of sales will
increase or that such additional financing will be obtained or will be
obtainable, on terms that are in the best interest of the Company or its
stockholders. The Company is in the early process of implementing QS 9000 to
ensure that the Company's product quality will consistently meet the
requirements of the trucking and automotive industries.

Warranties.
----------

         The Purifiner carries a six-month performance warranty, and is
currently generally warranted to the original user to be free of defects in
material and workmanship for ten years (previously five years), except for the
heating element which is currently warranted for five years (previously two
years). The Company also offers limited 250,000-mile and 100,000-mile continuous
oil purification performance warranties for Class VII and VIII trucks in the
United States and Canada, limited performance warranties for recreational

                                       21
<PAGE>

vehicles, including a twelve-month performance warranty, and some limited
performance warranties with a specific industrial user. The Company maintains
$2,000,000 aggregate ($1,000,000 per occurrence) product liability insurance
coverage in both the US and certain foreign markets.

Competition.
-----------

         Although the Company believes it is the largest supplier of bypass oil
purification systems (see "Legal Proceedings - Premo Litigation") , the Company
effectively competes with other bypass oil filtration products such as the
Spinner II unit of T.F. Hudgins, Inc., and the bypass filter made by Luberfiner,
Inc., The Donaldson Company, Parker Hannifin Corporation - Racor division, and
others. The Company's products affect the sales of full-flow filters,
maintenance services, replacement parts, original oil sales and oil disposal, as
well as sales of new engines.

         All of these products and services are provided by companies that have
significantly greater financial, marketing and operating resources than does the
Company. Additionally, the Company's other direct competitors include Premo
Lubrication Technologies, Incorporated and Certified Technologies, Corp.

Patents and Trademarks.
----------------------

        The Company has patents for a redesigned Purifiner, the basis for the
next generation of the Purifiner products, and the TFP Filter Plus which have
been issued in the United States and certain other foreign countries in 1997
(See "Distribution - TF Purifiner Ltd.). In 1997, the Company obtained a U.S.
patent for its new oil flow meter which enables the user to visually determine
that oil is flowing through the Purifiner and a U.S. patent issued in 1998 on
another method of introducing additives into the oil. These patents expire from
May, 2014 to October, 2016. There can be no assurance that such patents
withstand competitive threats to their patentability or, in the case of the
redesigned Purifiner, be developed into commercially viable products.

         The Company has a license and royalty agreement (See Item 3, "Legal
Proceedings") with the owner of two of the U.S. patents which covered most of
the Company's existing Purifiners. One of these patents expired in September
1998 and the other patent under this agreement, used in a small number of the
Company's products, expires in June 2008. This agreement also covers several
foreign issued and pending patents in several other countries, the earliest of
which will expire in June 2004. The term of the agreement is for the life of the
patents and any improvements thereto and requires the payment of a 5% royalty
based on the net sales price, as defined, of the covered products. This
agreement also covers the Purifiner trademark in the United States for which the
Company pays a 1% royalty based on net Purifiner sales, as defined. The Company
is primarily responsible for maintaining and defending the integrity of these
patents and the Purifiner trademark.

        The Company has registered the product trademark, "Purifiner" in
substantially all the countries of the industrialized world (other than in the
United States, where the Company's licensor has registered the trademark) and is
registering the Puradyn trademark in the United States.

                                       22
<PAGE>

Governmental Approval.
---------------------

         The Company's 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 recertification in July 1998, the Company has obtained an Executive Order
issued by the State of California Air Resources Board stating that the Purifiner
does not reduce the effectiveness of applicable vehicle pollution control
systems, and may be installed on all 1998 and older model year vehicles with
pressure oil systems.

Engineering and Development.
---------------------------

         The Company had four employees who focused primarily on engineering and
development, prior to the termination of its Vice-President of Technology and
reassignment of his administrative assistant. One is the inventor and originator
of four U.S. patents issued to the Company in 1996 and 1997, as well as of the
most recently issued patent licensed to the Company. During the last two to
three years the inventor has devoted substantially all of his time to the
engineering, development and enhancement of the Company's products. The other
three employees, included the Company's former Vice President of Technology, who
was hired in September 1997 and a former mechanical designer who was hired in
January 1998, who devoted substantially all their time to the engineering,
development and enhancement of the Company's products, with an emphasis on
requirements of OEM's, and researching, developing and engineering various
product enhancements which will enable the current and future generation of
Purifiners to compete more effectively in the marketplace, and a former
administrative assistant. Specifically, during 1997 and 1998, the Company's
engineering resources have focused on improving product quality, including
redesigning the Purifiner lid, improving sealing and heating characteristics,
improving mounting and other hardware and banjo fittings. Certain of these
improvements were required in order to eliminate leaks from the Purifiner which
occurred under certain circumstances and resulted in various Company product
evaluations being extended, or in some cases, curtailed. The Company's
Engineering Department has focused on the underlying reasons for these leaks and
has successfully implemented product enhancements to resolve these problems.

Employees.
---------

         At March 19, 1999, the Company had 12 employees, 4 of whom were engaged
in manufacturing, assembly, quality control, warehousing and shipping, 5 in
marketing, technical and installation assistance and sales, 1 in engineering and
development and 2 in administrative positions. None of the employees are
represented by a labor union. The Company believes its employee relations are
good.

                                       23

<PAGE>

ITEM 2.   DESCRIPTION OF PROPERTY.
          -----------------------

        Substantially all of the Company's operations are conducted from its
14,500 square foot facility located in Boynton Beach, Florida. The facility was
leased for a term which ended March 31, 1999 at a monthly rate of approximately
$8,000. The Company has made arrangements with the landlord to extend the lease
on a month to month basis until longer lease terms can be negotiated.




ITEM 3.           LEGAL PROCEEDINGS.
                  -----------------

Malt Litigation

         On January 13, 1997, Robert C. Malt ("Malt"), as owner of certain
patents licensed to the Company, filed an action against Puradyn Filter
Technologies, Incorporated and T/F Systems, Inc. (collectively the "Defendants")
in the Circuit Court of the 15the Judicial Circuit of Florida in Palm Beach
County. Malt has alleged that the Defendants are in breach of their license
agreement with Malt. Malt was seeking a (1) permanent injunction to enjoin the
Defendants from manufacturing and marketing the covered Purifiner products and
use of the U.S. trademark and (2) approximately $21,000 for alleged past-due
breaches of the license agreements.

         In 1998, the Company tendered a formal offer of judgment to Malt in the
amount of $55,000 which was rejected. After a four day trial to the court, the
court ruled on March 2, 1999 that Malt was not entitled to any injunctive relief
and was awarded a total judgement of $20,168.48. As that judgement is much less
than the $55,000 offer of judgement, Malt may now be liable to the Company for
attorneys' fees and expenses of litigation from the date of the offer of
judgement.

         The Company, upon the advise of counsel, has filed a motion for
rehearing and amendment of the final judgement on issue of damages and
requirement. Counsel believes the undisputed evidence shows payments made by the
Company from October 1996 to present were such that Malt's damages are only on
sales totaling $79,483, and therefore Malt's damages are a maximum of 5% of that
amount or $3,974.


Searcy, Denny, Scarola  et. al and Related Claims:
         On June 24, 1997, Searcy, Denny, Scarola, Barnhardt & Shipley, P.A.
("Plaintiff") filed an action in the Circuit Court of the Fifteenth Judicial
Circuit in and for Palm Beach County, Florida, against Systems, the Company,
Richard C. Ford, individually, and Controlled Fuel Systems, Inc., an inactive
Company controlled by Richard C. Ford ("Defendants") for unpaid legal fees and
costs of approximately $313,000 plus interest and attorney's fees.

                                       24
<PAGE>

         In late 1990 and early 1991, the Plaintiff was engaged by Systems to
represent it in obtaining the manufacturing and marketing rights to the
Purifiner and to perform other general matters for Systems. The Plaintiff was
ultimately successful in assisting Systems in obtaining such rights. TFS was
awaiting the judgment of an appellate court which, if adjudicated in TFS's
favor, would have provided TFS with sufficient funds to pay such legal fees and
other possible legal fee claims aggregating approximately $75,000, and thereby
remove the possibility of the Company being held liable for such fees. On
February 26, 1997, the appellate court ruled against Systems and, accordingly,
the funds discussed above are not currently available to Systems to satisfy such
claims and the case involving these funds has been remanded to the trial court
for a retrial. Puradyn did not assume these obligations as part of its purchase
of Systems, and was indemnified by Systems with regard to these claims and
related expenses. Management believes such amounts are not the responsibility of
Puradyn Filter Technologies, Incorporated and intends to vigorously defend
against this action. However, Systems is an inactive company whose only asset is
the claim that was reversed on appeal and maybe retried by Systems. Accordingly,
the ability to collect such funds, as required, from Systems is uncertain. The
ultimate outcome of this litigation against the Company cannot be determined at
this time, however, based on the opinion of counsel, a favorable outcome is
likely.

Premo Litigation

         On December 8, 1994, the Company, and Robert C. Malt, filed a patent
infringement action against Premo Lubrication Technologies, Incorporated
("Premo") and Charles Borzarelli (collectively the "Defendants") in the United
States District Court for the Southern District of Florida. The Defendants
subsequently filed certain counterclaims, as amended, against Plaintiffs
including that the Company and certain of its employees have libeled the
Defendant's business and unlawfully interfered with its business relationships.
During February 1998, this case was settled with no adverse effect to the
Company.


Other Matters:

         In addition, in the ordinary course of business, the Company has been
named in an action concerning a balance due to a vendor.



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

         Not Applicable.

                                       25
<PAGE>

ITEM 5.  MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.

         As of March 19, 1999, there were approximately 284 stockholders of
record of the Company's stock. The closing bid price quoted on the OTC Bulletin
Board sheets for the Company's Common Stock at March 19, 1999 was $.8125. The
Company currently trades under the symbol "PFTI", and prior to its name change
in February, 1998 it traded under the symbol "TFPU".

         The transfer agent for the Company's Common Stock is Florida Atlantic
Stock Transfer, Inc., 5701 N. Pine Island road, Tamarac, Florida 33321.

         The Company has never declared or paid cash dividends on its Common
Stock and is restricted in doing so without the approval of Quantum Industrial
Partners LLC ("Quantum"). 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 the Company's existing agreement with Quantum,
earnings, capital requirements, expansion plans, financial condition and other
relevant factors.

         The following table sets forth for the period indicated, the high and
low closing prices for the quarterly periods in 1997 and 1998, and from January
1, 1999 through March 19, 1999.
<TABLE>
<CAPTION>
                                                                     Common Stock
                                                                High              Low
                                                                ----              ---
<S>                                                             <C>                <C>
         January 1, 1997 - March 31, 1997                       $10.00            $7.90
         April 1, 1997 - June 30, 1997                            9.25             4.75
         July 1, 1997 - September 30, 1997                        7.75             3.25
         October 1, 1997 - December 31, 1997                      4.38             2.00
         January 1, 1998 - March 31, 1998                         3.12             1.10
         April 1, 1998 - June 30, 1998                            1.63              .38
          July 1, 1998 - September 30, 1998                        .69              .38
         October 1, 1998 - December 31, 1998                       .44              .10
         January 1, 1999 - March 19, 1999                         1.50              .17
</TABLE>

         The above quotation reflect inter-dealer prices, without retail
mark-up, mark-down or commission and may not necessarily represent actual
transactions.


ITEM 6.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

         Other than historical and factual statements, the matters and items
discussed in this Annual Report on Form 10-KSB are forward-looking statements
that involve risks and uncertainties. Actual results of the Company may differ
materially from the results discussed in the forward-looking statements. Certain
factors that could contribute to such differences are discussed with the
forward-looking statements throughout this report.

                                       26
<PAGE>

General

         The Company was formed in 1987, and commenced limited operations in
1991 when it obtained worldwide manufacturing and marketing rights to the
Purifiner(R) products. The acceptance of the Purifiner products is the result of
various factors, including the growing desire of users to extend oil change
intervals, reduce maintenance costs, extend engine life and preserve the
environment. In 1997, the Company had been unable to significantly increase its
revenues through its current distribution network. Accordingly, the Company had
recently refocused certain of its resources on the development of commercial
relationships with original equipment manufacturers ("OEM's") and medium to
large size fleets, which the Company believes will result in the increasing
acceptance of the Purifiner products in the marketplace and, accordingly,
increase revenues. There can be no assurance that such efforts to develop
commercial OEM and major fleet business relationships will be successful. As
previously discussed, the Company is currently reevaluating its overall
strategy, including its allocation of resources.

         In late March 1998, several key employees and Directors were either
terminated or resigned from their positions with the Company. These individuals
included the Company's Executive Officer, who was also a Director, Vice
Presidents of Sales and Marketing, and Technology, its Controller and two
members of the Board of Directors. Subsequent to these actions, the Company
hired a new president. The president and Richard C. Ford now serve as the
Company's Board of Directors.

         At or about the same time, the Company curtailed its operations and
reduced its remaining workforce to key personnel. These actions were taken for a
number of reasons, but primarily to reduce the amount of cash required to
maintain operations of the Company while it continues to seek to arrange
additional financing and replace certain personnel who are no longer with the
Company. There can be no assurance that such financing or other alternatives,
such as selling the Company, will be accomplished. Without further financing it
is unlikely that the Company will be able to sustain operations.

         As a result of the Company's performance and in light of the recent
events discussed above, the Company is in the process of reevaluating its
strategy as discussed below.

         As the Purifiner has had limited acceptance in the marketplace, the
Company's strategy has been to obtain product credibility by disproving the
long-held conviction that oil must be changed regularly in accordance with
manufacturers' recommended guidelines. Gradually, the credibility of the
Purifiner and the concept of extended oil replacement intervals is becoming more
readily accepted. The Company believes that this increasing acceptance is due to
the third-party testing of the product, awards and other recognition the
Purifiner has received and increasing awareness of consumers as well as vehicle
and engine manufacturers and oil companies of the cost benefits, the Company's
warranties, as well as environmental benefits of conserving oil and reducing the
disposal of waste oil.

                                       27
<PAGE>
         The Company is currently working with certain original equipment
manufacturers ("OEM's") to enable them to evaluate the benefits of the Purifiner
with the goal of obtaining their approval of the Purifiner and eventually to
install the Purifiner on their products at their factories and distribute the
Purifiner throughout their dealer networks (See "Marketing"). These OEM's are
mindful of the significant competitive benefits of extended drain intervals and
the environmental and related regulatory considerations of the use of an oil
purification system such as the Purifiner.

         Currently, the Company is refocusing its new distribution network and
direct sales activities, primarily in the heavy-duty truck marketplace,
primarily in the United States, although it does have some international
distributors to which it allocates limited amounts of resources. The Company
also formed a foreign joint venture effective January 1, 1996, to market the
Purifiner through Europe, the Middle East, the former Soviet Union, Egypt, and
South Africa. (See "Distribution" for recent events related to this joint
venture). In the future, the Company plans to expand its distribution channels
worldwide, as well as the number of market segments on which it focuses.

         The Company had employed direct sales personnel to help establish and
service its aftermarket distributors and to directly sell its products to
certain major national accounts. Additionally, the Company employed technical
and installation personnel to assist customers in analyzing the benefits of the
Purifiner through oil analysis, as well as answering technical questions and
assisting with the training and installation on the use of the Purifiner. In the
future, the Company may also consider additional joint ventures to manufacture
and/or market its products in various parts of the world.

         There can be no assurance that the Company will be able to successfully
implement its strategies.

Results of Operations

The following table sets forth for the periods indicated the amounts in
thousands of net sales and the categories of operating costs and expenses,
interest expense and interest income for each of the years ended December 31,
1997 and 1998 together with the amount of increase or decrease from the
preceding year.

                                       28
<PAGE>
<TABLE>
<CAPTION>
                                                               Year Ended December 31, (in thousands)
                                                               --------------------------------------
                                                                       1997 vs 1996               1998 vs 1997
                                                                         Increase                     Increase
                                                 1996         1997      (Decrease)          1998    (Decrease)
                                               ------       ------     ------------         ----  ------------
<S>                                               <C>        <C>                <C>          <C>         <C>
Net sales                                      $1,327      $ 1,353       $      26      $    708    $    (645)
                                             --------    ---------       ---------    ----------    ----------
Operating costs and expenses:
  Cost of sales                                   957        1,019              62           580          (439)
  Selling expenses                              1,291        2,740           1,449         1,060        (1,680)
  General and administrative expenses             947        1,121             174           630          (491)
  Engineering and development                      75          184             109           152           (32)
  Deferred profit                                  17          (9)            (26)                           9
  Impaired assets                                   -          324             324             -          (324)
                                             --------    ---------       ---------    ----------    ----------
Total operating costs and expenses              3,287        5,379           2,092         2,422        (2,957)
                                             --------    ---------       ---------    ----------    ----------

Operating loss                                 (1,960)      (4,026)         (2,066)       (1,714)        2,312

Interest (Expense)                                (25)        (460)           (435)         (354)          106
Interest Income                                     2           63              61             7           (56)
                                             --------    ---------       ---------    ----------    ----------
Net Loss                                      $(1,983)     $(4,423)        $(2,440)      $(2,061)       $2,362
                                             ========    =========       =========    ==========    ==========
</TABLE>
Year Ended December 31, 1998 Compared to Year Ended December 31, 1997

         Net Sales. Net sales decreased by $645,000 from $1,353,000 in 1997 to
$708,000 in 1998. This decrease was a continuation of a decline in sales that
began in the third fiscal quarter of 1997 due in part to unsuccessful product
evaluation results from a redesign that caused leaks in the products and due to
an unsuccessful revision of the Company's sales strategy. During 1998, the
Company experienced reduced international and marine sales due to prior
management's discontinuation of its efforts in these markets, continued
inability to turn product evaluations into sales, continued overall market
resistance to purchase the Purifiner in large volume amounts without long term
evaluation periods, and cancellation of sales efforts planned for the
recreational vehicle and military markets. However, during 1998, the Company
completed improvements to the quality of the Purifiner product and has since
obtained documentation from potential customers on successful tests of the
product which the Company believes will result in an improvement in sales in
1999.

         Cost of Sales. Cost of sales decreased by $439,000 from $1,019,000 in
1997 to $580,000 in 1998. The Company's gross margin decreased from 24.6% in
1997 to 18.1% in 1998. The decrease in cost of sales is primarily due to excess
fixed and indirect manufacturing costs related to the decrease in sales
discussed above. Although the Company reduced many of its manufacturing expenses
during 1998, its gross margin will continue to be adversely affected by its
excess manufacturing capacity.

         Selling Expenses. Selling expenses decreased by $1,680,000 from
$2,740,000 in 1997 to $1,060,000 in 1998. The decrease is due to the reduction
by management of many sales related expenses in 1998 to reduce spending.
Salaries and benefit expenses were reduced by approximately $800,000, related
travel expenses by $267,000, use of outside consultants by $185,000 and costs
related to product evaluations by $100,000.

         General and Administrative Expenses. General and administrative
expenses decreased by $492,000 from $1,122,000 in 1997 to $630,000 in 1998. This
decrease was due to reductions in personnel resulting in a decrease in salaries
of $240,000 and $50,000 in related travel expenses, and a reduction in legal

                                       29
<PAGE>

expenses of $80,000. In addition, expenses related to the amortization of the
cost of stock options given to outside consultants decreased by $100,000.

         Engineering and Development Expenses. Engineering and development
expenses decreased by $32,000 from $184,000 in 1997 to $152,000 in 1998 due
primarily to the expense in 1997 of $32,000 related to the cashless exercise of
stock options in that year.

         Impaired Assets. In the fourth quarter of 1997, the Company wrote down
the unamortized amount of costs in excess of net assets acquired and wrote down
to $1 each the amount of patents and trademarks due to impairment of the
respective amounts based on anticipated cash flows. Such costs amounted to
$324,330 for the year ended December 31, 1997. There were no such expenses in
1998.

         Interest Expense and Income. Interest expense decreased by $106,000
from $460,000 in 1997 to $354,000 in 1998. Interest expense in 1997 included
$447,000 related to the $2,000,000 short term loan received from Quantum
Industrial Partners ("QIP"), including the amortization of a discount on the
loan due to the issuance of a warrant to purchase shares of the Company's Common
Stock. In 1998 the QIP loan was converted to a 12% Senior Subordinated
Convertible Note Payable and increased in amount to $2,500,000 (See Note 8 to
the Financial Statements). There was no such discount amortization in 1998.
Interest income decreased from $63,000 in 1997 to $7,000 in 1998 as a result of
smaller amounts of idle cash balances to invest in 1998 and a decrease in
interest earned on a note receivable from the Company's former president, which
was repaid in June 1997.

Year Ended December 31, 1997 Compared to with Year Ended December 31, 1996

         Net Sales. Net sales increased by $26,000 from $1,327,000 in 1996 to
$1,353,000 in 1997. This small increase was primarily attributable to the effect
of the Company's increased direct US selling efforts offset by the effect of the
Company's price reductions implemented in the last quarter of 1996, reduced
international sales in 1997, inability to turn material evaluations into sales
in 1997 and the overall market resistance seen in 1997 to purchase the Purifiner
in large volume amount without long term evaluation periods and the acceptance
of the Purifiner by major engine and truck manufacturers. The Company expected
this market resistance to turn around in 1998 resulting from major truck engine
and truck manufacturers currently evaluating extended drain intervals and bypass
filtration methods, including the Purifiner, as a means to help meet various
federal emissions regulations, as well as for competitive advantage in the
marketplace. The approach by which the Company was dealing with it minimal
revenue growth is discussed below. Additionally, during 1996, the Company had
approximately $254,000 of sales to Ltd., the Company's joint venture formed in
1996 compared to approximately $55,000 in 1997.

         In October, 1996, the Company reduced its selling prices believing this
new strategy would promote the sale of the Company's products and result in
increased long-term revenues from unit and replacement filter sales and also
provide the Company with the ability to reduce its product costs through volume

                                       30
<PAGE>

purchase discounts, utilization of excess fixed manufacturing capacity and
improved production processes. The Company did not realize the significant
increase in revenues it had anticipated as a result of lowering its selling
prices and also did not realize the related anticipated cost savings which
adversely affected its gross margin. The Company revised its pricing strategy in
November, 1997 to substantially increase the U.S. prices of substantially all
the Purifiner units in order to recapture various cost increases from product
improvements, material cost increases and to position the Purifiner pricing to
be in line with the Company's revised strategy to sell Purifiners to Original
Equipment Manufacturers ("OEM's") and to establish a new master distributor
network.

         Cost of Sales. Cost of sales increased by $62,000 from $957,000 in 1996
to $1,019,000 in 1997. The Company's gross margin decreased slightly from 27.9%
to 24.6%. The gross margin decrease was due to the significant price reductions
implemented in the latter part of 1996 combined with the effect of cost
increases to the product incurred for improvements and material price increases
offset by the reduction of sales in 1997 to Ltd which were at substantially
lower sales prices than the Company's international distributor pricing.

         Selling Expenses. Selling expenses increased by $1,449,000 from
$1,291,000 in 1996 to $2,740,000 in 1997. The primary reasons were increases in
personnel resulting in increased expenses for recruiting, salaries, use of
outside consultants, compensatory stock options, and related travel and office
expenses, increased efforts in advertising, product evaluation and installation
expenses, and restructuring expenses related to the severance of various direct
salespeople in 1997, offset by a $200,000 write off of patent costs in 1996.

         Commencing primarily in the first two quarters of 1997, the Company
began implementing a product evaluation program, whereby it would supply
Purifiner units, replacement filters and installation services at no cost to
certain potential customers or to assist its distributors' potential customers
to evaluate the effectiveness of the Purifiner. The costs related to this
evaluation program have been charged to selling expenses and no revenues were
recognized. Only a limited number of these evaluations were converted to actual
sales and the program was curtailed in the latter part of 1997 due to the
unsuccessful evaluation results previously discussed.

         General and Administrative Expenses. General and administrative
expenses increased by $175,000 from $947,000 in 1996 to $1,122,000 in 1997. This
dollar increase was due to the increased level of personnel resulting in
increases in salaries, travel and related office expenses, increased use of
consultants, and increased professional fees offset by a reduction in
contributions and compensatory stock option and warrant expenses.

         Engineering and Development Expenses. Engineering and development
expenses increased by $109,000 from $75,000 in 1996 to $184,000 in 1997. This
increase was primarily the result of increased personnel costs, compensatory
stock options and focusing on reengineering of the Purifiner.

                                       31
<PAGE>

         Impaired Assets. In the fourth quarter of 1997, the Company wrote down
the unamortized amount of costs in excess of net assets acquired and wrote down
to $1 each the amount of patents and trademarks due to impairment of the
respective amounts based on anticipated cash flows. Such costs amounted to
$324,000 for the year ended December 31, 1997.

         Interest Expense and Income. Interest expense increased from $25,000 in
1996 to $460,000 in 1997 resulting from an increase in average short and long
term borrowings outstanding in 1997 versus the comparable period in 1996. In
1997, the Company obtained the $2,000,000 short term loan from QIP, which
resulted in $447,000 of interest expense including expenses related to a
discount on the loan due to the issuance of warrants. Interest income increased
from $2,000 in 1996 to $63,000 in 1997 as a result of investing an increased
amount of idle cash balances and interest earned on a note receivable from its
former president, which note was repaid in June 1997.

Liquidity and Capital Resources

         To date, the Company's capital requirements in connection with its
business activities have been and will continue to be significant. To fund its
activities, the Company has been dependent upon available cash generated from
operations, the proceeds of sales of its securities to investors and
stockholders, and other loans, including the $2,000,000 loan from QIP in June,
1997 and an additional loan of $500,000 from QIP in January, 1998, short term
borrowings in 1998 of $250,000 from the Company's bank and $150,000 from the
Company's Chairman of the Board of Directors and an additional $100,000 from the
Company's bank in January, 1999. The report of the Company's independent
auditors includes an explanatory paragraph which states that because the Company
has sustained recurring operating losses and negative cash flows from operating
activities substantial doubt is raised about the Company's ability to continue
as a going concern.

         In late March, 1998, the Company curtailed its operations and reduced
its remaining workforce to key personnel. These actions were taken for a number
of reasons, but of primary importance was the reduction of the amount of cash
required to maintain operations of the Company while it continues to seek to
arrange additional financing.

         At December 31, 1998, the Company had negative working capital of
$1,380,017 and its current ratio (current assets to current liabilities) was .21
to 1, as compared with a working capital of $357,645 and a current ratio of 1.57
to 1 at December 31, 1997. At December 31, 1998, the Company had negative cash
of 77,693. Outstanding short-term debt from lenders and shareholders was
$694,756 at December 31, 1998 which included a former shareholder loan of
$294,756 due to the Estate of Willard Taylor. (See Notes 6 and 7 in the Notes
to Financial Statements). The balance of long term debt of $2,512,851 at
December 31, 1998 included $2,500,000 due to QIP (see Note 8 in the Notes to
Financial Statements).

                                       32
<PAGE>

         At December 31, 1998, the Company had approximately $497,000 in current
liabilities to various trade creditors. Many of these creditors continue to
provide services to the company or have indicated a willingness to restructure
the payment of these obligations or defer for the current time payment of these
obligations. However, one creditor, who claims to be owed approximately $72,000,
has initiated suit against the Company which the Company is seeking to defend,
in part, on what is believed to be excessive charges alleged by this creditor.
At January 31, 1999, the Company failed to make a scheduled installment payment
of $105,512 on a note payable to a former shareholder. The note holder declared
the note agreement to be in default and claimed immediate payment of the balance
due totaling $294,756. There can be no assurances that trade creditors will
continue to provide service to the Company or that other creditors and debt
holders will refrain from initiating lawsuits against the Company in the future.

         The Company continues to seek both short term and long term investment
commitments from various institutions and investor groups. In the meantime, the
Company has obtained several sources of short term funding. Richard C. Ford, a
shareholder and director of the Company, loaned to the Company $150,000 in May
and June 1998 notes payable at 12% interest. On August 21, 1998 the Company
entered into a Revolving Note Agreement with its bank for $250,000 with interest
at 8.75% and, in January 1999, revised that loan agreement to $350,000 with
interest at prime rate (7.75%, initially). The Revolving Note is secured by
substantially all of the Company's assets, is guaranteed by Richard C. Ford and
is due August 21, 1999. In March, 1999, Mr. Ford agreed to guarantee an addition
under the bank Revolving Note of approximately $175,000.

         The Company believes that business, economic, competitive,
environmental and governmental factors are now converging to provide fertile and
opportunistic conditions for achieving profitable business outcomes. One such
example of a noteworthy development was a video the company commissioned in
mid-December 1998 of an engine teardown of a Vulcan Chemicals Company truck with
an M-11 Cummins engine equipped with a Purifiner filter unit that went 616,000
miles without a single oil change. The engine wear and oil analysis reports
stated the engine parts and oil were well within specifications and normal.
Because the content of this video provides validation and assurance of the
Purifiner's benefits to end-users, it has been a catalyst for establishing sales
opportunities with numerous prospects since the beginning of 1999, and the
Company believes it will also assist in the search for long term financing
commitments from institutions or investor groups. The Company has developed an
in-depth business plan and renewed its comprehensive search for such financing.

         Management believes the favorable response from potential customers
will result in improved sales in 1999, however, there can be no assurance such
improvements will occur. Furthermore, management believes it will also need
additional financing in 1999. There can be no assurances that the Company will
be able to obtain additional financing from either members of management or

                                       33
<PAGE>

other investors or that such cash resources will be sufficient. In the absence
of sufficient financing, the Company may be unable to sustain its operations.

         Consistent with industry practices, the Company may accept product
returns or provide other credits in the event that a distributor holds excess
inventory of the Company's products. The Company's sales are made on credit
terms which vary significantly depending on the nature of the sale. In addition,
the Company does not hold collateral to secure payment from its United States
and Canadian distributors. Therefore, a default in payment by one or more of the
Company's United States and Canadian distributors or customers could adversely
affect the Company's business, results of operations and financial condition.
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 reserves. Any
significant increase in product returns or uncollected accounts receivable
beyond reserves could have a material adverse effect on the Company's business,
results of operations and financial condition. The Company has not experienced
material product returns or uncollectible receivables in the past, however,
there can be no assurance that such trends will continue in the future.

         Sales of the Company's products will depend principally on end user
demand for such products and acceptance of the Company's products by original
equipment manufacturers ("OEM's"). 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, particularly worldwide, 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.

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.

Impact of Year 2000 Issue

         The Company is assessing the possible effects on its operations of the
impact through its own systems and the systems of its key suppliers and
subcontractors of the Year 2000 issue. The Company has no interactive or linked
computer systems to any of its suppliers or subcontractors and does not have
extensive reliance on internal computer systems for its manufacturing, marketing
or sales operations. While the impact of the Year 2000 issue could have a
material effect on the Company's operations and financial results, the Company
at this time believes the potential impact and related costs are not
significant.

                                       34
<PAGE>

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.



                                       35

<PAGE>
                                    PART III


ITEM 8.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS.
         ---------------------------------------------

         On January 6, 1999, the Company dismissed its independent certified
accountants, Richard A. Eisner & Company, LLP, and on January 8, 1999, the
Company appointed Durland & Company as its new independent certified
accountants. The opinion of Richard A. Eisner & Company, LLP on each of years
ended December 31, 1997 and 1996 did not contain any disclaimer of opinion, or
qualification or modification as to audit scope or accounting principles,
however their report included a paragraph as to the uncertainty of the Company's
ability to continue as a going concern.

         During the two years ended December 31, 1997 and the subsequent interim
period preceding the dismissal, there were no disagreements with Richard A.
Eisner & Company, LLP on any matters of accounting principles or practices,
financial statement disclosure, or auditing scope or procedure.

         Both the dismissal of Richard A. Eisner & Company, LLP and the
appointment of Durland & Company were approved by the Company's Board of
Directors.

ITEM 9.  DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS
         ------------------------------------------------------------

         The following table sets forth the names, positions with the Company
and ages of the directors, executive officers and significant employees and
directors of the Company. 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. Officers are elected by the Board and their terms of
office are, except to the extent governed by employment contract, at the
discretion of the Board.

Directors and Executive Officers
--------------------------------
<TABLE>
<CAPTION>
         Name                       Age              Position
         ----                       ---              --------
<S>                                 <C>              <C>
Richard C. Ford                     54               Chairman of the Board of Directors and Chief Exeuctive Officer
Alan J. Sandler                     60               President, Chief Operating Officer, Secretary,
                                                     Chief Financial Officer, and Director
</TABLE>

RICHARD C. FORD had been President, Chief Executive Officer, Treasurer and a
Director of the Company since its inception in 1988. In April 1997, Mr. Ford
resigned as President of the Company and in June 1997, Mr. Ford resigned as
Chief Executive Officer, Treasurer and Chief Financial Officer of the Company.
He rejoined the Company in April, 1998. Mr. Ford was also a Director of TF
Purifiner Ltd through July 17, 1997 at which time he resigned. He served as
Secretary of the Company from its inception until August 1996. In January 1999,
Mr. Ford was elected Chairman of the Board of Directors and appointed Chief
Executive Officer.

ALAN J. SANDLER joined the Company in June, 1998. He serves as President, Chief
Operating Officer, Secretary, Chief Financial Officer, and Director. Most

                                       36
<PAGE>

recently Mr. Sandler served as President, Chief Executive Officer and Consultant
to Hood Depot, Inc., a national restaurant supply manufacturer/distributor. From
1979-1995 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, an
advertising agency where he worked on marketing with clients such as Anheuser
Busch, Inc., Ralston Purina Company, Monsanto, Sun Oil, Pet, Inc., and
Southwestern Bell Telephone Company.


ITEM 10.    EXECUTIVE COMPENSATION
            ----------------------

Cash Compensation
-----------------

         The following table shows, for the three year period ended December 31,
1998, the cash and other compensation paid by the Company to its former
Presidents and Chief Executive Officer and to each of the executive officers of
the Company who had annual compensation in excess of $100,000.
<TABLE>
<CAPTION>
                                                Summary Compensation Table

Name and                                                     Other                                  All
Principal                                                   Annual        Number of     LTIP       Other
Position                          Year   Salary(1) Bonus  Compensation(2)  Options    Payouts   Compensation(3)
--------                          ----   --------- -----  ---------------  -------    -------   ---------------
<S>                              <C>     <C>               <C>             <C>                      <C>
Richard C. Ford (4)              1998    $ 79,000   -      $1,800          300,000       -          $16,000
President, CEO,                  1997      85,800   -         700                -       -           48,899
Treasurer, CFO                   1996     120,000   -       1,200          275,000       -           11,000

Alan J. Sandler (5)              1998      42,460               -          260,000       -                -
President, COO, Secretary
and Chief Financial Officer

Keith T.J. Hart (6)
President, CEO, CFO,             1997      91,346           4,752          100,000       -                -
Treasurer and Secretary
</TABLE>


(1)      Mr. Ford elected to defer payment of $53,000 included in his 1998
         salary.

(2)      This amount represents payments made by the Company for health
         insurance premiums.

(3)      This amount represents payments made to Mr. Ford for performing various
         product field testing in 1996, consulting services in 1997 and 1998,
         and a car allowance in 1997.

(4)      Mr. Ford served as Secretary of the Company until August 1996. Mr. Ford
         served as President of the Company until April 1, 1997 and served as
         Chief Executive Officer, Treasurer and Chief Financial Officer until
         June 19, 1997. Mr. Ford left the employment of the Company on July 17,
         1997 and provided consulting services under an agreement with the
         Company until April 1, 1998 when he rejoined the Company. (See Item 12,
         Certain Relationships and Related Transactions).

                                       37
<PAGE>

(5)      Mr. Sandler joined the Company June 29, 1998 as President, Chief
         Operating Officer and Director.

(6)      Mr. Hart served as President and Chief Operating officer beginning
         April 1, 1997 and served as Chief Executive Officer, Treasurer,
         Secretary and Chief Financial Officer beginning June 19, 1997, and
         resigned from these positions in March, 1998. In March 1997, Mr. Hart
         served as a consultant for the Company for which he received
         approximately $10,400.

Employment Agreements
---------------------

Effective June 29, 1998, the Company hired Alan Sandler as president of the
Company. Mr. Sandler will receive initial compensation at the rate of $80,000
per year. On July 7, 1998, the Company granted Mr. Sandler options to purchase
260,000 shares of the Company's stock at $.38 per share of which 65,000 vested
immediately and the balance vests in increments of 65,000 on the first, second
and third year anniversaries of the grant.

The Company currently does not have any other employment agreements with
executive officers or significant employees.

Option Grants in Last Fiscal Year
---------------------------------

         The following table sets forth information with respect to the grant of
options to purchase shares of Common Stock during the fiscal year ended December
31, 1998 to each person named in the Summary Compensation Table.
<TABLE>
<CAPTION>
                           Number of             % of total
                           Securities            Options
                           Underlying            Granted to            Exercise or
                           Options               Employees in          Base Price         Expiration
Name                       Granted (#)           Fiscal year           ($ / Shares)            Date
----                       -----------           -----------           ------------       ------------
<S>                         <C>                    <C>                 <C>  <C>                 <C>
Richard C. Ford             300,000                32.2%               $.38/300,000       July, 2008
Alan J. Sandler             260,000                27.9                 .38/260,000       July, 2008
</TABLE>

Incentive and Nonqualified Stock Option Plan
--------------------------------------------

        The Board of Directors and a majority of the Company's stockholders
adopted the Company's 1996 Stock Option Plan (the "Plan") on July 31, 1996 and
the approval was ratified at the Company's Annual Meeting held on August 28,
1996. The number of shares authorized under the Plan was increased by the Board
of Directors from 1,625,000 to 2,200,000 in July 1997, which increase was
subject to stockholder approval.

         The Plan 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 Plan 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 Plan, the Company had reserved an aggregate of 2,200,000
shares of Common Stock for issuance pursuant to options granted under the Plan
("Plan Options"). The Board of Directors or a Committee of the Board of

                                       38
<PAGE>

Directors (the "Committee") of the Company will administer the Plan including,
without limitation, the selection of the persons who will be granted Plan
Options under the Plan, the type of Plan Options to be granted, the number of
shares subject to each Plan Option and the Plan Option price.

         Plan Options granted under the Plan 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 Plan also allows 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 Plan 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.

         The per share purchase price of shares subject to Plan Options granted
under the Plan 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 Plan. 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 30 days 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

                                       39
<PAGE>

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 Plan at any time, except that no amendment shall be made which (i) increases
the total number of shares subject to the Plan or changes the minimum purchase
price therefor (except in either case in the event of adjustments due to changes
in the Company's capitalization) , (ii) affects outstanding Plan Options or any
exercise right thereunder, (iii) extends the term of any Plan Option beyond ten
years, or (iv) extends the termination date of the Plan. Unless the Plan shall
theretofore have been suspended or terminated by the Board of Directors, the
Plan shall terminate on July 31, 2006. Any such termination of the Plan shall
not affect the validity of any Plan Options previously granted thereunder.

        As of December 31, 1998, incentive stock options to purchase 279,107
shares of Common Stock were outstanding and non-qualified options to purchase
1,355,248 shares of Common Stock were outstanding under the Plan.

        Options Granted to Officers and Directors. On July 8, 1998, Richard C.
Ford was granted 300,000 stock options to purchase shares of the Company's
Common Stock at $.38 per share. Of these options 50% will vest July 8, 1998 and
50% July 7, 1999.

        On July 8, 1998 the Company granted Alan J. Sandler 260,000 stock
options to purchase shares of the Company's Common Stock of which 65,000 vested
July 8, 1998. The balance of 195,000 shares will vest at the rate of 65,000
shares over the next three annual anniversary dates beginning July 7, 1999.

        On August 2, 1996, the Company granted Richard C. Ford incentive Plan
Options to purchase an aggregate of 50,000 shares of Common Stock at $2.20 per
share through August 2, 2001, of which 25,000 vested on August 2, 1996, 12,500
vested on August 2, 1997, and 12,500 vest on August 2, 1998. On August 2, 1996,
the Company granted Richard C. Ford nonqualified options to purchase an
aggregate of 200,000 shares of Common Stock at $2.00 per Share through August 2,
2006, of which 100,000 vested on August 2, 1996, 50,000 vested on August 2,
1997, and 50,000 vest on August 2, 1998. On December 3, 1996, the Company
granted Richard C. Ford nonqualified options to purchase an aggregate of 25,000
shares of Common Stock at $6.00 per share through December 3, 2006, all of which
vested on December 3, 1996.

         On December 1, 1997, the Company granted Bradley A. Hittle, a former
director who was appointed on July 17, 1997 and resigned on March 25, 1998,
non-qualified Plan Options to purchase an aggregate of 15,000 shares of Common
Stock at $2.75 per share through December 1, 2007 of which 7,500 vest on
December 1, 1998 and 7,500 vest on December 1, 1999. These options were
cancelled upon Mr. Hittle's resignation.

        On April 1, 1997, the Company granted Keith T.J. Hart, a former
director, incentive Plan Options to purchase an aggregate of 47,056 shares of
Common Stock at $8.50 per share through April 1, 2007, of which 11,764 vested on
April 1, 1997, 11,764 vest on April 1, 1998, 11,764 vest on April 1, 1999 and

                                       40
<PAGE>

11,764 vest on April 1, 2000. On April 1, 1997, the Company granted Mr. Hart
non-qualified Plan Options to purchase an aggregate of 52,944 shares of Common
Stock at $8.50 per share through April 1, 2007 of which 13,236 vested on April
1, 1997, 13,236 vest on April 1, 1998, and 13,236 vest on April 1, 1999 and
13,236 vest on April 1, 2000, respectively. These options were cancelled upon
Mr. Hart's resignation.

        On August 2, 1996, the Company granted Byron Lefebvre, a former Director
who resigned on June 19, 1997, incentive Plan Options to purchase an aggregate
of 75,000 shares of Common Stock at $2.00 per share through August 2, 2006, of
which 37,500 vested on August 2, 1996, 18,750 vested on August 2, 1997 and
18,750 vest on August 2, 1998.

        On August 2, 1996, the Company granted Richard J. Ford, a former
Director and Secretary who resigned on June 19, 1997 and a former Vice President
who resigned on July 17, 1997, incentive Plan Options to purchase an aggregate
of 18,750 shares of Common Stock at $2.20 per share through August 2, 2001, of
which 9,375 vested on August 2, 1996, 4,668 vested on August 2, 1997, and 4,687
vest on August 2, 1998. On December 3, 1996, the Company granted Richard J. Ford
nonqualified options to purchase an aggregate of 3,375 shares of Common Stock at
$6.00 per share through December 3, 2006, all of which vested on December 3,
1996. On January 16, 1997, the Company granted Richard J. Ford nonqualified
options to purchase an aggregate of 62,500 shares of Common Stock at $8.75 per
share through January 16, 2007 of which 31,250 vested on January 16, 1997,
15,625 vested on January 16, 1998 and 15,625 vest on January 16, 1999.

Option Exercises and Holdings
-----------------------------

         The following table sets forth information with respect to the exercise
of options to purchase shares of Common Stock during the fiscal year ended
December 31, 1998 to each person named in the Summary Compensation Table and the
unexercised options held as of the end of the 1998 fiscal year.
<TABLE>
<CAPTION>
                                    AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR
                                               AND FY-END OPTION/SAR VALUES

                                                                 Securities Underlying       Value of Unexercised
                                     Number of                       Unexercised                 in-the-Money
                                   Shares Acquired                  Options/SARS                Options/SARs
                                     On Exercise       Value          at FY-End (#)               at FY-End ($)
                                     Realized       Exercsiable/     Exercisable/                Exercissable/
                                           (#)         ($)           Unexercisable             Unexercisable (1)
------------------------------------------------------------------------------------------------------------------
<S>                                                                 <C>     <C>                     <C>
Richard C. Ford                           -           -             425,000/150,000                 $0/$0
Chairman of the Board of Directors
and Chief Executive Officer

Alan J. Sandler, President, Chief         -           -              65,000/195,000                 $0/$0
Operating Officer and Director
</TABLE>

(1) In accordance with the Securities and Exchange Commission's rules, values
are calculated by subtracting the exercise price from the fair market value of
the underlying common stock. For purposes of this table, fair market value is
deemed to be $.17, the closing price reported on December 31, 1998.

                                       41
<PAGE>
              LONG-TERM INCENTIVE PLANS AWARDS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
                                  Number           Performance            Estimated Future Payouts Under
                                  of Shares,       or Other                  Non-Stock Price-Based Plans
                                  Units or         Period Until              ---------------------------
                                  Other Rights     Maturation           Threshold        Target    Maximum
             Name                    (#)           or Payout            ($ or #)        ($ or #)   ($ or #)
             ----                    ---           ---------            --------        --------   --------
<S>                                     <C>              <C>                 <C>             <C>          <C>
Richard C. Ford                        -                -                   -                -          -
Chairman of the Board of Directors
and Chief Executive Officer

Alan J. Sandler                        -                -                   -                -          -
President, Chief Operating
Officer and Director
</TABLE>

ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
         --------------------------------------------------------------

         The following table sets forth certain information regarding the
Company' s Common Stock beneficially owned on March 19, 1999 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
executive officers and directors, and (iii) all 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 beneficial ownership within sixty (60)
days. At March 19, 1999, there were 5,223,493 shares of Common Stock
outstanding. The address of each of the persons set forth below is 3020 High
Ridge Road, Suite 100, Boynton Beach, Florida 33426, except as otherwise noted.
<TABLE>
<CAPTION>
                                                      No. of Shares         Percent of
Name and Address or                               of Common Stock           Beneficial
Identity of Group                                 Beneficially Owned        Ownership
-----------------                                 ------------------        ---------
<S>                                                    <C>                     <C>
Richard C. Ford (1)                                    1,091,333               13.5%
Alan J. Sandler (2)                                       65,000                   *
Armen Partners, L.P. (3)                                 600,000                7.4%
Richard J. Ford (4)                                      506,890                6.3%
Traci M. Ford (5)                                        435,750                5.4%
Jennifer D. Ford/Roe (6)                                 419,250                5.2%
Greystone Partners, L.P. (7)                             295,000                3.6%
Quantum Industrial Partners LDC ("QIP") (8)            2,595,962               32.1%
All Executive Officers
and Directors as a group (2 persons)                   1,156,333               14.3%
</TABLE>

*Less than 2%

                                       42
<PAGE>

(1)    Mr. Ford serves as a Chairman of the Board of Directors and Chief
       Executive Officer. Includes 136,875 shares owned by Catherine Ford, Mr.
       Ford's wife, of which Mr. Ford disclaims beneficial ownership. Also
       includes options to purchase (i) 50,000 shares of Common Stock at $2.20
       per Share through August 2, 2001; 200,000 shares of Common Stock at
       $2.00 per Share through August 2, 2006; 25,000 shares of Common Stock at
       $6.00 per share through December 3, 2006, and 150,000 shares of Common
       Stock at $.38 per Share through July 7, 2000; (iii) options issued to
       Mrs. Catherine Ford to purchase 62,500shares of Common Stock at $8.75
       through January 16, 2007, 18,750 shares of Common Stock at $6.00 per
       share through December 3, 2006, and 9,375 shares at $2.20 through August
       2, 2001 for which Mr. Ford disclaims beneficial ownership. Also includes
       40,000 shares held in custody by Mr. Ford for his grandchildren, and
       14,000 shares held in custody by Mrs. Ford for her children for which
       Mr. Ford disclaims beneficial ownership. This number does not include
       options held by Mr. Ford to purchase 250,000 shares which have not
       vested at this date.

(2)    Mr. Sandler serves as President, Chief Operating Officer, Secretary,
       Chief Financial Officer and Director. Includes 65,000 subject options but
       does not include 195,000 subject options which have not vested at this
       date.

(3)    Address is c/o Armen Partners LP, 630 Fifth Avenue, Suite 918, New York,
       New York 10111. Includes 325,000 and 50,000 shares of Common Stock owned
       by Armen Partners, L.P. and Armen Partners Offshore Fund Ltd. of which
       Garo Armen is the general partner. Includes warrants to purchase 162,500,
       25,000 and 12,500 shares of Common Stock at $2.00 per share through
       December 31, 1999 owned by Armen Partners, L.P., Armen Partners Offshore
       Fund Ltd., and Garo Armen, respectively. Includes 25,000 shares of Common
       Stock owned by Garo Armen.

(4)    Address is 859 Glouchester St. Boca Raton, FL. 33487. Includes options
       to purchase 18,750 shares of Common Stock at $2.20 per Share through
       August 2, 2006, 3,375 shares of Common Stock at $6.00 per share through
       December 3, 2006 and 62,500 shares of Common Stock at $8.75 per share
       through January 16, 2007.

(5)    Address is 61 Lexington Avenue, New York, New York  10010.

(6)    Address is 1627 SE Greenacres Circle, Port St. Lucie, Florida  34952.

(7)    Address is 1160 Third Avenue, New York, New York 10021. Includes 150,000
       shares of Common Stock and Warrants to purchase 75,000 shares of Common
       Stock at $2.00 per share through December 31, 1999 owned by Greystone
       Partners, LP. Also includes 50,000 shares of Common Stock and options to
       purchase 20,000 shares of Common Stock at $9.00 per share through March
       31, 2000 owned by Mr. Harvey Stober, the General Partner of Greystone
       Partners, L.P.

(8)    Address is c/o Curacao Corporation Company, N.V., Kaya Flamboyan,
       Willenstad Curacao, Netherlands, Antilles. Includes warrants to purchase
       500,000 shares of Common Stock at $2.75 per share through December 31,
       2000. Includes 1,025,962 shares of Common Stock which can be obtained
       upon conversion of $2.5 million of 12% Senior Subordinated Convertible
       Notes at a conversion price of $2.75 per share through January 1, 2003.

                                       43
<PAGE>

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, 1997, all Section 16
(a) filing requirements applicable to its officers, directors and greater than
ten percent (10%) beneficial owners were completed and filed on a timely basis,
except that reports for Mr. Ron Hiram, a director elected on July 17, 1997 who
resigned on December 4, 1998, and Mr. Robert Soros, who replaced Mr. Hiram as a
director on December 4, 1998 and resigned on February 5, 1998, were not filed on
a timely basis.

ITEM 12.   CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
           ----------------------------------------------

Loans and Issuances of Securities to Taylor/Ford. During 1994, the Company and
its then principal shareholder, Richard C. Ford, instituted legal action against
the estate of a former 50% owner of the Company ("the Estate"). This litigation
sought a declaratory judgment approving the dilution of the Estate's interest in
the Company from 50% to approximately 10% as a result of the issuance of
additional Common Stock in 1994 to the principal shareholder and his children.
Subsequently, the beneficiaries of the Estate filed counterclaims against the
Company and its principal shareholder and his children seeking declaratory
relief, cancellation of additional stock issuances by the Company, an injunction
against further issuances, appointment of a receiver and damages against Ford
individually. In June 1995, the Estate demanded repayment of the non interest
bearing shareholder loans due to the Estate for which there were no stated due
dates. In September 1996, the Company entered into an Agreement in Partial
Settlement of Puradyn Issues ("Agreement") which released the Company, with
prejudice, from all litigation pending or contemplated by the Taylor Family, the
beneficiaries of the Estate, and individually, against the Company related to
any actions taken by the Company before the date of the Agreement. In return,
the Company agreed to repay the Estate's loans of $502,026 as follows: $167,342
due 90 days after any equity financings which raise in excess of $5,000,000 of
gross proceeds; $167,342 on the first and second anniversaries of such equity
financings. If the equity financings are less than $5,000,000 the amount of the
periodic debt repayment will be reduced and the term extended proportionately.
The Estate has agreed not to commence any action for loan repayment as long as
the Company is in compliance with the Agreement and raises gross proceeds of at
least $2,000,000 within one year of the Agreement. The Company has raised in
excess of $2,000,000 as required by the Agreement, however, it failed to make
the required payment on January 31, 1999. The Estate has declared the Agreement
to be in default and has demanded immediate payment of the balance due totaling
$294,756.

                                       44
<PAGE>

        In 1996, Mr. Ford loaned the Company $23,458 at 10% per annum. During
1996, the Company incurred approximately $500 of interest expense related to
these and other loans. See "Note 4 to the Notes to Financial Statements".

        During 1996, Mr. Richard C. Ford was repaid an aggregate amount of
$58,671 on all outstanding loans. On August 1, 1996, Mr. Ford received 251,013
shares of Common Stock in exchange for his non interesting bearing shareholder
loans in the amount of $502,026.

        In January 1997, as amended, the Company loaned Richard C. Ford $200,000
bearing interest at 10% per annum and due in June 1997 secured by 40,000 shares
of the Company's Common Stock owned by Mr. Ford. On June 19, 1997, Mr. Ford
repaid the entire principal and accrued interest on his loan in the amount of
$209,078.

        During 1995, Mr. Richard C. Ford agreed to become personally obligated
on behalf of the Company for the repayment of certain loans made to the Company
of which all such loans had been repaid as of December 31, 1996.

        Richard C. Ford Consulting Agreement. On July 17, 1997, the Company
entered into a six month consulting agreement with Richard C. Ford whereby Mr.
Ford would perform various sales consulting and other services for the Company
in exchange for a fee of $8,000 per month, health insurance premiums of
approximately $1,000, reimbursable business expenses and a commission of 10% of
the gross margin of any sales consummated by Mr. Ford during this period. Such
agreement was extended to March 4, 1998. During 1998 and 1997, Mr. Ford was paid
approximately $16,000 and $45,000, respectively, pursuant to this consulting
agreement.

        On July 8, 1998 Richard C. Ford was awarded 300,000 options for past and
future services to the Company covering March 1998 through July 7, 1999. One-
half of these options vested July 8, 1998 and the other half will vest July 7,
1999.

        D.B. Filters, Inc. On May 20, 1996, the Company acquired all of the
common stock of D.B. Filters, Inc. ("DB Filters") for $1,275 in cash and 90,773
shares of its Common Stock with an estimated fair value of approximately
$137,000. The fair market value of the shares of Common Stock was based upon
$1.51 per Share, which was the price per Share being offered by the Company to
investors pursuant to a private offering, which was being undertaken by the
Company at the same time as the acquisition of DB Filters. DB Filters was owned
by two employees of the Company, one of which was Byron Lefebvre, a former
Director of the Company. DB Filter's only assets were the future royalty rights
related to the Company's new Element patent and certain restricted, as defined,
North American Element manufacturing rights. DB Filters had no other material
assets or liabilities at December 3, 1994 and 1995 and no material operations in
1994 and 1995.

                                       45
<PAGE>

Quantum Industrial Partners LLC. On June 19, 1997, the Company and members of
the Ford Family and Taylor Family entered into a Securities Purchase Agreement
with Quantum Industrial Partners LDC ("QIP") ("the Agreement"). Pursuant to the
Agreement, the Company issued QIP a $2,000,000 non-interest bearing promissory
note due December 19, 1997 and received gross proceeds of $2,000,000. This note
was subject to mandatory prepayment prior to its due date upon the Company's
consummation of a public offering of either debt or equity securities. As long
as this note was outstanding, the Company cannot, without the consent of QIP,
declare or pay any dividends, purchase, redeem or acquire any of its Common
Stock or retire its existing indebtedness other than required periodic payments.
Effective December 19, 1997, the QIP note began accruing interest at 12% per
annum.

        Additionally, the Company issued a Common Stock Purchase Warrant to QIP
for the purchase of 500,000 shares of the Company's Common Stock, exercisable at
$2.75 per share and expiring on December 31, 2000. The warrant is subject to
anti-dilution provisions under certain circumstances. The Company has also
agreed to register securities of QIP under certain circumstances.

        On January 26, 1998, the Company and QIP entered into a Note Exchange
Agreement whereby the above $2,000,000 promissory note, due December 19, 1997,
was exchanged for a $2,000,000 12% Senior Subordinated Convertible Note (Note)
due 2003. Interest shall be payable quarterly commencing April 1, 1998, provided
however that at the option of the Company, unpaid interest may be added to the
principal balance of the Note in lieu of a cash payment. The Note is senior to
all indebtedness of the Company, except bank or financial institution debt. The
Note will be redeemable at the option of QIP on or after the earlier of January
1, 2001 and the date on which the Company raises cash proceeds aggregate $10
million involving the sale of debt, equity or assets. As long as this Note is
outstanding, the Company cannot, without the consent of QIP, declare or pay any
dividends, purchase, redeem or acquire any of its Common Stock, retire its
existing indebtedness other than existing required periodic payments or enter
into transactions with any affiliate.

        Prior to January 1, 2003, the Note shall be convertible, at the option
of QIP, into Common Stock in the Company at a conversion price of $2.75 per
share. The Note is subject to anti-dilution provisions under certain
circumstances. The Company has also agreed to register the securities underlying
the Note under certain circumstances.

        Additionally, on January 26, 1998, the Company and QIP entered into a
Note Purchase Agreement whereby the Company issued QIP a 12% Senior Subordinated
Convertible Note in the aggregate principal amount of $500,000. The loan
proceeds can be used for general operating expenses of the Company and to repay
$103,501 due to a former shareholder. The terms and conditions of this $500,000
Note are identical to the $2,000,000 Note described above.

        The Company has not paid the quarterly interest on the $2,000,000 and
$500,000 12% Senior Subordinated Convertible Notes since inception, and has
elected to add the amounts, aggregating $321,396, at December 31, 1998, to the
principal under provisions of the respective note agreements.

                                       46
<PAGE>

        On June 19, 1997, QIP purchased 285,000 and 785,000 shares of the
Company's Common Stock directly from the children of the Taylor Family and from
Mr. Richard Ford and his children for an aggregate purchase price of $785,750
and $2,158,750, respectively.

        Consulting Services. On August 2, 1996, the Company granted Armen
Capital Management Corp., whose President is Garo Armen, non-qualified stock
options to purchase an aggregate of 250,000 shares of Common Stock at $2.00 per
share through August 2, 1998, which vested on January 1, 1997, for various
consulting services. These options expired in August, 1998.

        On May 20, 1997, the Company granted to Harvey Stober, for various
consulting services, non-qualified stock options to purchase an aggregate of
20,000 shares of Common Stock at $9.00 per share through March 31, 2000, of
which 2,500 shares vested on May 20, 1997, and the remaining options vested
quarterly in increments of 2,500 shares commencing on September 30, 1997.

        The Company believes that the transactions referred to above were on
terms no less favorable to the Company than terms which could have been obtained
from unrelated third parties.

                                       47

<PAGE>
<TABLE>
<CAPTION>

ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
         --------------------------------

A)       Index to Exhibits

Exhibits          Description of Documents
--------          ------------------------
<S>               <C>
3.1               Amended and Restated Certificate of Incorporation of T/F Purifiner, Inc. dated December 30, 1996 (2).
3.1(a)            Certificate of Amendment to Certificate of Incorporation dated February 3, 1998 (4)
3.2               Bylaws of T/F Purifiner, Inc. (1).
3.3               Memorandum and Articles of Association of TF Purifiner Ltd. (1).
4.1               Amendment No. 1 to Registration Rights Agreement (4).
10.1              Stock Option Plan (1).
10.2              Agreement between T/F Systems, Inc. and T/F Purifiner, Inc. dated March 1, 1991 (with exhibits) (1).
10.3              Asset Purchase Agreement between T/F Systems, Inc. and T/F Purifiner, Inc. dated December 31, 1995 (1).
10.4              Stock Exchange Agreement between D.B. Filters,  Inc., Byron Lefebvre and Robert Meyer, and T/F Purifiner,
                  Inc. (with exhibits) (1).
10.5              Joint Venture Agreement between T/F Purifiner,  Inc. T/F Systems,  Inc., Centrax Limited, The Barr Family
                  and A.N. Davies (1).
10.6              Lease  Agreement  between Papeyco Trading  International,  Inc. and T/F Purifiner,  Inc. dated August 23,
                  1993 (1).
10.7              Master Distributor Agreement dated April 6, 1995 between KLC Corporation and the Company (1).
10.8              Exclusive  Distributor Agreement / Colombia Effective Date March 1, 1996, between Al Pacific Cali and the
                  Company (1).
10.9              Exclusive  Agreement for  Distributorship  in Singapore dated February 6, 1996 between Kian Seng Hardware
                  Trading Pte. Ltd. and the Company (1).
10.10             Exclusive  Agreement for  Distributorship  in Malaysia  dated February 5, 1995 between Kian Seng Hardware
                  Trading Pte. Ltd. and the Company (1).
10.11             Exclusive  Agreement  for  Distributorship  in Thailand  dated  November 17, 1995 between  N.Haven  Group
                  International Co. Ltd. and the Company (1).
10.12             Exclusive  Agreement for  Distributorship  in Indonesia dated February 5, 1996 between PT Hista Bayhu and
                  the Company (1).
10.13             Master Distributor Agreement dated January 11, 1995 between Trimex Korea and the Company (1).
10.14             Promissory Note dated December 21, 1995 between the Company, Richard C. Ford, individually,  T/F Systems,
                  Inc. as maker and Bassett Boat Company of Florida in the principal amount of $200,000 (1).
10.15             Securities Purchase Agreement and Exhibits thereto (3)
10.16             Note Exchange Agreement dated as of January 26, 1998 (4).
10.17             12% Senior Subordinated Convertible Note in the principal amount of $2,000,000 (4).
10.18             Note Purchase Agreement dated January 26, 1998 (4)

                                       48
<PAGE>
10.19             12% Senior Subordinated Convertible Note in the principal amount of $500,000 (4).
24.1              Consent of Independent Auditors as of December 31, 1998 (5)
24.2              Consent of Independent Auditors as of December 31, 1997 (5)
27                Financial Data Schedule (5)
99.1              Final Judgment in T/F Systems,  Inc. v. Southeast Capital Financing,  Inc., Case No. CL 90-12772AE in the
                  Circuit Court of the 15th Judicial Circuit in and for Palm Beach County, Florida (1).
</TABLE>
-------------------
(1)      Incorporated by reference from the Exhibits to the Company's Form 10-SB
         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-K,
         June 19, 1997, as filed with the Securities and Exchange Commission.
(4)      Incorporated by reference from the Exhibit to the Company's Form 8-KA,
         February 11, 1998, as filed with the Securities and Exchange
         Commission.
(5)      Filed herewith.

B)       Report on Form 8-K.
         None


                                       49
<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: June 11, 1999                   By: /s/Richard C. Ford
                                          --------------------------
                                             Richard C. Ford
                                             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: June 11, 1999


By: /s/Allan J. Sandler               By: /s/Richard C. Ford
    --------------------------------      -------------------------------------
       Alan J. Sandler                       Richard C. Ford
       President, Director and Chief         Chairman of the Board of Directors
       Financial and Accounting Officer



                                       50

<PAGE>

ITEM 7.  FINANCIAL STATEMENTS
         --------------------

                    Puradyn Filter Technologies, Incorporated

                          INDEX TO FINANCIAL STATEMENTS



                                                                            Page


Independent Auditors' Report as of December 31, 1998.........................F-2

Independent Auditors' Report as of December 31, 1997.........................F-3

Balance Sheet................................................................F-4

Statements of Operations.....................................................F-5

Statements of Stockholders' Deficiency.......................................F-6

Statements of Cash Flows.....................................................F-7

Notes to  Financial Statements...............................................F-8





















                                       F-1
<PAGE>



                          INDEPENDENT AUDITORS' REPORT


Board of Directors and Shareholders of
Puradyn Filter Technologies, Incorporated
Boynton Beach, Florida


We have audited the accompanying  balance sheet of Puradyn Filter  Technologies,
Incorporated  (formerly  known as T/F Purifiner,  Inc.), as of December 31, 1998
and the related  statements of  operations,  stockholders'  deficiency  and cash
flows for the year 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 audit.

We conducted our audit in accordance with generally accepted auditing standards.
Those standards  require that we plan and perform the audit to obtain reasonable
assurance   about  whether  the  financial   statements  are  free  of  material
misstatement.  An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the 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 audit provides a reasonable basis for our opinion.

In our opinion,  the financial  statements  referred to above present fairly, in
all material respects,  the financial position of the Company as of December 31,
1998 and the  results  of its  operations  and its cash  flows for the year then
ended in conformity with generally accepted accounting principles.

The  accompanying  financial  statements  have been  prepared  assuming that the
Company  will  continue  as a  going  concern.  As  discussed  in  Note 1 to the
financial  statements,  the  Company  has  experienced  operating  losses  since
inception.   The  Company's  financial  position  and  operating  results  raise
substantial doubt about its ability to continue as a going concern. Management's
plans in regard to these  matters are also  described  in Note 1. The  financial
statements do not include any adjustments  that might result from the outcome of
this uncertainty.



                                                /s/Durland & Company, CPAs, P.A.
                                                   Durland & Company, CPAs, P.A.
Palm Beach, Florida
March 5, 1999, except for
Note 6, as to which the date
is March 25, 1999


                                       F-2
<PAGE>

                                            Richard A. Eisner & Company, LLP
                                            Accountants and Consultants

EISNER

                                            575 Madison Avenue
                                            New York, NY 10022-2597
                                            Tel 212 355 1700 Fax 212 355 2414
                                            www.rae.com

INDEPENDENT AUDITORS' REPORT

Board of Directors and Stockholders of
Puradyn Filter Technologies, Incorporated


         We have audited the accompanying statements of operations, changes in
stockholder' equity (capital deficiency) and cash flows for the year December
31, 1997 of Puradyn Filter Technologies Incorporated (formerly known as T/F
Purifiner, Inc.). 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 audit.

         We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
missatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the 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 audit provides a reasonable basis for our opinion.

         In our opinion, the financial statements of Puradyn Filter
Technologies, Incorporated enumerated above present fairly, in all material
respects, the results of its operations and its cash flows for the year ended
December 31, 1997, in conformity with generally accepted accounting principles.

         The accompanying financial statements have been prepared assuming that
the Company will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company has sustained recurring operating losses and
negative cash flows from operating activities that raise substantial doubt about
its ability to continue as a going concern. Management's plans in regard to
these matters are also described in Note 1. The financial statements do not
include any adjustments that might result from the outcome of this uncertainty.


/s/ Richard A. Eisner & Company, LLP
------------------------------------
Richard A. Eisner & Company, LLP


New York, New York
February 20, 1998


With respect to Note 11
September 8, 1998


                                       F-3
<PAGE>
                    Puradyn Filter Technologies, Incorporated
                                  Balance Sheet
                                December 31, 1998
<TABLE>
<S>                                                                                   <C>
                                        ASSETS
CURRENT ASSETS
   Trade accounts receivable, net of allowance for doubtful accounts of $35,000       $                      30,623
    Inventories                                                                                             342,439
    Prepaid expenses and other current assets                                                                   207
                                                                                      -----------------------------
Total current assets                                                                                        373,269
                                                                                      -----------------------------
FIXED ASSETS
   Property and equipment, net                                                                              289,317
                                                                                      -----------------------------
Total fixed assets                                                                                          289,317
                                                                                      -----------------------------
OTHER ASSETS
   Other assets                                                                                              16,370
                                                                                      -----------------------------
Total other assets                                                                                           16,370
                                                                                      -----------------------------
Total assets                                                                          $                     678,956
                                                                                      =============================
                       LIABILITIES AND STOCKHOLDERS' DEFICIENCY
CURRENT LIABILITIES
   Cash overdraft                                                                     $                      77,693
   Accounts payable -trade                                                                                  422,252
   Accrued expenses                                                                                         167,661
   Customer deposits                                                                                         48,568
   Current portion of capital lease obligations                                                              20,960
   Note payable to bank                                                                                     250,000
   Note payable to shareholder                                                                              150,000
   Note payable to former shareholder                                                                       294,756
                                                                                      -----------------------------
Total current liabilities                                                                                 1,431,890
                                                                                      -----------------------------
LONG TERM DEBT
   Note payable and accrued interest to QIP, a shareholder                                                2,821,396
   Capital lease obligations                                                                                 12,851
                                                                                      -----------------------------
Total other liabilities                                                                                   2,834,247
                                                                                      -----------------------------
Total liabilities                                                                                         4,266,137
                                                                                      -----------------------------
STOCKHOLDERS' DEFICIENCY
   Preferred stock, $.001 par value, 500,000 shares authorized; 0 issued and
       outstanding                                                                                                0
   Common stock, $.001 par  value, 20,000,000 shares authorized, 5,223,493 issued
       and outstanding                                                                                        5,223
   Additional paid-in capital                                                                             7,309,201
   Unearned compensatory options                                                                             (2,560)
   Loan receivable, net of allowance for doubtful accounts of $38,000                                       (22,931)
   Deficit                                                                                              (10,876,114)
                                                                                      -----------------------------
Total stockholders' deficiency                                                                           (3,587,181)
                                                                                      -----------------------------
Total Liabilities and Stockholders' Deficiency                                        $                     678,956
                                                                                      =============================
</TABLE>
    The accompanying notes are an integral part of the financial statements.
                                      F-4
<PAGE>
                    Puradyn Filter Technologies, Incorporated
                            Statements of Operations
                     Years Ended December 31, 1997 and 1998
<TABLE>
<S>                                                                    <C>                    <C>
                                                                                1997                  1998
                                                                       ---------------------- ---------------------
Net sales                                                              $            1,352,663 $             708,028
Cost of sales                                                                       1,019,317               579,508
                                                                       ---------------------- ---------------------
Gross profit                                                                          333,346               128,520
                                                                       ---------------------- ---------------------
Operating expenses:
   Selling                                                                          2,740,188             1,059,573
   General and administrative                                                       1,121,888               630,502
   Engineering and development                                                        183,468               152,016
   Deferred profit                                                                    (9,607)                     0
   Impaired assets                                                                    324,330                     0
                                                                       ---------------------- ---------------------
Total operating expenses                                                            4,360,267             1,842,091
                                                                       ---------------------- ---------------------
Operating loss                                                                    (4,026,921)           (1,713,571)
                                                                       ---------------------- ---------------------
Other income (loss)
   Interest expense                                                                 (460,050)             (354,281)
   Interest income                                                                     62,846                 6,763
                                                                       ---------------------- ---------------------
Total other income (loss)                                                           (397,204)             (347,518)
                                                                       ---------------------- ---------------------
Net loss                                                               $          (4,424,125) $         (2,061,089)
                                                                       ====================== =====================
Basic loss per common share                                            $                (.86) $               (.40)
                                                                       ====================== =====================
Basic number of weighted average common shares outstanding                          5,167,681             5,213,752
                                                                       ====================== =====================
</TABLE>








     The accompanying notes are an integral part of the financial statements
                                       F-5
<PAGE>
                    Puradyn Filter Technologies, Incorporated
                     Statements of Stockholders' Deficiency
<TABLE>
<S>                                   <C>          <C>        <C>           <C>            <C>        <C>             <C>
                                                               Additional     Unearned                                   Total
                                           Common Stock         Paid-in     Compensatory    Loans                     Stockholders
                                                                Capital        Options    Recveivable    Deficit       Deficiency
                                      ----------------------- ------------- ------------- ----------- --------------- --------------
                                         Shares      Amount
                                      ------------ ---------- ------------- ------------- ----------- --------------- --------------
BALANCE, January 1, 1997                5,097,080  $   5,097  $  6,323,505  $   (123,114) $        0  $   (4,390,900) $   1,814,588

Cancellation of common stock               (8,676)        (9)      (22,491)            0           0               0        (22,500)
Exercise of stock option, net             117,475        118       239,456             0     (73,931)              0        165,643
Issuance of compensatory stock option
   and warrants                                 0          0       357,052      (357,052)          0               0              0
Amortization of unearned  compensation          0          0             0       462,846           0               0        462,846
Issuance of stock purchase warrant              0          0       400,000             0           0               0        400,000
Net loss                                        0          0             0             0           0      (4,424,125)    (4,424,125)
                                      ------------ ---------- ------------- ------------- ----------- --------------- --------------
BALANCE, December 31, 1997              5,205,879      5,206     7,297,522       (17,320)    (73,931)     (8,815,025)    (1,603,548)

Exercise of stock option, net                 500          0         1,000             0           0               0          1,000
Issuance of common stock                   17,114         17        10,679             0           0               0         10,696
Amortization of unearned  compensation          0          0             0        14,760           0               0         14,760
Collection of loan receivable                   0          0             0             0      13,000               0         13,000
Provision on loss on loan receivable            0          0             0             0      38,000               0         38,000
Net loss                                        0          0             0             0           0      (2,061,089)    (2,061,089)
                                      ------------ ---------- ------------- ------------- ----------- --------------- --------------

BALANCE, December 31, 1998              5,223,493  $   5,223  $  7,309,201  $     (2,560) $  (22,931) $  (10,876,114) $  (3,587,181)
                                      ============ ========== ============= ============= =========== =============== ==============
</TABLE>















     The accompanying notes are an integral part of the financial statements
                                       F-6
<PAGE>
                    Puradyn Filter Technologies, Incorporated
                             Statement of Cash Flows
                     Years ended December 31, 1997 and 1998
<TABLE>
<S>                                                                                           <C>                 <C>
                                                                                                      1997                1998
                                                                                              ------------------- ------------------
Operating activities
Net loss                                                                                      $       (4,424,125) $      (2,061,089)
Adjustments to reconcile net loss to net cash used by operating activities:
   Depreciation and amortization                                                                         571,756            104,941
   Provision for doubtful accounts                                                                        12,549            (15,000)
   Provision for uncollectible loan receivable                                                                 0             38,000
   Write down of impaired assets                                                                         324,330                  0
   Issuances of common stock and compensatory options and warrants                                       462,846             14,760
   Cancellation of common stock                                                                          (10,000)                 0
Changes in operating assets and liabilities:
     Trade accounts receivable                                                                            39,664             71,521
      Inventories                                                                                        (89,201)           187,001
      Prepaid expenses and other current assets                                                          (94,440)           112,270
      Other assets                                                                                       (14,249)               769
      Accounts payable - trade                                                                          (107,239)           233,553
      Accrued expenses                                                                                   106,782             (8,198)
      Accrued interest payable - QIP                                                                           0            313,396
      Customer deposits                                                                                 (159,085)           (66,272)
      Deferred rent                                                                                      (10,754)                 0
                                                                                              ------------------- ------------------
Net cash used by operating expenses                                                                   (3,391,166)        (1,074,348)
                                                                                              ------------------- ------------------
Investing activities
Additions to patents and trademarks                                                                      (60,092)                 0
Purchases of property and equipment                                                                     (221,115)           (31,360)
Decrease (increase) in other assets, net                                                                  10,100                  0
Increase in note receivable from shareholder/officer                                                    (200,000)                 0
Decrease in note receivable from shareholder/officer                                                     200,000                  0
                                                                                              ------------------- ------------------
Net cash used by investing activities                                                                   (271,107)           (31,360)
                                                                                              ------------------- ------------------
Financing activities
Increase in deferred issuance and financing costs                                                        (70,325)                 0
Proceeds from issuances of common stock and exercise of stock option, net                              1,194,737             11,698
Collection of loans and subscription receivable                                                                0             13,000
Proceeds from notes payable                                                                               20,200                  0
Payment on notes payable and capital lease obligations                                                   (33,000)           (46,056)
Proceeds from note payable to QIP                                                                      2,000,000            500,000
Proceeds from note payable to bank                                                                             0            250,000
Proceeds from note payable to shareholder                                                                      0            150,000
Payment on note payable to former shareholder                                                           (103,501)          (103,501)
Borrowing from investee                                                                                   20,875                  0
Repayment to investee                                                                                    (42,799)                 0
Increase in cash overdraft                                                                                     0             77,693
                                                                                              ------------------- ------------------
Net cash provided by financing activities                                                              2,986,187            852,834
                                                                                              ------------------- ------------------

Increase (decrease) in cash and cash equivalents                                                        (676,086)          (252,874)
Cash and cash equivalents at beginning of year                                                           928,960            252,874
                                                                                              ------------------- ------------------
Cash and cash equivalents at end of year                                                      $          252,874  $               0
                                                                                              =================== ==================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid for interest                                                                        $           52,050  $          14,486
                                                                                              =================== ==================
SUPPLEMENTAL DISCLOSURES OF NON-CASH FINANCING ACTIVITIES
Property and equipment acquired under capital leases                                          $           49,000  $               0
                                                                                              =================== ==================
</TABLE>
     The accompanying notes are an integral part of the financial statements
                                       F-7
<PAGE>
                    Puradyn Filter Technologies, Incorporated
                          Notes to Financial Statements
                           December 31, 1997 and 1998

(1)   The Company and Summary of Significant Accounting Policies
          The Company Puradyn Filter Technologies,Incorporated(formerly known as
          T/F  Purifiner,  Inc.),  ("Puradyn"  or  the  "Company"),  a  Delaware
          corporation, is engaged in the manufacturing, distribution and sale of
          oil  purification  systems  under  the  trademarks   Purifiner(R)  and
          Puradyn(TM).

          The Company holds the exclusive worldwide  manufacturing and marketing
          rights for the Purifiner products pursuant to licenses for two patents
          (see Note 9) and through direct ownership of various patents.

Going Concern    The  Company   has  incurred  losses  from   operations   since
          inception,  which has  resulted in negative  cash flow from  operating
          activities  and the  continuing  need  for  additional  financing.  In
          addition,  the Company has negative  working  capital and negative net
          worth.  These  factors  raise  substantial  doubt about the  Company's
          ability to  continue  as a going  concern.  In order to  continue as a
          going concern, the Company must obtain additional financing,  which it
          is endeavoring to do through the issuance of additional securities.

          The Company has  completed  several  private  placements of its Common
          Stock in 1996, and obtained debt financing in 1997,  1998 and January,
          1999, however, the Company needs to complete additional  financings in
          early 1999 to continue its operations.  There is no assurance that the
          Company can complete these  financings or that  profitable  operations
          can be achieved. The inability to obtain adequate additional financing
          when  needed,  would have a material  adverse  effect on the  Company,
          including requiring the Company to significantly  curtail or cease its
          operations.  The financial  statements do not include any  adjustments
          relating to the  recoverability  or  classification  of recorded asset
          amounts or the amounts or  classification of liabilities that might be
          necessary as a result of the above uncertainty.

          The  preparation of financial  statements in conformity with generally
          accepted  accounting  principles requires management to make estimates
          and  assumptions  that  affect  the  reported  amounts  of assets  and
          liabilities and disclosure of contingent assets and liabilities at the
          date of the financial statements, and the reported amounts of revenues
          and expenses during the reporting period.  Actual results could differ
          from those estimates.

Revenue Recognition   Sales  are  recognized  upon  shipment. Cash  received  by
          the Company prior to shipment is recorded as a customer deposit. 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.

Inventories    Inventories  are  stated  at  the lower of cost (first-in, first-
          out method) or market.

Property  and   Equipment   Property  and   equipment   are  recorded  at  cost.
          Depreciation  is  provided  using the  straight-line  method  over the
          estimated  useful lives of the related assets,  including  assets held
          under capital leases.  Leasehold  improvements  are amortized over the
          shorter  of the  useful  lives of the  improvement  or the term of the
          related lease. The estimated useful lives of property and equipment is
          5 years.  Upon sale or retirement,  the costs and related  accumulated
          depreciation  are eliminated from their respective  accounts,  and the
          resulting  gain or loss is  included  in the  results  of  operations.
          Repairs and  maintenance  charges,  which do not  increase  the useful
          lives of the assets, are charges to operations as incurred.

Patents and Trademarks   Patents  and   trademarks  have been written down to $1
          each, due to impairment of the respective amounts based on anticipated
          cash flows. See  "Impairment".  Accordingly,  expenditures for patents
          and trademarks are expensed as incurred. Patent and trademark expenses
          in 1998 and 1997 were $28,300 and $3,535, respectively.
                                       F-8
<PAGE>
                    Puradyn Filter Technologies, Incorporated
                          Notes to Financial Statements

Advertising Costs  Advertising  costs are generally charged to operations in the
          year  incurred.  During the years  ended  December  31, 1998 and 1997,
          these costs  totaled  $159,400  and  $113,200,  respectively,  and are
          presented in selling  expenses.  The 1998 amount  includes  $70,000 in
          expenses related to the pending litigation discussed in Note 11.

Engineering  and Development  Engineering and development  costs are expensed as
          incurred.

Impairment   Management reviews long lived  assets  and  intangible  assets  for
          impairment  whenever events or changes in  circumstances  indicate the
          carrying amount of such assets may not be recoverable.  Recoverability
          of these assets is determined by comparing the forecasted undiscounted
          net cash  flows  estimated  to be  generated  by those  assets  to the
          asset's  carrying  amount.  In the fourth quarter of 1997, the Company
          wrote  down the  unamortized  amount of costs in excess of net  assets
          acquired,  and  wrote  down to $1  each  the  amount  of  patents  and
          trademarks  due to  impairment  of the  respective  amounts  based  on
          anticipated cash flows.

Stock Based Compensation    The   Company   adopted   Statement   of   Financial
          Accounting    Standards   No.   123,   "Accounting   for   Stock-Based
          Compensation"  (SFAS  No.123).  The Company has elected to continue to
          apply APB No. 25 in accounting  for its employee stock option plan and
          to  disclose  in the  footnotes  the pro forma  effects  on net income
          (loss) as if the fair value of the  options has been  expensed.  Under
          the provisions of APB No. 25,  compensation  cost for stock options is
          measured as the  excess,  if any,  of the quoted  market  price of the
          Company's  Common  Stock  at the date of grant  over  the  amount  the
          employee must pay to acquire the stock. (See Note 13).

Credit Risk    The Company minimizes the concentration of credit risk associated
          with  cash  and  cash  equivalents  by  maintaining  its cash and cash
          equivalents  with  a  high  quality,   federally   insured   financial
          institution.   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 potential credit losses. (See Note 16.)

Fair Value of Financial Instruments    The  following   methods  and assumptions
          were  used in  estimating  the  indicated  fair  values  of  financial
          instruments:

          Cash and cash equivalents:  The carrying amount  approximates the fair
          value due to the short maturity of these instruments.

          Short term debt: The carrying  amount  approximates  fair value due to
          the short term maturity of these instruments.

          Long  term  debt:   The  fair  value  of  the   Company's   borrowings
          approximates  the carrying value based on current rates offered to the
          Company for similar debt.

Basic and Diluted Loss Per Share    The  Company   has   adopted   Statement  of
          Financial  Accounting  Standards  No. 128,  "Earnings  Per Share" (FAS
          128),  which  establishes  new standards for computing and  presenting
          earnings  per share  ("EPS")  effective  for the periods  ending after
          December 15, 1997. FAS 128 requires a dual  presentation  of basic and
          diluted  earnings per share.  Because of losses from  operations,  the
          effect  of  stock   options,   warrants   and   convertible   debt  is
          anti-dilutive.
                                       F-9
<PAGE>
                    Puradyn Filter Technologies, Incorporated
                          Notes to Financial Statements

(2)   Inventories  At December 31, 1998 inventories consist of the following:

                          Raw materials                   $298,008
                          Finished goods                    43,431
                          Supplies                           1,000
                                                       -------------
                                                          $342,439

(3)   Property and Equipment At December 31, 1998 property and equipment at cost
          consists of the following:

                          Machinery and equipment              $ 509,102
                          Furniture and fixtures                  47,193
                          Leasehold improvements                  45,698
                                                              ------------
                                                                 601,993
                          Less accumulated depreciation
                            and amortization                    (312,676)
                                                               $ 289,317

          At  December  31,  and  1998,   machinery   and   equipment   includes
          approximately  $103,000 of equipment  held under  capital  leases with
          related accumulated amortization of approximately $49,000.

(4)       Leases The Company's  manufacturing,  warehouse and office  facilities
          are leased under a five year, noncancelable operating lease. The lease
          began on April 1, 1994,  with payments  commencing on July 1, 1994 and
          increasing  lease payments over the second through fourth years of its
          term.  The Company has  accounted for these lease  payments  using the
          straight-line  method  over  the  term of the  lease  and  recorded  a
          deferred  rent  payable.  At December 31, 1998,  future  minimum lease
          payments  to the term of the lease at March 31,  1999 are  $22,530.  A
          month-to-month  operating lease entered into in 1997, with payments of
          $1,590  per month,  was  canceled  in 1998.  Total  rent  expense  was
          approximately $96,000 and $86,000 for 1997 and 1998, respectively.

          The Company  also  has  entered  into  several obligations for certain
          office and  manufacturing  equipment  which have been accounted for as
          capital leases. At December 31, 1998, future minimum commitments under
          these noncancelable capital leases are as follows:

                                              1999                   $20,960
                                              2000                    12,851
                                                                      -------
                Total minimum lease payments                          33,811
                 Less amount representing interest at
                    approximately 16%                                 (5,630)
                                                                   ----------
                 Present value of minimum lease payments            $ 28,181
                                                                     =======

(5)       Note  Payable to  Shareholder  On May 21,  1998 and on June 24,  1998,
          Richard C. Ford,  Chairman  of the Board of  Directors  and a majority
          shareholder of the Company,  loaned the Company  $110,000 and $40,000,
          respectively.  For each loan, the Company issued notes payable due one
          year from the date of issuance at 12% interest and secured by accounts
          receivable  and  inventories.  Interest  accrued to December  31, 1998
          totaling $10,750 has not been paid.
                                      F-10
<PAGE>
                    Puradyn Filter Technologies, Incorporated
                          Notes to Financial Statements

(6)       Note Payable to Bank On August 21, 1998, the Company borrowed $250,000
          from its bank under a  revolving  note  payable  due one year from the
          date of issuance with interest at 8.75%, payable monthly. The note was
          secured by substantially all assets of the Company.

          On January 21,1999,  the Company converted its loan with the bank to a
          $350,000 revolving line of credit, due on demand, with interest at the
          bank's prime rate (7.75% at  inception).  The revolving line of credit
          is secured by  certificates  of deposit in the name of Richard C. Ford
          and held by the bank.  On January 21,  1999,  the Company  borrowed an
          additional  $100,000 under the new revolving line of credit.  Both the
          initial  loan  and  the  revolving  line  of  credit  were  personally
          guaranteed by Richard C. Ford.

          On March 25, 1999, the Company  increased the revolving line of credit
          from  $350,000 to  $525,000.  The  additional  $175,000 was drawn down
          during  March 1999.  The total  balance  owed on the line of credit is
          secured by  certificates of deposit in the name of Richard C. Ford and
          held at the bank.

(7)   Note Payable to Former Shareholder   In  1996, the Company entered into an
          Agreement (the "Agreement") with  the beneficiaries of the estate of a
          former  50%  owner of the Company ("the Estate") in partial settlement
          the issues  under which the Company agreed to repay the Estate's loans
          of  $502,026  based  on  a  formula  related  to  the amount of equity
          financings  by  the  Company.  The  Estate  agreed not to commence any
          action for loan repayment as long as the Company is in compliance with
          the  Agreement.  Based  upon  equity raised through December 31, 1998,
          future payments due on January 31 each year are: 1999: $104,328; 2000:
          $104,328;  and  2001: $86,100.  However,  the Company did not make the
          required payment on January 31,1999 and the Estate has issued a letter
          to  the  Company  to  declare  the  Agreement in default and to demand
          immediate  payment  of the entire remaining balance.  Accordingly, the
          entire remaining balance has been classified as a current liability as
          of December 31, 1998.

(8)  Notes Payable to QIP, a Shareholder   On  January 26, 1998, the Company and
          Quantum  Industrial  Partners LDC ("QIP") entered into a Note Exchange
          Agreement whereby a $2,000,000 promissory note issued June 19, 1997 to
          QIP was exchanged for a $2,000,000 12% Senior Subordinated Convertible
          Note ("Note") due 2003. Interest is payable quarterly commencing April
          1, 1998, provided, however, that at the option of the  Company, unpaid
          interest  may be added to the principal balance of the Note in lieu of
          a  cash  payment,  which  the  Company  has elected to do each quarter
          through December 31, 1998. Such unpaid interest bears interest  at 15%
          per annum and is payable on demand. Total accrued interest at December
          31, 1998 was $321,396.  The  Note is senior to all indebtedness of the
          Company,  except  bank  or financial institution debt. The Note can be
          redeemable at the option  of QIP on or after the earlier of January 1,
          2001 or the date on which the Company raises cash proceeds aggregating
          $10 million from the sale of debt or equity securities or assets.   As
          long  as  the  Note  is  outstanding,  the Company cannot, without the
          consent  of  QIP,  declare  or  pay any dividends, purchase, redeem or
          acquire any of its Common Stock retire its existing indebtedness other
          than  existing  required  periodic payments or enter into transactions
          with any affiliate.

          Prior to January 1, 2003,  the Note is  convertible,  at the option of
          QIP,  into Common Stock of the Company at a conversion  price of $2.75
          per  share,  which was  greater  than the quoted  market  price of the
          Company's   Common  stock  on  the  date  of  issue.   Under   certain
          circumstances, the Note is subject to anti-dilution provisions and the
          Company will  register the  securities  underlying  the Note.  Also on
          January 26,  1998,  the Company and QIP entered  into a Note  Purchase
          Agreement  whereby  the Company  issued QIP a 12% Senior  Subordinated
          Convertible Note in the aggregate  principal  amount of $500,000.  The
          terms  and  conditions  of this  $500,000  note are  identical  to the
          $2,000,000 Note described above.

          At December 31, 1998, the Company has classified principal and accrued
          interest  of  $2,821,396  as a long term  liability  and has  reserved
          1,025,962  shares of Common Stock under the  conversion  provisions of
          the notes discussed above.
                                      F-11
<PAGE>
                    Puradyn Filter Technologies, Incorporated
                          Notes to Financial Statements

(8)  Notes Payable to QIP, a Shareholder (continued)    In  connection  with the
          $2,000,000 promissory note originally  issued to QIP on June 19, 1997,
          the  Company  issued  a  Common  Stock Purchase Warrant to QIP for the
          purchase  of 500,000 shares of the Company's Common Stock, exercisable
          at $2.75 per share and expiring on December 31, 2000.   The warrant is
          subject to anti-dilution provisions under certain circumstances.   The
          warrant  was  assigned  a  value  of  $400,000  which  was credited to
          additional paidin capital and the $2,000,000 note payable was recorded
          net of the related discount.  The  Company has reserved 500,000 shares
          of its Common Stock underlying this warrant.

(9)  Royalties       In  connection  with the Company  being  granted  worldwide
          manufacturing  and  marketing  rights  for  certain  of the  Purifiner
          products,  a royalty  agreement  was  entered  into over a term  which
          mirrors the life of the related patents or any  improvements  thereto.
          Pursuant to this  royalty  agreement,  the owner of the  patents  will
          receive  5% of the net unit sale  price and of all  covered  Purifiner
          products,  as  defined.  Additionally,  1% of the net  sales  price of
          replacement  oil filter elements will be paid as a royalty for the use
          of the Purifiner U.S. trademark.

          In  May  1994,  the  Company  and  the  patent  owner  entered  into a
          settlement  agreement  relating  to  royalties.  As a  result  of this
          agreement, the patent owner is entitled to a minimum annual royalty of
          $24,000,  payable in minimum monthly  installments of $2,000.  Royalty
          expense  for  1998 and 1997 was  approximately  $21,000  and  $44,000,
          respectively.

          In  February,  1997,  the patent  owner  filed an action  against  the
          Company for non payment of approximately  $21,000 of royalties claimed
          by  him,  seeking  a  permanent   injunction   against  the  Company's
          manufacturing and selling of the covered Purifiner products.  On March
          2, 1999,  the trial court ruled that the patent owner was not entitled
          to any  injunctive  relief and was  entitled to receive  approximately
          $20,000 in past royalties which are recorded at December 31, 1998.

(10) Income Taxes      In  accordance  with  Statement  of Financial  Accounting
          Standards  (SFAS)  No.  109,  deferred  income  taxes  (benefits)  are
          provided  for certain  income and  expenses  which are  recognized  in
          different  periods  for  tax  and  financial  reporting  purposes.  At
          December 31, 1998, the Company has net operating loss carryforwards of
          approximately  $7,872,900 for Federal income tax purposes which expire
          in 2018.  Due to the Company's  net losses,  no provision was made for
          income taxes in 1997 and 1998.

          The  significant  components  of the  net  deferred  tax  asset  as of
          December 31, 1998 are as follows:

                      Net operating losses                            2,963,000
                      Excess tax basis of manufacturing
                      rights acquired from related party                 60,000
                      Compensatory options and warrants                 241,000
                      Intangible assets                                 117,000
                      Other                                              28,000
                                                                     -----------
                                                                      3,409,000
                      Valuation allowance                            (3,409,000)
                                                                      ---------
                      Net deferred tax asset                  $               0
                                                               =================

          The difference between the statutory tax rate of 34% and the Company's
          effective tax rate of 0% is due to the increase in valuation allowance
          of $773,000.

          As a result of certain ownership  changes,  the Company may be subject
          to an annual  limitation on the  utilization of its net operating loss
          carryforward pursuant to Section 382 of the Internal Revenue Code
                                      F-12
<PAGE>
                    Puradyn Filter Technologies, Incorporated
                          Notes to Financial Statements

(11)  Contingencies   TF  Systems, Inc. ("Systems"), a related party (previously
          under  common  ownership  with  the  Company),  formerly   owned   the
          manufacturing and marketing rights to the Purifiner and transferred or
          sold such rights to the Company in 1995. In June, 1997, the former law
          firm of Systems filed a complaint against the Company, Systems,Richard
          C. Ford, individually and an inactive company controlled by Richard C.
          Ford,  demanding  payment  of approximately $313,000 of legal fees and
          costs, plus interest and attorney fees, related primarily to obtaining
          the  manufacturing  and  marketing rights to the Purifiner for Systems
          and the Company. Systems was awaiting a judgment of an appellate court
          which, if adjudicated in Systems' favor,  would  have provided it with
          sufficient  funds  to pay such legal fees and other possible legal fee
          claims  aggregating  approximately $75,000.  On February 26, 1997, the
          appellate  court  ruled  against Systems and, accordingly,  the  funds
          discussed above are not currently available to Systems to satisfy such
          claims. Puradyn Filter Technologies, Incorporated did not assume these
          obligations as part of its purchase of Systems in 1995  and management
          believes  such  amounts  are not the responsibility of Puradyn  Filter
          Technologies, Incorporated.  However,  Systems  is an inactive company
          whose  only asset is the claim that was reversed on  appeal and may be
          retried  by  Systems.   Accordingly, the ability to collect such funds
          from Systems is uncertain. The ultimate outcome of this litigation and
          other  unasserted  claims  against the Company cannot be determined at
          this  time,  however, based upon the opinion of the Company's counsel,
          a  favorable  outcome  is  likely.  No liability has been recorded for
          these claims in the accompanying balance sheet.

          During 1998, in the ordinary course of business,  the Company has been
          named in an action concerning a balance due to a vendor. The claim has
          been  estimated  at $72,000.  In  addition,  on  September 8, 1998 the
          Company  received  notice  from a  stockholder  regarding  a potential
          stockholder's  derivative  action  and/or a direct  negligence  action
          against the prior  Directors and Officers of the Company.  The Company
          advised the stockholder that it is not pursuing any potential claim at
          this time.  The  impact of this  contingent  matter is not  reasonably
          determinable.

(12)  Common Stock      During 1997,  5,000  shares  issued to a  not-for-profit
          environmental group in 1996 for past services and support given to the
          Company were returned to the Company and cancelled at a value of $2.00
          per share and credited to Additional Paid In Capital. These shares had
          been issued based on a $2.00  market  value.  Also during 1997,  3,676
          shares at a value of $12,500 were  canceled  that had been  subscribed
          for at December 31, 1996.

          Common stock reserved for possible  future issuance as of December 31,
          1998 is as follows:

                      Conversion of QIP notes (Note 8)                1,025,962
                      Stock Options (Note 13)                         1,977,025
                      Warrants (Notes 8 and 14)                         835,000
                                                                     ----------
                      Total shares of common stock                    3,837,987
                                                                      =========

(13)  Stock Options The Company's stock option plan, adopted in 1996 and amended
          in  July,  1997 (the "1996 Option Plan"), provides for the granting of
          up  to  2,200,000  options  for both incentive and non-qualified stock
          options  to  key personnel, including officers, directors, consultants
          and advisors to the Company, based upon the determination of the Board
          of Directors.  The  exercise  price of the options may be no less than
          fair  value  of  the  Common  Stock on the date of grant for incentive
          stock  options,  and the option term may not exceed five or ten years.
          Generally, options to employees vest over four years at 25% per annum,
          except  for  certain  grants  to employees which vested 50% upon grant
          with remaining amounts over two years at 25% per annum. At December 31
          1998  1,977,025 shares of Common Stock have been reserved for issuance
          under the 1996 Option Plan.
                                      F-13
<PAGE>
                    Puradyn Filter Technologies, Incorporated
                          Notes to Financial Statements

(13)   Stock Options (continued)  Additional information concerning the activity
          in the 1996 Option Plan is as follows:
                                               Number of        Weighted Average
                                                Shares           Exercise Price
     Options outstanding, January 1, 1997      1,360,000               $2.57
          Granted                                566,625                7.88
          Exercised                             (117,475)(a)            2.05
          Cancelled                             (139,330)               8.23
                                               ---------
     Options outstanding at December 31, 1997  1,669,820                3.93
          Granted                                932,685                 .47
          Exercised                                 (500)               2.00
          Cancelled                             (967,650)               3.80
                                               ---------
     Options outstanding at December 31, 1998  1,634,355                2.03
                                               =========

     Options exercisable at December 31:
               1997                            1,135,228               $3.24
                                               =========
               1998                              970,320                2.68
                                               =========

       Options available for grant at December 31:
            1997                                 287,705
                                              ==========
            1998                                 322,670
                                              ==========

          (a) At December 31, 1998,  $60,931 of loans receivable,  substantially
          all  collateralized  by underlying  Common Stock, was due from current
          and former  employees  who were allowed a cashless  exercise of 45,375
          stock options. As a result of allowing these cashless  exercises,  the
          Company  was  required  to treat such  options as newly  granted  and,
          accordingly,  has  expensed  $270,000 in 1997 based on the  difference
          between the quoted market price and exercise  price on the date of the
          cashless exercise.

          Summarized  information  with  respect  to 1996  Option  Plan  options
          outstanding at December 31, 1998 is as follows:

                          Options Outstanding                Options Exercisable
               --------------------------------------------- -------------------
               Weighted Average      Weighted       Weighted            Weighted
                  Remaining      Average Remaining   Average            Average
Range of            Number          Contractual     Exercise   Number   Exercise
Exercise Price   Outstanding      Life (in Years)     Price  Exercisable  Price

$ .38 - $ .44       862,035           6.77          $   .39    255,000   $   .38
 2.00 -  2.75       539,820           6.11             2.04    539,820      2.04
 4.50 - 10.00       232,500           7.86             8.13    175,500      7.98
                    -------                                    -------
                  1,634,355                                    970,320
                  =========                                    =======

          The effect of applying SFAS No. 123 on 1997 and 1998 proforma net loss
          and  recognizing  compensation  expense for consultants and the former
          Board of Advisors as stated below are not  necessarily  representative
          of the effects on  reported  net loss for future  years due to,  among
          other things,  (1) the vesting period of the stock options and the (2)
          fair  value  of  additional   stock  options  in  future  years.   Had
          compensation  cost  for the  Company's  1996  Option  Plan  grants  to
          employees and directors been determined based upon the fair value
                                      F-14
<PAGE>
                    Puradyn Filter Technologies, Incorporated
                          Notes to Financial Statements

(13)   Stock Options (continued)   at  the  grant date for awards under the 1996
          Option Plan, consistent with the methodology prescribed under SFAS No.
          123,  the  Company's  net  loss  in  1997  and  1998  would  have been
          approximately  $(4,703,000)  or $(.91) per basic and diluted share and
          $(2,142,000) or $(.41) per basic and diluted share, respectively.  The
          fair  value  of the options granted to employees/directors during 1998
          are estimated as $.39 per share ($.97 per  share in 1997), on the date
          of  grant  using  the  Black-Scholes  option  pricing  model  with the
          following weighted average assumptions:  dividend yield 0% in 1997 and
          1998,  volatility  of 161% in 1998 and 58% in 1997, risk-free interest
          rate  of 5.5% in 1998 and 6.0% in 1997 and expected life of 4 years in
          1998 and 2.3 years in 1997.

          During 1997, the Company  expensed  approximately  $120,000 related to
          the granting of stock  options to various  consultants  and the former
          Board of Advisors.  During 1997,  the Company  expensed  approximately
          $73,000  related to the granting of 50,000 stock  options and warrants
          to various  consultants.  The fair value of these options was $1.86 on
          the date of grant using the  Black-Scholes  option  pricing model with
          the following weighted assumptions: dividend yield 0%, volatility 40%,
          risk free interest rate of 5.7% and expected life of 1.3 years.

          During  1997 the  Company  granted  a  consultant  20,000  options  to
          purchase  Common Stock at $9.00 per share which are not under the 1996
          Option Plan. At December 31, 1998,  options to purchase  17,500 shares
          are exercisable and this option had a remaining contractual life of 15
          months.

(14) Warrants  At December 31, 1998, the Company had 10,000 warrants to purchase
          Common  Stock  outstanding  which  were  granted  in  1997  to various
          consultants.  These warrants are exercisable at $10.00 per  share  and
          expire on January 27, 1999. Also at December 31, 1998, the Company had
          325,000  warrants  to  purchase Common Stock  outstanding,  which were
          issued in connection with a private  placement.   These  warrants  are
          exercisable  at  $2.00  per  share and expire on December 31, 1999. As
          discussed  in  Note  8,  the Company issued to QIP 500,000 warrants to
          purchase Common Stock at $2.75 per share, which expire on December 31,
          2000.The Company has reserved an aggregate of 835,000 shares of Common
          Stock for shares issuable in connection with these warrants.

(15)  Joint Venture  Effective January 1, 1996, the Company entered into a joint
          venture agreement whereby such venture, TF Purifiner Ltd.("Ltd"), will
          sell  and  distribute the Company's product in Europe, the Middle East
          and  certain  African  countries.   The Company has an approximate 45%
          interest  in  Ltd's operations (50% voting interest) and is accounting
          for  Ltd using the equity method.  The Company is not required to fund
          Ltd,  and  Ltd  was  initially  capitalized with approximately $88,000
          provided  by one of its shareholders.  The Company is negotiating with
          Ltd's  other 45% shareholder (Centrax Ltd.) relating to the ownership/
          licensing of various pending patents filed by Centrax,as well as other
          matters, including the  possible  discontinuation of the joint venture
          with Centrax.  The  ultimate  outcome  of these negotiations cannot be
          determined at  this  time.  In 1997 and 1998, the Company had sales of
          approximately  $55,000 and $4,000, respectively, to Ltd, at negotiated
          prices.
                                      F-15
<PAGE>
                    Puradyn Filter Technologies, Incorporated
                          Notes to Financial Statements

(15)  Joint Venture (continued)    At December 31, and for the years then ended,
          summarized financial information of Ltd is as follows:

                                            1997                     1998
                                       --------------            -----------
          Total assets                  $    582,000              $ 465,000
          Total liabilities (1)            1,312,000              1,277,000
          Capital deficiency                (730,000)              (812,000)

          Total revenues                     394,000                270,000
          Gross profit                       170,000                140,000
          Net loss                          (447,000)              (465,000)

          (1) Includes  approximately $799,000 and $957,000 at December 31, 1997
          and  1998,  respectively,  of  loans  due  to  one  of  Ltd's  foreign
          shareholders,  collateralized by substantially all the tangible assets
          of Ltd.

(16)  Major Customers and Export Sales    The  Company   currently   operates  a
          single business  segment.  Its products are oil purification  systems,
          substantially  all of which are sold to distributors and end users for
          use on  transportation  vehicles.  This could  unfavorably  affect the
          Company's  overall exposure to credit risk inasmuch as these customers
          could be affected by similar economic or other conditions.

          During  1998,  18 customers  accounted  for  approximately  50% of the
          Company's net sales, and one customer  accounted for approximately 10%
          of  the  Company's  net  sales.  In  1998,   export  sales  aggregated
          approximately  $109,000 in geographic  regions as follows:  $81,000 in
          South America, $14,000 in Europe, and $14,000 in Asia/Pacific.  During
          1997, 31 customers  accounted for  approximately  73% of the Company's
          net sales and one  customer  accounted  for  approximately  11% of the
          Company's net sales. In 1997,  export sales  aggregated  approximately
          $415,000 in geographic regions as follows:  $151,000 in South America,
          $64,000 in Europe, and $200,000 in Asia/Pacific.  The loss of business
          from one or a combination of the Company's significant customers could
          adversely effect its operations.

(17)   Related Party Transactions     During  1998,  the  Company  borrowed   an
          aggregate of $150,000  from Richard C. Ford,  Chairman of the Board of
          Directors and a major shareholder of the Company, as discussed in Note
          5.  In  addition,   Mr.  Ford  personally   guaranteed  the  Company's
          indebtedness to its bank as discussed in Note 6.

          In  January  1997,  the  Company  loaned  Richard  C.  Ford,  its then
          President and principal shareholder,  $200,000 bearing interest at 10%
          per annum,  which was repaid in June,  1997. In addition,  on July 17,
          1997, the Company entered into a six month  consulting  agreement with
          Mr. Ford, who was then no longer President of the Company, whereby Mr.
          Ford would perform various sales consulting and other services for the
          Company  in  exchange  for a fee of $8,000 per  month,  provision  for
          health benefits,  reimbursement of business  expenses and a commission
          of 10% on the gross margin of any sales consummated by Mr. Ford during
          this period. Such agreement was extended to March 4, 1998. During 1997
          and  1998,  Mr.  Ford  was paid  approximately  $45,000  and  $16,000,
          respectively, pursuant to this consulting agreement.
                                      F-16