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, 2002

{ }  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
                    -----------------------------------------
                 (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)

                2017 High Ridge Road 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


                 -----------------------------------------------
                                (Title of class)


                 -----------------------------------------------
                                (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 { }

<PAGE>

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: $2,137,118

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 21, 2003. Based on the
closing price of the Common Stock quoted on the American Stock Exchange as
reported on March 21, 2003 ($2.43), the aggregate market value of the 4,570,000
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 $11,105,000. 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.

                         (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 Section 12, 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 21, 2003: 15,670,164

This report contains a total of 53 pages.

                                       2

<PAGE>

                                     PART I

The term "the Company" or "PURADYN" refers to Puradyn Filter Technologies,
Incorporated, unless the context otherwise implies.

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

Forward Looking Statements
--------------------------

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

THE COMPANY

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

         Puradyn Filter Technologies, Incorporated (the "Company"),
manufactures, markets and distributes worldwide the Puradyn(R) by-pass oil
filtration system (the "Puradyn") for use with substantially all internal
combustion engines and hydraulic equipment that use lubricating oil. The Puradyn
cleans oil by continually removing solid and liquid contaminants from the oil
through a sophisticated and unique filtration and evaporation process. The
Puradyn has been used successfully to substantially extend oil-drain intervals
and to extend the time between engine overhauls. The Company is the only
manufacturer and distributor of disposable replacement filter elements
("Element") for the Puradyn.

         By keeping the oil continually clean, the Puradyn 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.

BACKGROUND AND FORMATION OF PURADYN FILTER TECHNOLOGIES, INCORPORATED
---------------------------------------------------------------------

         The patents were issued in the early 1980's on the oil filtration
system. After further development a new Puradyn unit evolved. The owners of such
patents attempted to market and sell the original system under various other
trade names, 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 Puradyn; (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 Puradyn, previously known as
the Purifiner, in several states from Refineco Manufacturing Company, Inc.
("Refineco"), then located in Oakland Park, Florida. Byron Lefebvre, currently
an employee for 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 that 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 his supply commitment, Systems obtained the
worldwide manufacturing and marketing rights to the Purifiner in 1990.

                                       3
<PAGE>

         In February 1988, the Company 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 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, the Company was the exclusive distributor
and Systems was the exclusive manufacturer of the Purifiner. On December 31,
1995, in exchange for any claims the Company had in the delay damage award, the
Company 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, the Company currently owns all
manufacturing and marketing rights previously owned by Systems.

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

         The Company curtailed its operations and reduced its remaining
workforce to key personnel in March 1998, due to continuing operating losses and
negative cash flow. These actions were taken to reduce the amount of cash
required to maintain operations of the Company. At the same time, the Company
sought to arrange additional financing. In November 1999, the Company formulated
a plan to convert all of its outstanding notes payable into common stock and to
sell additional common stock to raise cash in excess of $3,500,000.

         On January 24, 2000, the Company completed the conversion of $3,175,000
of principal amount of debt of five notes payable (together with accrued
interest of $717,997 that had been added to principal of two of the notes
payable) into 3,175,000 shares of its common stock. On February 28, 2000, the
Company completed the sale of 4,172,000 shares of its common stock through a
private placement, with net proceeds of approximately $4,429,000. Furthermore,
on September 26, 2000, the Company completed the sale of an additional 940,935
shares of its common stock with net proceeds of approximately $6,559,000, for a
total of approximately $10,988,000 of new funds.

         During 2000, the Company invested the funds received from the private
placements in corporate bonds, certificates of deposits and for a brief period,
in international bonds. These investments had maturity dates of one to five
years. The investment portfolio was managed by Salomon Smith Barney, who in
April 2001, executed a credit line loan with the Company, which was
collateralized by the investment portfolio. The Company borrowed a total of
approximately $5,431,000 under the credit line. As of April 2002, the Company
had sold all of its investments, the proceeds of which were used to repay the
Company's loan on investments in April 2002 and to fund operations.

         On March 28, 2002, the Company executed a binding agreement with one of
its stockholders, who is also a Board Member, to fund up to $2.5 million through
March 31, 2003. Under the terms of the agreement, the Company could draw amounts
as needed in multiples of $500,000 to fund operations subject to Board of
Director approval. Amounts drawn bear interest at the prime rate payable monthly
per annum and become due and payable on December 31, 2003 or upon a change in
control of the Company or consummation of any other financing over $3 million.
In March 2003, the payback date was extended to December 31, 2004. In
consideration for the stockholder entering into this agreement, the Company
granted the stockholder 100,000 common stock purchase warrants at an exercise
price equal to the closing market price of the Company's stock on the date of
grant. As of December 31, 2002, the Company had drawn $2,000,000 of the
available funds. The final $500,000 was drawn on February 14, 2003.

         On March 14, 2003, the Company executed a second agreement with the
same stockholder to fund up to an additional $3.5 million through December 31,
2003. Under the terms of the second agreement, the Company can draw amounts as
needed in multiples of $500,000 to fund operations subject to Board of Director
approval. Amounts drawn bear interest at the prime rate per annum payable
monthly and become due and payable on December 31, 2004 or upon a change in
control of the Company or consummation of any other financing over $7 million.
In consideration, the Company granted the stockholder 125,000 common stock
purchase warrants at an exercise price equal to the closing market price of the
Company's stock on the date of grant. The fair value of the warrants granted was
estimated at approximately $214,000.

                                       4
<PAGE>

         In December 2001, the Company was accepted and listed on the American
Stock Exchange under the symbol PFT.


JOINT VENTURE
-------------

         In 1996, the Company entered into a joint venture agreement with
Centrax, Ltd. (with the Company owning 45%, Centrax owning 45%, and Albert N.
Davies of Devon U.K., owning the remaining 10%) called TF Purifiner, Ltd.
("Ltd."). Ltd. manufactured, distributed and marketed the Company's products in
Europe, the Middle East, the former Soviet Union, Egypt, and South Africa. The
joint venture had operating losses and negative net worth, and, consequently,
the Company had no recorded investment in Ltd. Effective May 31, 2000, the
Company and Centrax agreed to dissolve Ltd. with no obligation on the part of
the Company to have any liability for, or to fund any part of the dissolution.

         At the time of the dissolution, Centrax sold to the Company certain
foreign patents, inventory and factory equipment used in manufacturing products
for the joint venture. The patented products, consisting of a full-flow and a
by-pass oil filter all housed in one Puradyn unit, as well as a side-by-side
full-flow and Puradyn by-pass filter are products designed primarily for
original equipment manufacturers (OEM.) The Company is currently conducting its
operations in England under the name Puradyn Filter Technologies, Limited
(PFTL), a wholly owned subsidiary, which performs limited manufacturing
functions and primarily markets the product to distributors in the countries
formerly serviced by the joint venture. The Company has provided funding for
PFTL's operations, as they have been cash flow negative since inception. PFTL
anticipates that during 2003, they will become cash flow positive through
increased sales, however, there can be no assurance that sales will increase or
that they will become cash flow positive in 2003 or thereafter.

PRODUCTS
--------

         The Puradyn Oil Filtration System, formerly called the Purifiner Oil
Purification System, significantly extends the life of lubricating oil in
internal combustion engines as well as hydraulic fluid used in industrial
machinery. The core product, the Puradyn, 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 Puradyn 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 and fuel). As the Puradyn dramatically extends the
useful life of the oil, it also protects the engine or hydraulic equipment from
the harmful wear caused by contaminants in oil. Since the oil is continuously
clean, wear in the engine or hydraulic equipment is kept to a minimum resulting
in less down time for maintenance and longer engine life. Further, not only are
oil purchases drastically reduced but the need for and cost of disposal decline
dramatically.

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

         The Puradyn is currently manufactured in six different sizes suitable
for placement on engines or equipment with oil sump capacities ranging from 8 to
240 quarts. A new generation of product has been engineered to be manufactured
in eight different sizes with sump oil capacities varying from 4 to 60 quarts
(see "Manufacturing and Production"). The Puradyn also can be used in multiples
for larger oil sumps. Qualified personnel can usually install the Puradyn on
engines and other equipment in approximately 1-1/2 to 2 hours.

         The Company unveiled the next generation of its by-pass oil filtration
systems at the TMC show in Nashville, TN on March 11, 2001. Similar to the
Company's previous units, the new Puradyn by-pass oil filters allow engines to
operate for hundreds of thousands of miles without the need for a traditional
oil change to save customers significant maintenance costs including up to a 90%
reduction in the need for new oil and the amount of oil for disposal.

         As with the Company's prior system, the new generation of products
clean, reduce and maintain oil contaminants to less than one micron (standard
full-flow oil filters maintain contaminants in the 15-40 micron range). By
continually removing contaminants and replacing vital additives through its
patented time-release additive package, the Puradyn filters substantially extend
intervals between oil changes. Both the original and the new generation of the
Puradyn products utilize the same filtering Elements for similar size models.

                                       5
<PAGE>

         For its new filtering Elements, the Company has implemented patented
technology that provides several improvements over previous Puradyn Elements
including:

         -        CGP(TM) a patent-pending process for chemical grafting. This
                  new technology improves the attraction and retention of soot
                  and other solid contaminants to the packed cotton filter
                  material.

         -        Increased oil distribution within the filter: New product
                  engineering distributes oil more evenly throughout the main
                  filter element. This reduces the effect of "channeling".

         -        Ease of maintenance: The filter element of the new filter can
                  be replaced in a matter of seconds.

         The Company developed the new filter technology over three years, with
field-testing conducted for 30 months. The consolidated results from across the
country show that test vehicles averaged more than 160,000 miles without the
need for a traditional oil change. In addition, 1,800 hours of in-house and
independent testing have been conducted on the new filter. During 2001 and 2002,
however, the Company continued to address design issues and product enhancements
that curtailed sales of the new product. In addition, this may have impacted
sales of the original TF model as companies preferred not to order the original
product line but rather wait for the perfected PFT model line to go into full
production. However, the Company at this time feels that these design issues
have been resolved and full production has resumed.

         The Company also has developed and sells a Hydraulic Batch System
("HBS"), which is mounted on a handcart for mobility. The HBS was developed to
clean 55-gallon drums of used hydraulic oils. The HBS 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 Puradyns, a preheater, a pump and other miscellaneous parts.

         All Puradyns 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 Puradyn cannot be used on engines without a
pressurized lubricating system, and neither can be used on any engines that mix
oil with the fuel.

         The Company also manufactures and distributes its replacement Elements
for the Puradyn. The Company generally recommends that the Element be replaced
at the engine manufacturer's recommended/approved periodic oil change interval.
With one exception of one model currently used solely for gasoline applications,
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. patented oil-flow
meter, which enables the user to visually confirm that the oil is flowing
through the Puradyn. 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 perform 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
Element, the current US suggested prices for fleet end-users of the Elements
range from approximately $11 to $41 for standard elements and from approximately
$17 to $60 for the CGP(TM) Extended Life Elements. The cost of an oil analysis
ranges from approximately $10.50 to $19.50 per sample.

         The Company has received patents from the United States Patent Office
and certain other countries for a new Element (the "PFT Filter Plus"), in which
pelletized chemicals are added to the filtering media. The chemicals are
antioxidants that will reduce the amount of oxidation, stabilize the alkalinity
and further help reduce the acid build-up in the oil. This is especially
important on new engines built since the 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 PFT Filter Plus
helps compensate for this factor.

         When the Element is changed, make-up oil is added to replace any oil
retained in the discarded used Element or consumed in the normal engine
combustion process. The Company's performance warranties for product used in the
United States and Canada require the user to take a small sample of the used oil
(in conjunction with a puraDYN Filter Element replacement) for submission to an
oil testing laboratory at the same intervals that the OEM recommends/approves
for an oil change, but at least once a year (See "Warranties"). The Puradyn has
an oil sample valve to expedite the taking of the oil sample. The Company
warrants all parts free of defects in workmanship and materials for one year
from date of installation.

                                       6
<PAGE>

         Users must maintain a record of the laboratory oil analysis results in
order for the Company's warranties to remain in effect. Management believes the
risk of losing the Puradyn's warranties encourages customers to complete the oil
analysis and replace Elements in a timely manner, making the Puradyn more
effective and stimulating recurring Element sales. In order to maintain the
Company's performance guarantee, users must among other things, change the full
flow filters once a year or every 50,000 to 60,000 miles or 1,500 hours,
depending on the particular application of the Puradyn. 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. 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.

         The Puradyn has no moving parts and consequently requires no
significant ongoing maintenance. The Puradyn 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 the Puradyn will perform as designed. The cost of changing a full flow
filter is part of the cost of an oil change, as discussed above. Puradyns 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.

         The Company has received letters from Deere & Company, Detroit Diesel
Corporation, Caterpillar, Inc., Ford Motor Company, Mack Trucks, Inc., Cummins
Engine Company, Inc., Daimler Chrysler Corporation, Mercedes Benz of North
American, Inc. and others, who have all stated that the installation and use of
the Puradyn does not void their manufacturer's warranties unless an engine
failure is attributed to the Puradyn. Most engine manufacturers will accept oil
analyses as alternatives to their recommended oil change intervals. This is
standard industry practice endorsed by OEMs and various fleet maintenance
organizations. Management believes the existence of other longer-life oils in
the marketplace which allow for extended oil drains has been and will continue
to exert pressure on the use of bypass oil filtration and oil analysis as an
acceptable alternative to engine manufacturer's recommended oil change
intervals, as will the cost, environmental and other benefits obtained from
extended oil drain intervals.

WARRANTIES
----------

         The Puradyn carries a six-month performance guarantee, and is currently
warranted to the original user to be free of defects in material and workmanship
for one year with unlimited miles/hours. End users can purchase a four-year
extended warranty for $125. The Company has approximately $47,000 of related
accrued warranty costs at December 31, 2002. This accrual includes estimated
costs related to a design modification on the new generation Puradyn for units
sold in 2001 and early 2002.

MARKETING
---------

         The Company's products are 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 Company's primary focus is on the on-highway fleet,
industrial/construction and original equipment manufacturer ("OEM") segments.

         During 2001 and 2002, the Company determined that an advertising
campaign in OEM and truck fleet-related trade magazines, combined with
editorials, trade shows and other methods to promote its products, was prudent
in order to generate awareness and help stimulate sales primarily with OEMs and
on-highway fleets. Additionally, the Company employed six sales personnel.
However, in 2002, the Company continued to incur significant losses (although
approximately 23% less than in 2001) due primarily to its inability to launch a
full-scale new product introduction as a result of the design issues faced
during 2001. The design issues were corrected in the spring of 2002, with a
major enhancement introduced in the fall of 2002.

                                       7
<PAGE>

         The Company's products have achieved recognition from well-known
sources, including:

         o   Certification (in 1994) and re-certification (in 1998) by the
             California Environmental Protection Agency's Department of
             Toxic Substances as a "Pollution Prevention Technology"
         o   Receipt of the State of Florida's 1995 Governor' s New Product
             Award (Small Business Category)
         o   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)
         o   Receipt of the World Trade Center's (Ft. Lauderdale, Florida)
             1996 Award for Outstanding Achievement in International Trade
             (Manufacturing Category)
         o   Being selected as one of the finalists in the 1998 Discover
             Magazine awards for Technological Innovation
         o   Receipt of Lubricants World's 2001 Annual Award in the Equipment
             Category for expected contribution "to the advancement and
             enrichment of the lubricants industry"
         o   Heavy Duty Trucking Magazine "Nifty Fifty" award as one of the
             best new products for 2000

         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 Puradyn 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 Puradyn and increase its sales. However, no assurance can be given
that such associations will be successful in promoting the Company's products.

         The Company relies on management's ability to determine the existence
and extent of available markets for its product. Company management and
consultants have considerable sales and marketing backgrounds and have devoted a
significant portion of their time to sales related activities. The Company
continues to market its products at various national trade shows, including the
Workboat Show in New Orleans, Louisiana, Mid-America Truck Show in Louisville,
Kentucky, the Technology and Maintenance Council Show in Nashville, Tennessee,
the NDIA Environmental Symposium in Austin, Texas, and others.

         Management believes that the ultimate success of its product will
depend on the strong demand for the product by end-users, while complementing
this action by direct sales to OEMs and through their distribution networks. A
number of international and domestic engine and truck OEMs are currently
evaluating the Company's products. There can be no assurance that these or other
OEMs will accept the Company's products for standard original placement on their
equipment or directly approve the use of the Puradyn as an option with their
equipment.

         The Company has established aftermarket programs with Mack Trucks,
Volvo Trucks North America and PACCAR (Kenworth and Peterbilt) to offer the
Puradyn unit through its dealers and Parts Distribution Centers. In addition,
Honeywell Consumer Products Group (Honeywell), manufacturer of Fram Filters,
began purchasing Puradyn systems in conjunction with a three-year supply
agreement in February 2003.

         These agreements provide more exposure for the product as well as
greater penetration for acceptance by OEMs. To date, some Company customers have
purchased and requested that the Puradyn be installed at a Volvo Trucks North
America factory (North Carolina), International Truck and Engine Corp. factory
(formerly Navistar International), a Mack Truck factory, a Kenworth Truck
factory and a Freightliner factory on a limited number of vehicles. Monroe Truck
Equipment (a major General Motors Corporation modification center) has installed
over 600 Puradyn systems at the request of one of the largest fleets in the US.
In addition, new environmental regulations requiring higher standards for diesel
truck emissions took effect in October 2002. Engine and truck manufacturers can
capitalize on Puradyn's enhanced technology to remove increased soot from the
oil, thus providing OEMs with a solution for clean oil.

         In 2002, Honeywell Consumer Products Group, manufacturer of FRAM(R)
filters, announced a strategic alliance with PURADYN to co-brand and market
PURADYN's bypass oil filtration systems through its dealers. In early 2003
Honeywell finalized and placed its initial stocking order. In addition, PURADYN
is now offering the full line of FRAM(R) filters to its independent
distributors.

                                       8
<PAGE>

DISTRIBUTION
------------

         The Company currently distributes its products through several channels
under the Puradyn registered trademark.

         The Company has written distribution agreements with its domestic and
international distributors. The Company does require these domestic and
international 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 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, Europe and Asia.
These distributors purchase product directly from the Company and sell to their
existing or new customers. Sales responsibilities are now performed primarily by
direct employees, independent distributor networks and aftermarket OEM
distributor/dealer networks. The Company's primary target for sales is with
OEMs, industrial/construction and on-highway trucking fleets. The Company will
accept returns of products that are defective at the time of sale to distributor
or prove defective during the warranty period. Returns are subject to the
following conditions: (1) Company approval (2) shipped pre-paid to Company (3)
product in salable condition, subject to Company inspection before acceptance,
and subject to a 20% restocking charge (4) credits for product returns issued at
the distributor price in effect at the time the credit is issued, less any
applicable discounts.

         The Company's products are oil filtration systems, of which
approximately fifty percent are sold to distributors and end users for use on
transportation vehicles. This could unfavorably affect the Company's overall
exposure to credit risk in as much as these customers could be affected by
similar economic or other conditions. During 2002 and 2001, four and five
customers accounted for approximately 55% and 38%, respectively, of the
Company's net sales. In 2002, there were two customers that individually
accounted for greater than 10% each of net sales, or approximately $593,000 and
$397,000, while in 2001 there was one such customer who purchased approximately
$327,000. There were two customers in 2002 whose trade receivable balances
exceeded 5% of total receivables, representing approximately 62% and 6% of total
accounts receivable. In 2001, four customers represented approximately 31%, 14%,
9% and 6% of total accounts receivable. The loss of business from one or a
combination of the Company's significant customers could adversely affect its
operations.

         PFTL operates from the U.K. to generate distribution and sales in
Europe, the Middle East, the former Soviet Union, Egypt, and Africa. Certain
manufacturing functions are performed in the U.K. to modify the product so as to
comply with European usage standards. There can be no assurance that such
distributors will be successful in introducing the Puradyn in their territories
as they will face obstacles similar to those the Company and its other
distributors have encountered in introducing an innovative technology in their
territories. PFTL has also commenced or completed various evaluation programs,
including those of two large international generator manufacturers, four truck
OEMs, one construction equipment OEM and one diesel engine OEM. One of the
world's largest OEMs of medium-size power generators has approved and begun
purchasing the Puradyn from PFTL. PFTL's sales accounted for approximately 29%
of the Company's 2002 consolidated sales.

SALES
-----

DIRECT SALES

         The Company directly and/or with the assistance of its manufacturer's
representatives, distributors or other agents markets its products directly to
OEMs, other distributors and national accounts. Typically 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 claimed. Management believes that this evaluation period
will continue to be shortened as the Company's products gain wider acceptance
and support from well-known end users and OEM's.

         Currently, the Company' s products are being evaluated (with various
stages of progress) by numerous potential end users and existing customers
including:

         o   A leading major generator set OEM

         o   A major construction equipment OEM

         o   A major engine OEM

         o   A leading soft drink Company

         o   A road materials handling Company

         o   Two leading food companies

         o   A key regional airlines' ground transportation equipment

         o   A leading truck leasing Company

         o   A leading equipment rental company

         o   An important OEM forklift company

         o   A leading refuse disposal company

         o   The U.S. Military and others

                                       9
<PAGE>

         In July 1995, the Company's products were issued National Stocking
Numbers by the General Services Administration pursuant to a contract that
expired in June 1998. The Company negotiated a new contract, which was received
in July 1999. This will enable the Company to more efficiently sell its products
to the U.S. Government and its agencies.

         Late in 2000, Asplundh Tree Expert Company, the world's largest
vegetation management Company with one of the nation's largest, privately held
fleet of trucks and equipment, began purchasing the Puradyn for new equipment
including trucks, chippers and aerial devices. In addition, after extensive
testing, one of the world's largest manufacturers of medium-size power
generators purchased over $350,000 of product in 2002. This customer accounted
for 57% of PFTL's 2002 sales and 17% of the Company's consolidated sales. In
December 2002, the customer transacted one purchase for approximately $226,000.
Although the Company anticipates increased sales to this customer in 2003, there
can be no assurance that the sales volume generated by this customer will
increase or remain at the same level in 2003.

         Further, at the request of a customer, a major modification center
began installing Puradyn products in 2002 on their large fleet of new equipment.

         The Company continues to work with a marketing and public affairs
consultant to promote Puradyn to municipalities in Florida and other specified
states. Additionally, the Company again received approval for Florida's State
Negotiated Agreement Price Schedule (SNAPS) to allow easier marketing of Puradyn
to Florida's local and state government agencies at discounted prices.

         In order to more efficiently carryout the Company's investor relations
function, the Company has established an in-house investor relations department
and discontinued its relationship with a New York investor relations company.

         On September 19, 2002, the Company announced a strategic alliance with
FRAM(R) Filters, America's #1 oil filter brand. FRAM(R) Filters are manufactured
by Honeywell Consumer Products Group (Honeywell), which also includes the
Prestone(R), Autolite(R) and Holts(R) brands and is a subsidiary of Honeywell
Inc. Honeywell will offer the puraDYN(R) By-Pass Oil Filtration Systems along
with the related replacement cartridges and service parts through its' extensive
North American distribution network. In February 2003, the Company signed a
three-year supply contract with Honeywell who has placed an initial stocking
order. All of the Company's products sold by FRAM(R) dealers will be co-branded
as PURADYN(R) and FRAM(R) enabling the dealers to sell a total solution for oil
filtration by combining their FRAM(R) full-flow filter with the PURADYN bypass
oil filtration system.

INTERNATIONAL SALES

          The Company directly and/or with the assistance of commission based
manufacturer's representatives, has established primarily non-exclusive
distributors in various countries, including Denmark, South Africa, Nigeria,
Kuwait, United Arab Emirates, Thailand, Colombia, and others. The majority of
these distributorships were established in 1995 and later. Therefore, the
ultimate success of these and other distributors depends upon, among other
things, their abilities to successfully introduce and sell the product in their
territories, including obtaining local evaluations, establishing distribution
and other factors similar to those faced by the Company in the United States.
The Company's sales to its international customers amounted to approximately 40%
and 24% of total sales in 2002 and 2001, respectively. Sales have been adversely
affected by the weakened local economies of some of these nations and future
sales to their distributors may be adversely affected due to these continuing
economic and/or political problems

                                       10
<PAGE>

MANUFACTURING AND PRODUCTION

         The Company subcontracts for the manufacture of component parts for its
Puradyn units and manufactures all of its filter 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. Management intends 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.

         The Company continues to develop quality control systems in line with
QS 9000 and ISO 14000 quality standards to ensure that the Company's product
quality will consistently meet the requirements of the transportation industry.
In this respect it hired a quality control manager in 2001and additionally will
work with a consultant in 2003 to oversee and expedite the implementation of
these controls.

COMPETITION
-----------

         Although the Company believes it is one of the largest suppliers of
bypass oil filtration systems, 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 Premo Lubrication Technologies,
Incorporated, Luberfiner, Inc., Parker Hannifin Corporation - Racor Division,
and others. Recent results performed by a major independent testing facility on
the Company's by-pass oil filtration system demonstrated that its product
surpassed the capacity, efficiency and overall performance of its leading
competition with an average efficiency of 92.05% for Puradyn as compared with
67.47% for a major competitor "Centrifuge System." Efficiency reflects the
ability to remove particles and other chemicals from the oil, which is measured
in microns. Efficiency is not necessarily a comparison to other products, but
rather demonstrates the filtering capability of the Puradyn unit. These tests
were performed at the request of one of the country's largest engine
manufacturers. In other tests performed by the same lab in 2001, the efficiency
of the system was proved both in standard by-pass filtration testing (99.65%
efficient) and in a 2002 test with SOFTC-2A composition, similar to soot, the
average efficiency was 69%. The efficiency of the Company's products tends to
create less demand for full-flow filters, maintenance services, replacement
parts, original oil sales and oil disposal.

         Most of these competitive products and services are provided by
companies that have significantly greater financial, marketing and operating
resources than does the Company.

PATENTS AND TRADEMARKS
----------------------

         The Company has patents for the redesigned Puradyn, the basis for the
next generation of the Puradyn products, and the PFT Filter Plus, which have
been issued in the United States and certain other foreign countries in 1997
(See "Distribution"). 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 Puradyn. A U.S. patent was issued in 1998 covering a method of
introducing additives into the oil. These patents expire from May 2014 to
October 2016. The Company recently applied for a provisional patent application
for improved filtration efficiency using CGP(TM), a patent-pending process for
chemical grafting that can significantly increase the life of the filter element
and further extend oil drain intervals for the end user. There can be no
assurance that such patents withstand competitive threats to their patentability
or, in the case of the redesigned Puradyn, be developed into commercially viable
products.

         The Company had a license and royalty agreement (which was the subject
of a lawsuit - see "Legal Proceeding") with the owner of two of the U.S. patents
which covered some of the Company's existing Puradyns. 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 covered several foreign issued and pending patents in several other
countries, the earliest of which will expire in June 2004. The term of the
agreement was for the life of the patents and any improvements thereto and
required the payment of a 5% royalty based on the net sales price, as defined,
of the covered products. This agreement also covered the Purifiner trademark in
the United States for which the Company payed a 1% royalty based on net
Purifiner sales, as defined. The Company was primarily responsible for
maintaining and defending the integrity of these patents and the Purifiner
trademark.

         As of March 26, 2001, the Company notified the owner of the
aforementioned remaining patent that the Company is no longer producing or
shipping this unit, nor would the Company be using the Purifiner name in the
U.S. As such, no further royalties under this patent will be paid.

                                       11
<PAGE>

         The Company has registered the product trademark "Puradyn" in the
United States and other all countries where the "Purifiner" was registered.
Further, the Company has filed a provisional Patent Application for CGP(TM)
(Chemical Grafting Process), its new technology that enhances the attraction and
retention of soot and other solid contaminants in the Puradyn Filter Element.

         At the time of disbanding the joint venture with Centrax (see
Distribution), and the subsequent formation of PFTL both in the U.K., the
Company acquired several foreign patents on Puradyn technology which included a
manifold type full-flow filter/by-pass filtration unit (side-by-side.)

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 re-certification in July 1998, the Company has obtained an Executive Order
issued by the State of California Air Resources Board stating that the Purifiner
(Puradyn) 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
---------------------------

         Currently, the Company has four individuals directly involved in
product engineering and development: a Product Engineer Manager, a Director of
Manufacturing/Product Development, an Engineering Technician and a Technical
Consultant (one of the original inventors of the product), as well as fulltime
staff to support the product line. The engineering department is also testing
additional design improvements that also may be candidates for patents for the
Company. During the past two years the Company's engineering department has
devoted resources to improve the product's filtration efficiency and abilities
to meet the customers extended drain interval requirements with the next
generation of diesel engines. This required a complete redesign of the existing
product to make it easier to use by our customers. The redesigned product
eliminates the four mounting bolts/nuts required to hold the
Diffuser/Head/Heater Assembly in place by moving those components to the bottom
of the product to improve efficiency. This allowed the design to improve the
filter cartridge removal and replacement process by making a Lid Assembly that
does not require mounting bolts/nuts. Within the last year a significant design
enhancement was made by moving from a "cam" lid assembly to a "twist-off" lid
assembly. Testing of the new product is ongoing and will continue to insure our
product is a leader in the industry.

EMPLOYEES
---------

         At December 31, 2002, the Company had 46 employees, including 4 from
PFTL, in the following areas:

         o   18 in manufacturing, assembly, quality control, warehousing
             and shipping
         o   1 in purchasing
         o   2 in customer service
         o   9 in marketing and sales
         o   1 in technical support and installation assistance
         o   3 in engineering and development
         o   3 in finance
         o   9 in administrative positions

         None of the employees are represented by a labor union. The Company
believes its employee relations are good.


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

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

         In order to support its operations in Europe, the Company has a lease
for 3,150 square feet in Devon, England, which extended through March 31, 2002
and is now on a month-to-month basis for approximately $2,000 per month.

                                       12
<PAGE>

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

MALT LITIGATION

         In connection with the Company being granted worldwide manufacturing
and marketing rights for certain of the Purifiner products, a royalty agreement
was entered into with a term equal to the life of the related patents or any
improvements thereto. Pursuant to this royalty agreement, the owner of the
patents was to receive 5% of the net unit sale price of all covered Purifiner
products, as defined. Additionally, 1% of the net sales price of replacement oil
filter elements was to be paid as a royalty on certain Puradyn filters for the
use of the U.S. Purifiner trademark. The Company is no longer retaining the
Purifiner patents or trademarks and accordingly is not renewing them upon
expiration.

         In May 1994, the Company and the patent owner entered into a settlement
agreement relating to royalties under which the patent owner was entitled to a
minimum annual royalty of $24,000, payable in monthly installments of $2,000. In
February 1997, the patent owner filed an action against the Company for
nonpayment of approximately $20,000 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 but was entitled to
$20,169 in past royalties, which the Company paid. The patent owner filed a
motion for additional damages and attorney fees and on December 13, 2000, the
Court found the patent owner was entitled to an additional $15,505. The Company
appealed that judgment but has paid the additional judgment. Thereafter, on
February 22, 2001, the trial court ordered the Company to pay the sum of $18,049
for the patent owner's attorney's fees and court costs for which the Company
posted a bond in the amount of $22,238 to secure payment. That order was
appealed and combined with the first appeal. On April 24th, 2002, the judgment
for attorney's fees and court costs was reversed. In May 2002, the bond was
discharged and in June 2002, the funds were released to the Company.
Accordingly, the Company reversed the related accrual of approximately $21,000.

SEARCY, DENNY, SCAROLA  ET. AL AND RELATED CLAIMS

         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, (the Company's current Chief Executive
Officer), individually and an inactive Company controlled by Richard C. Ford,
demanding payment of approximately $313,000 of legal fees and other 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 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 did
not assume these obligations as part of its purchase of Systems in 1995 and
based on advice of legal counsel, management believes such amounts are not the
responsibility of the Company. On January 30, 2002, the action was dismissed
without prejudice. The law firm did not receive any payment from the Company and
both parties agreed to be responsible for their own litigation expenses.


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

         On July 9, 2002, the Company held its Annual Meeting of Shareholders.
At the meeting, 13,816,166 common shares (88.69% of the common shares
outstanding) were voted. Shareholders voted in person or by proxy for the
following purposes.

         (a)  Shareholders voted to elect seven directors, each to serve for
              a term of one year, as follows:

  DIRECTOR                        FOR               WITHHELD AUTHORITY
  -------------------          ----------           ------------------
  Joseph V. Vittoria           13,816,166               25,210
  Richard C. Ford              13,813,166               28,210
  Kevin G. Kroger              13,813,166               28,210
  Alan J. Sandler              13,813,166               28,210
  Peter H. Stephaich           13,816,166               25,210
  Ottavio Serena               13,816,166               25,210
  Michael Castellano           13,816,166               25,210

                                       13
<PAGE>

         (b)  Shareholders voted to approve and ratify the appointment of
              Ernst & Young LLP, independent certified public accountants,
              as the Company's independent auditors for the year ended
              December 31, 2002. 13,788,922 shares were voted in favor of
              this proposal, 48,740 shares were voted against and there were
              3,714 abstentions.

         (c)  Shareholders voted to approve the amendment to the Certificate
              of Incorporation to increase the authorized number of shares
              of common stock from 20,000,000 to 30,000,000. 13,632,434
              shares were voted in favor of this proposal, 201,332 shares
              were voted against and there were 7,610 abstentions.


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

         As of March 21, 2003, there were approximately 2,050 stockholders of
record of the Company's stock. The closing bid price quoted on the American
Stock Exchange for the Company's Common Stock at March 21, 2003 was $2.43. The
Company currently trades under the symbol "PFT".

         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. 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 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 2001 and 2002.

                                  2001 SALES PRICE            2002 SALES PRICE
                                 ------------------         -------------------
                                   HIGH      LOW              HIGH       LOW
                                 ------------------         -------------------
               March 31           $7.13     $3.75            $4.85     $2.70
               June 30             5.08      2.95             4.49      2.70
               September 30        4.45      1.77             3.21      2.20
               December 31         5.25      2.20             2.80      1.80

         As of March 28, 2003, the high sales price for the first quarter of
2003 was $2.70 while the low for the quarter was $1.41.

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.

General

         The Company was formed in 1987, and was inactive until it commenced
limited operations in 1991 when it obtained worldwide manufacturing and
marketing rights to the Purifiner (R) product, now called the Puradyn By-pass
Oil Filtration System or the "Puradyn" system.

                                       14
<PAGE>

         Through 1997, the Company had minimal revenues from its distribution
network, which caused the Company to change its sales strategy. In 1998, the
Company changed its name from T/F Purifiner, Inc. to Puradyn Filter
Technologies, Incorporated in anticipation of its new business plan. The Company
reduced its workforce and operational overhead in an effort to reduce cash
expenditures until it had sufficient funds to support operations based on its
new sales plan. The Company began to refocus its sales effort toward the
development of commercial relationships with original equipment manufacturers
("OEM's") and companies having medium to large size fleets of vehicles, as well
as the expansion of its international and domestic distribution networks. As
part of this refocus, the Company announced a strategic relationship in
September 2002, with Honeywell's Consumer Products Group, the manufacturer of
FRAM oil filters, under which the Puradyn system will be sold to Honeywell and
co-branded with the FRAM trademark name. The co-branded product will be
distributed through Honeywell's Consumer Products Group's distribution network
to offer a complete filtration system as a solution to end users to
significantly reduce both large and small particle contamination in the
lubricating oil. Honeywell's Consumer Products Group also includes the
Prestone(R), Autolite(R) and Holts(R) brands and is a subsidiary of Honeywell,
Inc. There can be no assurance, however, that the Company's sales efforts or
strategic relationships will meet management's expectations or result in
significant, if any, new sources of revenues.

         The Company's sales effort not only involves educating the potential
customer on the benefits of the Puradyn system, but also allowing the customer
to test the Puradyn system on its fleet vehicles. Consequently the sales cycle
can be relatively long. The Company is currently working with several large
OEM's and a large number of companies that have large vehicle fleets to enable
them to evaluate the benefits of the Puradyn system.

         Effective June 1, 2000, the Company formed a wholly owned subsidiary,
PFTL, in the United Kingdom to sell the Company's products in Europe, the Middle
East and Africa. The subsidiary was the result of the dissolution of a joint
venture (TF Purifiner, Ltd.) the Company had with Centrax, Ltd. The results of
PFTL have been consolidated with the Company since June 1, 2000.

         The Company directly and/or with the assistance of its manufacturer's
representatives, warehouse distributors or other agents markets its products
directly to national account end users. 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, support and usage
from well-known customers and OEM's. Based on the results of some of the
evaluations as well as orders placed and indications from several customers, the
Company anticipates a significant increase in revenues in 2003.

         The Company recognizes revenue from product sales to customers,
distributors and resellers when products that do not require further services or
installation by the Company are shipped, when there are no uncertainties
surrounding customer acceptance and for which collectibility is reasonably
assured in accordance with Staff Accounting Bulletin (SAB) No. 101, Revenue
Recognition in Financial Statements. Cash received by the Company prior to
shipment is recorded as deferred revenue. Sales are made to certain customers
under terms allowing certain limited rights of return and other limited product
and performance warranties for which provision has been made in the accompanying
financial statements. Management believes, based on past experience and future
expectations, that such limited return rights and warranties will not have a
material adverse effect on the Company's financial statements.

Critical Accounting Policies and Estimates
------------------------------------------

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

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

                                       15
<PAGE>

Revenue Recognition
-------------------

         Revenue is recognized when earned. The Company's revenue recognition
policies are in compliance with the provisions issued in SAB No. 101, Revenue
Recognition in Financial Statements. Revenue from product sales to customers,
distributors and resellers is recorded when products that do not require further
services or installation by the Company are shipped, when there are no
uncertainties surrounding customer acceptance and for which collectibility is
reasonably assured. The Company provides for sales returns based on a historical
returns analysis. The estimate is updated for current return activity and the
provision is adjusted accordingly. Should actual returns exceed management's
estimates, the provision may require further adjustment and accordingly, net
sales may decrease.

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


Allowance for Doubtful Accounts
-------------------------------

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

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

Estimation of Product Warranty Cost
-----------------------------------

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

Estimation of Inventory Obsolescence
------------------------------------

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

Impairment of Long-Lived Assets
-------------------------------

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

Results of Operations
---------------------

         The following table sets forth (amounts in thousands) the Company's
operating information for the years December 31, 2002 and 2001:

                                          YEAR ENDED DECEMBER 31, (IN THOUSANDS)
                                          --------------------------------------
                                                                     INCREASE
                                              2002        2001      (DECREASE)
                                          --------------------------------------

            Net sales                        $ 2,137     $ 1,472     $   665

            Operating costs and expenses:
              Cost of products sold            2,059       1,850         209
              Salaries and wages               1,872       1,755         117
              Selling and administrative       1,522       2,879      (1,357)
                                             -------------------------------
                                               5,453       6,484      (1,031)

            Loss from operations              (3,316)     (5,012)      1,696

            Other income (expense):
              Investment (loss) income           (22)        484        (506)
              Interest income                     53          23          30
              Interest expense                  (231)        (52)       (179)
                                             -------------------------------
            Total other income (expense)        (200)        455        (655)
                                             -------------------------------
            Net loss                         $(3,516)    $(4,557)    $ 1,041
                                             ===============================

                                       16
<PAGE>

Year Ended December 31, 2002 Compared to Year Ended December 31, 2001
---------------------------------------------------------------------

         NET SALES Net sales increased by approximately $665,000 from
approximately $1,472,000 in 2001 to approximately $2,137,000 in 2002. The
Company's focus of its sales efforts toward original equipment manufacturers
("OEMs"), industrial construction and companies having large fleets of trucks is
primarily attributable to the increase in sales in 2002. Significant customers
in 2002 included two OEM aftermarket distribution programs, one of the top three
worldwide OEM's of mid-range generators for industrial use, one of the largest
privately owned fleets in the country as well as a Latin American distributor.
These customers represented approximately 55% of 2002 sales.

         During 2002, one individual customer purchased approximately $357,000
of products from the Company. This customer accounted for approximately 57% of
PFTL's 2002 sales and approximately 17% of the Company's 2002 consolidated
sales. Approximately $226,000 of these sales were made on December 30, 2002.
Although the Company anticipates increased sales to this customer in 2003, there
can be no assurance that the sales volume generated by this customer will
increase or remain at the same level in 2003.

         COST OF SALES Cost of sales increased by approximately $209,000 from
approximately $1,850,000 in 2001 to approximately $2,059,000 in 2002, related in
part to the increase in sales. The Company's gross margin increased from
negative 26% in 2001 to 4% in 2002 due to the partial absorption of the costs of
excess manufacturing capacity.

         SALARIES AND WAGES Salaries and wages increased approximately $117,000
due to the addition of six employees throughout the year.

         SELLING AND ADMINISTRATIVE EXPENSES Selling and administrative expenses
decreased by approximately $1,357,000 from approximately $2,879,000 in 2001 to
approximately $1,522,000 in 2002. The decrease was principally the result of
changes in the variable accounting of stock options, which decreased by
approximately $755,000 from approximately $181,000 in 2001 to a credit of
approximately $574,000 in 2002. Advertising expense decreased approximately
$151,000 due to a reduction in trade shows and media ads. Bad debt expense had a
credit balance in 2002 of $60,000 due to recoveries of bad debt compared with
expense of approximately $78,000 in 2001, a decrease of approximately $138,000.
As a result of the Company's efforts to reduce costs, there was a reduction in
travel and entertainment expenses of approximately $39,000 and a reduction in
engineering expenses of approximately $40,000.

         INVESTMENT INCOME (LOSS) Investment income decreased by approximately
$506,000 to a loss of $22,000 because the investment portfolio was sold in its
entirety for working capital needs by April 2002. The income from the investment
portfolio was offset by the realized losses incurred from the sale of the bonds,
including a Worldcom bond and Qwest related bond.

         INTEREST INCOME Interest income increased as a result of the interest
earned of approximately $48,000 in 2002 versus approximately $21,000 in 2001
from the stockholder notes receivable.

         INTEREST EXPENSE Interest expense increased as a result of the
amortization of the deferred financing costs of approximately $177,000 from the
issuance of a warrant for funding from a stockholder commitment. The Company
pays interest monthly on the note payable to stockholder at the prime rate,
which was 4.25% as of December 31, 2002. Approximately $17,000 of interest
expense is attributable to the stockholder note payable in 2002.


Liquidity and Capital Resources
-------------------------------

         As of December 31, 2002, the Company had cash and cash equivalents of
approximately $633,000. For the year ended December 31, 2002, net cash used in
operating activities was approximately $4,158,000, which primarily resulted from
the net loss of approximately $3,516,000 combined with changes in working
capital amounts and the aforementioned non cash credit to compensation expense.
Net cash provided by investing activities was approximately $5,633,000 resulting
primarily from net proceeds from sales of our investments, which was offset by
purchases of property and equipment of approximately $194,000. Net cash used in
financing activities was approximately $1,826,000 for the year, primarily due to
payment in full of the loan on investments.

                                       17
<PAGE>

          The Company has incurred net losses each year since inception and has
relied on the sale of its stock from time to time and loans from third parties
and from related parties to fund its operations. On January 24, 2000, the
Company completed the conversion of $3,175,000 of principal amount of debt of
five notes payable (together with accrued interest of approximately $718,000
that had been added to principal of two of the notes payable) into 3,175,000
shares of its common stock. On February 28, 2000, the Company completed the sale
of 4,172,000 shares of its common stock through a private placement, with net
proceeds of approximately $4,429,000. Furthermore, on September 26, 2000, the
Company completed the sale of an additional 940,935 shares of its common stock
with net proceeds of approximately $6,559,000, for a total of approximately
$10,988,000 of new funds.

         During 2000, the Company invested the funds received from its private
placements into corporate bonds, certificates of deposits and for a brief
period, in international bonds. The investment portfolio was managed by Salomon
Smith Barney, who in April 2001 extended a credit line loan to the Company,
which was collateralized by the investment portfolio. As of April 2002, the
Company had sold all of its investments, the proceeds of which were used to
repay the Company's loan on investments in April 2002 and to fund operations.

         On March 28, 2002, the Company executed a binding agreement with one of
its stockholders, who is also a Board Member, to fund up to $2.5 million through
March 31, 2003. Under the terms of the agreement, the Company could draw amounts
as needed in multiples of $500,000 to fund operations subject to Board of
Director approval. Amounts drawn bear interest at the prime rate payable monthly
per annum and become due and payable on December 31, 2003 or upon a change in
control of the Company or consummation of any other financing over $3 million.
In March 2003, the payback date was extended to December 31, 2004. In
consideration for the stockholder entering into this agreement, the Company
granted the stockholder 100,000 common stock purchase warrants at an exercise
price equal to the closing market price of the Company's stock on the date of
grant. As of December 31, 2002, the Company had drawn $2,000,000 of the
available funds. The final $500,000 was drawn on February 14, 2003.

         On March 14, 2003, the Company executed a second agreement with the
same stockholder to fund up to an additional $3.5 million through December 31,
2003. Under the terms of the second agreement, the Company can draw amounts as
needed in multiples of $500,000 to fund operations subject to Board of Director
approval. Amounts drawn bear interest at the prime rate per annum payable
monthly and become due and payable on December 31, 2004 or upon a change in
control of the Company or consummation of any other financing over $7 million.
In consideration, the Company granted the stockholder 125,000 common stock
purchase warrants at an exercise price equal to the closing market price of the
Company's stock on the date of grant. The fair value of the warrants granted was
estimated at approximately $214,000.

         At December 31, 2002, the Company had working capital of approximately
$1,664,000 and its current ratio (current assets to current liabilities) was
3.02 to 1, as compared with working capital of approximately $3,058,000 and a
current ratio of 1.63 to 1 at December 31, 2001. The Company anticipates
increased cash flows from 2003 sales activity, however, additional cash will
still be needed to support operations.

         Management believes that the commitments received from its stockholder
and current working capital as well as cash from sales will be sufficient to
sustain its operations at its current level through December 31, 2003. However,
if the stockholder commitment is not funded for any reason to the extent
required, or its budgeted sales levels are not achieved, the Company may have to
modify its business plan, reduce or discontinue some of its operations or seek a
buyer for part of its assets to continue as a going concern through 2003.

         The Company believes it has sufficient cash for fiscal year 2003, and
while the Company believes it can attain profitable operations in the future,
there is no assurance that sales will increase to the level required to generate
profitable operations to provide positive cash flow from operations, and there
is no assurance that the Company will not have to seek additional financing in
the future.

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

                                       18
<PAGE>

         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.

         Late in 2000, Asplundh Tree Expert Company, the world's largest
vegetation management Company with one of the nation's largest, privately held
fleet of trucks and equipment, began purchasing the Puradyn for new equipment
including trucks, chippers and aerial devices. In 2001, Puradyn sold
approximately 1,400 units to Asplundh, totaling approximately $327,000. In 2002,
Puradyn sold approximately 2,000 units to Asplundh totaling approximately
$593,000, an 81% increase over 2001. In addition, after extensive testing, one
of the world's largest manufacturers of medium-size power generators purchased
over $350,000 of product in 2002, of which approximately $226,000 was purchased
in late December 2002.

         In 2002, Honeywell Consumer Products Group, manufacturer of FRAM(R)
filters, announced a strategic alliance with PURADYN to co-brand and market
PURADYN's bypass oil filtration systems through its dealers. In early 2003
Honeywell finalized and placed its initial stocking order. In addition, PURADYN
is now offering the full line of FRAM(R) filters to its independent
distributors.

Impact of Inflation
-------------------

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

Quarterly Fluctuations
----------------------

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

Risk Factors Affecting Future Results of Operations.
----------------------------------------------------

         The Company's future results of operations involve a number of risks
and uncertainties. The following paragraphs discuss a number of risks that could
impact the Company's financial condition and results of operations.

Our ability to raise capital to fund operations is limited.

         Our operating results to date have been net losses and have required
cash from investors and loans from third parties and from related parties. Our
ability to raise capital to fund future operations may be limited and cannot be
relied upon if present working capital funds are depleted.

Potential for continuing losses and accumulated deficit affects our outlook.

         Prior to 1995, Puradyn was engaged in limited sales activities.
Consequently, we have had a relatively limited operating history upon which an
evaluation of our prospects and performance can be made. Puradyn'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 we operate. We have had significant losses in each year of our
operations. In addition, we have an accumulated deficit, which amounted to
approximately $29,901,000 as of December 31, 2002. It is likely that losses will
continue until such time, that we are able to generate a level of revenue
sufficient to offset these continuing early-phase expenditures. While we are
optimistic that a market for the Puradyn will develop, there can be no assurance
that we will be able to successfully implement our business strategy, that our
revenues will increase substantially in the future, or that we will ever be able
to achieve significant profitable operations.

                                       19
<PAGE>

Our products may not satisfy our customers' needs.

         Our success will depend in part upon the ability of our products to
meet targeted performance and cost objectives, and will also depend upon their
timely introduction and acceptance into the marketplace. We will be required to
commit considerable time, effort and resources to finalize development of our
proposed products and product enhancements. Although we anticipate that the
development of our products and technology will be successfully concluded,
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). In addition, we can provide no assurance that our
products will satisfactorily perform the functions that our customers
anticipate, 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.

Our product may not obtain market acceptance.

         To date, we have generated limited revenues from the sale of our
products, which have achieved limited market acceptance. Demand for our products
and proposed products will depend principally upon consumer demand for the
Puradyn. The oil filtration industry has historically been competitive, and as
is typically the case with innovative products, the ultimate level of demand for
our products is subject to a high degree of uncertainty. Developing market
acceptance for our 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 our products and achieve name recognition. We
cannot assure you that we will be able to penetrate existing markets on a wide
scale basis or position our products to appeal to mainstream consumer markets or
that any marketing efforts undertaken by us will result in increased demand for
or market acceptance of our products. Puradyn relies, and intends to continue to
rely, in part, on arrangements with third parties for the marketing of our
products, including arrangements with distributors and other strategic partners.
We cannot assure you that they or the Company will be able to successfully
market Puradyn's products or that their efforts will result in any significant
increase in revenues.

We are dependent on suppliers and their loss could have a significant impact on
us.

         A substantial portion of the component parts of our products are
manufactured by various suppliers for assembly by Puradyn. We believe our
relationships with our suppliers are satisfactory and that alternative suppliers
are available if relationships falter or existing suppliers are unable to keep
up with the Puradyn's requirements. However, we cannot assure you that our
current or future suppliers will be able to meet our requirements on
commercially reasonable terms or within scheduled delivery times. An
interruption of Puradyn's arrangements with suppliers could cause a delay in the
production of our products for timely delivery to distributors and customers.
The absence of suitable manufacturing arrangements would have a material adverse
effect on our operations.

We are dependent on distributors and their loss could have a significant impact
on us.

         Puradyn 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 these distributors, customers, and their
active marketing and distribution efforts relating to Puradyn's products. Most
of the distributors to whom we sell products, including those that are
contractually obligated to purchase our products in order to maintain their
distribution territories, could discontinue carrying our 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. We cannot assure you that Puradyn will be able to
increase or maintain its distribution, and as a result, our operating results
could be adversely affected.

Competition may adversely affect our operations.

         Although there is limited competition in the electric mobile bypass oil
filtration 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 our products reduce oil consumption, full-flow oil filter sales
and disposal costs as well as extend engine life, Puradyn'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 Puradyn 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 us. Industry
standards with respect to the markets for the technology and products being
developed by Puradyn may be characterized as evolving, which often results in
product obsolescence or short product life cycles. Accordingly, the ability of
Puradyn to compete

                                       20
<PAGE>


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. We
cannot assure you that Puradyn will be able to compete successfully, that its
competitors or future competitors will not develop technologies or products that
render our products and technology obsolete or less marketable or that Puradyn
will be able to successfully enhance its proposed products or technology or
adapt them satisfactorily.

We are dependent on key personnel and their loss would adversely affect our
operations.

         The success of Puradyn will be largely dependent on the efforts of the
members of the management of the Company. Puradyn has not as yet entered into
employment agreements with some members of the management, and we cannot assure
you that these persons will continue their employment with Puradyn. The loss of
the services of one or more key personnel could have a material adverse effect
on our ability to maximize use of our products and technologies or to develop
related products and technologies. The success of Puradyn also is dependent upon
its ability to hire and retain qualified executive, engineering and marketing
personnel. We cannot assure you that Puradyn will be able to hire or retain such
necessary personnel. Puradyn does not presently have "key man" life insurance
with respect to all members of its management, except with respect to $1,000,000
coverage on the life of Kevin Kroger, our President and Chief Operating Officer.

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

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

There are risks associated with our international operations and international
distribution.

         In 2000, we formed a subsidiary in England for distribution throughout
Europe, Africa and the Middle East. These foreign operations are subject to a
number of risks, including longer payment cycles, unexpected changes in
regulatory requirements, import and export restrictions and tariffs,
difficulties in staffing and managing foreign operations, the burden of
complying with a variety of foreign laws, greater difficulty in accounts
receivable collection, potentially adverse tax consequences, currency
fluctuations and political and economic instability. Additionally, the
protection of our intellectual property may be more difficult to enforce outside
of the United States. In the event that we are successful in expanding our
international operations, the imposition of exchange or price controls or other
restrictions on foreign currencies could materially affect our business,
operating results and financial condition.

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

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

         We cannot assure you that the steps taken by Puradyn 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 our products. In addition, although we
believe that its technology has been independently developed and does not
infringe on the proprietary rights of others, we cannot assure you that
Puradyn's technology does not and will not infringe or that third parties will
not assert infringement claims against Puradyn in the future. In the case of
infringement, Puradyn would, under certain circumstances, be required to modify
its products or obtain a license. We cannot assure you that Puradyn would be
able to do either in a timely manner, or upon acceptable terms and conditions,
and this failure could have a material adverse effect on us. In addition, the
Company may not have the resources to defend a patent infringement or other
proprietary rights infringement action.

                                       21
<PAGE>

         Certain of our patents will expire in June 2008. We have patents for a
redesigned Puradyn (the basis for the next generation of the Puradyn products)
and the PFT 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. These patents expire from May 2014 to October 2016. Also, we recently filed
a provisional application for our new chemical grafting process (CGP), a
technology designed to enhance the filtration efficiency of specified media.
These patents may not withstand competitive threats to their patentability or,
in the case of the redesigned Puradyn, be developed into commercially viable
products. The expiration of these patents may have an adverse competitive effect
on us and patents pending for these new products in various foreign countries
may not be issued and may not provide meaningful proprietary protection.

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

         Puradyn'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 Puradyn's sales cycle to key
customers, distributors and other strategic partners, the timing and success of
the introduction of new products and product enhancements by Puradyn and its
competitors, technological factors, variations and effectiveness in sales by
product, salesperson, and distribution channel, and competitive pricing.
Consequently, product revenues may vary significantly by quarter, and our
operating results may experience significant fluctuations.

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


                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS


<TABLE>
<CAPTION>
                                                                                                   Page
                                                                                                   ----

<S>                                                                                                  <C>
Report of Independent Certified Public Accountants.................................................  38

Consolidated Financial Statements:

     Consolidated Balance Sheet - December 31, 2002................................................  39

     Consolidated Statements of Operations - Years ended December 31, 2002 and 2001................  40

     Consolidated Statements of Changes in Stockholders' Equity  -
         Years ended December 31, 2002 and 2001....................................................  41

     Consolidated Statements of Cash Flows - Years ended December 31, 2002 and 2001................  42

     Notes to Consolidated Financial Statements....................................................  44
</TABLE>

                                    PART III

ITEM 8.  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.

                                       22
<PAGE>

Directors and Executive Officers
--------------------------------

Name                      Age    Position
---------------------     ---    -----------------------------------------------
Joseph V. Vittoria        67     Chairman of the Board of Directors
Richard C. Ford           59     Chief Executive Officer and Director
Kevin G. Kroger           51     President, Chief Operating Officer and Director
Alan J. Sandler           64     Vice President, Secretary, and Director
Lisa M. De La Pointe      34     Chief Financial Officer
Joseph E Kirby            50     Vice President of Sales and Marketing
Joseph J Gaynor, Jr.      52     Director of Manufacturing and Operations
Peter H. Stephaich        47     Director
Ottavio Serena            50     Director
Michael Castellano        62     Director

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

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

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

ALAN J. SANDLER joined the Company in June 1998 as President, Chief Operating
Officer, Secretary, Chief Financial Officer, and Director. In January 2000, he
became Vice President and resigned from the positions of President and Chief
Operating Officer. In March 2001, he resigned as Chief Financial Officer. In
August 2001, Mr. Sandler resumed the position of Chief Financial Officer and
then resigned from the position in March 2002. From 1995 until 1997 Mr. Sandler
served as President and Chief Executive Officer to Hood Depot, Inc., a national
restaurant supply manufacturer/distributor. From 1979 to 1995 he was President
and Chief Executive Officer of Sandler & Sons Dental Supply Company, a regional
dental supply and equipment distributor. Previous to this position he was a Vice
President of Gardner Advertising Company, a national advertising agency. Mr.
Sandler was appointed as a Director of TF Purifiner Ltd. in 1999.

LISA M. DE LA POINTE joined the Company November 19, 2001 as the Controller. In
March 2002, she was appointed the Chief Financial Officer. Ms. De La Pointe
received a Bachelor of Science from Florida Atlantic University and is a CPA in
the state of Florida. Prior to her employment with Puradyn Filter Technologies,
Inc., she worked as a senior auditor for Ernst & Young LLP from December 1998 to
June 2000 as well as a Corporate Controller for an e commerce company and a
publishing company from October 1995 to December 1998.

PETER H. STEPHAICH was appointed to the Board of Directors at its meeting June
12, 2000. Mr. Stephaich is currently Chairman, Chief Executive Officer and
President of Blue Danube Incorporated, a private holding Company engaged in the
river transportation industry on the Upper Ohio River. Mr. Stephaich has been on
its Board of Directors since 1982 and has held the titles of Chief Executive
Officer and President since 1995. Prior to 1995, Mr. Stephaich worked for
various financial institutions, including four years at Banker Trust Company
where he provided international financial advisory services to the
transportation and aerospace industries.

OTTAVIO SERENA was appointed to the Board of Directors at it meeting June 12,
2000. Mr. Serena is a principal of The Lynx Partners, a private equity
consulting firm. He is also President of The Explorer and Fiber Group, and is a
director and Vice President of Financial Performance Corporation, a publicly
traded financial Company. From 1993 to 1999, Mr. Serena was with Citicorp
Venture Capital, a leveraged buyout Company. Mr. Serena co-founded and was
managing director of The Lynx Partners from 1987 to 1993.

MICHAEL CASTELLANO was appointed to the Board of Directors at the Company's
January 24, 2001 meeting. Mr. Castellano retired in 1997 from Kobren Insight
Group, a financial services company, where he served as Chief Administrative
Officer from 1995 to 1997, and in 1994, he was Executive Vice President of Wall
Street Access, a discount brokeraqge firm. Prior to that, from 1988 to 1993, Mr.
Castellano was Senior Vice President and Corporate Controller for Fidelity
Investments. Mr. Castellano also serves on the Boards of Kobren Insight Funds
and ResortQuest International, where he serves as Chairman of the Audit
Committee.

                                       23
<PAGE>

During 2002, Puradyn's board of directors met on three occasions. Puradyn has an
audit committee and a compensation committee.

Audit Committee
---------------

During 2002, the audit committee of the board of directors was composed of three
independent directors. It operates under a written charter adopted by the board
of directors. The committee members were Michael Castellano (chairperson), Peter
H. Stephaich and Joseph V. Vittoria. On December 13, 2002, Joseph V. Vittoria
resigned as a member of the audit committee so that the audit committee is
comprised of only independent directors.

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

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

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

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

In reliance on the reviews and discussions referred to above, the committee
recommended to the board of directors, and the board has approved, that the
audited consolidated financial statements be included in Puradyn's Form 10-KSB
for the year ended December 31, 2002, for filing with the Securities and
Exchange Commission.

Submitted by the audit committee of the board of directors:

                  Michael Castellano       Peter H. Stephaich

Compensation Committee
----------------------

The compensation committee provides overall guidance for officer compensation
programs, including salaries and other forms of compensation including all
employee stock option grants and warrant grants to non-employees. The
compensation committee consists of Peter Stephaich (chairperson), Joseph V.
Vittoria, Ottavio Serena and Michael Castellano.

ITEM 9.  EXECUTIVE COMPENSATION

Compensation
------------

         The following table shows, for the three year period ended December 31,
2002, the cash and other compensation paid by the Company to its former
President and Chief Executive Officer and to each of the executive officers of
the Company who had annual compensation in excess of $100,000.

                                       24
<PAGE>

                           SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
       NAME AND                                 OTHER           OTHER             LTIP
  PRINCIPAL POSITION    YEAR      SALARY     ANNUAL BONUS   COMPENSATION (1)     OPTIONS    COMPENSATION
-----------------------------------------------------------------------------------------------------------
<S>                     <C>      <C>         <C>                <C>               <C>          <C>

Richard C. Ford (2)     2002     $ 208,000   $       --         $  14,251             --  $       --
CEO and Director        2001       208,000           --            17,890             --          --
                        2000       200,000      150,000            13,644             --          --

                                                 80,000
Kevin G. Kroger         2002       166,000           (4)           29,135             --          --
President, COO and
Director                2001       166,000       76,000            30,641             --          --
-----------------------------------------------------------------------------------------------------------
                        2000        83,000       50,000            18,289          300,000        --
-----------------------------------------------------------------------------------------------------------

-----------------------------------------------------------------------------------------------------------
Alan Sandler            2002       100,000           --             5,117               --        --
Vice President and
Secretary and
Director (3)            2001       100,000           --             8,650               --        --
-----------------------------------------------------------------------------------------------------------
                        2000        96,615           --             7,865               --        --
</TABLE>

         (1)  This amount represents payments made by the Company for health
              insurance premiums and car allowances and, in the case of
              Mr. Kroger, also for life insurance and disability insurance
              premiums.

         (2)  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. In February 2000,
              Mr. Ford resigned as Chairman of the Board of Directors, but
              remained as a Director. (See Item 12, Certain Relationships
              and Related Transactions).

         (3)  Mr. Sandler joined the Company in June 1998 as President,
              Chief Operating Officer, Secretary, Chief Financial Officer,
              and Director. In January 2000, he became Vice President and
              resigned from the positions of President and Chief Operating
              Officer. In March 2001, he resigned as Chief Financial Officer.
              In August 2001, Mr. Sandler resumed the position of Chief
              Financial Officer and then resigned from the position in March
              2002.

         (4)  In January 2003, in lieu of the contractual cash bonus amount
              of $80,000, 100,000 ISO stock options were granted to Mr. Kroger.

Incentive and Non-qualified Stock Option Plans
----------------------------------------------

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

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

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

                                       25
<PAGE>

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

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

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

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

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

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

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

         As of December 31, 2002, under the Directors' Plan, options to purchase
287,500 shares of common stock were outstanding. As of December 31, 2002, under
the 1996 Plan, incentive stock options to purchase 157,357 shares of common
stock were outstanding and non-qualified options to purchase 587,238 shares of
common stock were outstanding and, under the 1999 Plan, incentive stock options
to purchase 1,231,750 shares of common stock were outstanding and non-qualified
options to purchase 22,000 shares of common stock were outstanding.

                                       26
<PAGE>

Options Granted to Officers and Directors
-----------------------------------------
<TABLE>
<CAPTION>

-------------------------------------------------------------------------------------------------------------------------
                                          OPTIONS/SAR GRANTS IN LAST FISCAL YEAR
-------------------------------------------------------------------------------------------------------------------------
                                                    Individual Grants
-------------------------------------------------------------------------------------------------------------------------
                              Number of Securities         % of Total Options/SARs       Exercise or
          Name               Underlying Options/SARs       Granted to Employees in        base Price      Expiration Date
                                   Granted (#)                   Fiscal Year                ($/Sh)
-------------------------------------------------------------------------------------------------------------------------
<S>                                <C>                             <C>                    <C>                 <C>
Michael Castellano                 10,000                          2.68%                  $    2.46           10/09/07
-------------------------------------------------------------------------------------------------------------------------
Ottavio Serena                      7,500                          2.01%                       2.46           10/09/07
-------------------------------------------------------------------------------------------------------------------------
Peter H. Stephaich                 10,000                          2.68%                       2.46           10/09/07
-------------------------------------------------------------------------------------------------------------------------
Joseph J. Gaynor, Jr.              60,000                         16.06%                       2.86           08/12/12
-------------------------------------------------------------------------------------------------------------------------
Joseph E. Kirby                    80,000                         21.42%                       2.50           08/29/12
-------------------------------------------------------------------------------------------------------------------------
Lisa M. De La Pointe               25,000                          6.69%                       2.91           02/11/12
-------------------------------------------------------------------------------------------------------------------------
</TABLE>

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, 2002 to each person named in the Summary Compensation Table and the
unexercised options held as of the end of the 2002 fiscal year.

<TABLE>
<CAPTION>

                  AGGREGATE OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FY-END OPTION/SAR VALUES
-------------------------------------------------------------------------------------------------------------------------
                            NUMBER OF
                             SHARES                      NUMBER OF SECURITIES          VALUE OF UNEXERCISED IN-THE-MONEY
                           ACQUIRED ON                  UNDERLYING UNEXERCISED               OPTIONS/ SARS AT FY-
                            EXERCISE       VALUE       OPTIONS/SARS AT FY-END (#)                 END ($) (1)
-------------------------------------------------------------------------------------------------------------------------
                               (#)      REALIZED ($)   EXERCISABLE  UNEXERCISABLE       EXERCISABLE         UNEXERCISABLE
-------------------------------------------------------------------------------------------------------------------------
<S>                                                           <C>                                <C>
Richard C. Ford                --             --              375,000               --           $241,500          --
Chief Executive Officer
   and Director

Kevin Kroger                   --             --              150,000           150,000                  (2)         (2)
President, COO and
   Director

Alan Sandler                   --             --                   --                --                --           --
Vice President,
   Secretary 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
              $1.99, the closing price reported on December 31, 2002.


         (2)  The closing price at December 31, 2002 of $1.99 is less than
              the exercise price of the options.

ITEM 10.  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 21, 2003 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 officers and directors as a
group. In general, a person is deemed to be a "beneficial owner" of a security
if that person has or shares the power to vote or direct the voting of such
security, or the power to dispose or to direct the disposition of such security.
A person is also deemed to be a beneficial owner of any securities of which the
person has the right to acquire ownership within sixty (60) days. At March 21,
2002, there were 15,670,164 shares of Common Stock outstanding. The address of
each of the persons set forth below is 2017 High Ridge Road, Boynton Beach,
Florida 33426, except as otherwise noted.

                                       27
<PAGE>
<TABLE>
<CAPTION>

                    NAME AND ADDRESS OR IDENTITY OF GROUP                             BE PERCENT OF
                                                                                       COMMON STOCK
                                                                      BENEFICIAL       BENEFICIALLY
                                                                      OWNERSHIP           OWNED
            ------------------------------------------------------------------------------------------
<S>                                                                    <C>                 <C>
            Quantum Industrial Partners LDC ("QIP") (1)                4,570,000           25.0%
            Richard C. Ford (2)                                        2,233,985           12.2%
            Kevin G. Kroger (3)                                          182,000              1%
            Alan J. Sandler (4)                                          319,992            1.7%
            Joseph V. Vittoria (5)                                     1,520,073            8.3%
            Peter Stephaich (6)                                          110,000             --*
            Ottavio Serena (6)                                           127,500             --*
            Michael Castellano (7)                                        19,000             --*
            Lisa De La Pointe (8)                                         18,750             --*
                                                                       -------------------------------
            All Officers and Directors as a group (8 persons)          4,531,300            24.8%
</TABLE>

       * Less than 1%

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

(2)    Mr. Ford serves as Chief Executive Officer and as a Director. Includes
       options to purchase (i) 100,000 shares of common stock at $.56 per share
       through April 14, 2004, options to purchase 100,000 shares at $.21 per
       share through January 7, 2004, and options to purchase 175,000 shares at
       $.94 per share through April 1, 2004.

(3)    Mr. Kroger is President, Chief Operating Officer, and a Director.
       Includes options to purchase 150,000 shares of common stock at $9.25
       through July 3, 2010.

(4)    Mr. Sandler serves as Vice President, Secretary and Director.

(5)    Mr. Vittoria serves as Chairman of the Board of Directors. Includes
       options to purchase 205,000 shares of common stock at $5.88 through
       October 23, 2005 and a warrant to purchase 100,000 shares of common stock
       at $4.05 through March 28, 2007.

(6)    Mr. Stephaich and Mr. Serena serve as Directors. Includes options to
       purchase 10,000 and 7,500, shares of common stock, respectively, at
       $5.88 through October 23, 2005. For Mr. Serena, also includes a warrant
       to purchase 100,000 shares of common stock at $1.00 through December
       20, 2003.

(7)    Mr. Castellano serves as a Director. Includes options to purchase 7,500
       shares of common stock at $6.50 through January 24, 2006 and 2,500 shares
       of common stock at $4.81 through May 16, 2006.

(8)    Ms. De La Pointe serves as Chief Financial Officer. Includes options to
       purchase 12,500 shares of common stock at $2.70 through November 19, 2011
       and 6,250 shares of common stock at $2.91 through February 11, 2012.

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, 2002, 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.

                                       28
<PAGE>

ITEM 11.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
---------------------------------------------------------

         During 1998, Richard C. Ford, who was, at the time, Chairman of the
Board of Directors and a major stockholder of the Company, loaned the Company
$150,000 for which the Company issued notes payable due one year from the date
of issuance, bearing interest at 12%, and secured by accounts receivable and
inventories. On January 24, 2000, Mr. Ford converted the loan and the related
accrued interest totaling $175,504 into 150,000 shares of common stock.

         During 1998 and 1999, the Company borrowed an aggregate of $525,000
from its bank under a revolving line-of-credit. The revolving line of credit was
secured by certificates of deposit in the name of Richard C. Ford and held by
the bank and a personal guarantee.

         In exchange for Mr. Ford's personal guarantee of the Company's
borrowings, the Board of Directors granted Mr. Ford 175,000 options. The fair
value of the options, estimated at $171,500 using the Black-Scholes valuation
model, was recorded as a deferred financing cost and has been amortized to
interest expense over the term of facility. Included in interest expense in the
accompanying statements of operations for 2000 is amortization of such deferred
financing costs of $39,000.

         On January 24, 2000, Mr. Ford and his daughter personally repaid the
bank on behalf of the Company and simultaneously converted their loans totaling
$525,000 into 525,000 shares of the Company's common stock. As a result of this
conversion, and the conversions discussed above, the Company recorded
compensation expense in 2000 totaling approximately $1,687,500 which represents
the excess of the fair market value of the common stock received by Mr. Ford and
his daughter over conversion price at the date of the conversion.

         At December 31, 1999, the Company was obligated to Quantum Industrial
Partners LDC ("QIP"), a significant shareholder, under a 12% Senior Subordinated
Convertible Note due 2003. In addition, during 1998, the Company and QIP entered
into a Note Purchase Agreement whereby the Company issued QIP a 12% Senior
Subordinated Convertible Note totaling $2.5 million.

         On December 31, 1999, the Company and QIP entered into an agreement for
QIP to convert the outstanding principal amount payable to QIP into 2,500,000
shares of the Company's common stock at a conversion rate of $1 per share. As a
result of the modification of the conversion terms, the Company recognized
interest expense in 1999 totaling $2,115,909, equal to the fair market value of
the additional shares received by QIP resulting from the modification, pursuant
to SFAS No. 84, Induced Conversions of Convertible Debt. On January 24, 2000,
QIP converted the principal balance of the notes, totaling $2,500,000, and
forgave the related accrued interest totaling $717,997, into 2,500,000 shares of
the Company's common stock.

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

         On April 1, 2002, the Company executed an agreement with a third party
and a related party who is affiliated with an executive officer, to receive web
site and advertising consulting services. The agreement was for a term of 15
weeks and the two consultants received 20,000 stock options having a fair value
of approximately $61,000, as well as cash of approximately $30,000 for services
rendered. The fair value of the options was estimated at the date of grant using
a Black-Scholes option pricing model with the following assumptions: risk free
interest rates of 4.65%, volatility factors of the expected market price of the
Company's common stock of 1.298, a dividend yield of zero, and a weighted
average expected life of 3 years.

         On March 28, 2002, the Company executed a binding agreement with one of
its stockholders, who is also a Board Member, to fund up to $2.5 million through
March 31, 2003. Under the terms of the agreement, the Company could draw amounts
as needed in multiples of $500,000 to fund operations subject to Board of
Director approval. Amounts drawn bear interest at the prime rate payable monthly
per annum and become due and payable on December 31, 2003 or upon a change in
control of the Company or consummation of any other financing over $3 million.
In March 2003, the payback date was extended to December 31, 2004. In
consideration for the stockholder entering into this agreement, the Company
granted the stockholder 100,000 common stock purchase warrants at an exercise
price equal to the closing market price of the Company's stock on the date of
grant. As of December 31, 2002, the Company had drawn $2,000,000 of the
available funds. The final $500,000 was drawn on February 14, 2003.

                                       29
<PAGE>
         On March 14, 2003, the Company executed a second agreement with the
same stockholder to fund up to an additional $3.5 million through December 31,
2003. Under the terms of the second agreement, the Company can draw amounts as
needed in multiples of $500,000 to fund operations subject to Board of Director
approval. Amounts drawn bear interest at the prime rate per annum payable
monthly and become due and payable on December 31, 2004 or upon a change in
control of the Company or consummation of any other financing over $7 million.
In consideration, the Company granted the stockholder 125,000 common stock
purchase warrants at an exercise price equal to the closing market price of the
Company's stock on the date of grant. The fair value of the warrants granted was
estimated at approximately $214,000.


Private Offering Investment by Directors
----------------------------------------

         During the Company's private offering memorandum of $1.00 that
concluded in March 2000, the following Directors participated:

                   Joseph V. Vittoria          $ 1,000,000
                   Peter Stephaich             $   100,000
                   Ottavio Serena              $    20,000

         For the Company's private offering memorandum of $7.50 that concluded
in September 2000, the following Directors participated:


                   Joseph V. Vittoria          $ 1,000,000
                   Kevin G. Kroger             $   150,000

ITEM 12. CONTROLS AND PROCEDURES
--------------------------------

         (a) Evaluation of disclosure controls and procedures. In accordance
             with Rule 13a-15(b) of the Securities Exchange Act of 1934 (the
             "Exchange Act"), within 90 days prior to the filing date of the
             annual report on Form 10-K, an evaluation was carried out under the
             supervision and with the participation of the Company's management,
             including the Company's President and Chief Executive Officer and
             Chief Financial Officer, of the effectiveness of the design and
             operation of the Company's disclosure controls and procedures (as
             defined in Rule 13a-14(c) under the Exchange Act). Based upon their
             evaluation of these disclosure controls and procedures, the
             President and Chief Executive Officer and the Chief Financial
             Officer concluded that the disclosure controls and procedures were
             effective as of the date of such evaluation to ensure that material
             information relating to the Company, including its consolidated
             subsidiaries, was made known to them by others within those
             entities, particularly during the period in which this Annual
             Report on Form 10-K was prepared.

         (b) Changes in internal controls. There were not any significant
             changes in the Company's internal controls or other factors that
             could significantly affect these controls subsequent to the date of
             their evaluation, including any corrective actions with regard to
             significant deficiencies and material weaknesses.

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

A)       Index to Exhibits

Exhibits                 Description of Documents
--------                 ------------------------

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).

                                       30
<PAGE>

Exhibits                 Description of Documents
--------                 ------------------------

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).

10.19                    12% Senior Subordinated Convertible Note in the
                         principal amount of $500,000(4).

10.20                    Stock Option Plan(5).

10.21                    2000 Non-Employee Directors' Plan(10).

23.1                     Consent of Independent Certified Public
                         Accountants(11).

31.1                     Rule 13a-14(a)/15d-14(a) Certifications(11).

                                       31
<PAGE>

Exhibits                 Description of Documents
--------                 ------------------------

99.1                     Certification of Chief Executive Officer(11).

99.2                     Certification of Chief Financial Officer(11).

(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.

(7)      Incorporated by reference from the Exhibit to the company's Form 8-K,
         June 19, 1997, as filed with the Securities and Exchange Commission.

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

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

(10)     Incorporated by reference from Form 10-KSB, April 19, 2001, as filed
         with the Securities and Exchange Commission.

(11)     Filed herewith.



                                       32
<PAGE>

                                   SIGNATURES

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

                                       Puradyn Filter Technologies, Incorporated
                                                    (Registrant)


Date: March 31, 2003                           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: March 31, 2003


By:     /s/ Richard C. Ford
       ----------------------------------------------
       Richard C. Ford
       Principal Executive Officer and Director

By:     /s/ Alan J. Sandler
       ----------------------------------------------
       Alan J. Sandler
       Vice President, Secretary and Director

By:     /s/ Lisa M. De La Pointe
       ----------------------------------------------
       Lisa M. De La Pointe
       Principal Financial and Accounting Officer

By:     /s/ Joseph V. Vittoria
       ----------------------------------------------
       Joseph V. Vittoria
       Chairman of the Board of Directors

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

By:     /s/ Michael Castellano
       ----------------------------------------------
       Michael Castellano, Director

By:     /s/ Peter Stephaich
       ----------------------------------------------
       Peter Stephaich, Director

By:     /s/ Ottavio Serena
       ----------------------------------------------
       Ottavio Serena, Director


                                       33
<PAGE>

                    PURADYN FILTER TECHNOLOGIES, INCORPORATED

     CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Richard C. Ford, Chief Executive Officer, certify that:

1.      I have reviewed this annual report on Form 10-KSB of Puradyn Filter
        Technologies, Incorporated (the "Company");

2.      Based on my knowledge, this annual report does not contain any untrue
        statement of a material fact or omit to state a material fact necessary
        to make the statements made, in light of the circumstances under which
        such statements were made, not misleading with respect to the period
        covered by this annual report;

3.      Based on my knowledge, the financial statements, and other financial
        information included in this annual report, fairly present in all
        material respects the financial condition, results of operations and
        cash flows of the Company as of, and for, the periods presented in this
        annual report;

4.      The Company's other certifying officer and I are responsible for
        establishing and maintaining disclosure controls and procedures (as
        defined in Exchange Act Rules 13a-14 and 15d-14) for the Company and we
        have:


         a)        designed such disclosure controls and procedures to ensure
                   that material information relating to the Company, including
                   its consolidated subsidiary, is made known to us by others
                   within those entities, particularly during the period in
                   which this annual report is being prepared;

         b)        evaluated the effectiveness of the Company's disclosure
                   controls and procedures as of a date within 90 days prior to
                   the filing date of this annual report (the "Evaluation
                   Date"); and

         c)        presented in this annual report our conclusions about the
                   effectiveness of the disclosure controls and procedures based
                   on our evaluation as of the Evaluation Date;

5.      The Company's other certifying officer and I have disclosed, based on
        our most recent evaluation, to the Company's auditors and the audit
        committee of Company's board of directors (or persons performing the
        equivalent function):

        a)        all significant deficiencies in the design or operation of
                  internal controls which could adversely affect the Company's
                  ability to record, process, summarize and report financial
                  data and have identified for the Company's auditors any
                  material weaknesses in internal controls; and

        b)        any fraud, whether or not material, that involves management
                  or other employees who have a significant role in the
                  Company's internal controls; and

6.      The Company's other certifying officer and I have indicated in this
        annual report whether or not there were significant changes in internal
        controls or in other factors that could significantly affect internal
        controls subsequent to the date of our most recent evaluation, including
        any corrective actions with regard to significant deficiencies and
        material weaknesses.


Date: March 31, 2003

                                                   /s/ Richard C. Ford
                                                   -----------------------
                                                   Richard C. Ford
                                                   Chief Executive Officer

                                       34
<PAGE>


                    PURADYN FILTER TECHNOLOGIES, INCORPORATED

     CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Lisa M. De La Pointe, Chief Financial Officer, certify that:


1.      I have reviewed this annual report on Form 10-KSB of Puradyn Filter
        Technologies, Incorporated (the "Company");

2.      Based on my knowledge, this annual report does not contain any untrue
        statement of a material fact or omit to state a material fact necessary
        to make the statements made, in light of the circumstances under which
        such statements were made, not misleading with respect to the period
        covered by this annual report;

3.      Based on my knowledge, the financial statements, and other financial
        information included in this annual report, fairly present in all
        material respects the financial condition, results of operations and
        cash flows of the Company as of, and for, the periods presented in this
        annual report;

4.      The Company's other certifying officer and I are responsible for
        establishing and maintaining disclosure controls and procedures (as
        defined in Exchange Act Rules 13a-14 and 15d-14) for the Company and we
        have:


         a)       designed such disclosure controls and procedures to ensure
                  that material information relating to the Company, including
                  its consolidated subsidiary, is made known to us by others
                  within those entities, particularly during the period in which
                  this annual report is being prepared;

         b)       evaluated the effectiveness of the Company's disclosure
                  controls and procedures as of a date within 90 days prior to
                  the filing date of this annual report (the "Evaluation Date");
                  and

         c)       presented in this annual report our conclusions about the
                  effectiveness of the disclosure controls and procedures based
                  on our evaluation as of the Evaluation Date;

5.      The Company's other certifying officer and I have disclosed, based on
        our most recent evaluation, to the Company's auditors and the audit
        committee of Company's board of directors (or persons performing the
        equivalent function):

        a)        all significant deficiencies in the design or operation of
                  internal controls which could adversely affect the Company's
                  ability to record, process, summarize and report financial
                  data and have identified for the Company's auditors any
                  material weaknesses in internal controls; and

         b)       any fraud, whether or not material, that involves management
                  or other employees who have a significant role in the
                  Company's internal controls; and

6.      The Company's other certifying officer and I have indicated in this
        annual report whether or not there were significant changes in internal
        controls or in other factors that could significantly affect internal
        controls subsequent to the date of our most recent evaluation, including
        any corrective actions with regard to significant deficiencies and
        material weaknesses.


Date: March 31, 2003

                                                      /s/ Lisa M. De La Pointe
                                                      ------------------------
                                                      Lisa M. De La Pointe
                                                      Chief Financial Officer

                                       35
<PAGE>

                    PURADYN FILTER TECHNOLOGIES, INCORPORATED

                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS


                                                                         Page
                                                                         ----

Report of Independent Certified Public Accountants......................  37

Consolidated Financial Statements:

     Consolidated Balance Sheet - December 31, 2002.....................  38

     Consolidated Statements of Operations -
         Years ended December 31, 2002 and 2001.........................  39

     Consolidated Statements of Changes in Stockholders' Equity  -
         Years ended December 31, 2002 and 2001.........................  40

     Consolidated Statements of Cash Flows -
         Years ended December 31, 2002 and 2001.........................  41

     Notes to Consolidated Financial Statements.........................  42


                                       36
<PAGE>

               Report of Independent Certified Public Accountants


Board of Directors and Stockholders
Puradyn Filter Technologies, Incorporated

         We have audited the accompanying consolidated balance sheet of Puradyn
Filter Technologies, Incorporated (the Company) as of December 31, 2002, and the
related consolidated statements of operations, changes in stockholders' equity
and cash flows for the years ended December 31, 2002 and 2001. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.

         We conducted our audits in accordance with auditing standards generally
accepted in the United States. 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 audits provide a reasonable basis
for our opinion.

         In our opinion, the financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Puradyn
Filter Technologies, Incorporated at December 31, 2002, and the consolidated
results of its operations and its cash flows for the years ended December 31,
2002 and 2001, in conformity with accounting principles generally accepted in
the United States.



                                                  /s/ Ernst & Young LLP



West Palm Beach, Florida
March 21, 2002

                                       37
<PAGE>

                    Puradyn Filter Technologies, Incorporated

                           Consolidated Balance Sheet

                                December 31, 2002
<TABLE>
<S>                                                                                   <C>
Assets
Current assets:
     Cash and cash equivalents                                                        $    633,024
     Accounts receivable, net of allowance for uncollectible accounts of $18,353           394,618
     Inventories                                                                         1,162,650
     Accrued interest receivable from related parties                                       69,005
     Prepaid expenses and other current assets                                             230,350
                                                                                      ------------
Total current assets                                                                     2,489,647

Property and equipment, net                                                                728,995

Other noncurrent assets                                                                    344,605
                                                                                      ------------
Total assets                                                                          $  3,563,247
                                                                                      ============

Liabilities and stockholders' equity
Current liabilities:
     Accounts payable                                                                 $    247,702
     Accrued liabilities                                                                   466,896
     Current portion of capital lease obligation                                             4,926
     Deferred revenues                                                                     105,996
                                                                                      ------------
Total current liabilities                                                                  825,520

Capital lease obligation, less current portion                                               2,665
Note payable - stockholder                                                               2,000,000

Commitments and contingencies

Stockholders' equity:
     Preferred stock, $.001 par value:
         Authorized shares - 500,000; none issued and outstanding                               --
     Common stock, $.001 par value,
         Authorized shares - 30,000,000; issued and outstanding - 15,648,389                15,648
     Additional paid-in capital                                                         31,488,028
     Stockholder notes receivable                                                         (875,256)
     Accumulated deficit                                                               (29,901,327)
     Accumulated other comprehensive income                                                  7,969
                                                                                      ------------
Total stockholders' equity                                                                 735,062
                                                                                      ------------
Total liabilities and stockholders' equity                                            $  3,563,247
                                                                                      ============
</TABLE>

See accompanying notes.

                                       38
<PAGE>


                    Puradyn Filter Technologies, Incorporated

                      Consolidated Statements of Operations


                                                  Year Ended December 31
                                                  2002              2001
                                             ------------       ------------

Net sales                                    $  2,137,118       $  1,472,307

Costs and expenses:
     Cost of products sold                      2,058,439          1,850,404
     Salaries and wages                         1,871,723          1,755,300
     Selling and administrative                 1,522,337          2,878,510
                                             ------------       ------------
                                                5,452,499          6,484,214
                                             ------------       ------------
Loss from operations                           (3,315,381)        (5,011,907)

Other (expense) income:
        Investment (loss) income                  (22,406)           484,367
        Interest income                            52,553             23,249
        Interest expense                         (230,482)           (52,459)
                                             ------------       ------------
Total other (expense) income                     (200,335)           455,157
                                             ------------       ------------

Net loss                                     $ (3,515,716)      $ (4,556,750)
                                             ============       ============

Basic and diluted loss per common share      $      (0.23)      $      (0.31)


Weighted average common shares
       outstanding                             15,588,539         14,733,287


See accompanying notes.


                                       39
<PAGE>

                    Puradyn Filter Technologies, Incorporated

           Consolidated Statements of Changes in Stockholders' Equity

<TABLE>
<CAPTION>

                                                                       ADDITIONAL       UNEARNED       STOCKHOLDER
                                                 COMMON STOCK           PAID-IN      COMPENSATION         NOTES
                                              SHARES       AMOUNT       CAPITAL         EXPENSE         RECEIVABLE
                                           -------------------------------------------------------------------------
<S>                                          <C>          <C>        <C>             <C>                <C>
Balance at January 1, 2001                   14,206,541   $ 14,207   $ 30,226,556    $    (29,326)      $ (21,506)
Foreign currency translation adjustment              --         --             --              --              --
Unrealized gain on available-for-sale
   investments                                       --         --             --              --              --
Reclassification of realized investment
   loss included in net loss                         --         --             --              --              --

Net loss                                             --         --             --              --              --
Total comprehensive loss
Exercise of stock options                     1,278,437      1,278        965,920              --        (853,750)
Issuance of common stock to vendors for
     services                                     7,895          8         14,992              --              --
Issuance of compensatory stock options
   to nonemployee directors                          --         --         59,225              --              --
Compensation expense associated with
   outstanding variable option awards                --         --        151,816          29,326              --
                                              ----------------------------------------------------------------------
Balance at December 31, 2001                 15,492,873     15,493     31,418,509              --        (875,256)
Foreign currency translation adjustment              --         --             --              --              --
Reclassification of realized investment
    loss included in net loss                        --         --             --              --              --

Net loss                                             --         --             --              --              --

Total comprehensive loss
Exercise of stock options                       155,516        155        170,169              --              --

Issuance of stock options to consultants
     for services                                    --         --         61,200              --              --
Issuance of warrants to stockholder                  --         --        318,000              --              --
Compensation expense associated with
     warrant modification                            --         --         94,000              --              --
Credit to previously recognized
   compensation expense associated with
   outstanding variable option awards                --         --       (573,850)             --              --
                                              ----------------------------------------------------------------------
Balance at December 31, 2002                 15,648,389     $ 15,648  $31,488,028        $     --       $(875,256)


[RESTUB]
<CAPTION>
                                                           ACCUMULATED OTHER        TOTAL
                                            ACCUMULATED      COMPREHENSIVE       STOCKHOLDERS'
                                              DEFICIT        INCOME (LOSS)          EQUITY
                                           --------------------------------------------------------
<S>                                        <C>                <C>                <C>
Balance at January 1, 2001                 $(21,828,861)      $   3,006          $  8,364,076
Foreign currency translation adjustment              --           1,132                 1,132
Unrealized gain on available-for-sale
   investments                                       --          83,570                83,570
Reclassification of realized investment
   loss included in net loss                         --          (3,538)               (3,538)

Net loss                                     (4,556,750)             --            (4,556,750)
                                                                                 ------------
Total comprehensive loss                                                           (4,475,586)
Exercise of stock options                            --              --               113,448
Issuance of common stock to vendors for
     services                                        --              --                15,000
Issuance of compensatory stock options
   to nonemployee directors                          --              --                59,225
Compensation expense associated with
   outstanding variable option awards                --              --               181,142
                                          ---------------------------------------------------
Balance at December 31, 2001                (26,385,611)         84,170             4,257,350
Foreign currency translation adjustment              --           9,419                 9,419
Reclassification of realized investment
    loss included in net loss                        --         (85,620)              (85,620)

Net loss                                     (3,515,716)             --            (3,515,716)
                                                                                 ------------
Total comprehensive loss                             --              --            (3,591,917)
Exercise of stock options                            --              --               170,324
Issuance of stock options to consultants
     for services                                    --              --                61,200
Issuance of warrants to stockholder                  --              --               318,000
Compensation expense associated with
     option modification                             --              --                94,000
Credit to previously recognized
   compensation expense associated with
   outstanding variable option awards                --              --              (573,850)
                                          ---------------------------------------------------
Balance at December 31, 2002               $(29,901,327)      $   7,969          $    735,062
</TABLE>

See accompanying notes.

                                       40
<PAGE>

                    Puradyn Filter Technologies, Incorporated

                      Consolidated Statements of Cash Flows

<TABLE>
<CAPTION>
                                                                                    YEAR ENDED DECEMBER 31
                                                                                    2002              2001
                                                                                 -----------------------------
<S>                                                                              <C>               <C>
OPERATING ACTIVITIES
Net loss                                                                         $(3,515,716)      $(4,556,750)
Adjustments to reconcile net loss to net cash used in operating activities:
     Depreciation and amortization                                                   202,968           113,198
     Provision for (reversal of) bad debts                                           (60,044)           77,601
     Amortization of deferred financing costs included in interest expense           176,667                --
     Loss on investments                                                             107,977                --
     Loss on disposal of property and equipment                                       25,494                --
     Amortization of discount on available-for-sale investments                           --            40,580
     Compensation (credit) expense on stock-based arrangements with
         employees and vendors                                                      (467,611)          255,367
     Changes in operating assets and liabilities:
         Accounts receivable                                                         (72,574)         (259,720)
         Inventories                                                                (369,601)         (509,008)
         Accrued interest receivable from related parties                             67,154            57,300
         Prepaid expenses and other current assets                                    40,930           142,094
         Other noncurrent assets                                                    (286,296)          (44,783)
         Accounts payable                                                           (283,835)          374,538
         Accrued liabilities                                                         270,395            37,933
         Deferred revenues                                                             6,398            45,371
         Other noncurrent liabilities                                                     --           (57,953)
         Accounts payable - related parties                                               --           (24,340)
                                                                                 -----------------------------
Net cash used in operating activities                                             (4,157,694)       (4,308,572)

INVESTING ACTIVITIES
Proceeds from sales and maturities of investments                                  5,815,930         9,421,347
Purchases of investments                                                                  --        (8,257,236)
Purchases of property and equipment                                                 (194,213)         (599,113)
                                                                                 -----------------------------
Net cash provided by investing activities                                          5,621,717           564,998

FINANCING ACTIVITIES
Proceeds from sale of common stock, net of offering costs                                 --           150,000
Proceeds from exercise of stock options                                              170,324           113,448
Proceeds from note payable secured by investments                                  1,450,501         3,983,582
Proceeds from stockholder note                                                     2,000,000                --
Payment on note payable secured by investments                                    (5,430,501)               --
Payment of capital lease obligations                                                  (4,781)           (9,707)
                                                                                 -----------------------------
Net cash (used in) provided by financing activities                               (1,814,457)        4,237,323
Effect of exchange rate changes on cash and cash equivalents                           9,419             1,132
                                                                                 -----------------------------
Net (decrease) increase in cash and cash equivalents                                (341,015)          494,881
Cash and cash equivalents at beginning of year                                       974,039           479,158
                                                                                 -----------------------------
Cash and cash equivalents at end of year                                             633,024           974,039
Less restricted cash                                                                      --           (22,238)
                                                                                 -----------------------------
Unrestricted cash and cash equivalents                                           $   633,024       $   951,801
                                                                                 =============================
SUPPLEMENTAL CASH FLOW INFORMATION:

Cash paid for interest                                                           $    48,914       $    76,759
                                                                                 =============================
NONCASH INVESTING AND FINANCING ACTIVITIES:

Stockholder notes receivable issued for exercise of stock options                $        --       $   853,750
                                                                                 =============================
Warrants issued for debt issue costs                                             $   318,000                --
                                                                                 =============================

Stock options issued for consulting services                                     $    61,000                --
                                                                                 =============================
Net unrealized gain on available-for-sale investments                            $        --       $    80,032
                                                                                 =============================
</TABLE>

See accompanying notes.

                                       41
<PAGE>

                    Puradyn Filter Technologies, Incorporated

                   Notes to Consolidated Financial Statements

                                December 31, 2002



1. SIGNIFICANT ACCOUNTING POLICIES

Organization

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

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

New Accounting Pronouncements

In June 2001, the FASB issued SFAS No. 141, Business Combinations (SFAS 141) and
SFAS No. 142, Goodwill and Other Intangible Assets (SFAS 142). SFAS 141 requires
all business combinations initiated after June 30, 2001 to be accounted for
using the purchase method. Under SFAS 142, goodwill and intangible assets with
indefinite lives are no longer amortized but are reviewed annually (or more
frequently if impairment indicators arise) for impairment. Separable intangible
assets that are not deemed to have indefinite lives will continue to be
amortized over their useful lives (but with no maximum life). The Company
adopted SFAS 141 on July 1, 2001 and SFAS 142 on January 1, 2002. The adoption
of these statements did not have a material effect on the Company's financial
position or the results of its operations.

In August 2001, the FASB issued SFAS No. 143, Accounting for Asset Retirement
Obligations (SFAS 143). This statement requires entities to record the fair
value of a liability for an asset retirement obligation in the period in which
it is incurred. This statement is effective for fiscal years beginning after
June 15, 2002. The Company does not have any asset retirement obligations, nor
does it have any plans to retire any assets, accordingly, this statement is not
expected to have a material impact on the Company's financial position or the
results of its operations.

In September 2001, the FASB issued SFAS No. 144, Accounting for the Impairment
or Disposal of Long-Lived Assets (SFAS 144), which supersedes SFAS No. 121,
Accounting for the Impairment of Long-lived Assets and for Long-lived Assets to
Be Disposed Of (FAS 121), and the accounting and reporting provisions of
Accounting Principles Board (APB) Opinion No. 30, Reporting the Results of
Operations -- Reporting the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions (APB
30), for the disposal of a segment of a business. Because SFAS 121 did not
address the accounting for a segment of a business accounted for as a
discontinued operation under APB 30, two accounting models existed for
long-lived assets to be disposed of. SFAS 144 establishes a single accounting
model, based on the framework established in SFAS 121, for long-lived assets to
be disposed of. It also addresses certain significant implementation issues
under SFAS 121. The provisions of SFAS 144 became effective for the Company on
January 1, 2002. The adoption of this statement did not have a material effect
on the Company's financial position or the results of its operations.

In April 2002, the FASB issued SFAS No. 145, Rescission of SFAS Nos. 4, 44, and
64, Amendment of SFAS 13, and Technical Corrections (SFAS 145). Among other
things, SFAS 145 rescinds various pronouncements regarding early extinguishments
of debt and allows extraordinary accounting treatment for early extinguishments
only when the provisions of APB 30 are met. This statement also amends SFAS 13
to require sale-leaseback accounting for certain lease modifications that have
economic effects that are similar to sale-leaseback transactions. The provisions
of SFAS 145 become effective for the Company on January 1, 2003. The Company
does not believe that the adoption of this standard will have a material effect
on its financial position or the results of its operations.

                                       42
<PAGE>

In July 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated with
Exit or Disposal Activities, (SFAS 146), which addresses significant issues
regarding the recognition, measurement, and reporting of costs that are
associated with exit and disposal activities, including restructuring activities
that are currently accounted for pursuant to the guidance that the Emerging
Issues Task Force (EITF) has set forth in EITF Issue No. 94-3, Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit an
Activity (including Certain Costs Incurred in a Restructuring). The scope of
SFAS 146 also includes (1) costs related to terminating a contract that is not a
capital lease and (2) termination benefits that employees who are involuntarily
terminated receive under the terms of a one-time benefit arrangement that is not
an ongoing benefit arrangement or an individual deferred-compensation contract.
SFAS 146 is effective for exit or disposal activities that are initiated after
December 31, 2002. The Company does not believe that the adoption of this
standard will have a material effect on its financial position or the results of
its operations.

In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based
Compensation--Transition and Disclosure (SFAS 148). SFAS 148 amends SFAS No.
123, Accounting for Stock-Based Compensation (SFAS 123), to provide alternative
methods of transition to SFAS 123's fair value method of accounting for
stock-based employee compensation. SFAS 148 also amends the disclosure
provisions of SFAS 123 and APB Opinion No. 28, Interim Financial Reporting, to
require disclosure in the summary of significant accounting policies of the
effects of an entity's accounting policy with respect to stock-based employee
compensation on reported net income and earnings per share in annual and interim
financial statements. SFAS 148 does not require companies to account for
employee stock options using the fair value method proscribed by SFAS 123. The
adoption of the new statement did not have an effect on the Company's financial
position or the results of its operations.

In March 2003, the FASB issued SFAS No. 149, Accounting for Certain Financial
Instruments with Characteristics of Liabilities and Equity (SFAS 149). This
statement establishes standards for classification of certain financial
instruments that have characteristics of both liabilities and equity in the
statement of financial position. This statement will be effective upon issuance
for all contracts created or modified after the date the statement is issued and
otherwise effective at the beginning of the first interim period beginning after
June 15, 2003. The Company does not believe that the adoption of this standard
will have a material effect on its financial position or the results of its
operations.

In November 2002, the FASB issued Interpretation No. 45, Guarantor's Accounting
and Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others (FIN 45). FIN 45 requires that certain guarantees be
initially recorded at fair value, which is different from the general current
practice of recording a liability only when a loss is probable and reasonably
estimable. FIN 45 also requires a guarantor to make significant new disclosures
for virtually all guarantees. The Company adopted the disclosure requirements
under FIN 45 for the year ended December 31, 2002 and will adopt the initial
recognition and initial measurement provisions for any guarantees issued or
modified after December 31, 2002. The Company does not believe that the adoption
of FIN 45 will have a material effect on its financial position or the results
of its operations.

In January 2003, the FASB issued Interpretation No. 46, Consolidation of
Variable Interest Entities - an Interpretation of ARB No. 51 (FIN 46), which
addresses consolidation of variable interest entities. FIN 46 expands the
criteria for consideration in determining whether a variable interest entity
should be consolidated by a business entity, and requires existing
unconsolidated variable interest entities (which include, but are not limited
to, Special Purpose Entities, or SPEs) to be consolidated by their primary
beneficiaries if the entities do not effectively disperse risks among parties
involved. This interpretation applies immediately to variable interest entities
created after January 31, 2003, and to variable interest entities in which an
enterprise obtains an interest after that date. It applies in the first fiscal
year or interim period beginning after June 15, 2003, to variable interest
entities in which an enterprise holds a variable interest that it acquired
before February 1, 2003. The Company does not believe that the adoption of this
pronouncement will have a material effect on its financial position or the
results of its operations.

In November 2002, the Emerging Issues Task Force (EITF) reached a consensus on
EITF Issue No. 00-21, Revenue Arrangements with Multiple Deliverables (EITF
00-21). EITF 00-21 addresses certain aspects of the accounting by a company for
arrangements under which it will perform multiple revenue-generating activities.
In applying EITF 00-21, generally, separate contracts with the same customer
that are entered into at or near the same time are presumed to have been
negotiated as a package and should, therefore, be evaluated as a single
contractual arrangement. It also addresses how contract consideration should be
measured and allocated to the separate deliverables in the arrangement. This
pronouncement is applicable to revenue arrangements entered into beginning in
2004. The Company does not believe that the adoption of this pronouncement will
have a material effect on its financial position or the results of its
operations.

Principles of Consolidation

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

Revenue Recognition

The Company recognizes revenue from product sales to customers, distributors and
resellers when products that do not require further services or installation at
the customer's site are shipped, there are no uncertainties surrounding customer
acceptance and for which collectibility is reasonably assured in accordance with
Staff Accounting Bulletin (SAB) No. 101, Revenue Recognition in Financial
Statements as amended and interpreted. Cash received by the Company prior to
revenue recognition is recorded as deferred revenues. Sales are made to
customers under terms allowing certain limited rights of return and other
limited product and performance warranties for which provision has been made in
the accompanying consolidated financial statements.

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

                                       43
<PAGE>

Use of Estimates

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

Cash and Cash Equivalents

Cash and cash equivalents include all highly liquid investments with original
maturities of three months or less at the time of purchase.

Fair Value of Financial Instruments

The carrying amounts of cash and cash equivalents, accounts receivable, accrued
interest receivable, prepaid expenses and other assets, accounts payable,
accrued liabilities and note payable to stockholder approximate their fair
values as of December 31, 2002 because of their short-term natures.

Accounts Receivable

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

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

Investments

During 2002, the Company sold all of its investments for approximately $5.83
million. The proceeds were used to pay in full the margin loan of $5.45 million,
which was collateralized by the investments, and to fund operations.

Inventories

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

Deferred Financing Costs

The Company capitalizes costs related to obtaining financing and amortizes them
using the straight-line method, which approximates the effective interest method
over the term of the related debt. Amortized financing costs are included in
interest expense and totaled approximately $177,000 for the year ended December
31, 2002. The deferred financing costs related to the $2.5 million commitment
provided by the Company's stockholder were initially amortized over the
nine-month draw down period ending December 31, 2002. Upon the first draw in
August 2002, the amortization period was extended to 18 months or through
December 31, 2003. On March 14, 2003, the commitment was amended to extend the
repayment period through December 31, 2004. Effective March 14, 2003, the
Company will amortize the then remaining deferred financing costs prospectively
over the extended payback period.

                                       44
<PAGE>

Property and Equipment

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

Patents and Trademarks

The Company capitalizes costs associated with obtaining patents and trademarks
related to its products. These costs are amortized using the straight-line
method over their estimated useful lives of ten years for trademarks and fifteen
years for patents. During 2002, the Company capitalized approximately $208,000
of such costs. In accordance with SFAS 144, an impairment analysis was performed
as of December 31, 2002 due to the presence of certain indicators of impairment.
Based on the results of this analysis, the carrying amounts of these assets were
written down to zero. The write off of approximately $208,000 is recorded in
selling and administrative expenses in the accompanying 2002 consolidated
statement of operations.

Impairment of Long-Lived Assets

Management assesses the recoverability of its long-lived assets when indicators
of impairment are present. If such indicators are present, recoverability of
these assets is determined by comparing the undiscounted net cash flows
estimated to result from those assets over the remaining life to the assets' net
carrying amounts. If the estimated undiscounted net cash flows are less than the
net carrying amount, the assets would be adjusted to their fair value, based on
appraisal or the present value of the undiscounted net cash flows. In accordance
with SFAS 144, a recoverability analysis was performed due to the presence of
certain indicators of impairment. Based on the results of the recoverability
analysis, the Company wrote off the entire carrying values of the patents and
trademarks of approximately $208,000 in 2002.

Comprehensive Income

SFAS No. 130, Reporting Comprehensive Income (SFAS 130) establishes rules for
reporting and display of comprehensive income and its components. Comprehensive
income is the sum of net loss as reported in the consolidated statements of
operations and other comprehensive income transactions reported in the
consolidated statement of changes in stockholders' equity. Other comprehensive
income transactions that currently apply to the Company result from changes in
exchange rates from translating the financial statements of the Company's
foreign subsidiary. Comprehensive income as of December 31, 2002 and 2001 is not
shown net of taxes because the Company's deferred tax asset has been fully
offset by a valuation allowance.

Advertising Costs

Advertising costs are expensed as incurred. During the years ended December 31,
2002 and 2001, advertising costs incurred by the Company totaled approximately
$178,000 and $331,000, respectively, and are included in selling and
administrative expenses in the accompanying consolidated statements of
operations.

Engineering and Development

Engineering and development costs are expensed as incurred. During the years
ended December 31, 2002 and 2001, engineering and development costs incurred by
the Company totaled approximately $129,000 and $117,000, respectively, and are
included in selling and administrative expenses in the accompanying consolidated
statements of operations.

Foreign Currency Translation

The financial statements of the Company's foreign subsidiary have been
translated into U.S. dollars in accordance with SFAS No. 52, Foreign Currency
Translation (SFAS 52). All balance sheet accounts have been translated using the
exchange rate in effect at the balance sheet date. Income statement amounts have
been translated using an appropriately weighted average exchange rate for the
year. The translation gains and losses resulting from the changes in exchange
rates during 2002 and 2001 have been reported in accumulated other comprehensive
income, except for gains and losses resulting from the translation of
intercompany receivables and payables, which are included in earnings for the
period. The Company recorded a foreign currency exchange rate gain of
approximately $24,000, which is included in selling and administrative expenses
in the accompanying 2002 consolidated statement of operations.

                                       45
<PAGE>

Income Taxes

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

Stock Option Plans

The Company accounts for its stock-based plans under Accounting Principles Board
Opinion No. 25, Accounting for Stock Issued to Employees (APB 25) and FASB
Interpretation No. 44, Accounting for Certain Transactions involving Stock
Compensation (FIN 44), and provides pro forma disclosures of the compensation
expense determined under the fair value provisions of SFAS 123. The Company does
not record compensation expense using the fair value provisions, because the
alternative fair value accounting provided for under SFAS 123 requires the use
of option valuation models that were not developed for use in valuing employee
stock options. Under APB 25, since the exercise price of the Company's employee
stock options equals the market price of the underlying stock on the date of
grant, no compensation expense is recognized.

The Company leases its employees from a payroll leasing company. The Company's
leased employees meet the definition of employees as specified by FIN 44, an
interpretation of APB 25, for purposes of applying APB 25.

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

Pro forma information regarding net income and earnings per share as if the
Company had accounted for its employee stock options under the fair value method
of SFAS 123 is presented below. The fair value for these options was estimated
at the date of grant using a Black-Scholes option-pricing model with the
following assumptions for the years ended December 31, 2002 and 2001,
respectively: risk free interest rates of 4.0% and 5.4%, volatility factors of
the expected market price of the Company's common stock of 1.26 and 2.4, a
dividend yield of zero, and a weighted average expected life of 5 years.

The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options, which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility. Because
the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.

For purposes of pro forma disclosure, the estimated fair value of the options is
amortized to expense over the options' vesting period. The Company's pro forma
information is as follows:

                                                       2002            2001
                                                   ------------    ------------
         Net loss as reported                      $(3,515,716)    $(4,556,750)
         Fair value method stock option expense     (1,819,429)     (2,112,340)
                                                   ------------    ------------
         Pro forma net loss                         (5,335,145)     (6,669,090)
         Loss per common share:
           Basic and diluted loss as reported      $     (0.23)    $     (0.31)
           Basic and diluted loss pro forma        $     (0.34)    $     (0.45)

Credit Risk

The Company minimizes the concentration of credit risk associated with its cash
and cash equivalents by maintaining its cash and cash equivalents with high
quality federally insured financial institutions. The Company performs ongoing
evaluations of its significant trade accounts receivable customers and generally
does not require collateral. An allowance for doubtful accounts is maintained
against trade accounts receivable at levels which management believes is
sufficient to cover probable credit losses. There are concentrations of credit
risk with respect to trade receivables due to the amounts owed by two customers
at December 31, 2002 whose trade receivable balances each represented
approximately 62% and 6% of total accounts receivable. The loss of business from
one or a combination of the Company's significant customers could adversely
affect its operations.

                                       46
<PAGE>

Basic and Diluted Loss Per Share

The Company follows SFAS No. 128, Earnings Per Share (SFAS 128), which
requires a dual presentation of basic and diluted earnings per share. However,
because of the Company's net losses, the effects of stock options and warrants
would be anti-dilutive and, accordingly, are excluded from the computation of
earnings per share. The number of such shares excluded from the computations of
diluted loss per share totaled 2,654,912 in 2002 and 2,727,728 in 2001.

Reclassifications

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

2. ISSUES AFFECTING LIQUIDITY AND MANAGEMENT'S PLANS

The Company's financial statements have been prepared assuming that the Company
will continue as a going concern. The Company has sustained losses since
inception in 1987 and used net cash in operations of approximately $4,158,000
and $4,309,000 during the years ended December 31, 2002 and 2001, respectively.
As a result, the Company has had to rely principally on private equity funding,
including the conversion of debt into stock, as well as shareholder loans to
fund its activities to date.

On March 28, 2002, the Company executed a binding agreement with one of its
stockholders, who is also a Board Member, to fund up to $2.5 million through
March 31, 2003. Under the terms of the agreement, the Company could draw amounts
as needed in multiples of $500,000 to fund operations subject to Board of
Director approval. Amounts drawn bear interest at the prime rate payable monthly
per annum and become due and payable on December 31, 2003 or upon a change in
control of the Company or consummation of any other financing over $3 million.
In March 2003, the payback date was extended to December 31, 2004. In
consideration for the stockholder entering into this agreement, the Company
granted the stockholder 100,000 common stock purchase warrants at an exercise
price equal to the closing market price of the Company's stock on the date of
grant. As of December 31, 2002, the Company had drawn $2,000,000 of the
available funds. The final $500,000 was drawn on February 14, 2003.

On March 14, 2003, the Company executed a second agreement with the same
stockholder to fund up to an additional $3.5 million through December 31, 2003.
Under the terms of the second agreement, the Company can draw amounts as needed
in multiples of $500,000 to fund operations subject to Board of Director
approval. Amounts drawn bear interest at the prime rate per annum payable
monthly and become due and payable on December 31, 2004 or upon a change in
control of the Company or consummation of any other financing over $7 million.
In consideration, the Company granted the stockholder 125,000 common stock
purchase warrants at an exercise price equal to the closing market price of the
Company's stock on the date of grant. The fair value of the warrants granted was
estimated at approximately $214,000.

The Company anticipates increased cash flows from 2003 sales activity; however,
additional cash may still be needed to support operations. Management believes
the funds received from its stockholder as well as cash flow from operations
will be sufficient to sustain the Company's operations through at least January
1, 2004. However, if the stockholder commitment is not funded for any reason or
budgeted sales levels are not achieved, the Company may have to modify its
business plan, reduce or discontinue some of its operations or seek a buyer for
part of its assets to continue as a going concern through 2003.

3. INVENTORIES

At December 31, 2002, inventories consisted of the following:



         Raw materials                                           $  940,444
         Finished goods                                             222,206
                                                                 ----------
                                                                 $1,162,650
                                                                 ==========

                                       47
<PAGE>

4. PREPAID EXPENSES AND OTHER CURRENT ASSETS


At December 31, 2002, prepaid expenses and other current assets consisted of the
following:


         Prepaid expenses                                        $ 115,498
         Current portion of refundable security deposit             42,347
         Deferred costs                                             72,505
                                                                 ---------
                                                                 $ 230,350
                                                                 =========



5. PROPERTY AND EQUIPMENT

At December 31, 2002, property and equipment consisted of the following:


         Machinery and equipment                                 $1,026,932
         Furniture and fixtures                                      57,260
         Leasehold improvements                                      98,633
         Website development                                         72,960
         Computer hardware and software                             174,541
                                                                 ----------
                                                                  1,430,326
         Less accumulated depreciation and amortization            (701,331)
                                                                 ----------
                                                                 $  728,995
                                                                 ==========

Depreciation and amortization expense of property and equipment for the years
ended December 31, 2002 and 2001 is approximately $203,000 and $113,000,
respectively, of which approximately $122,000 and $44,000 is included in cost of
products sold and approximately $81,000 and $69,000 is included in selling and
administrative costs, respectively, in the accompanying consolidated statements
of operations.

6.  LEASES

The Company leases their office and warehouse facilities in Boynton Beach,
Florida under a long-term noncancellable lease agreement, which contains renewal
options and rent escalation clauses and includes the option to expand the space
up to an additional 24,000 square feet. A $235,000 security deposit was paid in
2002, which will be refunded ratably on an annual basis over the first three
years of the lease term beginning on the last day of the first lease year,
provided there has been no Event of Default, as defined, by the Company, of
which $42,347 is included in prepaid expenses and other current assets and the
remainder is included in other noncurrent assets in the accompanying
consolidated balance sheet. The total minimum lease payments over the term of
the lease aggregate approximately $774,000. The terms of the lease include a
period of free rent and scheduled annual rate increases. As such, rent expense
is recognized on a straight-line basis over the 68-month term of the lease.

The Company's former office lease expires on March 31, 2003. The Company is
obligated to pay rent of approximately $32,000 through that date and has accrued
approximately $17,000 of rent expense, the Company's net obligation for the
period that the current office space will be vacant.

The Company had additional office facilities in Livonia, Michigan under a lease
that extended through January 31, 2002. The Company elected not to renew the
lease in Livonia, Michigan. Their wholly owned subsidiary, PFTL rents office
space in Devon, England under a lease that extended through March 31, 2002 and
is now on a month-to-month basis.

Rent expense under all operating leases for the years ended December 31, 2002
and 2001 totaled approximately $177,000 and $165,000, respectively, and is
included in cost of products sold and selling and administrative expenses in the
accompanying consolidated statements of operations.


                                       48
<PAGE>


Future minimum lease commitments due for facilities and equipment leases under
noncancellable capital and operating leases at December 31, 2002 are as follows:

                                                          CAPITAL      OPERATING
                                                          LEASES        LEASES
                                                          ----------------------
                2003                                      $  5,495     $ 85,669
                2004                                         2,748      122,751
                2005                                            --      151,645
                2006                                            --      156,194
                2007 and thereafter                             --      257,301
                                                          ---------------------
                Total minimum lease payments                 8,243      773,560
                                                                       ========
                Less amount representing interest             (653)
                                                          --------
                Present value of minimum lease payments
                     including current portion of $4,926  $  7,590
                                                          ========
7. ACCRUED LIABILITIES

At December 31, 2002, accrued liabilities consisted of the following:


          Accrued wages and benefits                       $215,760
          Accrued warranty costs                             46,607
          Accrued expenses relating to vendors and others   204,529
                                                           --------
                                                           $466,896
                                                           ========

8.  NOTE PAYABLE TO STOCKHOLDER

On March 28, 2002, the Company executed a binding agreement with one of its
stockholders, who is also a Board Member, to fund up to $2.5 million through
March 31, 2003. Under the terms of the agreement, the Company could draw amounts
as needed in multiples of $500,000 to fund operations subject to Board of
Director approval. Amounts drawn bear interest at the prime rate payable monthly
per annum and become due and payable on December 31, 2003 or upon a change in
control of the Company or consummation of any other financing over $3 million.
In March 2003, the payback date was extended to December 31, 2004. In
consideration for the stockholder entering into this agreement, the Company
granted the stockholder 100,000 common stock purchase warrants at an exercise
price equal to the closing market price of the Company's stock on the date of
grant. As of December 31, 2002, the Company had drawn $2,000,000 of the
available funds. The final $500,000 was drawn on February 14, 2003.

On March 14, 2003, the Company executed a second agreement with the same
stockholder to fund up to an additional $3.5 million through December 31, 2003.
Under the terms of the second agreement, the Company can draw amounts as needed
in multiples of $500,000 to fund operations subject to Board of Director
approval. Amounts drawn bear interest at the prime rate per annum payable
monthly and become due and payable on December 31, 2004 or upon a change in
control of the Company or consummation of any other financing over $7 million.
In consideration, the Company granted the stockholder 125,000 common stock
purchase warrants at an exercise price equal to the closing market price of the
Company's stock on the date of grant. The fair value of the warrants granted was
estimated at approximately $214,000.

9.  INCOME TAXES

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

                                                    2002            2001
                                                ---------------------------

         United States                          $(3,372,243)    $(4,287,348)
         Foreign                                   (120,235)       (245,938)
         Intercompany elimination                   (23,238)        (23,464)
                                                ============================
                                                $(3,515,716)    $(4,556,750)
                                                ============================

                                       49
<PAGE>

The significant components of the Company's deferred tax assets and liabilities
consisted of the following at December 31, 2002:


         Deferred tax assets:
              Net operating loss carryforwards               $8,542,757
              Depreciation and amortization                      46,868
              Accrued expenses and reserves                      64,796
              Impairment loss                                    78,304
              Compensatory stock options and warrants            58,460
              Other                                              16,176
                                                             ----------
         Total deferred tax assets                            8,807,361
         Valuation allowance                                 (8,807,361)
                                                             ----------
         Net deferred tax assets                             $       --
                                                             ==========

SFAS 109 requires a valuation allowance to reduce the deferred tax assets
reported if, based on the weight of the evidence, it is more likely than not
that some portion or all of the deferred tax assets will not be realized. After
consideration of all the evidence, both positive and negative, management has
determined that a full valuation allowance of $8,807,361 against its net
deferred taxes is necessary as of December 31, 2002. The change in valuation
allowance for the years ended December 31, 2002 and 2001 is $1,303,920 and
$1,610,253, respectively.

At December 31, 2002, the Company had approximately $26,590,000 of U.S. net
operating loss carryforwards remaining, which expire beginning in 2017. The
Company will record the benefit of $3,888,000 of the net operating loss
carryforwards through additional paid-in capital if and when the net operating
loss carryforwards are utilized, as such amounts relate to the tax benefit from
stock option exercises.

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

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

                                                              2002       2001
                                                             -------------------
         Federal statutory taxes                             (34.00)%   (34.00)%
         State income taxes, net of federal tax benefit       (3.63)     (3.63)
         Nondeductible items                                   0.21       0.07
         Change in valuation allowance                        37.11      37.56
         Other                                                  .31         --
                                                             -------------------
                                                                 --%        -- %
                                                             ===================

10. CONTINGENCIES

MALT LITIGATION

In connection with the Company being granted worldwide manufacturing and
marketing rights for certain of the Purifiner products, a royalty agreement was
entered into with a term equal to the life of the related patents or any
improvements thereto. Pursuant to this royalty agreement, the owner of the
patents was to receive 5% of the net unit sale price of all covered Purifiner
products, as defined. Additionally, 1% of the net sales price of replacement oil
filter elements was to be paid as a royalty on certain Puradyn filters for the
use of the U.S. Purifiner trademark. The Company is no longer retaining the
Purifiner patents or trademarks and accordingly is not renewing them upon
expiration.

In May 1994, the Company and the patent owner entered into a settlement
agreement relating to royalties under which the patent owner was entitled to a
minimum annual royalty of $24,000, payable in monthly installments of $2,000. In
February 1997, the patent owner filed an action against the Company for
nonpayment of approximately $20,000 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 but was entitled to
$20,169 in past royalties, which the Company paid. The patent owner filed a
motion for additional damages and attorney fees and on December 13, 2000, the
Court found the patent owner was entitled to an additional $15,505. The Company
appealed that judgment but has paid the additional judgment. Thereafter, on
February 22, 2001, the trial court ordered the Company to pay the sum of $18,049
for the patent owner's attorney's fees and court costs for which the Company
posted a bond in the amount of $22,238 to secure payment. That order was
appealed and combined with the first appeal. On April 24th, 2002, the judgment
for attorney's fees and court costs was reversed. In May 2002, the bond was
discharged and in June 2002, the funds were released to the Company.
Accordingly, the Company reversed the related accrual of approximately $21,000.

                                       50
<PAGE>

SEARCY, DENNY, SCAROLA  ET. AL

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, (the Company's current Chief Executive Officer),
individually and an inactive Company controlled by Richard C. Ford, demanding
payment of approximately $313,000 of legal fees and other 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 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 did
not assume these obligations as part of its purchase of Systems in 1995 and
based on advice of legal counsel, management believes such amounts are not the
responsibility of the Company. On January 30, 2002, the action was dismissed
without prejudice. The law firm did not receive any payment from the Company and
both parties agreed to be responsible for their own litigation expenses.

11. STOCK OPTIONS

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

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

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

                                       51
<PAGE>

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

<TABLE>
<CAPTION>
                                                               2002                           2001
                                                       ----------------------          ---------------------
                                                                     WEIGHTED                       WEIGHTED
                                                                      AVERAGE                        AVERAGE
                                                                     EXERCISE                       EXERCISE
                                                       OPTIONS         PRICE           OPTIONS        PRICE
                                                       ----------------------          ---------------------
<S>                                                    <C>           <C>              <C>            <C>
         Outstanding, beginning of year                2,482,161     $ 4.00            3,685,998     $ 1.31
              Granted                                    347,500       3.05              531,000       4.12
              Exercised                                 (155,516)      1.10           (1,278,437)       .75
              Expired                                          -          -               (9,375)      2.20
              Canceled                                  (388,300)      5.09             (447,025)      5.74
                                                       -----------------------------------------
         Outstanding, end of year                      2,285,845       3.87            2,482,161       4.00
                                                       =========                       =========
         Exercisable, end of year                      1,580,345     $ 3.53            1,343,331     $ 2.99
         Options available for future grant,
              end of year                              1,050,255                       1,032,955
</TABLE>

Summarized information with respect to options outstanding under the three plans
at December 31, 2002 is as follows:

<TABLE>
<CAPTION>

                                 OPTIONS OUTSTANDING                    OPTIONS EXERCISABLE
                   ------------------------------------------------  -----------------------------
                                      REMAINING
                                       AVERAGE         WEIGHTED                        WEIGHTED
       RANGE OF          NUMBER       CONTRACTUAL       AVERAGE         NUMBER         AVERAGE
    EXERCISE PRICE     OUTSTANDING  LIFE (IN YEARS)  EXERCISE PRICE   EXERCISABLE    EXERCISE PRICE
   ------------------------------------------------------------------------------------------------
   <S>                   <C>              <C>           <C>             <C>        <C>
   $ .21  - $ 1.06       773,175          4.0           $ .76           750,675    $     .75
    2.00  -   4.50       727,295          7.2            2.82           256,795         2.51
    4.81  -   6.81       297,875          3.8            6.02           260,375         5.97
    8.50  -   9.50       487,500          6.7            9.07           312,500         8.99
                   --------------------------------------------------------------------------------
           Totals      2,285,845          5.6           $3.87         1,580,345     $   3.53
                   =============================================================== ================
</TABLE>

During 2002 and 2001, 27,500 and 42,500, respectively, of options were issued to
nonemployee Directors. Interpretation No. 44 of APB 25, requires that stock
compensation issued to nonemployee Directors that were not elected by
shareholder vote to be recorded at their fair value. Prior to the election of
the Directors by shareholder vote in September 2001, compensation expense equal
to the estimated fair value of the options of approximately $59,000 was recorded
in 2001.

During 2002, the Company recognized a credit to compensation expense of
approximately $574,000, relating to variable option awards outstanding, which is
included in selling and administrative expenses. In 2001, compensation expense
of $181,000 was recognized related to the variable option awards. At December
31, 2002, approximately 212,000 awards subject to variable accounting remained
outstanding with an average exercise price of $0.47.

In July 2001, the Company received promissory notes from two of its officers for
the exercise of their vested stock options in the amount of $853,750 and bearing
interest of 5.63%. The principal and accrued interest are due upon the earlier
of the expiration of the original option periods, which range from July 2008 to
December 2009, or upon the sale of the common stock acquired by the execution of
the options. Interest income on these notes of approximately $48,000 in 2002 and
$21,000 in 2001, is included in interest income in the accompanying consolidated
statements of operations.

On April 1, 2002, the Company executed an agreement with a related party who is
affiliated with an executive officer and a third party to receive web site and
advertising consulting services. The agreement was for a term of 15 weeks and
the two consultants received 20,000 fully vested stock options with an exercise
price of $4.05, having a fair value of approximately $61,000, as well as cash of
approximately $30,000 for services rendered. The fair value of the options was
estimated at the date of grant using a Black-Scholes option pricing model with
the following assumptions: risk free interest rates of 4.65%, volatility factors
of the expected market price of the Company's common stock of 1.298, a dividend
yield of zero, and a weighted average expected life of 3 years.

12. COMMON STOCK

On July 9, 2002, the Company held its Annual Meeting of Shareholders, at which
the shareholders approved the amendment to the Certificate of Incorporation to
increase the authorized number of shares of common stock from 20,000,000 to
30,000,000.

In September 2001, the Company issued 7,895 shares of common stock to a vendor
for consulting services performed. The value of the services rendered of
approximately $15,000 was the market price of the Company's common stock on the
date of grant and is recorded in selling and administrative expenses in the
accompanying 2001 consolidated statement of operations.

                                       52
<PAGE>

13. WARRANTS

At December 31, 2002 and 2001, 369,067 and 269,067 respectively, shares of
common stock have been reserved for issuance under outstanding warrants.
Information concerning the Company's warrant activity is as follows:

<TABLE>
<CAPTION>
                                                              2002                        2001
                                                    ------------------------     -----------------------
                                                        WEIGHTED AVERAGE            WEIGHTED AVERAGE
                                                            EXERCISE                    EXERCISE
                                                    -------------- ---------     ------------- ---------
                                                       OPTIONS       PRICE         OPTIONS      PRICE
                                                    -------------- ---------     ------------- ---------

<S>                                                      <C>         <C>           <C>          <C>
         Outstanding, at the beginning of year           269,067     $2.83         269,067      $2.83
              Granted                                    100,000      4.05              --         --
              Exercised                                       --        --              --         --
              Canceled                                        --        --              --         --
                                                    ------------------------     ------------- ---------
         Outstanding, at the end of year                 369,067     $3.16          269,067     $2.83
                                                    ========================     =======================
</TABLE>


On March 28, 2002, the Company recorded a deferred charge of $318,000 for the
issuance of 100,000 fully vested warrants to purchase common stock relating to a
financing agreement with one of its shareholders to fund up to $2.5 million
through March 31, 2003 (see Note 2). The fair value of the deferred charge was
estimated at the date of grant using a Black-Scholes option pricing model with
the following assumptions: risk free interest rates of 4.65%, volatility factors
of the expected market price of the Company's common stock of 1.385, a dividend
yield of zero, and a weighted average expected life of 3 years. The warrants
have an exercise price of $4.05. The deferred charge was initially amortized
over the commitment period and subsequently revised to include the repayment
period. At December 31, 2002, the Company had amortized approximately $177,000
of such costs, which is included in interest expense in the accompanying 2002
consolidated statement of operations.

On May 23, 2002, the Company extended the life of a vendor warrant to purchase
100,000 shares of common stock that was issued in March 2000 and was fully
vested. The expiration date of the warrant was extended from March 2003 to March
2005. The fair value of the modified warrant was estimated at the date of grant
using a Black-Scholes option pricing model with the following assumptions: risk
free interest rates of 4.65%, volatility factors of the expected market price of
the Company's common stock of 1.298, a dividend yield of zero, and a weighted
average expected life of 2.79 years. The warrants have an exercise price of
$3.875. The difference in the fair value of the old award and the new award was
estimated to be $94,000, and is included in selling and administrative expenses
in the accompanying 2002 consolidated statement of operations.

14. MAJOR CUSTOMERS

During 2002 and 2001, four and five customers accounted for approximately 55%
and 38%, respectively, of the Company's net sales. In 2002, there were two
customers that individually accounted for greater than 10% each of net sales, or
approximately $593,000 and $357,000, while in 2001 there was one such customer
who purchased approximately $327,000. Of the approximately $357,000 of sales
made to the certain customer in 2002, approximately $226,000 was made on
December 30, 2002. There were two customers in 2002 whose trade receivable
balances exceeded 5% of total receivables, representing approximately 62% and 6%
of total accounts receivable. The loss of business from one or a combination of
the Company's significant customers could adversely affect its operations.

15. GEOGRAPHIC INFORMATION

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

                                                 Year Ended December 31
                                                  2002            2001
                                                -------------------------
       Net sales:
         United States                          $1,510,440     $1,299,540
         United Kingdom                            626,678        172,767
                                                -------------------------
                                                $2,137,118     $1,472,307
                                                =========================

       Long-lived assets by area:
         United States                          $  700,163
         United Kingdom                             28,832
                                                ----------
                                                $  728,995
                                                ==========


                                       53