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, 2005

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

                      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          (561) 547-9499
     -------------------------------------------------          --------------
(Address of principal executive offices including Zip Code)   (Telephone Number)

         SECURITIES REGISTERED UNDER SECTION 12(B) OF THE EXCHANGE ACT:

   Title of each class                 Name of each exchange on which registered
   -------------------                 -----------------------------------------
COMMON STOCK, $.001 PAR VALUE                            OTCBB

      Securities registered under Section 12(g) of the Exchange Act:  NONE

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

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

Indicate by check mark whether the issuer is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes { } No {X}

State issuer's revenues for its most recent fiscal year: $2,475,285 for the 12
months ended December 31, 2005.

State the aggregate market value of the voting and non-voting common equity held
by non-affiliates computed by reference to the price at which the common equity
was sold, or the average bid price and asked prices of such common equity, as of
a specified date within the past 60 days. The aggregate market value of the
voting stock held by non-affiliates computed at the closing price of Puradyn
Filter's common stock on April 3, 2006 (1.40) is approximately $10,791,676.

State the number of shares outstanding of each of the issuer's class of common
equity, as of the last practicable date.  As of April 3, 2006, there were
25,350,099 shares of registrant's common stock outstanding, par value $.001.

This report contains a total of 46 pages.

<PAGE>

                                 TABLE OF CONTENTS
PART I

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

        Forward Looking Statements

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

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

ITEM 3.  LEGAL PROCEEDINGS................................................ 10

ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.............. 10

PART II

ITEM 5.  MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS......... 10

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

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

ITEM 7.  FINANCIAL STATEMENTS..............................................16

ITEM 8.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
         FINANCIAL DISCLOSURES.............................................17

ITEM 8A. CONTROLS AND PROCEDURES...........................................17

ITEM 8B. OTHER INFORMATION.................................................17

PART III

ITEM 9.  DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
         COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT.................17

ITEM 10. EXECUTIVE COMPENSATION............................................21

ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
         AND MANAGEMENT AND RELATED STOCKHOLDER TRANSACTIONS...............23

ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS....................24

ITEM 13. EXHIBITS..........................................................24

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES............................26


                                       2
<PAGE>

                                     PART I

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

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

THE COMPANY

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

We operate through:

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

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

         On June 24, 2005, the Company submitted an application to the
Securities and Exchange Commission (SEC) for the voluntarily withdrawal of the
listing of its common stock from the Exchange. On August 18, 2005 this
application was approved effective at the opening of business that day. The
Company continues to be required to file reports with the SEC under Section 13
of the Securities Exchange Act of 1934, including quarterly and annual reports
and, as of August 31, 2005, its common stock is included for quotation on the
OTC Bulletin Board under the symbol PFTI.OB.

                                       3
<PAGE>

PRODUCTS

         The core product, the patented PURADYN bypass oil filtration system, is
offered in two models, TF and PFT, and can be attached to almost any engine and
hydraulic systems. The concept of bypass filtration is similar to a dialysis
machine that filters blood to rid it of impurities, keeping the oil continually
clean. Whenever the engine or machinery is operating, the PURADYN is extracting
from the oil solid particles down to less than one micron (1/39 millionth of an
inch), as well as gaseous and liquid contaminants, while protecting the engine
or hydraulic equipment from harmful wear caused by contaminants in the oil.
Additionally, an additive package in which chemicals are added to the filtering
media replenish spent additives in the oil, helping to maintain the oil's proper
chemical balance and viscosity.

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

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

         The original PURADYN system, the TF model, is currently manufactured in
six different sizes suitable for placement on engines or equipment with oil sump
capacities ranging from 12 to 240 quarts. A new generation of product, the PFT
model, has been engineered to be manufactured in five different sizes with sump
oil capacities varying from 8 to 60 quarts. The PFT model offers the same
benefits and features of the TF model, with the added enhancements of easier
serviceability and the main component of the system being more corrosion-
resistant.

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

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

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

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

   o     An additive package in which pelletized chemicals are added to the
         filtering media to replenish additives in the oil. This additive
         package helps to maintain the oil's chemical balance and viscosity.

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

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

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

                                       4
<PAGE>

         The PURADYN has no moving parts and consequently requires no
significant ongoing maintenance. As long as Elements are changed at the
recommended intervals and other standard preventive maintenance procedures such
as changing factory full flow and air filters and oil analysis are completed,
the Company believes the PURADYN will perform as designed.

         We have also become either Distributor or Master Distributor for the
following companies:

   o     Honeywell Consumer Products Group, manufacturer of FRAM{reg-trade-mark}
         filters, announced a strategic alliance with Puradyn in 2002. As a
         result, we are able to offer the full line of FRAM filters to our
         distributors.

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

   o     Rentar Environmental Systems. Puradyn is a Master Distributor for
         Rentar. The patented and proprietary Rentar{reg-trade-mark} Fuel
         Catalyst is specifically designed to increase the efficiency of diesel
         engines by increasing fuel efficiency and reducing harmful emissions.

WARRANTIES

         The PURADYN carries a six-month `money-back' performance guarantee, and
is currently warranted to the original user to be free of defects in material
and workmanship for one year with unlimited miles/hours. End users have the
option to purchase a four-year extended warranty, however, sales of these
extended warranties have been minimal.

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

         The Company has received letters from Deere & Company, Detroit Diesel
Corporation, Caterpillar, Inc., Ford Motor Company, Mack Trucks, Inc., Cummins
Engine Company, Inc., Daimler Chrysler Corporation, Mercedes Benz of North
America, Inc. and other engine manufacturers who have all stated that the
installation and use of the PURADYN does not void their manufacturer warranties
unless an engine failure is attributed to the PURADYN. 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.

MARKETING

         The Company's products are marketed to numerous segments of the
transportation industry 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
large-sized fleet, industrial/construction, generator set, and OEM segments.

         The Company reduced its advertising campaigns in OEM and truck fleet-
related trade magazines in 2004 and 2005, concentrating instead on trade shows,
white papers and other methods of demonstration to promote its products within
targeted markets to generate awareness and stimulate sales.

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

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

                                       5
<PAGE>

         One of our marketing strategies is based on creating customer `pull-
through', a sustained level of request for our product on the OEM level from
end-users. To this end we established aftermarket programs in 2001 and 2002 with
Mack Trucks, Volvo Trucks North America, Pierce Manufacturing and Paccar (parent
company of Kenworth and Peterbilt), all of which are OEMs that sell and service,
to offer our product through their dealer network and distribution centers. To
date, customer pull-through has resulted in a limited number of our systems
being factory-installed at individual Volvo Trucks, N.A., Mack Trucks, Kenworth
Truck and Freightliner facilities. However, Monroe Truck Equipment (a major
General Motors Corporation modification center) has installed more than 2,000
PURADYN systems as a result of customer pull-through. We continue to develop
this strategic part of our business.

         In 2005, we entered into limited-time agreements with three outside
consultants to actively pursue federal contacts on three separate levels:
legislative, environmental and energy policy, and military procurement.
Management believes that this is a market that can be successfully cultivated at
this time, based on the following:

                  o    Test results from the US Department of Energy, which show
                       that the PURADYN systems used in evaluation of the
                       benefits and cost analysis of bypass oil filtration has
                       produced an estimated savings of 80% in oil usage and
                       purchases.
                  o    New five-year contract awarded in December 2004 from the
                       General Services Administration (GSA) for its Vehicular
                       Multiple Award Schedule, New Technologies, which
                       simplifies the procurement process for governmental
                       agencies.
                  o    Successful presentation of the PURADYN at the Military
                       Expedited Modernization Initiative Procedure (EMIP)
                       Program in January 2005.
                  o    Initial order placed by the U.S. Military to have the
                       PURADYN installed on new trucks supplied by Freightliner
                       LLC for foreign military sales.

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

DISTRIBUTION

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

         The Company has warehouse distributors located throughout North
America, predominantly 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. The Company will accept returns of products that are
defective at the time of sale to the distributor or prove to be defective during
the warranty period. Returns are subject to specific conditions.

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

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

SALES

DIRECT SALES

         The Company directly and/or with the assistance of its manufacturer's
representatives, distributors or other agents, markets its products directly to
OEMs, other distributors and national accounts. Typically these larger


                                       6
<PAGE>

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

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

                     o     A 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     A leading food company
                     o     An important OEM forklift company
                     o     The U.S. Department of Energy
                     o     The U.S. Military
                     o     A major oil company

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

         During 2005 and 2004, two customers together accounted for
approximately 45% and 37%, respectively, of the Company's consolidated net
sales. In 2005, there were two customers that individually accounted for greater
than 10% each of net sales, or approximately $705,000 and $424,000, while in
2004 two customers individually accounted for greater than 10% each of net
sales, or approximately $523,000 and $397,000.

         At December 31, 2005 there were five customers whose trade receivable
balances equaled or exceeded 5% of total receivables, representing approximately
33%, 24%, 18%, 8% and 6% respectively, for a total of 89% of total accounts
receivable. The loss of business from one or a combination of the Company's
significant customers could adversely affect its operations.

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

         In 2005, sales to a customer with one of the nation's largest privately
held fleet of trucks and equipment, represented 28% of our consolidated net
sales. This represents a 7% increase from its percentage of consolidated net
sales in 2004. Sales in 2005 to this company had increased due to its
integration of newly acquired equipment and increased demand for new fleet
equipment purchases, and in turn, increased demand for our bypass filtration
systems.

         In 2002, after extensive testing, one of the world's largest
manufacturers of medium-size power generators purchased over $350,000 of
product. This customer accounted for 16% of our 2004 consolidated net sales and
17% of our 2005 consolidated net sales.

INTERNATIONAL SALES

         The Company, directly and/or with the assistance of commission-based
manufacturer's representatives, has established primarily non-exclusive
distributors in various countries, including Denmark, South Africa, Nigeria,
United Kingdom, Kuwait, United Arab Emirates, Thailand, Colombia, and others.
The ultimate success of these and other distributors depends upon, among other
things, their abilities to successfully introduce and sell the product in their
territories including obtaining local evaluations, establishing distribution and
other factors similar to those faced by the Company in the United States. Total
international sales amounted to approximately 44% and 42% of consolidated net
sales in 2005 and 2004, respectively.

                                       7
<PAGE>

MANUFACTURING AND PRODUCTION

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

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

         In January 2004, we received ISO 9001:2000 certification from the
International Organization for Standardization. ISO 9001:2000 is a series of
internationally accepted, multi-part quality management systems for industry-
wide standardization applied to manufacturing and service organizations.
Management believes this certification will reinforce recognition of its
tangible commitment to quality control from OEMs and other potential large
customers. In January and November 2005, we successfully completed surveillance
audits to maintain our certification.

COMPETITION

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

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

         In addition, the PURADYN system is the only bypass oil filtration
system designated by the California EPA as a `Pollution Prevention' technology.
The certificate states in part, "The PURADYN{reg-trade-mark} system has been
shown to be an effective means of extending engine oil change intervals without
adversely affecting engine wear or performance."

         Recent tests performed by a leading independent testing facility
demonstrated that the PURADYN system surpassed the capacity, efficiency and
overall performance of its leading competitors. Using our standard filter with
additives, the PURADYN system tested 92.05% efficient under the SAE HS806-95
(modified) standards for filter capacity and contaminant removal. Efficiency
reflects the ability to remove particles and other chemicals from the oil. While
efficiency is not necessarily a standard of comparison to other products, it
does demonstrate the filtering capability of the PURADYN unit. These tests,
performed at the request of one of North America's largest engine manufacturers,
compare favorably with similar tests run by Puradyn in 2001 using our CGP
filter, which showed a filter efficiency of 99.75%.

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

INTELLECTUAL PROPERTY

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

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

                                       8
<PAGE>

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

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

GOVERNMENTAL INFLUENCE

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

         In October 2002, new federal environmental regulations requiring higher
standards for diesel truck emissions took effect with more stringent
conformances expected in 2007. We believe that engine and truck manufacturers
can capitalize on our enhanced technology to remove soot from their oil to
maintain their extended drain intervals by operating on constantly clean oil.

ENGINEERING AND DEVELOPMENT

         Currently, we have two individuals directly involved in product
engineering and development: a Product Engineer Manager and an Applications
Engineer. In addition, we employ the services of an outside petrochemical
consultant. The engineering department is also testing additional design
improvements that may be candidates for patents for the Company. During the past
two years our 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.

         In 2005 and 2004, we spent approximately $31,000 and $65,000,
respectively, on engineering research, the cost of which was not passed on to
our customers.

EMPLOYEES

         At December 31, 2005, the Company had 28 employees, including 3 from
Puradyn Ltd., in the following areas:

            o    9 in manufacturing, assembly, quality control, warehousing and
                 shipping
            o    1 in purchasing
            o    2 in customer service
            o    5 in marketing and sales
            o    1 in technical support and installation assistance
            o    2 in engineering and development
            o    3 in finance
            o    2 in administrative positions
            o    3 in administration and sales

         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 lease term at the
new facility is for 68 months with a total lease obligation of approximately
$774,000.

                                       9
<PAGE>

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

ITEM 3.  LEGAL PROCEEDINGS.

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 paid the additional judgment. Thereafter, on February
22, 2002, 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. In April 2003, the patent
owner posed two discovery requests, in order to extend the time remaining before
the automatic dismissal of his claim.

         On May 27, 2004, the Company filed responses to the interrogatories.
The Court sent notices to certain current and one former employee of the Company
to take depositions in August 2004, which were re-noticed for August 2005. The
Company then filed a motion to dismiss the case and to quash plaintiff's re-
notice of taking depositions. As of this date, that motion has not been heard
and the case remains dormant. The Company believes the likelihood of a favorable
outcome is probable.

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

NONE.

                                    PART II

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

         As of December 31, 2005, there were approximately 285 stockholders of
record of the Company's stock. The closing bid price quoted on the Over The
Counter Bulletin Board for the Company's Common Stock at March 31, 2006 was
$1.40. The Company currently trades under the symbol "PFTI". The transfer agent
for the Company's common stock is Florida Atlantic Stock Transfer, Inc., 7130
Nob Hill Road, Tamarac, Florida 33321.

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

                                       10
<PAGE>

      The following table sets forth for the period  indicated, the high and low
sales prices for the quarterly periods in 2005 and 2004.

                 QUARTER ENDED          2005 SALES PRICE  2004 SALES PRICE
                                       ------------------------------------
                                         HIGH     LOW       HIGH     LOW
                                       ------------------------------------
                 March 31                 $1.24   $0.86     $3.00    $1.91
                 June 30                  $1.04   $0.32     $2.22    $1.70
                 September 30             $1.80    $.31     $1.98    $1.10
                 December 31              $1.21   $0.51     $1.39    $0.86

         As of April 3, 2006, the high sales price for the first quarter of
2006 was $1.90, while the low for the quarter was $0.67.

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

General

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

         Through industry data research, we have been able to identify the
potential applications where management believes market penetration is most
accessible. Currently no bypass oil filtration system has captured a substantial
share of the estimated recurring $13 billion potential market. We believe we are
in a unique position to capitalize on the growing acceptance of bypass oil
filtration given that our product and our Company are positioned as, including,
but not limited to:

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

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

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

         This strategy includes focus on:

         o    The expansion of existing strategic relationships
         o    Development and expansion of our distribution network with
              qualified distributors in order to establish a sales- and service-
              oriented nationwide infrastructure
         o    Continuing to target existing and new medium-to-large sized
              fleets, industrial/construction business and major diesel engine
              and generator set OEMs
         o    Creating customer `pull-through', a sustained level of request for
              our product on the OEM level
         o    Closely monitoring evaluations to ensure customer issues are
              addressed on a timely basis
         o    Converting customer evaluations into sales, both immediate and
              long term

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

         o    2004 ongoing test results released by the US Department of Energy
              (DOE) estimating an 80% savings in oil using bypass oil
              filtration. Our system was used in this ongoing test evaluating
              the benefits and cost savings of the technology.

                                       11
<PAGE>

         o    2004 announcement that Miami-Dade County, Florida has again
              specified the PURADYN system on new equipment purchases.
         o    2005 announcement that the puraDYN system is now being installed
              by one of the largest U.S. suppliers of construction aggregates
              upon successful conclusion of a joint test conducted with a major
              oil company.
         o    2006 announcement that the U.S. Military has ordered the puraDYN
              system installed on new trucks that Freightliner LLC is supplying
              for foreign military sales.
         o    2006 continued testing with the U.S. Military on use of the
              puraDYN system on several other applications.
         o    Growth of replacement filters has been substantially increased
              since 2004, achieving targeted growth for this time period.

         We believe that industry acceptance resulting in sales will continue to
grow in 2006; however, there can be no assurance that any of our sales efforts
or strategic relationships will meet management's expectations or result in
actual revenues.

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

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

         International sales are especially well suited to our product given
that environmental controls are not as regulated in countries outside North
America. Certain applications representing a higher return on investment are
more prevalent in use outside of North America and end-users consequently are
more receptive to the total maintenance package, including the use of oil
analysis, which the PURADYN system represents. In 2005, total international
sales accounted for 44% of the Company's consolidated net sales.

         The Company recognizes revenue from product sales to customers,
distributors and resellers when products that do not require further services or
installation by the Company are shipped, when there are no uncertainties
surrounding customer acceptance and for which collectibility is reasonably
assured in accordance with Staff Accounting Bulletin (SAB) No. 104, Revenue
Recognition in Financial Statements. Cash received by the Company prior to
shipment is recorded as deferred revenue. Sales are made to certain customers
under terms allowing certain limited rights of return and other limited product
and performance warranties for which provision has been made in the accompanying
financial statements. Management believes, based on past experience and future
expectations, that such limited return rights and warranties will not have a
material adverse effect on the Company's financial statements.

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

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

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


                                       12
<PAGE>

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

Revenue Recognition

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

Results of Operations

         The following table sets forth (amounts in thousands) the Company's
operating information for the years ended December 31,2005 and 2004:

                                                    (IN THOUSANDS)
                                                                     INCREASE
                                            2005          2004      (DECREASE)
                                           -------      -------      -------

         Net sales                         $ 2,475      $ 2,472      $     3

         Operating costs and expenses:
           Cost of products sold             2,420        2,526         (106)
           Salaries and wages                1,405        1,662         (257)
           Selling and administrative        1,444        1,591         (147)
                                           -------      -------      -------
                                             5,269        5,779         (510)

         Loss from operations               (2,794)      (3,307)        (513)

         Other income (expense):
           Interest income                      63           53           10
           Interest expense                   (460)        (334)        (126)
                                           -------      -------      -------
         Total other expense                  (397)        (281)        (116)

         Net loss                          $(3,191)     $(3,588)     $  (397)
                                           =======      =======      =======

                                       13
<PAGE>

Year Ended December 31, 2005 Compared to Year Ended December 31, 2004
---------------------------------------------------------------------

         NET SALES Net sales increased by approximately $3,000 from
approximately $2,472,000 in 2004 to approximately $2,475,000 in 2005. The mix of
product sold continues to change as the filter sales have increased slightly and
unit sales have decreased slightly over last years volumes. Although the Company
anticipates increased sales to customers in 2006, there can be no assurance that
the sales volume generated by these customers will increase or remain at the
same level in 2006.

         COST OF SALES Cost of sales decreased by approximately $106,000 from
approximately $2,526,000 in 2004 to approximately $2,420,000 in 2005.

         SALARIES AND WAGES Salaries and wages decreased approximately $257,000
due to personnel changes in the sales and administrative staff.

         SELLING AND ADMINISTRATIVE EXPENSES Selling and administrative expenses
decreased by approximately $147,000 from approximately $1,591,000 in 2004 to
approximately $1,444,000 in 2005.

         INTEREST EXPENSE Interest expense increased by approximately $126,000
from $334,000 in 2004 to $460,000 in 2005. The Company pays interest monthly on
the note payable to stockholder at the prime rate, which was 7.25% as of
December 31, 2005. The increase is due to a higher principal balance of
$6,071,000 and interest rate of 7.25% at December 31, 2005 as compared to a
balance of $5,501,900 and an interest rate of 5.25% at December 31, 2004

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

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

         These recurring operating losses, liabilities exceeding assets and the
reliance on cash inflows from an institutional investor and current stockholder
have led the Company's independent auditor DaszkalBolton LLP to include a
statement in its audit report relating to the Company's audited consolidated
financial statements for the year ended December 31, 2004 expressing substantial
doubt about the Company's ability to continue as a going concern.

         The Company is currently addressing the liquidity and working capital
issues and is in the process of attempting to raise additional capital with
institutional and private investors and current stockholders.

         As of December 31, 2005, the Company had cash and cash equivalents of
approximately $156,000. For the year ended December 31, 2005, net cash used in
operating activities was approximately $2,227,000, which primarily resulted from
the net loss of approximately $3,191,000, combined with changes in working
capital amounts. Net cash used in investing activities was approximately $23,000
for purchases of property and equipment. Net cash provided by financing
activities was approximately $2,050,000 for the year, primarily due to proceeds
from stockholder notes of approximately $569,000 and $1,485,000 of funds from
the sale of common stock to a private placement investor.

         Beginning on March 28, 2002, the Company had a binding agreement with
one of its stockholders, who is also a Board Member, to fund up to $6.1 million.
Amounts drawn bear interest at the prime rate per annum (7.25% at December 31,
2005) payable monthly and were to become due and payable on December 31, 2005,
or upon a change in control of the Company or consummation of any other
financing over $7 million. In April 2005, the repayment date was extended to
December 31,2006. In March 2006, the repayment date was further extended from
December 31, 2006 to December 31, 2007. In consideration for the stockholder
entering into this loan agreement, the Company has granted the stockholder a
total of 475,000 common stock purchase warrants at an exercise price equal to
the closing market price of the Company's stock on the dates of grant. As of
December 31, 2005, the Company had drawn $6.071 million of the available funds.

                                       14
<PAGE>

         In March 2004, an existing investor purchased an additional 1,000,000
shares of common stock for $2,000,000. The funds were used to reduce the
outstanding balance of the notes payable to stockholder. The Company then drew
amounts as needed, for operating and capital expenditures.

         In April 2005, the repayment dates of the stockholder loan agreements
were extended from December 31, 2005 to December 31, 2006.

         On October 26, 2004, the Company engaged Imperial Capital, LLC ("IC")
as an exclusive financial advisor to the Company. The agreement with IC was to
assist the Company in raising additional capital, as well as possibly pursuing a
strategic partner from a mutually related field to enhance the Company's ability
to develop business.

         In consideration for IC's services, the Company agreed to pay a
$100,000 non-refundable retainer, as well as an advance for future out-of-pocket
expenses incurred by IC. Upon the consummation of a transaction, as defined by
the agreement, the Company will pay a success fee of 2.5% of the principal
amount of any debt or equity securities sold or the consideration received from
a strategic relationship. Either party upon 30-day written notice may terminate
the agreement. On December 1, 2005, the Company discontinued its relationship
with IC based on non-performance and the $100,000 retainer was expensed.

         At December 31, 2005, the Company had working capital of approximately
$907,000 and its current ratio (current assets to current liabilities) was 1.83
to 1, as compared with working capital of approximately $1,743,000 and a current
ratio of 3.33 to 1 at December 31, 2004. The Company anticipates increased cash
flows from 2006 sales activity; however, additional cash will still be needed to
support operations and meet working capital needs. If additional capital is not
raised, budgeted sales levels are not achieved or significant unanticipated
expenditures occur, the Company will have to modify its business plan, reduce or
discontinue some of its operations or seek a buyer for part of its assets to
continue as a going concern through 2006. There can be no assurance that the
Company will be able to raise the additional capital or that it will continue to
operate as a going concern.

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

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

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

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

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

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

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

o    Our ability to operate as a going concern.

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

                                       15
<PAGE>

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

o    Our products may not satisfy our customers' needs.

o    Our product may not obtain market acceptance.

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

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

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

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

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

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

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

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

ITEM 7.  FINANCIAL STATEMENTS

                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

                                                                         PAGE
                                                                         ----

Reports of Independent Registered Public Accounting Firms.................29

Consolidated Financial Statements:

   Consolidated Balance Sheet - December 31, 2005........................ 30

   Consolidated Statements of Operations -
     Years ended December 31, 2005 and 2004.............................. 31

   Consolidated Statements of Changes in Stockholders' Deficit  -
     Years ended December 31, 2005 and 2004.............................. 32

   Consolidated Statements of Cash Flows - Years ended
     December 31, 2005 and 2004.......................................... 33

   Notes to Consolidated Financial Statements............................ 34


                                       16
<PAGE>

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

None

ITEM 8A.  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-KSB, an evaluation was carried out under
              the supervision and with the participation of the Company's
              management, including the Company's Chief Executive Officer and
              Chief Financial Officer, on 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
              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 subsidiary,
              was made known to them by others within those entities,
              particularly during the period in which this Annual Report on Form
              10-KSB 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 8B. OTHER INFORMATION

         NONE

                                    PART III

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

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

Board of Directors and Executive Management
-------------------------------------------

Name                    Age      Position
----                    ---      --------
Joseph V. Vittoria       70      Chairman of the Board of Directors
Richard C. Ford          62      Chief Executive Officer and Director
Kevin G. Kroger          54      President, Chief Operating Officer and Director
John S. Caldwell         61      Director
Forrest D. Hayes         73      Director
Charles W. Walton        73      Director
Alan J. Sandler          67      Vice President, Chief Administrative Officer
                                 and Secretary
Cindy Lea Gimler         39      Chief Financial Officer

JOSEPH V. VITTORIA was appointed to the Board of Directors and appointed as
Chairman on February 8, 2000. Mr. Vittoria was Chairman and Chief Executive
Officer of Travel Services International, Inc. where he served from 1998 to
2000. From 1987 to 1997, Mr. Vittoria served as Chairman and Chief Executive
Officer of Avis, Inc. and was President and Chief Operating Officer of Avis,
Inc. from 1982 to 1987. Mr. Vittoria also serves on the boards of several
companies, including Autoeurope, 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 resigned from the Company in 1997 but returned to the Company as President
in April 1998 and in January 1999, 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 in 1999, currently serving as a Director on the Board of Puradyn, Ltd.

KEVIN G. KROGER joined the Company July 3, 2000 as President and Chief Operating
Officer, and was appointed to the Board of Directors in November 2000, and was


                                       17
<PAGE>

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

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

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

CHARLES W. WALTON, PhD. was appointed to the Puradyn Board of Directors on
August 25, 2005 and is a member of the Audit Committee. Dr. Walton is Chairman
of Wastequip, Inc., which he founded in 1989 with the goal of consolidating the
equipment segment of the waste management industry. As a result of eighteen
successful acquisitions and internal growth, Wastequip is now the largest
supplier of equipment in the industry with approximately $400 million in sales
and 29 manufacturing plants in North America. It was recently purchased by DLJ
Merchant Banking Partners, a unit of Credit Suisse First Boston. Prior to
founding Wastequip, Dr. Walton was President and Chief Executive Officer of
Sudbury, Inc., a Fortune 500 diversified manufacturing company, which he co-
founded in 1983. In 1987, he was awarded the Dively Entrepreneurship Award by
Case Western Reserve Weather head School of Management and the Harvard Business
School Club of Cleveland. Dr. Walton holds the degrees of Bachelor of Science in
Foreign Service and PhD. in economics from Georgetown University, Washington,
D.C.

ALAN J. SANDLER joined the Company in June 1998 as President, Chief Operating
Officer, Secretary, Chief Financial Officer, and Director. In January 2000, he
became Vice President and resigned from the positions of President and Chief
Operating Officer. In March 2001, he resigned as Chief Financial Officer. In
August 2001, Mr. Sandler resumed the position of Chief Financial Officer and
then resigned from the position in March 2002. From 1995 until 1997 Mr. Sandler
served as President and Chief Executive Officer to Hood Depot, Inc., a national
restaurant supply manufacturer/distributor. From 1979 to 1995 he was President
and Chief Executive Officer of Sandler & Sons Dental Supply Company, a regional
dental supply and equipment distributor. Previous to this position he was a Vice
President of Gardner Advertising Company, a national advertising agency. Mr.
Sandler was appointed as a Director of TF Purifiner Ltd. in 1999 through 2000.
Effective December 16, 2004 Mr. Sandler did not seek reelection to the Board of
Directors at the 2004 Annual Meeting of Stockholders. He resigned from the
Director position to maintain a balanced Board with regard to independence as
defined in Section 121B(2)(c), of the AMEX listing standards and currently holds
the positions of Vice President, Chief Administrative Officer and Secretary to
the Board.

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

                                       18
<PAGE>

Senior Management
-----------------

D. Wayne Clifton       67   Director of Sales and Marketing
Joseph J. Gaynor, Jr.  55   Director of Manufacturing and Operations
Kevin Davies           47   Managing Director, Puradyn Filter Technologies, Ltd.

D. WAYNE CLIFTON joined the Company in 1994 as Southwest Regional Manager. With
over 40 years in sales and management, Mr. Clifton became Sales & Marketing
Director for the Company in July 2003. Prior to joining Puradyn, Mr. Clifton was
President/CEO of Wayne Clifton & Associates, a buying and management services
company within the apparel industry for 30 years. Mr. Clifton also served as
Western District Sales Manager of the West Coast and then National Accounts
Manager for the Philip Morris Company.

JOSEPH J. GAYNOR, JR. joined the Company in 2002. From 2000-2002, Mr. Gaynor
served as VP, Operations/General Manager at JDS Uniphase Corporation. With over
25 years of management, manufacturing and engineering experience, Mr. Gaynor has
also held executive positions with Spectrum Control, Rockwell International and
Corning Glass Works.

KEVIN DAVIES serves as Managing Director of Puradyn, Ltd, located in the UK. Mr.
Davies has been with the Company since 1995 and at different times has served in
the positions of Technical Sales Manager, Marketing Director, Acting Managing
Director, and, as of March 2004, Managing Director. Prior to joining Puradyn,
Mr. Davies worked for Recruitment and Management Consultancy in London, and from
1985-1990, for a diesel engine and spare parts company (part of the Lancaster
Group) in the positions of National Sales Manager, USA, as well as Export Sales
Manager for North America, Europe and the Middle East.

During 2005, Puradyn's board of directors met on eight occasions. Puradyn has an
audit committee and a compensation committee.

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

         During 2005, the audit committee of the board of directors was composed
of two independent directors. It operates under a written charter adopted by the
board of directors. The committee members were Michael Castellano (Chairperson)
and Peter H. Stephaich. On August 25, 2005, Mr. Stephaich resigned from the
board with Mr. Castellano being sole member of the audit committee.

         On November 10, 2005, Mr. Castellano resigned from the board and
Forrest D. Hayes was simultaneously appointed to the board of directors and
chairman of the audit committee. On November 30, board member Charles W. Walton
was appointed to the audit committee

         The Board has determined that Mr. Hayes satisfies the criteria as an
audit committee financial expert as established by the SEC under Item 401(e) of
Regulation S-B and the American Stock Exchange, and that both members of the
committee are independent as that term is defined in applicable SEC Rules and
OTCBB listing standards. The audit committee met four times in 2005.

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

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

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

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

                                       19
<PAGE>

         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, 2005, for filing with the Securities and
Exchange Commission.

Submitted by the audit committee of the Board of Directors:

                      Forrest D. Hayes            Charles W. Walton

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

         The compensation committee provides overall guidance for officer
compensation programs, including salaries and other forms of compensation
including all employee stock option grants and warrant grants to non-employees.
Until August 25, 2005, the compensation committee consisted of three independent
directors, Peter Stephaich (Chairperson), Ottavio Serena and Michael Castellano.

         On August 25, 2005, directors Serena and Stephaich resigned from the
board, with Mr. Castellano remaining as sole member of the compensation
committee. On November 10, 2005, Mr. Castellano resigned from the Board. On
November 30, 2005, board members John S. Caldwell, and Forrest D. Hayes were
appointed to the compensation committee. The compensation committee meets on an
as needed basis and reports to the Board of Directors.

Beneficial Ownership Reporting Compliance
-----------------------------------------

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

         To the Company's knowledge, based solely on a review of the copies of
such reports furnished to the Company and written representations that no other
reports were required, during the year ended December 31, 2005, the following
failed to meet the Section 16 (a) filing requirements applicable to its
officers, directors and greater than ten percent (10%) beneficial owners for
filing on a timely basis:

                        Kevin G. Kroger - 1 late filing, 1 late transaction
                        Joseph V. Vittoria - 1 late filing, 1 late transaction
                        Richard C. Ford - 1 late filing, 1 late transaction
                        Forrest D. Hayes - 1 late filing, 1 late transaction
                        John S. Caldwell - 2 late filing, 2 late transactions
                        Charles W. Walton - 1 late filing, 1 late transaction

Code of Ethics
--------------

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

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



                                       20
<PAGE>

ITEM 10. EXECUTIVE COMPENSATION

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

         The following table shows, for the three year period ended December 31,
2005, the cash and other compensation paid by the Company to its Chief Executive
Officer and to each of the executive officers of the Company who had annual
compensation in excess of $100,000.
<TABLE>
<CAPTION>
                                                                   SUMMARY COMPENSATION TABLE
                                 --------------------------------------------------------------------------------------------
                                                                                                LONG TERM
                                                                                              COMPENSATION
                                                       ANNUAL COMPENSATION                       AWARDS
                                           ----------------------------------------------     -------------
                                                                           OTHER ANNUAL        SECURITIES          ALL OTHER
NAME AND                                                                  COMPENSATION($)      UNDERLYING        COMPENSATION
PRINCIPAL POSITION               YEAR      SALARY($)(3)       BONUS($)          (1)            OPTIONS(#)           ($)(2)
------------------               ----      ------------       --------    ---------------      ----------        ------------
<S>                              <C>         <C>              <C>             <C>                  <C>            <C>
Richard C. Ford                  2005        $124,000         $    --         $13,000              --             $     --
CEO and                          2004         208,000              --          11,000              --                   --
Director                         2003         208,000              --          13,000              --                   --

Kevin G. Kroger                  2005          98,962              --          20,294              --                2,713
President, COO and               2004         166,000              --          17,880              --                   --
COO and Director                 2003         166,000              --          21,833              --                2,372

Alan Sandler                     2005          71,154              --              --              --                   --
Vice President                   2004         100,000              --              --              --                   --
Secretary and CAO                2003         100,000              --              --              --                   --
CAO
</TABLE>

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

(2)  Other compensation represents insurance premiums paid by the Company on
     behalf of Mr. Kroger for term life insurance for the benefit of Mr.
     Kroger's family. There are no dividends or cash surrender value payable on
     this policy, which is renewable annually.

(3)  Amounts include compensation paid. The executive officers have deferred
     approximately 50% of their annual salaries.

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

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

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

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

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

                                       21
<PAGE>

         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, 2005, under the Directors' Plan, options to purchase
145,000 shares of common stock were outstanding. As of December 31, 2005, under
the 1996 Plan, incentive stock options to purchase 157,357 shares of common
stock were outstanding and non-qualified options to purchase 585,463 shares of
common stock were outstanding and, under the 1999 Plan, incentive stock options
to purchase 1,174,250 shares of common stock were outstanding and non-qualified
options to purchase 225,000 shares of common stock were outstanding.

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, 2005 to each person named in the Summary Compensation Table and the
unexercised options held as of the end of the 2005 fiscal year.

                                       22
<PAGE>

AGGREGATE OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FY-END OPTION/SAR VALUES
<TABLE>
<CAPTION>
                       NUMBER OF                            NUMBER OF SECURITIES           VALUE OF UNEXERCISED
                         SHARES                           UNDERLYING UNEXERCISED       IN-THE-MONEY OPTIONS/SARS AT
                      ACQUIRED ON     VALUE REALIZED     OPTIONS/SARS AT FY-END(#)              FY-END($)(1)
                      EXERCISE(#)          ($)           EXERCISABLE/UNEXERCISABLE       EXERCISABLE/UNEXERCISABLE
                      -----------     --------------     -------------------------     ----------------------------
<S>                       <C>              <C>             <C>           <C>              <C>            <C>
Richard C. Ford           --               --              375,000       --               $65,000        --
Chief Executive
  Officer and
  Director

Kevin Kroger              --               --              400,000       --                  --          --
President,
  COO and
  Director

Alan Sandler              --               --                --          --                  --          --
Vice President,
  CAO and
  Secretary
</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 $0.71, the closing price reported on December 31,
     2005.

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

         The following table sets forth certain information regarding the
Company's common stock beneficially owned on April 3, 2006 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 as reported under Item 10.Executive Compensation, 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 April 3, 2006, there were 25,350,099
shares of Common Stock outstanding. The address of each of the persons set forth
below is 2017 High Ridge Road, Boynton Beach, Florida 33426, except as otherwise
noted.

                                                                  PERCENT OF
                                                                 COMMON STOCK
                                                   BENEFICIAL    BENEFICIALLY
   NAME AND ADDRESS OR IDENTITY OF GROUP           OWNERSHIP         OWNED
   -------------------------------------           ----------    ------------
Quantum Industrial Partners LDC ("QIP") (1)        4,570,000         18.0
Glenhill Capital Management, LP (2)                3,918,223         12.2
Richard C. Ford (3)                                3,225,651         14.2
Joseph V. Vittoria (4)                             2,878,536         10.3
Kevin G. Kroger (5)                                  700,000          3.0
Alan J. Sandler (6)                                  315,992          1.2
John S. Caldwell (7)                                                   --*
Forrest D. Hayes (8)                                                   --*
Charles W. Walton (7)                                244,000          1.0

All Officers and Directors as a group (7 persons)  5,952,846

----------
*    Less than 1%

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

(2)  Address is 598 Madison Avenue, 12th Floor, New York, NY 10022.

(3)  Mr. Ford serves as Chief Executive Officer and as a Director. Includes
     options to purchase 100,000 shares of common stock at $.56 per share


                                       23
<PAGE>

     through April 14, 2009, options to purchase 100,000 shares at $.21 per
     share through January 7, 2009, and options to purchase 175,000 shares at
     $.94 per share through April 1, 2009 and purchase of 1,666,667 shares of
     common stock at $0.30 on June 30, 2005. Also includes purchase of 1,666,666
     shares of common stock at $.30 on June 10, 2005.

(4)  Mr. Vittoria serves as Chairman of the Board of Directors. Includes four
     warrants to purchase 100,000 shares of common stock at $4.05 through March
     28, 2007, 125,000 shares of common stock at $2.25 through March 14, 2008,
     150,000 shares of common stock at $2.00 through February 2, 2009, and
     100,000 shares of common stock at $.95 through April 14, 2010,
     respectively. Also includes purchase of 833,333 shares of common stock at
     $0.30 on June 30, 2005, and 833,333 shares of common stock at $0.30 on
     February 28, 2006.

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

(6)  Mr. Sandler serves as Vice President, Chief Administrative Officer and
     Secretary.

(7)  General Caldwell and Dr. Walton serve as Directors. Includes options to
     purchase 5,000 shares of common stock each at $0.42 and 2,500 shares of
     common stock each at $0.66, through August 25, 2010 and November 30, 2010,
     respectively.

(8)  Mr. Hayes serves as a Director. Includes options to purchase 7,500 shares
     of common stock at $1.00 through November 10, 2010 and options to purchase
     2,500 shares of common stock through November 30, 2010.

ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

         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.

         Beginning on March 28, 2002, the Company executed a binding agreement
with one of its stockholders, who is also a Board Member, to fund up to $6.1
million. Amounts drawn bear interest at the prime rate per annum (7.25% at
December 31, 2005) payable monthly and were to become due and payable on
December 31, 2005, or upon a change in control of the Company or consummation of
any other financing over $7 million. In April 2005, the maturity date was
extended to December 31, 2006 and then in March 2006, the maturity date was
extended to December 31, 2007. In consideration for the stockholder entering
into this loan agreement, the Company granted the stockholder a total of 475,000
common stock purchase warrants at an exercise price equal to the closing market
price of the Company's stock on the dates of grant. As of December 31, 2005, the
Company had drawn $6.071 million of the available funds.

ITEM 13. EXHIBITS

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 (3)

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

3.3      Memorandum and Articles of Association of TF Purifiner Ltd. (1)

                                       24
<PAGE>

Exhibits Description of Documents
-------- ------------------------
4.1      Amendment No. 1 to Registration Rights Agreement (3)

4.2      Notice of Delisting from the American Stock Exchange (12)

4.3      Notice of transfer of the Company's Common Stock from the American
         Stock Exchange to the Over The Counter Bulletin Board (13)

10.1     1996 Stock Option Plan (1)

10.2     1999 Stock Option Plan (4)

10.3     2000 Non-Employee Directors' Plan (5)

10.4     2002 Audit Committee Charter (8)

10.5     2002 Supply Agreement between Puradyn Filter Technologies, Inc. and
         Honeywell Consumer Products Group (8)

10.6     2004 Agreement between Puradyn Filter Technologies, Inc. and Imperial
         Capital LLP (7)

10.7     2005 Agreement between Puradyn Filter Technologies, Inc. and Biscayne
         Capital Markets (10)

10.8     2005 Agreement between Puradyn Filter Technologies, Inc. and
         CapitalLink, L.C. (10)

10.9     Change in compensatory plan (11)

14.1     Code of Ethics (8)

16       Letter on change in Certifying Accountant (9)

23.1     Consent of Independent Registered Public Accounting Firm (6)

31.1     Sarbanes-Oxley Act Section 302 Certification

31.2     Sarbanes-Oxley Act Section 302 Certification

32.1     Sarbanes-Oxley Act Section 906 Certification

32.2     Sarbanes-Oxley Act Section 906 Certification

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

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

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

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

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

(6)  Filed herewith.

                                       25
<PAGE>

(7)  Incorporated by reference from the Exhibit to the company's Form 8-K,
     October 29, 2004, as filed with the Securities and Exchange Commission.

(8)  Incorporated by reference from Form 10-KSB, March 30, 2004, as filed with
     the Securities and Exchange Commission.

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

(10) Incorporated by reference from the Exhibit to the company's Form 8-K, April
     28, 2005, as filed with the Securities and Exchange Commission.

(11) Incorporated by reference from the Exhibit to the company's Form 8-K, June
     21, 2005, as filed with the Securities and Exchange Commission.

(12) Incorporated by reference from the Exhibit to the company's Form 8-K, June
     29, 2005, as filed with the Securities and Exchange Commission.

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

ITEM 14. PRINCIPAL ACCOUNTANTS FEES AND SERVICES

         The following table sets forth the aggregate fees billed to the Company
for the years ended December 31, 2005 and December 31, 2004 by DaszkalBolton,
the Company's principal accountants:

                                              2005           2004
                                            -------        -------
                  Audit Fees                $49,000        $89,368
                  Audit-Related Fees         19,500         58,962
                  Tax Fees                       --             --
                  All Other Fees              2,251          1,500

         Audit and audit-related fees represent amounts billed for professional
services rendered for the audit of the Company's annual financial statements and
the reviews of the financials statements included in the Company's Forms 10-QSB
for the fiscal years ended December 31, 2005 and 2004.

                                       26
<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: April 4, 2006                 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: April 4, 2006

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

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

By: /s/ Cindy Lea Gimler
    ----------------------------------------
    Cindy Lea Gimler
    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 Chief
    Operating Officer and Director

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

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

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

                                       27

<PAGE>

                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS


                                                                         Page
                                                                         ----

Report of Independent Registered Public Accounting Firm...................29

Consolidated Financial Statements:

   Consolidated Balance Sheet - December 31, 2005.........................30

   Consolidated Statements of Operations -
     Years ended December 31, 2005 and 2004...............................31

   Consolidated Statements of Changes in Stockholders' Deficit -
     Years ended December 31, 2005 and 2004...............................32

   Consolidated Statements of Cash Flows -
     Years ended December 31, 2005 and 2004...............................33

   Notes to Consolidated Financial Statements............................ 34


                                       28
<PAGE>

             Report of Independent Registered Public Accounting Firm

Board of Directors and Stockholders
Puradyn Filter Technologies Incorporated

         We have audited the accompanying consolidated balance sheet of Puradyn
Filter Technologies Incorporated (the Company) as of December 31, 2005, and the
related consolidated statements of operations, changes in stockholders' deficit
and cash flows for the two years then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.

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

         In our opinion, the financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Puradyn
Filter Technologies Incorporated at December 31, 2005, and the results of their
operations and their cash flows for the two years then ended in conformity with
accounting principles generally accepted in the United States of America.

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

                                              /s/ / DaszkalBolton LLP


Boca Raton, Florida
March 22, 2006, except for Note 16, as to which the date is March 29, 2006.

                                       29
<PAGE>
                    Puradyn Filter Technologies Incorporated

                           Consolidated Balance Sheet

                               December 31, 2005

Assets
Current assets:
   Cash and cash equivalents                                   $    155,557
   Accounts receivable, net of allowance for
     uncollectible accounts of $50,220                              423,041
   Inventories                                                    1,181,781
   Prepaid expenses and other current assets                        245,171
       Deferred financing costs                                      89,648
                                                               ------------
Total current assets                                              2,095,198

Property and equipment, net                                         334,615
Other noncurrent assets                                              40,930
                                                               ------------
Total assets                                                   $  2,470,743
                                                               ============

Liabilities and stockholders' deficit
Current liabilities:
   Accounts payable                                            $    270,389
   Accrued liabilities                                              747,810
   Current portion of capital lease obligation                        4,520
   Deferred revenues                                                 75,810
                                                               ------------
Total current liabilities                                         1,098,529
Capital lease obligation, less current portion                        6,060
Notes Payable - stockholder                                       6,071,000
Commitments and contingencies
Stockholders' deficit:
   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 - 22,276,099                            22,276
   Additional paid-in capital                                    37,078,716
   Notes receivable from stockholders                            (1,088,590)
   Accumulated deficit                                          (40,730,646)
   Accumulated other comprehensive income                            13,398
                                                               ------------
Total stockholders' deficit                                      (4,074,846)
                                                               ------------
Total liabilities and stockholders' deficit                    $  2,470,743
                                                               ============

See accompanying notes to consolidated financial statements.

                                       30
<PAGE>
                    Puradyn Filter Technologies Incorporated

                     Consolidated Statements of Operations
<TABLE>
<CAPTION>
                                                          Year Ended December 31
                                                     ------------------------------
                                                          2005              2004
                                                     ------------      ------------
<S>                                                  <C>               <C>
Net sales                                            $  2,475,285      $  2,472,059

Costs and expenses:
   Cost of products sold                                2,420,145         2,525,981
   Salaries and wages                                   1,404,788         1,661,923
   Selling and administrative                           1,444,038         1,591,100
                                                     ------------      ------------
                                                        5,268,971         5,779,004
                                                     ------------      ------------
Loss from operations                                   (2,793,686)       (3,306,945)

Other (expense) income:
        Interest income                                    63,365            53,560
        Interest expense                                 (460,473)         (334,383)
                                                     ------------      ------------
Total other expense                                      (397,107)         (280,823)
                                                     ------------      ------------

Income taxes                                                   --                --

Net loss                                             $ (3,190,794)     $ (3,587,768)
                                                     ============      ============

Basic and diluted loss per common share              $       (.16)     $      (0.21)
                                                     ============      ============

Basic and diluted weighted average common shares
         Outstanding                                   20,268,512        17,278,448
                                                     ============      ============
</TABLE>

See accompanying notes to consolidated financial statements.

                                       31
<PAGE>
                    Puradyn Filter Technologies Incorporated

           Consolidated Statements of Changes in Stockholders' Deficit
<TABLE>
<CAPTION>
                                                              Notes                       Accumulated
                          Common Stock       Additional     Receivable                       Other            Total
                      --------------------     Paid-in        From        Accumulated    Comprehensive    Stockholders'
                        Shares     Amount      Capital     Stockholders     Deficit      Income (Loss)       Deficit
                      ----------   -------   -----------   ------------   ------------   -------------   ----------------
<S>                   <C>          <C>       <C>           <C>            <C>            <C>             <C>
Balance at
 December 31, 2003    16,442,164   $16,442   $33,309,707   $  (992,326)   $(33,952,086)  $     (43,822)  $     (1,662,085)
Foreign currency
 translation
 adjustment                   --        --            --             --             --         (36,858)           (36,858)
Net loss                      --        --            --             --     (3,587,768)             --         (3,587,768)
Total
 comprehensive
 loss                         --        --            --             --             --              --         (3,624,626)
Exercise of
 stock options            10,000        10         9,990             --             --              --             10,000
Issuance of
 common stock
 in private
 placement, net        1,000,000     1,000     1,978,359             --             --              --          1,979,359
Issuance of
 warrants to
 stockholder                  --        --       112,500             --             --              --            112,500
Interest
 receivable
 related to
 notes  receivable
 from
 stockholders                 --        --            --        (48,198)            --              --            (48,198)
Compensation
 expense associated
 with warrant
 modification                 --        --       282,750             --             --              --            282,750
Compensation
 expense associated
 with outstanding
 variable option
 awards                       --        --      (177,058)            --             --              --           (177,058)
                      ----------   -------   -----------   ------------   ------------   -------------   ----------------
Balance at
 December 31, 2004    17,452,164   $17,452   $35,516,248   $ (1,040,524)  $(37,539,854)  $     (80,680)  $     (3,127,358)
Foreign currency
 translation
 adjustment                   --        --            --             --             --          94,079             94,079
Net loss                      --        --            --             --     (3,190,794)             --         (3,190,794)
Total
 comprehensive
 loss                         --        --            --             --             --              --         (3,096,715)
Exercise of
 stock options             3,270         3         2,933             --             --              --              2,936
Issuance of
 common stock
 in private
 placement, net
 of issuance
 costs                 4,820,665     4,821     1,477,379             --             --              --          1,482,200
Issuance of
 warrants to
 stockholder                  --        --        55,000             --             --              --             55,000
Issuance of
 warrants to
 investors                    --        --        79,908             --             --              --             79,908
Interest
 receivable
 related to
 notes
 receivable from
 stockholders                 --        --            --        (48,066)            --              --            (48,066)
Stock options
 issued to
 consultants                  --        --        45,600             --             --              --             45,600
Compensation
 expense associated
 with outstanding
 variable option
 awards                       --        --       (98,352)            --             --              --            (98,352)
                      ----------   -------   -----------   ------------   ------------   -------------   ----------------
Balance at
December 31, 2005     22,276,099   $22,276   $37,078,716   $ (1,088,590)  $(40,730,646)  $      13,398   $     (4,704,846)
                      ==========   =======   ===========   ============   ============   =============   ================
</TABLE>

See accompanying notes to consolidated financial statements.

                                       32
<PAGE>
                    Puradyn Filter Technologies Incorporated
                Condensed Consolidated Statements of Cash Flows

<TABLE>
<CAPTION>
                                                                                            YEAR ENDED
                                                                                           DECEMBER 31,
                                                                                   ----------------------------
                                                                                      2005              2004
                                                                                   -----------      -----------
<S>                                                                                <C>              <C>
OPERATING ACTIVITIES
Net loss                                                                           $(3,190,794)     $(3,587,768)
                                                                                   -----------      -----------
Adjustments to reconcile net loss to net cash
 used in operating activities:
   Depreciation and amortization                                                       231,119          244,248
   Provision for bad debts                                                               9,000            3,884
   Provision for obsolete and slow moving inventory                                     14,492          (14,668)
   Amortization of deferred financing costs included in  interest expense              101,197          158,422
   Interest receivable from stockholders' notes                                        (48,066)         (48,198)
   Compensation expense on stock-based arrangements with employees and vendors         125,508          105,692
   Compensation expense on option-based arrangements with consultants                  (98,352)              --
   Changes in operating assets and liabilities:
      Accounts receivable                                                               58,609         (269,979)
      Inventories                                                                       74,368          (53,473)
      Prepaid expenses and other current assets                                        166,453         (182,718)
      Other noncurrent assets                                                               --           66,667
      Accounts payable                                                                  50,153          125,095
      Accrued liabilities                                                              245,399           (6,410)
      Deferred revenues                                                                 33,419            5,930
                                                                                   -----------      -----------
Net cash used in operating activities                                               (2,227,495)      (3,453,276)
INVESTING ACTIVITIES
Purchases of property and equipment                                                    (23,012)        (132,782)
                                                                                   -----------      -----------
Net cash used in investing activities                                                  (23,012)        (132,782)
FINANCING ACTIVITIES
Proceeds from sale of common stock, net of issuance costs                            1,482,200        1,979,359
Proceeds from exercise of stock options                                                  2,936           10,000
Proceeds from notes payable to stockholder                                           1,613,100        2,500,000
Payment of notes payable to stockholder                                             (1,044,000)      (2,000,000)
Payment of capital lease obligations                                                    (4,560)          (4,063)
                                                                                   -----------      -----------
Net cash provided by financing activities                                            2,049,676        2,485,296
Effect of exchange rate changes on cash and cash equivalents                            99,178          (36,858)
                                                                                   -----------      -----------
Net (decrease) in cash and cash equivalents                                           (101,653)      (1,137,620)
Cash and cash equivalents at beginning of period                                       257,210        1,394,830
                                                                                   -----------      -----------
Cash and cash equivalents at end of period                                             155,557          257,210
SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for interest                                                                 240,118      $   195,129
                                                                                   ===========      ===========
NONCASH INVESTING AND FINANCING ACTIVITIES
Warrants issued for deferred financing and capital raising costs                   $    55,000      $   112,500
                                                                                   ===========      ===========
</TABLE>

See accompanying notes to consolidated financial statements.

                                       33
<PAGE>
                    Puradyn Filter Technologies Incorporated

                   Notes to Consolidated Financial Statements

                               December 31, 2005

1. SIGNIFICANT ACCOUNTING POLICIES

Organization

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

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

New Accounting Pronouncements

In December 2004, the Financial Accounting Standards Board (FASB), issued SFAS
No. 123 (revised 2004), "Share-Based Payment" (SFAS 123R), which replaces SFAS
No. 123, "Accounting for Stock-Based Compensation" (SFAS 123) and supercedes APB
Opinion No. 25, "Accounting for Stock Issued to Employees." SFAS No. 123R
requires all share-based payments to employees, including grants of employee
stock options, to be recognized in the financial statements based on their fair
values, beginning with the first interim or annual period after June 15, 2005.
Small business filers will be required to adopt the provisions of SFAS No. 123R
in the first interim or annual reporting period beginning after December 15,
2005. The grant-date fair value of employee share options and similar
instruments will be estimated using an option-pricing model adjusted for any
unique characteristics of a particular instrument. If an equity award is
modified after the grant date, incremental compensation cost will be recognized
in an amount equal to the excess of the fair value of the modified award over
the fair value of the original award immediately before the modification. As a
result of this pronouncement, the Company's income statement would have
reflected approximately $227,000 of future compensation expense. On December 22,
2005, the board of directors approved the acceleration of vesting rights with
respect to options issued to employees, officers and directors to purchase
197,000 shares of common stock of the Company, thus eliminating future expenses
related to these previously issued options.

In November 2004, the FASB issued Statement of Financial Accounting Standards
No. 151, "Inventory Costs: an Amendment to ARB No. 43" (SFAS 151). This
statement clarifies the types of costs that should be expensed rather than
capitalized as inventory. This statement also clarifies the circumstances under
which fixed overhead costs, such as abnormal amounts of idle facility expense,
freight, handling costs and wasted material, associated with operating
facilities involved in inventory processing should be expensed or capitalized.
The provisions of this statement are effective for fiscal years beginning after
June 15, 2005. Consequently, the Company adopted the standard in 2005 and it did
not have a material effect on the Company's 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, Puradyn Filter Technologies, Ltd. All significant
intercompany transactions and balances have been eliminated.

Revenue Recognition

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

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

Use of Estimates

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

Cash and Cash Equivalents

Cash and cash equivalents include all highly liquid investments with original
maturities of three months or less at the time of purchase. At December 31, 2005
and December 31, 2004, the Company did not have any cash equivalents.

Fair Value of Financial Instruments

The carrying amounts of cash and cash equivalents, accounts receivable, prepaid
expenses and other assets, accounts payable, accrued liabilities and notes
payable to stockholder approximate their fair values as of December 31, 2005
because of their short-term natures.

Accounts Receivable

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

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

                                       34
<PAGE>

Inventories

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

Deferred Financing Costs

The Company capitalizes financing costs and amortizes them using the effective
interest method over the term of the related debt. Amortization of deferred
financing costs is included in interest expense and totaled $101,197 and
$139,672 for the years ended December 31, 2005 and 2004, respectively. The
deferred financing costs related to the $2.5 million commitment provided by the
Company's stockholder, who is also a Board Member, totaled $318,000 and 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 Company
recorded additional deferred financing costs of $214,400 related to an
additional $3.5 million commitment provided by the same stockholder, with a
maturity date of December 31, 2004. The $214,400 of deferred financing costs is
being amortized over the maturity period. In addition, the repayment period for
the $2.5 million commitment was extended to December 31, 2004. Effective March
14, 2003, the Company began amortizing the then remaining deferred financing
costs for the $2.5 million commitment prospectively over the extended maturity
period. On February 2, 2004 the maturity period for both commitments were
extended to December 31, 2005 (see Note 2). On April 13, 2005 the maturity date
for both commitments were further extended to December 31, 2006. Accumulated
amortization of deferred financing costs as of December 31, 2005 was $591,502.

Property and Equipment

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

Impairment of Long-Lived Assets

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

Product Warranty Costs

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

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

The following table shows the changes in the aggregate product warranty
liability for the year ended December 31, 2005:

        Balance as of December 31, 2004                  $ 44,203
        Less: Payments made                               (11,686)
        Change in prior period estimate                     1,201
        Add: Provision for current period warranties       36,652
                                                         -------
        Balance as of December 31, 2005                  $ 70,370
                                                         =======

                                       35
<PAGE>

Guarantees

In August 2003 the Company made a guarantee to its wholly owned subsidiary,
Puradyn Filter Technologies, Ltd., that it would provide cash for working
capital on an as needed basis for a minimum period of twelve months. The
guarantee was provided as assurance that they will continue as a going concern
for 2003. This guarantee is excluded from the recognition and measurement
provisions of FIN 45, as it relates to a wholly owned consolidated subsidiary.

Comprehensive Income

SFAS No. 130, Reporting Comprehensive Income (SFAS 130) establishes rules for
reporting and displaying of comprehensive income and its components.
Comprehensive income is the sum of net loss as reported in the consolidated
statements of operations and other comprehensive income transactions as reported
in the consolidated statement of changes in stockholders' equity (deficit).
Other comprehensive income transactions that currently apply to the Company
result from changes in exchange rates used in translating the financial
statements of its wholly owned subsidiary, Ltd. Comprehensive income as of
December 31, 2005 and 2004 is not shown net of taxes because the Company's
deferred tax asset has been fully offset by a 100% valuation allowance.

Advertising Costs

Advertising costs are expensed as incurred. During the years ended December 31,
2005 and 2004, advertising costs incurred by the Company totaled approximately
$25,000 and $44,000, 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, 2005 and 2004, engineering and development costs incurred by
the Company totaled approximately $31,000 and $65,000, 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 2005 and 2004 have been reported in accumulated other comprehensive
income, except for gains and losses resulting from the translation of
intercompany receivables and payables, which are included in earnings for the
period. During the years ended December 31, 2005 and 2004, the Company recorded
a foreign currency exchange rate loss of approximately $131,000 and a gain of
approximately $43,000, respectively, which is included in selling and
administrative expenses in the accompanying consolidated statements of
operations.

Income Taxes

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

Stock Option Plans

The Company accounts for its stock-based compensation 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), including related amendments and
interpretations, 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


                                       36
<PAGE>

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 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,
including related amendments and interpretations. The related expense is
recognized over the period the services are provided.

Pro forma information regarding net loss and loss per common share as if the
Company had accounted for its employee stock options under the fair value method
of SFAS 123 is presented below. 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:

<TABLE>
<CAPTION>
                                                         Year Ended December 31
                                                     -----------------------------
                                                        2005               2004
                                                     -----------       -----------
<S>                                                  <C>               <C>
Net loss as reported                                 $(3,190,794)      $(3,587,768)
Stock-based employee compensation cost
 (intrinsic value method)                                     --                --

Fair value method stock option expense                    16,271          (602,182)
                                                     -----------       -----------
Pro forma net loss                                   $(3,174,523)      $(4,189,950)
                                                     ===========       ===========
Loss per common share:
  Basic and diluted loss as reported                 $     (0.16)      $     (0.21)
  Basic and diluted loss pro forma                   $     (0.16)      $     (0.24)
Weighted average fair value per option granted
  during the period(1)                               $       .54       $      1.13
Assumptions:
     Average risk free interest rate                        3.90%             3.10%
     Average volatility factor                             .7314             1.014
     Expected dividend yield                                   0%                0%
     Expected life (in years)                               5.00              5.00
</TABLE>
----------
(1)  A Black-Scholes option-pricing model was used to develop the fair values of
     the options granted.

Credit Risk

The Company minimizes the concentration of credit risk associated with its cash
and cash equivalents by maintaining its cash and cash equivalents with high
quality federally insured financial institutions. However, cash balances in
excess of the FDIC insured limit of $100,000 are at risk. At December 31, 2005,
the Company did not have a cash balance above the FDIC insured limit. The
Company performs ongoing evaluations of its significant trade accounts
receivable customers and generally does not require collateral. An allowance for
doubtful accounts is maintained against trade accounts receivable at levels
which management believes is sufficient to cover probable credit losses. There
are concentrations of credit risk with respect to trade receivables due to the
amounts owed by five customers at December 31, 2005 whose trade receivable
balances each represented approximately 33%, 24%, 18%, 8% and 6% for a total of
89% of total accounts receivable. The loss of business from one or a combination
of the Company's significant customers, or an unexpected deterioration in their
financial condition, could adversely affect the Company's operations.

                                       37
<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 3,107,070 in 2005 and 2,901,070 in 2004. In March 2004,
the Company issued 1,000,000 shares of common stock to a private placement
investor (see Note 12).

Reclassifications

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

2. ISSUES AFFECTING LIQUIDITY AND MANAGEMENT'S PLANS

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

These recurring operating losses, liabilities exceeding assets and the reliance
on cash inflows from an institutional investor and current stockholder have led
the Company's independent registered public accounting firm DaszkalBolton LLP to
include a statement in its audit report relating to the Company's audited
consolidated financial statements for the year ended December 31, 2005
expressing substantial doubt about the Company's ability to continue as a going
concern.

The Company has been addressing the liquidity and working capital issues and
continues to attempt to raise additional capital with institutional and private
investors and current stockholders. Cost reductions were and continue to be
implemented by the Company, including acquiring alternative suppliers for raw
materials, and the company expects to see results from these reductions, as well
as other cost reduction plans through 2006. Additionally, the Company is
reviewing cost of material increases, which are expected to be passed through to
its customers as product price increases.

The Company has sustained losses since inception in 1987 and used net cash in
operations of approximately $2,227,000 and $3,453,000 during the years ended
December 31, 2005 and 2004, respectively. As a result, the Company has had to
rely principally on private equity funding, including the conversion of debt
into stock, as well as stockholder loans to fund its activities to date.

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

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

The Company experienced a modest reduction in cash used in operations in 2005
and anticipates additional reductions in cash used in operations in 2006;
however, additional cash will still be needed to support operations. Management
believes that the commitments received from its stockholder, the funds received
from its recent current private placement offering, as well as cash from sales
and current working capital will be sufficient to sustain its operations at its
current level through October 2006. However, if budgeted sales levels are not
achieved and/or significant unanticipated expenditures occur, the Company may
have to modify its business plan, reduce or discontinue some of its operations
or seek a buyer for all or part of its assets to continue as a going concern
through 2006. There can be no assurance that the Company will be able to raise
the additional capital needed to continue as a going concern.

                                       38
<PAGE>

3. INVENTORIES

At December 31, 2005, inventories consisted of the following:

         Raw materials             989,389
         Finished goods            363,041
         Valuation allowance      (170,650)
                                 ---------
                                 1,181,781
                                 =========

4. PREPAID EXPENSES AND OTHER CURRENT ASSETS

At December 31, 2005, prepaid expenses and other current assets consisted of
the following:

         Prepaid expenses                                        131,663
         Current portion of refundable security deposit           66,667
         Deferred costs related to deferred revenue               46,841
                                                                 -------
                                                                 245,171
                                                                 =======

5. PROPERTY AND EQUIPMENT

At December 31, 2005, property and equipment consisted of the following:

         Machinery and equipment                                  1,028,418
         Furniture and fixtures                                      94,516
         Leasehold improvements                                     122,622
         Website development                                         72,960
         Computer hardware and software                             115,691
                                                                 ----------
                                                                  1,434,207
         Less accumulated depreciation and amortization          (1,099,592)
                                                                 ----------
                                                                    334,615
                                                                 ==========

Depreciation and amortization expense of property and equipment for the years
ended December 31, 2005 and 2004 is $231,119 and $244,248, respectively, of
which approximately $158,000 and $156,000 is included in cost of products sold
and approximately $72,000 and $88,000 is included in selling and administrative
costs, respectively, in the accompanying consolidated statements of operations.

6.  LEASES

The Company leases its office and warehouse facilities in Boynton Beach, Florida
under a long-term noncancellable lease agreement, which contains renewal options
and rent escalation clauses. A $235,000 security deposit was paid in 2002, which
will be refunded ratably on an annual basis over the first three years of the
lease term beginning on the last day of the first lease year, provided there has
been no Event of Default, as defined, by the Company. Of this amount, $66,667
was paid to the Company in November 2003, January 2005 and January 2006,
respectively. As of December 31, 2005, $66,667 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 leases a condominium in Ocean Ridge, Florida to provide
accommodations for Company use. The lease is renewable annually and is paid in
two six-month installments.

The Company's wholly owned subsidiary, Ltd., rented office space in Devon,
England under a lease that extended through March 31, 2002 and was subsequently
extended on a month-to-month basis. In September 2003, Ltd. moved to new office
space by assuming the existing lease, which expired in August 2004 and was
renegotiated in September 2005 and expires in September 2010. Rent expense under
all operating leases for the years ended December 31, 2005 and 2004 totaled
approximately $308,000 and $274,000, respectively, of which approximately
$223,000 and $210,000 is included in cost of products sold and approximately
$85,000 and $64,000 is included in selling and administrative costs,
respectively, in the accompanying consolidated statements of operations.

                                       39
<PAGE>

In December 2003, the Company entered into a capital lease obligation for the
purchase of approximately $19,000 of office equipment, which is included in
property and equipment, net of approximately $9,000 of accumulated amortization,
in the accompanying consolidated balance sheet.

Future minimum lease commitments due for facilities and equipment leases under
noncancellable capital and operating leases at December 31, 2005 are as follows:

                                                                       OPERATING
                                                  CAPITAL LEASES        LEASES
                                                    --------           --------
         2006                                       $  5,922           $205,551
         2007                                          5,922            210,237
         2008                                             --            145,778
         2009                                             --             49,357
         20010 and thereafter                             --             36,546
                                                    --------           --------
         Total minimum lease payments                 11,844           $610,922
                                                                       ========
         Less amount representing interest            (1,264)
                                                    --------
         Present value of minimum lease payments
          including current portion of $4,520       $ 10,580
                                                    ========

7. ACCRUED LIABILITIES

At December 31, 2005, accrued liabilities consisted of the following:

         Accrued wages and benefits                              $378,845
         Accrued expenses relating to vendors and others          123,378
         Deferral of straight-line rent expense                    60,843
         Reclassified accounts receivable credit balances          88,931
         Accrued warranty costs                                    70,370
         Accrued interest payable relating to stockholder notes    25,443
                                                                 --------
                                                                 $747,810
                                                                 ========

8. LONG-TERM DEBT

NOTES PAYABLE TO STOCKHOLDER

Beginning on March 28, 2002 the Company executed a binding agreement with one of
its stockholders, who is also a Board Member, to fund up to $6.1 million. Under
the terms of the agreements, the Company can draw amounts as needed to fund
operations. Amounts drawn bear interest at the prime rate per annum (7.25% at
December 31, 2005), payable monthly and were to become due and payable on
December 31, 2005 or upon a change in control of the Company or consummation of
any other financing over $7.0 million. In March 2006, the maturity date for the
agreement was extended to December 31, 2007.

At December 31, 2005, the Company had drawn $6.071 million of the available
funds.

In April 2005, the maturity date of the agreement was extended from December 31,
2005 to December 31, 2006. As consideration of this extension, this stockholder
was granted an additional 100,000 common stock purchase warrants at an exercise
price equal to the closing market price of the Company's stock on the date of
grant, for a period of five years.

During the years ended December 31, 2005 and 2004, the Company incurred interest
expense of approximately $256,000 and $191,000, respectively, on its draws,
which is included in interest expense in the accompanying consolidated
statements of operations.



                                       40
<PAGE>

MATURITIES OF LONG-TERM OBLIGATIONS FOR FIVE YEARS AND BEYOND

Long-term obligations consisted of the following at December 31, 2005:

         Notes payable to stockholder          $ 6,071,000
         Capital lease obligation                   10,580
                                               -----------
                                                 6,081,580
         Less: current maturities                   (4,520)
                                               -----------
                                               $ 6,077,060
                                               ===========

The minimum annual principal payments of notes payable and capital lease
obligations at December 31, 2005 were:

         2006          $    4,520
         2007           6,077,060
                       ----------
                       $6,081,580
                       ==========

9.  INCOME TAXES

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

                                                 2005                  2004
                                             -----------           -----------
         United States                       $(2,746,846)          $(3,365,968)
         Foreign                                (443,948)             (221,799)
         Intercompany elimination                     --                    --
                                             -----------           -----------
         Loss from continuing operations
           before income taxes               $(3,190,794)          $(3,587,768)

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

         Deferred tax assets:                        2005              2004
                                                 ------------      ------------
            Net operating loss carryforwards     $ 12,173,178      $ 11,155,010
            Depreciation and amortization              82,007            90,904
            Accrued expenses and reserves              87,982            70,099
            Impairment loss                            78,304            78,304
            Compensatory stock options
             and warrants                              57,354            57,354
            Capital Loss Carryover                     40,842            40,632
            Other                                      16,802            16,421
                                                 ------------      ------------
         Total deferred tax assets                 12,536,469        11,508,724
         Valuation allowance                      (12,536,469)      (11,508,724)
                                                 ------------      ------------
         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 $12,536,469 against its net
deferred taxes is necessary as of December 31, 2005. The change in valuation
allowance for the years ended December 31, 2005 and 2004 is $1,027,745 and
$1,259,407 respectively.

At December 31, 2005, the Company had approximately $33,701,720 of U.S. net
operating loss carryforwards remaining, which expire beginning in 2020. The
Company will record the benefit of approximately $1,352,000 of the net operating
loss carryforwards through additional paid-in capital if and when the net
operating loss carryforwards are utilized, as such amounts relate to the
unrecognized tax benefit from stock option exercises.

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

                                       41
<PAGE>

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:

                                                 2005             2004
                                                ------           ------
         Federal statutory taxes                (34.00)%         (34.00)%
         State income taxes,
          net of federal tax benefit             (3.63)           (3.63)
         Nondeductible items                      0.20             0.23
         Change in valuation allowance           37.74            37.42
         Other                                    (.31)            (.02)
                                                ------           ------
                                                    --%              --%
                                                ======           ======

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 paid the additional judgment. Thereafter, on February
22, 2002, 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. In April 2003, the patent
owner posed two discovery requests, in order to extend the time remaining before
automatic dismissal of his claim. On May 27, 2004, the Company filed responses
to the interrogatories. The Court sent notices to certain current and one former
employee of the Company to take depositions in August 2004, which were
re-noticed for August 2005. The Company then filed a motion to dismiss the case
and to quash plaintiff's re-notice of taking depositions. As of this date, that
motion has not been heard and the case remains dormant. The Company believes the
likelihood of a favorable outcome is probable.

INVESTMENT BANKING AGREEMENTS

On October 26, 2004, the Company engaged Imperial Capital, LLC ("IC") as an
exclusive financial advisor to the Company. IC was to assist the Company in
raising additional capital, as well as possibly pursuing a strategic partner
from a mutually related field to enhance the Company's ability to develop
business.

In consideration for IC's services, the Company agreed to pay a $100,000 non-
refundable retainer, as well as an advance for future out-of-pocket expenses
incurred by IC. Upon the consummation of a transaction, as defined by the
agreement, the Company will pay a success fee of 2.5% of the principal amount of
any debt or equity securities sold or the consideration received from a
strategic relationship. Either party upon 30-day written notice may terminate
the agreement and on December 1, 2005, the Company exercised its option to
terminate the agreement, effective date December 31, 2005. There were no
additional fees incurred.

On April 21, 2005, the Company entered into an agreement with Biscayne Capital
Markets, Inc. ("BCMI"), an investment-banking firm, to provide assistance in
obtaining financing. The Company agreed to pay a fee of 7% of gross proceeds
received by the Company as a result of services performed under the agreement.
Fees paid in consideration of services rendered are based upon performance and
there is no obligation to pay any fees unless financing is closed.

                                       42
<PAGE>

On April 28, 2005, the Company entered into a one-year non-exclusive agreement
with CapitalLink, L.C., an investment-banking firm, to assist in additional
financing. The Company agreed to pay a fee of 7% of gross proceeds received by
the Company as a result of services performed under the contract, as well as
reimbursement of pre-approved out-of-pocket expenses.

AMERICAN STOCK EXCHANGE DELISTING

On April 28, 2005, the Company received a notice from the Staff of the American
Stock Exchange (the Exchange) indicating that the Company was below certain of
the Exchange's continued listing standards. Specifically, as set forth in
Sections 1003(a)(i) and (ii) of the Exchange Company Guide, the Company
sustained losses from continuing operations and/or net losses in two out of its
three most recent fiscal years with stockholders' equity of less than $2
million, and losses from continuing operations and/or net losses in three out of
its four most recent fiscal years with stockholders' equity of less than $4
million.

The Company was given the opportunity to submit a plan to the Exchange outlining
actions it has taken, or would take, over the next 18 months that would bring it
into compliance with continued listing standards. The Company submitted its
compliance plan to Exchange by the scheduled deadline of May 31, 2005.

On June 24, 2005, the Board of Directors approved a resolution to voluntarily
withdraw the Company's common stock from listing on the Exchange. The Board's
decision was based upon a determination that Puradyn would not be able to timely
comply with the Exchange's ongoing financial compliance standards under Section
1003 of the Exchange's Company Guide, as well as the ongoing costs of compliance
with the Exchange's requirement, including the provisions of the Sarbanes-Oxley
Act of 2002 as they apply to Exchange-listed companies, and the requirement to
either limit the amount of financing of its previously announced financing or to
incure additional costs and defer receipt of the financing pending stockholder
approval as required by the Exchange's rules.

Additionally, on June 24, 2005, the Company submitted an application to the
Securities and Exchange Commission (SEC) pursuant to Section 12(d) of the
Securities Exchange Act of 1934 for the voluntarily withdrawal of the listing of
its common stock from the Exchange. On August 18, 2005 this application was
approved effective at the opening of business that day. The Company continues to
be required to file reports with the SEC under Section 13 of the Securities
Exchange Act of 1934, including quarterly and annual reports, and as of August
31, 2005, its common stock is included for quotation on the OTC Bulletin Board.

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.

On October 3, 2005, the Company agreed to extend the exercise date to December
31, 2007 for the aggregate 17,500 shares of common stock issued to two directors
that resigned from the board of directors on August 23, 2005. As per the terms
outlined in the 2000 Non-Employee Directors Stock Option Plan, #6 (b) Option
Expiration, the resigning directors would have had (i) 5 years after the date of


                                       43
<PAGE>

grant or (ii) one year after their August 23, 2005 resignation from the board of
directors to exercise all vested options.

On November 10, the Company agreed to extend the exercise date to December 31,
2007 for 10,000 shares of common stock issued to a director that resigned from
the board of directors on November 10, 2005. As per the terms outlined in the
2000 Non-Employee Directors Stock Option Plan, #6 (b) Option Expiration, the
resigning directors would have had (i) 5 years after the date of grant or (ii)
one year after their August 23, 2005 resignation from the board of directors to
exercise all vested options.

During each of 2005 and 2004, 25,000 and 27,500 of options were issued to non-
employee Directors.

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

<TABLE>
<CAPTION>
                                                        2005                                2004
                                            -------------------------           -------------------------
                                                              WEIGHTED                            WEIGHTED
                                                              AVERAGE                             AVERAGE
                                                              EXERCISE                            EXERCISE
                                             OPTIONS           PRICE            OPTIONS            PRICE
                                            ---------          ------           ---------          ------
<S>                                         <C>                <C>              <C>                <C>
Outstanding, beginning of year              2,326,070          $ 3.68           2,338,570          $ 3.75
   Granted                                    228,270             .88             107,500            1.76
   Exercised                                   (3,270)           1.05             (10,000)           1.00
   Cancelled                                 (154,500)           3.30            (110,000)           3.75
   Expired                                   (244,500)           5.73                  00              --
                                            ---------          ------           ---------          ------
Outstanding, end of year                    2,152,070            3.18           2,326,070            3.68
                                            =========                           =========
Exercisable, end of year                    2,118,320          $ 3.22           2,041,320          $ 3.88
                                            =========                           =========
Options available for
 future grant, end of year                  1,129,485                             958,755
                                            =========                           =========
</TABLE>

Summarized information with respect to options outstanding under the three
option plans at December 31, 2005 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 - $1.70      $1,101,900                5.6              $     .88             1,069,400      $     .89
  1.86 - 4.50          549,295                3.6                   2.50               548,045           2.50
  4.81 - 6.81           13,375                 .4                   6.06                13,375           6.06
  8.50 - 9.25          487,500                2.1                   9.07               487,500           9.07
                     ---------               ----              ---------             ---------      ---------
         Totals      2,152,070               4.05              $    3.18             2,118,320      $    3.22
                     =========               ====              =========             =========      =========
</TABLE>

On March 9, 2004, the Company extended the expiration date of the exercise
period of 270,000 fully vested stock options for a terminated employee who left
the Company in August 2003. The Company's Stock Option Plan permits an employee
to exercise their stock options for up to one month after their termination
date, at which time they expire. The exercise price of the options ranges from
$1.00 to $8.50. In accordance with FIN 44, the Company compared the options'
intrinsic value on the modification date to the original intrinsic value on the
date of grant. The Company recorded approximately $263,000 of compensation
expense related to this modification, which was included in the consolidated
statement of operations for the year ending December 31, 2004.

On June 29,2005 the Company extended the expiration date of the exercise period
of 11,650 partially vested stock options for a terminated employee who left the
company in May, 2005. The exercise price of the options ranges from $.38 to
$2.15. In accordance with SFAS 123, incremental compensation cost was recognized
in an amount equal to the excess of the fair value of the modified award over
the fair value of the original award immediately before the modification. The
Company recorded approximately $1,648 of compensation expense related to this
modification, which was included in the consolidated statement of operations for
the year ended December 31, 2005.

On December 22, 2005, the board of directors approved the acceleration of
vesting rights with respect to options issued to employees, officers and


                                       44
<PAGE>

directors to purchase 197,000 shares of common stock of the Company. Of the
options vested, options to purchase approximately 143,000 shares were held by
the Company's executive officers and directors. No other changes were made with
respect to the option grants.

The vesting of such options will eliminate future compensation expense of
approximately $227,000, that the Company would otherwise recognize in its income
statement with respect to these options upon the adoption of Financial
Accounting Standards Board Statement of Financial Accounting Standards No. 123
(Revised 2004), Share-Based Payment (SFAS 123R). SFAS 123R requires that
compensation expense associated with stock options be recognized in the income
statement, rather than as footnote disclosure in the Company's consolidated
financial statements, effective for the first fiscal year that begins after
December 15, 2005.

12. COMMON STOCK

In April 2005, a majority stockholder and board member was granted 100,000
warrants to purchase common stock, in consideration for extending the repayment
period of the notes payable to stockholder from December 31, 2005 to December
31, 2006, The fair value of the warrants was estimated at $55,000 on the date of
grant using a Black-Scholes option-pricing model, and was recorded as a deferred
financing cost. (see Note 2).

On March 12, 2004, the Company received gross cash proceeds of $2.0 million from
the sale of 1.0 million shares of common stock from its private placement
offering. The funds were used to reduce the outstanding principal balance of the
notes payable to stockholder. The Company then drew amounts, per the terms of
the stockholder commitment letters dated March 28, 2002 and March 14, 2003, and
amendments thereto, as needed, for operating and capital expenditures. The
related offering costs were $35,520.

During June and July 2005, the Company received cash proceeds of 1.48 million
from the sale of 4,820,664 shares of common stock from a private placement
offering. The funds were used for corporate purposes and to reduce the
outstanding principle balance of the notes payable to stockholder. Additionally,
warrants in the amount of 400,000 and 80,000 were offered to two separate
participants in the private placement at a price of $0.80 per each share of
common stock with an exercise date of June 17, 2006, and an expiration date of
June 17, 2008. The fair value of the warrants were estimated at $124,000 and
$22,000, respectively, on the date of grant, using a Black-Scholes
option-pricing model. Approximately $67,000 and $13,000, respectively, were
recorded as stock based compensation expense in the accompanying consolidated
statement of operations for the year ended December 31, 2005.

13. WARRANTS

At December 31, 2005 and 2004, 955,000 and 575,000 shares, respectively, of
common stock have been reserved for issuance under outstanding warrants. All of
the warrants are fully vested and have expiration dates ranging from March 28,
2007 to April 13, 2010. Information concerning the Company's warrant activity is
as follows:

<TABLE>
<CAPTION>
                                                   2005                       2004
                                           --------------------       -------------------
                                             WEIGHTED AVERAGE           WEIGHTED AVERAGE
                                                 EXERCISE                   EXERCISE
                                           --------------------       -------------------
                                            OPTIONS       PRICE       OPTIONS       PRICE
                                           --------       -----       -------       -----
<S>                                         <C>           <C>         <C>           <C>
Outstanding, at the beginning of year       575,000       $2.56       440,000       $2.79
   Granted                                  580,000         .83       150,000        2.00
   Exercised                                     --          --            --          --
   Expired                                 (200,000)       2.44       (15,000)       3.50
                                           --------       -----       -------       -----
Outstanding, at the end of year             955,000       $1.53       575,000       $2.56
                                           --------       -----       -------       -----
</TABLE>

In consideration of the stockholder loan agreement (Item 12), the Company has
granted the stockholder a total of 475,000 common stock purchase warrants at an
exercise price equal to the closing market price of the Company's stock on the
dates of grant. On March 28, 2002, the Company recorded a deferred charge of
$318,000 . The deferred charge was initially amortized over the commitment
period and subsequently revised to include the repayment period, as amended.
During the years ended December 31, 2005 and 2004, the Company had amortized
approximately $22,000 and $45,000 of such costs, respectively, which are
included in interest expense in the accompanying consolidated statements of
operations.

On March 14, 2003, the Company recorded a deferred charge of $212,500. The
deferred charge is being amortized over the repayment period of 21.5 months.


                                       45
<PAGE>

During the years ended December 31, 2005 and 2004, the Company had amortized
approximately $79,000 and $94,000 respectively, which is included in interest
expense in the accompanying 2005 consolidated statement of operations.

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

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

14. MAJOR CUSTOMERS

During 2005 and 2004, two customers together accounted for approximately 45% and
37%, respectively, of the Company's net sales. In 2005 there were two customers
that individually accounted for greater than 10% of net sales, or approximately
$705,000 and $424,000, while in 2004 there were two customers that individually
accounted for greater than 10% of net sales, or approximately $523,000 and
$397,000. There were five customers at December 31, 2005 whose trade receivable
balances equaled or exceeded 5% of total receivables, representing approximately
33%, 24%, 18%, 8% and 6% respectively, of total accounts receivable. The loss of
business from one or a combination of the Company's significant customers could
adversely affect its operations.

15. GEOGRAPHIC INFORMATION

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

                                                 YEAR ENDED DECEMBER 31
                                            ------------------------------
                                               2005                2004
                                            ----------          ----------
         Net sales:
           United States                    $1,764,343          $1,686,775
           United Kingdom                      710,942             785,284
                                            ----------          ----------
                                            $2,475,285          $2,472,059
                                            ==========          ==========

         Long-lived assets by area:
           United States                    $  303,425
           United Kingdom                       31,190
                                            ----------
                                            $  334,615
                                            ==========

16. SUBSEQUENT EVENTS

On February 28, 2006, Puradyn Filter Technologies Inc. (the Company,) received
cash proceeds of $910,000 from five accredited investors for the purchase of
3,033,333 shares of common stock at $0.30 per share.

The purchase price of $0.30, previously agreed upon and approved by the Board of
Directors, was discounted as part of the June 2005 Equity Placement Offering,
wherein these five investors funded 50% of their total predetermined
contribution at that time. The 2005 funds were contributed with the
understanding that the 50% balance of investment would be offered at the same
purchase price as the initial offering.

Inasmuch each of the investors had a preexisting relationship with the issuer,
are stockholders and/or are members of management, are accredited and
sophisticated investors, the issuance of the securities was exempt from
registration pursuant to Section 4(2) of the Securities Act of 1933.

On March 29, 2006, the repayment date of the stockholder loan was extended from
December 31, 2006 to December 31, 2007.

                                       46