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, 2004
                   -------------------------------------------

{}  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              AMERICAN STOCK EXCHANGE

       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}

State issuer's revenues for its most recent fiscal year: $2,472,059 for the 12
months ended December 31, 2004.

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 March 31, 2005 (0.99)is approximately $6,753,351.

State the number of shares outstanding of each of the issuer's class of common
equity, as of the last practicable date. As of March 31, 2005, there were
17,455,434 shares of registrant's common stock outstanding, par value $.001.

This report contains a total of 54 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........................................  10
ITEM 3.      LEGAL PROCEEDINGS..............................................  10
ITEM 4.      SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS............  11


PART II
ITEM 5.      MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.......  11
ITEM 6.      MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS.....  12

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

ITEM 7.      FINANCIAL STATEMENTS...........................................  18
ITEM 8.      CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
             ACCOUNTING AND FINANCIAL DISCLOSURES...........................  18
ITEM 8A.     CONTROLS AND PROCEDURES.......................................   19
ITEM 8B.     OTHER INFORMATION.............................................   19

PART III
ITEM 9.      DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
             COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT.............   19
ITEM 10.     EXECUTIVE COMPENSATION........................................   23
ITEM 11.     SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
             AND MANAGEMENT AND RELATED STOCKHOLDER TRANSACTIONS...........   25
ITEM 12.     CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS................   26
ITEM 13.     EXHIBITS......................................................   27
ITEM 14.     PRINCIPAL ACCOUNTANT FEES AND SERVICES........................   28

                                       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 450 Fifth Street, NW, Washington, D.C. 20549, or call the SEC
Public Reference Room to obtain information at 1-800-SEC-0330.

THE COMPANY
-----------

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

We operate through:

         o        Puradyn Filter Technologies Incorporated - parent company

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

         The Company was formed in 1987 under the name T/F Systems, Inc. as a
distributor for Refineco Manufacturing Company, Inc., the manufacturer of the
Purifiner(R) bypass oil filtration system, as the puraDYN was then known. In
October 1990, the name of the Company was changed to T/F Purifiner, Inc. In
1995, the Company purchased from Refineco all marketing and manufacturing
rights.

                                       3
<PAGE>

         In 1996, the Company entered into a joint venture agreement with
Centrax, Ltd. in the United Kingdom called TF Purifiner, Ltd. In May 2000, the
Company and Centrax agreed to dissolve TF Purifiner, Ltd., and the Company is
currently conducting operations in the UK under the name Puradyn Filter
Technologies, Ltd., a wholly owned subsidiary. At the time of the dissolution,
Centrax sold to the Company certain foreign patents, inventory and factory
equipment used in manufacturing products for the joint venture.

         In February 1998, the Company filed a Certificate of Amendment to
change its name from T/F Purifiner, Inc. to Puradyn Filter Technologies
Incorporated.

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

PRODUCTS
--------

         The core product, the 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.

         We also have developed and sell a specialized Hydraulic Batch System
("HBS"), which is mounted on a handcart for mobility. The HBS was developed to
clean 55-gallon drums of used hydraulic oils. The HBS consists primarily of two
60-quart puraDYN systems, a preheater, a pump and other miscellaneous parts.

         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. Except for the HBS, 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.

                                       4
<PAGE>

o    CGP(R) Extended Life Filter Element containing a patent-pending process for
     chemical grafting. This new technology improves the attraction and
     retention of soot and other solid contaminants to the packed cotton filter
     material. CGP(R) 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.

         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.

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
Class 3 - 8 on-highway fleet, industrial/construction, end-user, and OEM
segments.

         The Company determined that an advertising campaign in OEM and truck
fleet-related trade magazines, combined with editorials, trade shows and other
methods to promote its products, was prudent in order to generate awareness and
help stimulate sales primarily with targeted end-users, OEMs, and on-highway
fleets.

         In 2004, the Company was able to streamline costs in the area of
advertising by utilizing the strategic alliance with Honeywell Consumer Product
Group (HCPG). HCPG is actively pursuing the on-highway truck market by placing
ads showing our puraDYN system co-labeled with FRAM. This allowed us to
concentrate on our targeted markets including the off-highway and power
generation markets.

         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. Monroe Truck Equipment (a major
General Motors Corporation modification center) has installed more than 1,100
puraDYN systems at the request of one of the largest fleets in the US. Work
continues to develop this strategic part of our business.

         In 2002, Honeywell Consumer Products Group ("Honeywell"), manufacturer
of FRAM(R) filters, announced a strategic alliance with Puradyn. Honeywell,
which also manufactures the Prestone(R), Autolite(R) and Holts(R) brands, began
offering our products co-branded as puraDYN and FRAM through its extensive North
American distribution network. In early 2003 Honeywell finalized and placed its
initial stocking order, and in line with our strategic alliance, we are able to
offer the full line of FRAM(R) filters to our distributors.

         In 2003 we were selected as a Strategic Supplier for one of North
America's larger equipment rental companies. Our progress continues to take time
to gain momentum in reaching this company's many branches.

         The Company continues to work with a marketing and public affairs
consultant to promote puraDYN to municipalities in Florida and other specified
states. Additionally, the Company again received approval in 2003 for Florida's
State Negotiated Agreement Price Schedule (SNAPS II) to allow easier marketing
of our system to Florida local and state government agencies at discounted
prices. The program was successful, however, the SNAPS II program was
discontinued in 2004 and replaced with a competitive procurement program,
MyFlorida Marketplace, in which we now participate.

         We have also entered into agreements with three outside consultants to
actively pursue federal contracts 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        Recent test results from the DOE, which show that the puraDYN
                  systems currently in evaluation have produced an estimated
                  savings of 80% during the first two years of its three-year
                  test to evaluate the benefits and potential savings of bypass
                  oil filtration.
         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.

         In order to more efficiently carry out the Company's investor relations
activities, we discontinued our relationship with an outside investor and public
relations firm in December 2002 and established an in-house investor relations
department in January 2003.

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.

                                       6
<PAGE>

         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
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.
In 2003, we conducted a record number of 80 evaluations, of which approximately
65 continued through 2004 and are still ongoing.

         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        A leading truck leasing Company

         o        An important OEM forklift company

         o        The U.S. Department of Energy

         o        The U.S. Military

         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 2004 and 2003, two and three customers together accounted for
approximately 37% and 45%, respectively, of the Company's consolidated net
sales. In 2004, there were two customers that individually accounted for greater
than 10% each of net sales, or approximately $523,000 and $397,000, while in
2003 three customers individually accounted for greater than 10% each of net
sales, or approximately $334,000, 300,000 and $221,000.

         In 2004 there were three customers whose trade receivable balances
equaled or exceeded 5% of total receivables, representing approximately 29%,
21%, 12% respectively, for a total of 62% 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.

                                       7
<PAGE>

         In 2004, sales to a customer with one of the nation's largest privately
held fleet of trucks and equipment, represented 21% of our consolidated net
sales. This represents a 9% increase from its percentage of consolidated net
sales in 2003. Sales in 2004 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 15% of our 2003 consolidated net sales and
16% of our 2004 consolidated net sales.

         In February 2003, Honeywell finalized and placed its initial stocking
order for the FRAM/puraDYN co-labeled product. In addition, we are now able to
offer the full line of FRAM(R) filters to our distributors.

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 42% and 41% of consolidated net
sales in 2004 and 2003, respectively. Sales have been adversely affected by the
weakened local economies of some of these nations and future sales to their
distributors may be adversely affected due to these continuing economic and/or
political problems, such as the war in Iraq and subsequent restoration, which
negatively affected sales in the Middle East.

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 2005, we successfully completed a surveillance audit
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(R) system has been shown to be an
effective means of extending engine oil change intervals without adversely
affecting engine wear or performance."

                                       8
<PAGE>

         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.

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

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

GOVERNMENTAL INFLUENCE
----------------------

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

         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 three individuals directly involved in product
engineering and development: a Product Engineer Manager, an Applications
Engineer and an Engineering Technician. . In addition, we employ the services of
two outside petrochemical consultants. Until August 2003, a Technical Consultant
(one of the original inventors of the product) was also available to us. 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. This required a
complete redesign of the existing product to make it easier to use by our
customers.

         In 2004 and 2003, we spent approximately $65,000 and $50,000,
respectively, on engineering research, the cost of which was not passed on to
our customers.

                                       9
<PAGE>

EMPLOYEES
---------

         At December 31, 2004, the Company had 34 employees, including 3 from
Puradyn Ltd., in the following areas:

         o        12 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        5 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.

         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 and are currently in the process of negotiating a new
lease and expect the lease terms to remain similar.

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.

                                       10
<PAGE>

         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 are now pending a rescheduling date.
The Company does not believe the likelihood of an unfavorable outcome is
probable.

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

         On December 16, 2004, the Company held its Annual Meeting of
Stockholders. At the meeting, each director received over 85% of the Common
Share votes. Stockholders voted in person or by proxy for the following
purposes:

         (a)      Stockholders voted to elect six directors, each to service for
                  a term of one year, as follows:

                      DIRECTOR                 FOR          WITHHELD AUTHORITY
                      --------                 ---          ------------------

                  Joseph V. Vittoria       15,193,234            120,590
                  Richard C. Ford          15,189,124            124,700
                  Kevin G. Kroger          15,193,234            124,590
                  Peter H. Stephaich       15,201,534            112,290
                  Ottavio Serena           15,202,734            111,090
                  Michael Castellano       15,160,621            153,203

         (b)      Stockholders voted to approve and ratify the appointment of
                  Ernst & Young, LLP, independent registered public accounting
                  firms, as the Company independent auditors for the year ending
                  December 31, 2004. 15,304,324 shares were voted in favor of
                  this proposal, 8,800 shares were voted against and there were
                  700 abstentions. As announced at the meeting, the Company made
                  a change in independent auditors on November 15, 2004 at the
                  discretion of the Board, dissolving its relationship with
                  Ernst & Young, LLP and hiring DaszkalBolton LLP to act as the
                  Company's new independent registered public accounting firm
                  for the year ending December 31, 2004. The change was made in
                  regard to cost savings.

                                     PART II
                                     -------

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

         As of December 14, 2004, there were approximately 287 stockholders of
record of the Company's stock. The closing bid price quoted on the American
Stock Exchange for the Company's Common Stock at March 31, 2005 was $0.99. The
Company currently trades under the symbol "PFT". The transfer agent for the
Company's common stock is Florida Atlantic Stock Transfer, Inc., 7130 Nob Hill
Road, Tamarac, Florida 33321.

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

         The following table sets forth for the period indicated, the high and
low sales prices for the quarterly periods in 2004 and 2003.

               QUARTER ENDED     2004 SALES PRICE        2003 SALES PRICE
                                -------------------    ------------------
                                 HIGH          LOW      HIGH         LOW

                                -------------------    ------------------
               March 31         $3.00         $1.91    $2.70        $1.40
               June 30          $2.22         $1.70    $2.70        $2.10
               September 30     $1.98         $1.10    $2.80        $1.80
               December 31      $1.39         $0.86    $2.35        $1.40

         As of March 31, 2005, the high sales price for the first quarter of
2005 was $1.24, while the low for the quarter was $0.86.

                                       11
<PAGE>

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

         Since 2001, the Company has redirected the focus of its sales strategy
from individual sales and distribution efforts to include the development of a
strong nationwide distribution network that will not only sell but also install
and service 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 educating the customer on the benefits of our system and 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        2001 approved by one of the largest private fleets in the U.S.
                  to install puraDYN on their new equipment, a program still
                  currently ongoing.

         o        2002 strategic alliance with Honeywell's Consumer Products
                  Group (Honeywell), the manufacturer of FRAM(R) oil filters,
                  under which the puraDYN system will be sold and co-branded
                  with the FRAM trademark name. The co-branded product will be
                  distributed through Honeywell's national distribution network
                  to offer a complete filtration system.

         o        2002 approval and purchase of the puraDYN system by a major
                  international OEM of medium-sized power generators.

         o        2003 selection as a Strategic Supplier for one of the larger
                  equipment rental companies in North America, which plans to
                  fully utilize the puraDYN system throughout its organization.
                  Although the system is fully supported at the customer's
                  corporate level and has been included in the 2004 budget, the
                  program is expected to take some time to gain momentum as all
                  branches become familiar enough with the benefits of the
                  puraDYN system to begin purchasing.

                                       12
<PAGE>

         o        2003 announcement by an OEM of custom-crafted emergency fire
                  and rescue response vehicles that they would be installing the
                  puraDYN system as standard equipment on its line of premium
                  chassis.

         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.

         o        2004 announcement that Miami-Dade County, Florida has again
                  specified the puraDYN system on new equipment purchases.

         o        2004 announcement that a Puradyn distributor in Miami-Dade
                  County was awarded a blanket open purchase order up to
                  $650,000, which would allow them to offer our puraDYN system
                  on various county equipment.

         o        2004 announcement of combined international expansion with the
                  introduction of two potential distributors in the bus and
                  construction markets in China and continued progress with our
                  distributor in Egypt, which included working with United
                  States Agency for International Development (US AID).

         We believe that industry acceptance resulting in sales will continue to
grow in 2005; 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 will
continue to be shortened as our products gain wider acceptance, support and
usage from well-known customers and OEMs. In 2003, the Company conducted a
record number of 80 evaluations, of which approximately 65 continued through
2004 and are still ongoing.

         Effective June 1, 2000, the Company formed a 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. The subsidiary was the
result of the dissolution of a joint venture (TF Purifiner, Ltd.) the Company
had with Centrax, Ltd. The results of Ltd. have been consolidated with the
Company since June 1, 2000.

         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 2004, total international
sales accounted for 42% 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.

                                       13
<PAGE>

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

Allowance for Doubtful Accounts

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

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

Estimation of Product Warranty Cost

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

                                       14
<PAGE>

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

         The following table sets forth (amounts in thousands) the Company's
operating information for the years ended December 31, 2004 and 2003:

                                                (IN THOUSANDS)
                                                               INCREASE
                                           2004       2003    (DECREASE)

         Net sales                       $ 2,472    $ 1,907      $565


         Operating costs and expenses:
           Cost of products sold           2,526      2,283       243
           Salaries and wages              1,662      1,728       (66)
           Selling and administrative      1,591      1,667       (76)
                                         -----------------------------
                                           5,779      5,678       101

         Loss from operations             (3,307)    (3,771)     (464)

         Other income (expense):
           Interest income                    53         51         2
           Interest expense                 (334)      (331)       (3)
                                         -----------------------------
         Total other expense                (281)      (280)       (1)

         Net loss                        $(3,588)   $(4,051)    $(463)
                                         =============================

Year Ended December 31, 2004 Compared to Year Ended December 31, 2003
---------------------------------------------------------------------

         Net Sales Net sales increased by approximately $565,000 from
approximately $1,907,000 in 2003 to approximately $2,472,000 in 2004. This
increase is attributable to the addition of several new domestic and
international distributors, as well as an increase in sales to one of the
Company's largest customers, whose sales in 2004 increased approximately 132%
over 2003. Significant customers in 2004 included one of the largest privately
owned fleets in the US and one of the top three worldwide OEMs of mid-range
generators for industrial use. These two customers purchased approximately
$523,000 and $397,000 respectively, of products from the Company and accounted
for approximately 21% and 16% (for a total of 37%) of the Company's 2004
consolidated net sales. Although the Company anticipates increased sales to
these customers as well as other new and existing customers in 2005, there can
be no assurance that the sales volume generated by these customers will increase
or remain at the same level in 2005.

         Cost of Sales Cost of sales increased by approximately $243,000 from
approximately $2,283,000 in 2003 to approximately $2,526,000 in 2004. Cost of
sales increased 10% primarily due to the 30% increase in net sales. Cost of
sales did not increase proportionately to net sales due to the increased
utilization of overhead and improvements in raw material sourcing.

         Salaries and Wages Salaries and wages decreased approximately $66,000
due to personnel changes in the sales and administrative staff, which resulted
in a reduction of the sales force for a portion of 2004, as well as a reduction
in over-time costs associated with the manufacturing department.

         Selling and Administrative Expenses Selling and administrative expenses
decreased by approximately $76,000 from approximately $1,667,000 in 2003 to
approximately $1,591,000 in 2004.

         Interest Expense Interest expense increased by approximately $3,000
from $331,000 in 2003 to $334,000 in 2004. The Company pays interest monthly on
the note payable to stockholder at the prime rate, which was 5.25% as of
December 31, 2004.

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

         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. 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 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.

                                       15
<PAGE>

         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 shareholders.

         As of December 31, 2004, the Company had cash and cash equivalents of
approximately $257,000. For the year ended December 31, 2004, net cash used in
operating activities was approximately $3,453,000, which primarily resulted from
the net loss of approximately $3,588,000, combined with changes in working
capital amounts. Net cash used in investing activities was approximately
$133,000 for purchases of property and equipment. Net cash provided by financing
activities was approximately $2,485,000 for the year, primarily due to proceeds
from shareholder notes of approximately $500,000 and $1,979,000 of funds from
the sale of common stock to a private placement investor.

         On March 28, 2002, the Company executed a binding agreement with one of
its stockholders, who is also a Board Member, to fund up to $2.5 million through
March 31, 2003. Under the terms of the agreement, the Company could draw amounts
as needed in multiples of $500,000 to fund operations subject to Board of
Director approval. Amounts drawn bear interest at the prime rate per annum
(5.25% at December 31, 2004) payable monthly and were to become due and payable
on December 31, 2003, or upon a change in control of the Company or consummation
of any other financing over $3 million. In March 2003, the payback date was
extended to December 31, 2004. In consideration for the stockholder entering
into this agreement, the Company granted the stockholder 100,000 common stock
purchase warrants at an exercise price equal to the closing market price of the
Company's stock on the date of grant. As of December 31, 2004, the Company had
drawn the entire $2.5 million of the available funds.

         On March 14, 2003, the Company executed a second binding agreement with
the same stockholder to fund up to an additional $3.5 million through December
31, 2003. Under the terms of the second agreement, the Company can draw amounts
as needed in multiples of $500,000 to fund operations subject to Board of
Director approval. Amounts drawn bear interest at the prime rate per annum
(5.25% at December 31, 2004) payable monthly and became due and payable on
December 31, 2004, or upon a change in control of the Company or consummation of
any other financing over $7 million. In consideration, the Company granted the
stockholder 125,000 common stock purchase warrants at an exercise price equal to
the closing market price of the Company's stock on the date of grant. As of
December 31, 2004, the Company had drawn $2.5 million of the available funds.
Both of the lines allow for discretionary principal payments, which add to the
availability of additional funds that the Company may draw.

         On February 2, 2004, the Company granted this same stockholder an
additional 150,000 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
consideration for extending the payback dates of the March 28, 2002 and March
14, 2003 agreements from December 31, 2004 to December 31, 2005; for waiving the
funding requirement mandating payback terms until such time as the Company has
raised an additional $7,000,000 over the amount raised during the Company's 2004
private placement offering, the Company is operating within sufficient cash flow
parameters, as defined, or until the Company is sold; and for his involvement in
equity financing in 2003 and 2004, to date.

         On December 10, 2003, the Company completed the sale of 750,000 shares
of its common stock through its private placement to a third party investor,
initiated in November 2003, with gross proceeds of approximately $1,500,000, all
of which will be used for capital equipment purchases, marketing, working
capital and general corporate purposes. In March 2004, the same 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, 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.

         In April 2005, the payback dates of the March 28, 2002 and March 14,
2003 agreements were extended from December 31, 2005 to December 31, 2006. As
consideration of this extension, this shareholder 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.

         Furthermore, on December 18, 2003, the Company entered into an
agreement with an investment-banking firm in Boca Raton, Florida to assist in
raising approximately $3.0 million to $5.0 million in equity capital. The
Company agreed to pay a fee of 7% of any gross proceeds received by the Company
as a result of this firm's services, as well as all reasonable out-of-pocket
fees, expenses and costs in connection with the performance of its services
under the agreement. The agreement excluded the above capital raised in December
2003 and March 2004. On October 22, 2004, the agreement was mutually terminated.
No equity capital was raised pursuant to this agreement.

         On October 26, 2004, the Company engaged Imperial Capital, LLC ("IC")
as an exclusive financial advisor to the Company. IC will 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.

                                       16
<PAGE>

         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. The agreement may be terminated by either party upon
30-day written notice.

         At December 31, 2004, the Company had working capital of approximately
$1,743,000 and its current ratio (current assets to current liabilities) was
3.33 to 1, as compared with working capital of approximately $2,406,000 and a
current ratio of 4.73 to 1 at December 31, 2003. The Company anticipates
increased cash flows from 2005 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 2005. 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.

         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.

                                       17
<PAGE>

         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..................31-32

Consolidated Financial Statements:

     Consolidated Balance Sheet - December 31, 2004.........................  33

     Consolidated Statements of Operations -
         Years ended December 31, 2004 and 2003.............................  34

     Consolidated Statements of Changes in Stockholders' Equity (Deficit)  -
         Years ended December 31, 2004 and 2003.............................  35

     Consolidated Statements of Cash Flows -
         Years ended December 31, 2004 and 2003.............................  36

     Notes to Consolidated Financial Statements.............................  37



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

         (a)      On November 15, 2004, Ernst & Young LLP was dismissed as the
                  independent registered public accounting firm for the Company.
                  Ernst & Young had been the independent registered public
                  accounting firm for, and audited the financial statements of,
                  the Company.

                  The reports of Ernst & Young on the financial statements of
                  the Company for the past two fiscal years contained no adverse
                  opinion or disclaimer of opinion, and were not qualified or
                  modified as to uncertainty, audit scope or accounting
                  principles.

                  The decision to change accountants was approved by the Audit
                  Committee of the Board of Directors.

                  In connection with the audits for the two most recent fiscal
                  years and in connection with Ernst & Young's review of the
                  subsequent interim period preceding dismissal on November 15,
                  2004, there have been no disagreements between the Company and
                  Ernst & Young on any matter of accounting principles or
                  practices, financial statement disclosure, or auditing scope
                  or procedure, which, if not resolved to the satisfaction of
                  Ernst & Young, would have caused Ernst & Young, to make
                  reference thereto in their report on the Company's financial
                  statements for these fiscal years. During the two most recent
                  fiscal years and prior to the date of November 15, 2004, the
                  Company had no reportable events (as defined in Item 304(a)
                  (1) of Regulation S-B).

                                       18
<PAGE>

         (b)      DaszkalBolton LLP ("DaszkalBolton") by letter dated November
                  16, 2004, was engaged as the independent registered public
                  accounting firm for the Company.

                  The Company has not consulted with DaszkalBolton regarding the
                  application of accounting principles to any contemplated or
                  completed transactions nor the type of audit opinion that
                  might be rendered on the Company's financial statements, and
                  neither written nor oral advice was provided that would be an
                  important factor considered by the Company in reaching a
                  decision as to an accounting, auditing or financial reporting
                  issue.

                  There have been no disagreements between the Company and the
                  former certifying accountant, Ernst & Young, for which
                  DaszkalBolton was consulted upon.

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     69      Chairman of the Board of Directors
Richard C. Ford        61      Chief Executive Officer and Director
Kevin G. Kroger        53      President, Chief Operating Officer and Director
Peter H. Stephaich     49      Director
Ottavio Serena         52      Director
Michael Castellano     64      Director
Alan J. Sandler        66      Vice President, Chief Administrative Officer
                                and Secretary
Cindy Lea Gimler       38      Chief Financial Officer

                                       19
<PAGE>

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
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.

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

OTTAVIO SERENA was appointed to the Board of Directors at its meeting on June
12, 2000 and is a member of our Compensation Committee. Mr. Serena is a
principal of The Lynx Partners, a private equity consulting firm. He is also
President of The Explorer and Fiber Group, and is Managing Director of
Lincolnshire Management, Inc., a publicly traded financial Company. From 1993 to
1999, Mr. Serena was with Citicorp Venture Capital, a leveraged buyout company.
Mr. Serena co-founded and was managing director of The Lynx Partners from 1987
to 1993.

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

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.

                                       20
<PAGE>

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

D. Wayne Clifton       66   Director of Sales and Marketing
Joseph J. Gaynor, Jr.  54   Director of Manufacturing and Operations
Kevin Davies           46   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 2004, Puradyn's board of directors met on ten occasions. Puradyn has an
audit committee and a compensation committee.

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

         During 2004, the audit committee of the board of directors was composed
of two independent directors. It operates under a written charter adopted by the
board of directors. The committee members are Michael Castellano (Chairperson)
and Peter H. Stephaich. On December 13, 2002, Joseph V. Vittoria, then a member
of the audit committee, resigned so that the audit committee is comprised of
only independent directors.

         The Board has determined that Mr. Castellano 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
American Stock Exchange listing standards. The audit committee met four times in
2004.

         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.

                                       21
<PAGE>

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

         In reliance on the reviews and discussions referred to above, the
committee recommended to the board of directors, and the board has approved,
that the audited consolidated financial statements be included in Puradyn's Form
10-KSB for the year ended December 31, 2004, for filing with the Securities and
Exchange Commission.

Submitted by the audit committee of the Board of Directors:

                  Michael Castellano            Peter H. Stephaich

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

         The compensation committee provides overall guidance for officer
compensation programs, including salaries and other forms of compensation
including all employee stock option grants and warrant grants to non-employees.
The compensation committee consists of three independent directors, Peter
Stephaich (Chairperson), Ottavio Serena and Michael Castellano. 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, 2004.

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.

                                       22
<PAGE>

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

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

         The following table shows, for the three year period ended December 31,
2004, 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

---------------------------------------------------------------------------------------------------------------
                                            Annual Compensation                   Long Term
                                                                                Compensation
                                                                                  Awards
---------------------------------------------------------------------------------------------------------------
       Name and                                               Other Annual       Securities         All Other
                                                              Compensation       Underlying        Compensation
 Principal Position     Year     Salary($)     Bonus($)         ($)(1)           Options (#)         ($)(3)
---------------------------------------------------------------------------------------------------------------
<S>                     <C>      <C>         <C>               <C>                               <C>
 Richard C. Ford        2004     $ 208,000   $         -       $     11,000                 -    $           -
 CEO and Director       2003       208,000             -             13,000                 -                -
                        2002       208,000             -             12,000                 -                -

 Kevin G. Kroger        2004       166,000             -             17,880                 -                -
 President, COO and     2003       166,000             -             21,833                 -            2,372
 Director               2002       166,000        80,000 (2)         18,482           100,000(2)         2,144

 Alan Sandler           2004       100,000             -                  -                 -                -
 Vice President,        2003       100,000             -                  -                 -                -
 Secretary and CAO      2002       100,000             -                  -                 -                -
---------------------------------------------------------------------------------------------------------------
</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)      In January 2003, in lieu of the contractual cash bonus amount of
         $80,000, 100,000 ISO stock options were granted to Mr. Kroger.

(3)      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.

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

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

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

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

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

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

                                       23
<PAGE>

         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, 2004, under the Directors' Plan, options to purchase
342,500 shares of common stock were outstanding. As of December 31, 2004, 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 1,218,750 shares of common stock were outstanding and non-qualified
options to purchase 22,000 shares of common stock were outstanding.

                                       24
<PAGE>

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, 2004 to each person named in the Summary Compensation Table and the
unexercised options held as of the end of the 2004 fiscal year.

 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
                           Acquired On      Value               Options/SARs at FY-End(#)               at FY-End($)(1)
                          Exercise (#)    Realized ($)         Exercisable/ Unexercisable         Exercisable/ Unexercisable
-----------------------------------------------------------------------------------------------------------------------------
<S>                             <C>            <C>            <C>                    <C>           <C>                      <C>
Richard C. Ford                 -              -              375,000                 -            $ 208,500                -
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 $1.20, the closing price reported on
       December 31, 2004.

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

         The following table sets forth certain information regarding the
Company's common stock beneficially owned on March 31, 2005 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 March 31, 2005, there were 17,455,434
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.

<TABLE>
<CAPTION>
                                                                                        PERCENT OF
                                                                                       COMMON STOCK
                                                                     BENEFICIALLY      BENEFICIALLY
               NAME AND ADDRESS OR IDENTITY OF GROUP                  OWNERSHIP           OWNED
            ----------------------------------------------------------------------------------------
            <S>                                                        <C>                 <C>
            Quantum Industrial Partners LDC ("QIP") (1)                4,570,000           22.5%
            Glenhill Capital Management, LP (8)                        2,251,567           11.1%
            Richard C. Ford (2)                                        1,933,985            9.5%
            Joseph V. Vittoria (5)                                     1,791,870            8.8%

            Kevin G. Kroger (3)                                          420,000            2.1%
            Alan J. Sandler (4)                                          315,992            1.6%
            Ottavio Serena (6)                                           132,500              -*
            Peter Stephaich (6)                                          130,000              -*
            Michael Castellano (7)                                        39,000              -*
                                                                       -----------------------------
            All Officers and Directors as a group (7 persons)          4,763,347           23.5%
</TABLE>

*        Less than 1%

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

                                       25
<PAGE>


(2)      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
         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.

(3)      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 and options to purchase 100,000 shares at $1.70
         through January 10, 2013.

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

(5)      Mr. Vittoria serves as Chairman of the Board of Directors. Includes
         options to purchase 205,000 shares of common stock at $5.88 through
         October 23, 2005 and three 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, and 150,000 shares of common
         stock at $2.00 through February 2, 2009, respectively.

(6)      Mr. Stephaich and Mr. Serena serve as Directors. Includes options to
         purchase 10,000 and 7,500, shares of common stock, respectively, at
         $5.88 through October 23, 2005, 10,000 and 7,500 shares of common
         stock, respectively, at $2.60 through October 23, 2006, and 10,000 and
         7,500 shares of common stock, respectively, at $1.06 through December
         16, 2009. For Mr. Serena, also includes a warrant to purchase 100,000
         shares of common stock at $1.00 through December 20, 2005.

(7)      Mr. Castellano serves as a Director. Includes options to purchase 7,500
         shares of common stock at $6.50 through January 24, 2006, 10,000 shares
         of common stock at $2.60 through October 23, 2006, 2,500 shares of
         common stock at $4.81 through May 16, 2006, 10,000 shares of common
         stock at $2.46 through October 9, 2007, and 10,000 shares of common
         stock at $1.06 through December 16, 2009.

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

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.

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

         On March 28, 2002, the Company executed a binding agreement with one of
its stockholders, who is also a Board Member, to fund up to $2.5 million through
March 31, 2003. Under the terms of the agreement, the Company could draw amounts
as needed in multiples of $500,000 to fund operations subject to Board of
Director approval. Amounts drawn bear interest at the prime rate per annum
(5.25% at December 31, 2004) payable monthly and were to become due and payable
on December 31, 2004, or upon a change in control of the Company or consummation
of any other financing over $3 million. In March 2003, the payback date was
extended to December 31, 2004. In consideration for the stockholder entering
into this agreement, the Company granted the stockholder 100,000 common stock
purchase warrants at an exercise price equal to the closing market price of the
Company's stock on the date of grant. As of December 31, 2004, the Company had
drawn the entire $2.5 million of the available funds.

         On March 14, 2003, the Company executed a second binding agreement with
the same stockholder to fund up to an additional $3.5 million through December
31, 2004. Under the terms of the second agreement, the Company can draw amounts
as needed in multiples of $500,000 to fund operations subject to Board of
Director approval. Amounts drawn bear interest at the prime rate per annum
(5.25% at December 31, 2004) payable monthly and 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 consideration, the Company granted the
stockholder 125,000 common stock purchase warrants at an exercise price equal to
the closing market price of the Company's stock on the date of grant. As of
December 31, 2004, the Company had drawn $3.0 million of the available funds.

                                       26
<PAGE>

         On February 2, 2004, the Company granted this same stockholder an
additional 150,000 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
consideration for extending the expiration dates of the March 28, 2002 and March
14, 2003 agreements and amendments thereto, from December 31, 2004 to December
31, 2005; for waiving the funding requirement mandating payback terms until such
time as the Company has raised an additional $7,000,000 over the amount raised
during the Company's current 2004 private placement offering, the Company is
operating within sufficient cash flow parameters, as defined, or until the
Company is sold; and for his involvement in equity financing in 2003 and 2004.

       In April 2005, the payback dates of the March 28, 2002 and March 14, 2003
agreements were extended from December 31, 2005 to December 31, 2006. As
consideration of this extension, this shareholder 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.

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)
4.1         Amendment No. 1 to Registration Rights Agreement(3)
10.1        1996 Stock Option Plan(1)
10.2        1999 Stock Option Plan(4)
10.3        2000 Non-Employee Directors' Plan(5)
10.4        2002 Audit Committee Charter(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)
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.

                                       27
<PAGE>

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

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

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

(6)      Filed herewith.

(7)      Incorporated by reference from the Exhibit to the company's Form 8-K,
         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.

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, 2004 and December 31, 2003 by DaszkalBolton and
Ernst & Young respectively, the Company's principal accountants:

                                       2004           2003
                                    ---------      ----------
           Audit Fees               $  89,368      $  111,221
           Audit-Related Fees          58,962          39,384
           Tax Fees                        --              --
           All Other Fees               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, 2004 and 2003. Before Ernst & Young LLP
was engaged by the Company to render audit or non-audit services, the engagement
was approved by the Company's audit committee.

         On November 15, Ernst & Young LLP was dismissed as the independent
registered public accounting firm for, and audited the financial statements of,
the Company. DaszkalBolton LLP, by letter dated November 16, 2004, was engaged
as the independent registered public accounting firm for Puradyn. Both
decisions, to dismiss Ernst & Young LLP and retain the services of DaszkalBolton
LLP, were approved by the Company's audit committee.

                                       28
<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 15, 2005                    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 15, 2005


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/ Michael Castellano
       Michael Castellano, Director

By:    /s/ Peter Stephaich
       Peter Stephaich, Director

By:    /s/ Ottavio Serena
       Ottavio Serena, Director

                                       29

PAGE>

                    PURADYN FILTER TECHNOLOGIES INCORPORATED

                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

                                                                         Page
                                                                         -----
Reports of Independent Registered Public Accounting Firms............    31-32

Consolidated Financial Statements:

     Consolidated Balance Sheet - December 31, 2004..................    33

     Consolidated Statements of Operations -
         Years ended December 31, 2004 and 2003......................    34

     Consolidated Statements of Changes in Stockholders' Deficit  -
         Years ended December 31, 2004 and 2003......................    35

     Consolidated Statements of Cash Flows -
         Years ended December 31, 2004 and 2003......................    36

     Notes to Consolidated Financial Statements......................    37

                                       30
<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, 2004, and the
related consolidated statements of operations, changes in stockholders' equity
(deficit) and cash flows for the year then ended. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.

         We conducted our audit 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 enganged to perform, an
audit of its internal control over financial reporting. Our audit included
consideration of internal control over financial reporting as a basis for
designing audit procedures that are appropriate in the circumstances, but not
for the purpose of expressing an opinion on the effectiveness of the Company's
internal control over financial reporting. Accordingly, we express no such
opinion. 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, 2004, and the results of their
operations and their cash flows for the year 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 shareholder. 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 16, 2005 except for Note 16, as to which the date is April 15, 2005

                                       31
<PAGE>

             Report of Independent Registered Public Accounting Firm

Board of Directors and Stockholders
Puradyn Filter Technologies Incorporated

         We have audited the accompanying consolidated statements of operations,
changes in stockholders' equity (deficit) and cash flows of Puradyn Filter
Technologies Incorporated (the Company) for the year ended December 31, 2003.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audit.

         We conducted our audit in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for our opinion.

         In our opinion, the financial statements referred to above present
fairly, in all material respects, the consolidated results of operations and
cash flows of Puradyn Filter Technologies Incorporated for the year ended
December 31, 2003, in conformity with accounting principles generally accepted
in the United States.

 /s/ Ernst & Young LLP
Certified Public Accountants

West Palm Beach, Florida
February 24, 2004, except for the matters discussed in the last
paragraph of Note 11 and the third paragraph of Note 12, as to which
the date is March 12, 2004.

                                       32
<PAGE>
                    Puradyn Filter Technologies Incorporated

                           Consolidated Balance Sheet

                                December 31, 2004

Assets
Current assets:

     Cash and cash equivalents                                    $    257,210
     Accounts receivable, net of allowance for
       uncollectible accounts of $35,376                               490,650
     Inventories                                                     1,270,641
     Prepaid expenses and other current assets                         411,624
       Deferred financing costs                                        135,845
                                                                  ------------
Total current assets                                                 2,565,970

Property and equipment, net                                            547,819
Other noncurrent assets                                                 40,930
                                                                  ------------
Total assets                                                      $  3,154,719
                                                                  ============

Liabilities and stockholders' deficit Current liabilities:

     Accounts payable                                             $    220,235
     Accrued liabilities                                               502,411
     Current portion of capital lease obligation                         4,520
     Deferred revenues                                                  42,391
                                                                  ------------
Total current liabilities                                              769,557

Capital lease obligation, less current portion                          10,620

Notes Payable - stockholder                                          5,501,900

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
         - 17,452,164                                                   17,452
     Additional paid-in capital                                     35,516,248
     Notes receivable from stockholders                             (1,040,524)
     Accumulated deficit                                           (37,539,854)
     Accumulated other comprehensive loss                              (80,680)
                                                                  ------------
Total stockholders' deficit                                         (3,127,358)
                                                                  ------------
Total liabilities and stockholders' deficit                       $  3,154,719
                                                                  ============

See accompanying notes to consolidated financial statements.

                                       33
<PAGE>

                    Puradyn Filter Technologies Incorporated

                      Consolidated Statements of Operations


                                                      Year Ended December 31
                                                        2004           2003
                                                   ----------------------------

Net sales                                          $  2,472,059    $  1,906,517

Costs and expenses:
     Cost of products sold                            2,525,981       2,282,450
     Salaries and wages                               1,661,923       1,728,358
     Selling and administrative                       1,591,100       1,667,291
                                                   ------------    ------------
                                                      5,779,004       5,678,099
                                                   ------------    ------------
Loss from operations                                 (3,306,945)     (3,771,582)

Other (expense) income:
        Interest income                                  53,560          51,344
        Interest expense                               (334,383)       (330,521)
                                                   ------------    ------------
Total other expense                                    (280,823)       (279,177)
                                                   ------------    ------------

Net loss                                           $ (3,587,768)   $ (4,050,759)
                                                   ============    ============

Basic and diluted loss per common share            $      (0.21)   $      (0.26)
                                                   ============    ============

Basic and diluted weighted average common shares
         Outstanding                                 17,278,448      15,726,140
                                                   ============    ============

See accompanying notes to consolidated financial statements.

                                       34
<PAGE>


                    Puradyn Filter Technologies Incorporated

      Consolidated Statements of Changes in Stockholders' Equity (Deficit)

<TABLE>
<CAPTION>
                                                                        Additional           Notes
                                                Common Stock             Paid-in           Receivable
                                             Shares       Amount         Capital       From Stockholders

<S>                                         <C>          <C>          <C>                <C>
Balance at December 31, 2002                15,648,389   $15,648      $   31,488,028     $  (875,256)
Foreign currency translation adjustment             --        --                  --              --

Net loss                                            --        --                  --              --

Total comprehensive loss                            --        --                  --              --
Exercise of stock options                       43,775        44              42,622              --
Issuance of common stock in
  private placement, net                       750,000       750           1,465,500              --
Issuance of warrants to stockholder                 --        --             212,500              --
Issuance of stock options in lieu
  of Bonus                                          --        --              80,000              --
Reclassification of interest receivable
  related to notes  receivable from
  stockholders                                      --        --                  --        (117,070)
Compensation expense associated with
  warrant modification                              --        --               2,000              --
Compensation expense associated with
  outstanding variable option awards                --        --              19,057              --
                                         ---------------------------------------------------------------
Balance at December 31, 2003                16,442,164    16,442      $   33,309,707     $  (992,326)

Foreign currency translation adjustment             --        --                  --              --
Net loss                                            --        --                  --              --

Total comprehensive loss                            --        --                  --              --

Exercise of stock options                       10,000        10               9,990              --
Issuance of common stock in private
  placement, net of issuance costs           1,000,000     1,000           1,978,359              --
Issuance of warrants to stockholder                 --        --             112,500              --
Interest receivable related to notes
  receivable from stockholders                      --        --                  --         (48,198)
Compensation expense associated with
  warrant modification                              --        --             282,750              --
Compensation expense associated with
  outstanding variable option awards                --        --            (177,058)             --
                                         ---------------------------------------------------------------
Balance at December 31, 2004                17,452,164   $17,452      $   35,516,248     $ (1,040,524)
                                         ===============================================================


[RESTUB]
<CAPTION>


                                                              Accumulated
                                                                Other                Total
                                           Accumulated       Comprehensive      Stockholders'
                                             Deficit         Income (Loss)     Equity (Deficit)

<S>                                       <C>                     <C>             <C>
Balance at December 31, 2002              $(29,901,327)           7,969           $   735,062
Foreign currency translation adjustment             --          (51,791)              (51,791)

Net loss                                    (4,050,759)              --            (4,050,759)
                                                                            --------------------
Total comprehensive loss                            --               --            (4,102,550)
Exercise of stock options                           --               --                42,666
Issuance of common stock in
  private placement, net                            --               --             1,466,250
Issuance of warrants to stockholder                 --               --               212,500
Issuance of stock options in lieu
  of Bonus                                          --               --                80,000
Reclassification of interest receivable
  related to notes  receivable from
  stockholders                                      --               --              (117,070)
Compensation expense associated with
  warrant modification                              --               --                 2,000
Compensation expense associated with
  outstanding variable option awards                --               --                19,057
                                         ------------------------------------------------------
Balance at December 31, 2003              $(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
Issuance of common stock in private
  placement, net of issuance costs                  --               --             1,979,359
Issuance of warrants to stockholder                 --               --               112,500
Interest receivable related to notes
  receivable from stockholders                      --               --               (48,198)
Compensation expense associated with
  warrant modification                              --               --               282,750
Compensation expense associated with
  outstanding variable option awards                --               --              (177,058)
                                         ------------------------------------------------------
Balance at December 31, 2004             $ (37,539,854)        $(80,680)          $(3,127,358)
                                         ======================================================
</TABLE>

                                       35
<PAGE>

                    Puradyn Filter Technologies Incorporated

                      Consolidated Statements of Cash Flows


<TABLE>
<CAPTION>
                                                                  YEAR ENDED DECEMBER 31
                                                                    2004          2003
                                                               ---------------------------

<S>                                                            <C>            <C>
OPERATING ACTIVITIES
Net loss                                                       $(3,587,768)   $(4,050,759)
Adjustments to reconcile net loss to net cash
  used in operating activities:
     Depreciation and amortization                                 244,248        237,491
     Provision for bad debts                                         3,884         18,184
     Amortization of deferred financing costs
       included in interest expense                                158,422        173,967
     Interest receivable from shareholders' notes                  (48,198)       (48,067)
     Loss on disposal of property and equipment                         --          2,280
     Compensation expense on stock-based arrangements
       with employees and vendors                                  105,692         21,057
     Changes in operating assets and liabilities:
       Accounts receivable                                        (269,979)       151,880
       Inventories                                                 (68,141)       (39,851)
       Prepaid expenses and other current assets                  (182,718)         1,444
       Other noncurrent assets                                      66,667         95,675
       Accounts payable                                            125,095       (168,324)
       Accrued liabilities                                          (6,410)        88,176
       Deferred revenues                                             5,930        (69,535)
       Other noncurrent liabilities                                     --           (263)
                                                               -----------    -----------
Net cash used in operating activities                           (3,453,276)    (3,586,645)

INVESTING ACTIVITIES
Purchases of property and equipment                               (132,782)      (138,355)
                                                               -----------    -----------
Net cash used in investing activities                             (132,782)      (138,355)

FINANCING ACTIVITIES
Proceeds from sale of common stock, net of issuance costs        1,979,359      1,500,000
Proceeds from exercise of stock options                             10,000         42,666
Proceeds from notes payable to stockholder                       2,500,000      3,000,000
Payment of notes payable to stockholder                         (2,000,000)            --
Proceeds from short term loan payable to officer                        --        100,000
Payment of short term loan payable to officer                           --       (100,000)
Payment of capital lease obligations                                (4,063)        (4,069)
                                                               -----------    -----------
Net cash provided by financing activities                        2,485,296      4,538,597
Effect of exchange rate changes on cash and cash equivalents       (36,858)       (51,791)
                                                               -----------    -----------
Net (decrease) increase in cash and cash equivalents            (1,137,620)       761,806
Cash and cash equivalents at beginning of period                 1,394,830        633,024
                                                               -----------    -----------
Cash and cash equivalents at end of period                     $   257,210    $ 1,394,830
                                                               ===========    ===========

SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for interest                                         $   195,129    $   147,721
                                                               ===========    ===========
NONCASH INVESTING AND FINANCING ACTIVITIES:
Office equipment acquired under capital lease obligation       $        --    $    19,203
                                                               ===========    ===========
Common stock options issued in lieu of officer cash bonus      $        --    $    80,000
                                                               ===========    ===========
Warrants issued for deferred financing costs                   $   112,500    $   212,500
                                                               ===========    ===========
</TABLE>

See accompanying notes to consolidated financial statements.

                                       36
<PAGE>

                    Puradyn Filter Technologies Incorporated

                   Notes to Consolidated Financial Statements

                                December 31, 2004


1. SIGNIFICANT ACCOUNTING POLICIES

Organization

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

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

New Accounting Pronouncements

In 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. The
Company has not yet determined the method of adoption or the effect of adopting
SFAS No. 123R.

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. The
adoption of the new interpretation did not have an effect on the Company's
financial position or the results of its operations.

In January 2003, the FASB issued Interpretation No. 46, Consolidation of
Variable Interest Entities - an Interpretation of ARB No. 51 (FIN 46), which
addresses consolidation of variable interest entities. FIN 46 expands the
criteria for consideration in determining whether a variable interest entity
should be consolidated by a business entity, and requires existing
unconsolidated variable interest entities (which include, but are not limited
to, Special Purpose Entities, or SPEs) to be consolidated by their primary
beneficiaries if the entities do not effectively disperse risks among parties
involved. This interpretation applies immediately to variable interest entities
created after January 31, 2003, and to variable interest entities in which an
enterprise obtains an interest after that date. Originally, FIN 46 applied to
the first interim period beginning after June 15, 2003, to variable interest
entities in which an enterprise holds a variable interest that it acquired
before February 1, 2003. However, in December 2003, the FASB issued FASB Staff
Position No. FIN 46-e, Effective Date of FASB Interpretation No. 46,
Consolidation of Variable Interest Held by a Public Entity (FSP 46-e) that
delayed the implementation date for the Company to the first interim or annual
period ending after December 15, 2004. The Company does not anticipate that the
adoption of the new interpretation will have an effect on the Company's
financial position or the results of its operations.

                                       37
<PAGE>

In November 2002, the Emerging Issues Task Force (EITF) reached a consensus on
EITF Issue No. 00-21, Revenue Arrangements with Multiple Deliverables (EITF
00-21). EITF 00-21 addresses certain aspects of the accounting by a company for
arrangements under which it will perform multiple revenue-generating activities.
In applying EITF 00-21, generally, separate contracts with the same customer
that are entered into at or near the same time are presumed to have been
negotiated as a package and should, therefore, be evaluated as a single
contractual arrangement. It also addresses how contract consideration should be
measured and allocated to the separate deliverables in the arrangement. This
pronouncement is applicable to revenue arrangements entered into beginning in
2004. The adoption of the new pronouncement did not have an 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, 2004
and December 31, 2003, 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, 2004
because of their short-term natures.

Accounts Receivable

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

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

Inventories

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

                                       38
<PAGE>

Deferred Financing Costs

The Company capitalizes financing costs and amortizes them using the
straight-line method, which approximates the effective interest method over the
term of the related debt. Amortization of deferred financing costs is included
in interest expense and totaled $139,672 and $173,697 for the years ended
December 31, 2004 and 2003, 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 payback date of December 31, 2004. The
$214,400 of deferred financing costs is being amortized over the payback 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 payback period. On February 2, 2004 the payback
period for both commitments were extended to December 31, 2005 (see Note 2). On
April 13, 2005 the pay back period for both commitments were further extended to
December 31, 2006. Accumulated amortization of deferred financing costs as of
December 31, 2004 and 2003 was $490,305 and $350,633, respectively.

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, 2004:

            Balance as of December 31, 2003                      $  42,573
            Less: Payments made                                    (38,109)
                     Change in prior period estimate                (4,273)
                  Add: Provision for current period warranties      44,012
                                                                 ---------
                  Balance as of December 31, 2004                $  44,203
                                                                 =========

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.

                                       39
<PAGE>

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, 2004 and 2003 is not shown net of taxes because the Company's
deferred tax asset has been fully offset by a valuation allowance.

Advertising Costs

Advertising costs are expensed as incurred. During the years ended December 31,
2004 and 2003, advertising costs incurred by the Company totaled approximately
$44,000 and $106,000, 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, 2004 and 2003, engineering and development costs incurred by
the Company totaled approximately $65,000 and $50,000, 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 2004 and 2003 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, 2004 and 2003, the Company recorded
a foreign currency exchange rate gain of approximately $43,000 and $52,000,
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
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.

                                       40
<PAGE>

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

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:

                                               Year Ended December 31
                                               2004               2003
                                       -----------------------------------
Net loss as reported                   $    (3,587,768)   $    (4,050,759)

Stock-based employee compensation
  cost (intrinsic value method)                     --                 --

Fair value method stock option expense        (602,182)        (1,156,992)
                                         -------------     --------------
Pro forma net loss                       $                 $
                                            (4,189,950)        (5,207,751)
                                         =============     ==============
Loss per common share:
  Basic and diluted loss as reported             (0.21)             (0.26)
  Basic and diluted loss pro forma               (0.24)             (0.33)
Weighted average fair value per option
   granted during the period(1)          $        1.13     $         1.63
Assumptions:
   Average risk free interest rate                3.10%              2.19%
   Average volatility factor                     1.014              1.210
   Expected dividend yield                           0%                 0%
   Expected life (in years)                       5.00               4.64

(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, 2004,
the Company had a cash balance of $45,560 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 three customers at December 31, 2004 whose trade receivable
balances each represented approximately 29%, 21%, and 12% for a total of 62% of
total accounts receivable. The loss of business from one or a combination of the
Company's significant customers, or an unexpected deterioration in their
financial condition, could adversely affect the Company's operations.

Basic and Diluted Loss Per Share

The Company follows SFAS No. 128, Earnings Per Share (SFAS 128), which requires
a dual presentation of basic and diluted earnings per share. However, because of
the Company's net losses, the effects of stock options and warrants would be
anti-dilutive and, accordingly, are excluded from the computation of earnings
per share. The number of such shares excluded from the computations of diluted
loss per share totaled 2,901,070 in 2004 and 2,763,570 in 2003. 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.

                                       41
<PAGE>

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 auditor DaszkalBolton 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 shareholders. Cost reductions have already
been implemented by the Company, including acquiring alternative suppliers for
raw materials, and it expects to see results from these reductions, as well as
other cost reduction plans through 2005. Additionally, the Company is reviewing
cost of material increases, which are expected to be passed through to its
customers as price increases.

The Company has sustained losses since inception in 1987 and used net cash in
operations of approximately $3,453,000 and $3,587,000 during the years ended
December 31, 2004 and 2003, 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 March 28, 2002 and March 14, 2003, respectively, the Company executed a
binding agreement with one of its stockholders, who is also a Board Member, to
fund up to $2.5 million through March 31, 2003 and an additional $3.5 million
through December 31, 2003. Under the terms of the agreements, the Company can
draw amounts as needed in multiples of $500,000 to fund operations subject to
Board of Director approval. Amounts drawn bear interest at the prime rate per
annum (5.25% at December 31, 2004), payable monthly and were to become due and
payable on December 31, 2003 and December 31, 2004, respectively, or upon a
change in control of the Company or consummation of any other financing over
$3.0 million or over $7.0 million in the aggregate. In March 2003, the payback
date for the first agreement was extended to December 31, 2004.

On February 2, 2004, the stockholder amended both agreements to extend the
payback dates to December 31, 2005 and to waive the funding requirement
mandating payback 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 March 2004, the Company had repaid $2.0
million of the $5.0 million it had drawn from the available funds. Both of the
lines allow for discretionary principal payments, which add to the availability
of additional funds that the Company may draw. During the twelve months ended
December 31, 2004, the Company had drawn an additional $2,000,000 of the
available balance. On March 22, 2005, the original $2.5 million funding
agreement was increased to $2.65 million extending draw dates through March 31,
2005.

In addition, as part of the February 2, 2004 amendment described above, the
second agreement was amended to allow the Company to draw the remaining
available balance through December 31, 2004. In consideration for the
amendments, as well as for efforts in obtaining private placement funding, the
Company granted the stockholder 150,000 common stock purchase warrants at an
exercise price equal to the closing market price of the Company's stock on the
date of grant (see Note12).

In December 2003, the Company issued 750,000 shares of common stock for gross
proceeds of $1.5 million from its recent private placement offering
(approximately $1.47 million net of related expenses) to a third party investor.
In March 2004, an additional 1.0 million shares of common stock were issued to
the same investor for gross proceeds of $2.0 million (approximately $1.98
million net of related expenses.) The $2.0 million of gross proceeds was used to
reduce the outstanding principal balance of the notes payable to stockholder.
There is no assurance that the Company will raise any additional proceeds from
future private placements. Subscriptions for the recent private placement
expired on April 30, 2004.

In April 2005, the payback dates of the March 28, 2002 and March 14, 2003
agreements were extended from December 31, 2005 to December 31, 2006. As
consideration of this extension, this shareholder 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.

                                       42
<PAGE>

The Company experienced a modest increase in cash flows from 2004 sales activity
and anticipates additional increases in cash flows from 2005 sales activity;
however, additional cash will still be needed to support operations. If
additional capital is not raised, budgeted sales levels are not achieved and/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 all or part of its assets to continue as a going concern through 2005. There
can be no assurance that the Company will be able to raise the additional
capital needed to continue as a going concern.

3. INVENTORIES

At December 31, 2004, inventories consisted of the following:

         Raw materials                                           $    801,306
         Finished goods                                                469,335
                                                                 -------------
                                                                 $  1,270,641
                                                                 =============

4. PREPAID EXPENSES AND OTHER CURRENT ASSETS

At December 31, 2004, prepaid expenses and other current assets consisted of
the following:

          Prepaid expenses                                          $ 135,407
          Current portion of refundable security deposit
                                                                      133,333

          Retainer for investment banker                              115,000
          Deferred costs related to deferred revenue                   27,884
                                                                    ----------
                                                                    $ 411,624
                                                                    ==========

5. PROPERTY AND EQUIPMENT

At December 31, 2004, property and equipment consisted of the following:

         Machinery and equipment                                  $ 1,171,665
         Furniture and fixtures                                        99,327
         Leasehold improvements                                       122,622
         Website development                                           72,960
         Computer hardware and software                               232,341
                                                                  ------------
                                                                    1,698,915

         Less accumulated depreciation and amortization            (1,151,096)
                                                                  ------------
                                                                  $    547,819
                                                                  ============

Depreciation and amortization expense of property and equipment for the years
ended December 31, 2004 and 2003 is $244,248 and $237,491, respectively, of
which approximately $156,000 and $136,000 is included in cost of products sold
and approximately $88,000 and $101,000 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 and January 2005, respectively. As of
December 31, 2004, $133,333 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.

                                       43
<PAGE>

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 are
currently in the process of negotiating a new lease and expect the lease terms
to remain similar to the current agreement. Rent expense under all operating
leases for the years ended December 31, 2004 and 2003 totaled approximately
$274,000 and $257,000, respectively, of which approximately $210,000 and
$199,000 is included in cost of products sold and approximately $64,000 and
$58,000 is included in selling and administrative costs, respectively, in the
accompanying consolidated statements of operations.

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 $5,000 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, 2004 are as follows:

                                                       CAPITAL       OPERATING
                                                       LEASES         LEASES
                                                       ------------------------
         2005                                          $  5,922      $  151,645
         2006                                             5,922         156,194
         2007                                             5,922         160,880
         2008                                                --          96,421
         2009 and thereafter                                 --
                                                       ------------------------
         Total minimum lease payments                    17,766      $  565,140
                                                                     ==========
         Less amount representing interest               (2,626)
                                                       --------
         Present value of minimum lease payments
              including current portion of $4,520      $ 15,140
                                                       ========

7. ACCRUED LIABILITIES

At December 31, 2004, accrued liabilities consisted of the following:

         Accrued wages and benefits                                  $  175,043
         Accrued expenses relating to vendors and others                111,275
         Deferral of straight-line rent expense                          75,977
         Reclassified accounts receivable credit balances                86,238
         Accrued warranty costs                                          44,203
         Accrued interest payable relating to shareholder notes           9,675
                                                                     ----------
                                                                     $  502,411
                                                                     ==========

8.  LONG-TERM DEBT

Notes Payable to Stockholder

On March 28, 2002 and March 14, 2003, respectively, the Company executed a
binding agreement with one of its stockholders, who is also a Board Member, to
fund up to $2.5 million through March 31, 2003 and an additional $3.5 million
through December 31, 2003. Under the terms of the agreements, the Company can
draw amounts as needed in multiples of $500,000 to fund operations subject to
Board of Director approval. Amounts drawn bear interest at the prime rate per
annum (5.25% at December 31, 2004), payable monthly and were to become due and
payable on December 31, 2003 and December 31, 2004, respectively, or upon a
change in control of the Company or consummation of any other financing over
$3.0 million or over $7.0 million in the aggregate. In March 2003, the payback
date for the first agreement was extended to December 31, 2004.

                                       44
<PAGE>

On February 2, 2004, the stockholder amended both agreements to extend the
payback dates to December 31, 2005 and to waive the funding requirement
mandating payback 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 March 2004, the Company had repaid $2.0
million of the $5.0 million it had drawn from the available funds. Both of the
lines allow for discretionary principal payments, which add to the availability
of additional funds that the Company may draw. During the year ended December
31, 2004, the Company had drawn an additional $2,000,000 of the available
balance. In March 2005, an additional $500,000 draw was made, leaving no
available balance. On March 22, 2005 the original $2.5 million funding agreement
was amended to increase the funds available to $2.65 million and in March, 2005,
that draw was made, leaving no available balance.

In addition, as part of the February 2, 2004 amendment described above, the
second agreement was amended to allow the Company to draw the remaining
available balance through December 31, 2004. In consideration for the
amendments, as well as for efforts in obtaining private placement funding, the
Company granted the stockholder 150,000 common stock purchase warrants at an
exercise price equal to the closing market price of the Company's stock on the
date of grant (see Note 12). On February 4, 2005, the second agreement was
amended again to allow the Company to draw the remaining available balance
($500,000 as of December 31, 2004) through March 31, 2005.

In April 2005, the payback dates of the March 28, 2002 and March 14, 2003
agreements were extended from December 31, 2005 to December 31, 2006. As
consideration of this extension, this shareholder was granted an additional
100,000 comon 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, 2004 and 2003, the Company incurred interest
expense of approximately $191,000 and $152,000, respectively, on its draws,
which is included in interest expense in the accompanying consolidated
statements of operations.

Maturities of Long-Term Obligations for Five Years and Beyond

Long-term obligations consisted of the following at December 31, 2004:

              Notes payable to shareholder - LOC #1         $ 2,501,900
              Notes payable to shareholder - LOC #2           3,000,000
              Capital lease obligation                           15,140
                                                            -----------
                                                              5,517,040
              Less: current maturities                           (4,520)
                                                            -----------
                                                            $ 5,512,520
                                                            ===========

The minimum annual principal payments of notes payable and capital lease
obligations at December 31, 2004 were:

                                        2005                $     4,520
                                        2006                  5,506,928
                                        2007                      5,592
                                                            -----------
                                                            $ 5,517,040
                                                            ===========

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:

                                                2004              2003
                                                ----              ----

         United States                     $(3,365,969)      $(3,901,744)
         Foreign                              (221,799)         (200,900)
         Intercompany elimination               50,032            51,885
                                           -----------------------------
                                           $(3,587,768)      $(4,050,759)

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

         Deferred tax assets:                          2004             2003

           Net operating loss carryforwards        $ 11,155,010    $  9,900,413
           Depreciation and amortization                 90,904          82,118
           Accrued expenses and reserves                 70,099          74,245
           Impairment loss                               78,304          78,304
           Compensatory stock options and warrants       57,354          57,354
           Capital Loss  Carryover                       40,632          40,632
           Other                                         16,421          16,251
                                                   -----------------------------
         Total deferred tax assets                   11,508,724      10,249,317
         Valuation allowance                        (11,508,724)    (10,249,317)
                                                   -----------------------------
         Net deferred tax assets                   $         --    $         --
                                                   =============================

                                       45
<PAGE>

SFAS 109 requires a valuation allowance to reduce the deferred tax assets
reported if, based on the weight of the evidence, it is more likely than not
that some portion or all of the deferred tax assets will not be realized. After
consideration of all the evidence, both positive and negative, management has
determined that a full valuation allowance of $11,508,724 against its net
deferred taxes is necessary as of December 31, 2004. The change in valuation
allowance for the years ended December 31, 2004 and 2003 is $1,259,407 and
$1,495,133 respectively.

At December 31, 2004, the Company had approximately $31,012,000 of U.S. net
operating loss carryforwards remaining, which expire beginning in 2019. The
Company will record the benefit of approximately $1,368,000 of the net operating
loss carryforwards through additional paid-in capital if and when the net
operating loss carryforwards are utilized, as such amounts relate to the
unrecognized tax benefit from stock option exercises.

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

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

                                                          2004            2003
                                                        ------------------------
         Federal statutory taxes                         (34.00)%       (34.00)%
         State income taxes, net of federal tax benefit   (3.63)         (3.63)
         Nondeductible items                               0.23           0.19
         Change in valuation allowance                    37.42          38.32
         Other                                             (.02)          (.88)
                                                        ------------------------
                                                             --%           --%
                                                        ========================

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 are now
pending a rescheduling date. The Company does not believe the likelihood of an
unfavorable outcome is probable.

                                       46
<PAGE>

INVESTMENT BANKING AGREEMENT

On December 18, 2003, the Company entered into a one-year agreement with an
investment-banking firm in Boca Raton, Florida, to assist in raising
approximately $3.0 to $5.0 million in equity capital. The Company agreed to pay
a fee of 7% of any gross proceeds received by the Company as a result of this
firm's services, as well as all reasonable out-of-pocket fees, expenses and
costs in connection with the performance of its services under the agreement.
The agreement excluded the capital raised in December 2003 and March 2004. On
October 22, 2004, the agreement was mutually terminated. No equity capital was
raised pursuant to this agreement.

 On October 26, 2004, the Company engaged Imperial Capital, LLC ("IC") as an
exclusive financial advisor to the Company. IC will 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. The agreement may be terminated by either party upon
30-day written notice.

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. During each of 2004 and 2003, 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>
                                                                2004                           2003
                                                    -----------------------------   ---------------------------
                                                                     Weighted                       Weighted
                                                                      Average                        Average
                                                                     Exercise                       Exercise
                                                       Options         Price           Options        Price
                                                    -----------------------------   ---------------------------
<S>                                                    <C>           <C>               <C>           <C>
         Outstanding, beginning of year                2,338,570     $ 3.75            2,285,845     $ 3.87
              Granted                                    107,500       1.76              290,500       1.99
              Exercised                                  (10,000)      1.00              (43,775)       .97
              Expired                                   (110,000)      3.75             (194,000)      3.07
                                                    -----------------------------   ---------------------------
         Outstanding, end of year                      2,326,070       3.68            2,338,570       3.75
                                                    ==============                  ==============
         Exercisable, end of year                      2,041,320     $ 3.88            1,808,070     $ 3.78
                                                    ==============                  ==============
         Options available for future grant, end
              of year                                    958,755                         956,255
                                                    ==============                  ==============
</TABLE>

                                       47
<PAGE>

Summarized information with respect to options outstanding under the three
option plans at December 31, 2004 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>          <C>
 $ .21  - $ 1.70       876,900          5.2          $     .89             819,400      $     .86
  1.86  -   4.50       703,795          5.4               2.60             476,545           2.66
  4.81  -   6.81       257,875          1.4               5.96             257,875           5.96
  8.50  -   9.25       487,500          3.8               9.07             487,500           9.07
                   -----------------------------------------------------------------------------------
           Totals    2,326,070          4.8          $    3.68            ,041,320       $   3.88
                   ===================================================================================
</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.

12. COMMON STOCK

On December 10, 2003, the Company received $1,500,000 for the issuance of
750,000 shares of common stock from a third party private placement investor.
Issuance costs of $33,750 were related to this issuance. Included in this amount
is $18,750 for services rendered to raise private placement funding by the
individual who is both a stockholder and a Board Member, and who has provided
funding to the Company since 2002.

 In February 2004, this same stockholder was granted 150,000 warrants to
purchase common stock, in consideration for the amendments to extend the payback
periods of the notes payable to stockholder to December 31, 2005, the extension
of the remaining available draws on the second commitment letter through
December 31, 2004, as well as for services related to raising private placement
funding. The fair value of the warrants was estimated at $112,500 on the date of
grant using a Black-Scholes option-pricing model, and was allocated between
costs of the private placement investment and deferred financing costs. The
Company accrued $18,750 of the fair value related to the services rendered by
the stockholder in association with the private placement funds raised in
December 2003 and recorded a deferred charge of $93,750 in 2004 for the
amendments to the commitment agreements. (see Note 2).

On March 12, 2004, the Company received gross cash proceeds of $2,000,000 from
the sale of 1,000,000 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.

13. WARRANTS

At December 31, 2004 and 2003, 575,000 and 440,000 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 January 15,
2004 to March 14, 2008. Information concerning the Company's warrant activity is
as follows:

<TABLE>
<CAPTION>
                                                              2004                         2003
                                                    -------------------------    --------------------------
                                                        WEIGHTED AVERAGE               WEIGHTED AVERAGE
                                                            EXERCISE                       EXERCISE
                                                    -------------------------    --------------------------
                                                       OPTIONS       PRICE         OPTIONS        PRICE

                                                    -------------- ----------    ------------- ------------
<S>                                                      <C>       <C>             <C>           <C>
         Outstanding, at the beginning of year           440,000   $     2.79      369,067       $  3.16
              Granted                                    150,000         2.00      125,000          2.25
              Exercised                                       --           --           --            --
              Expired                                    (15,000)        3.50      (54,067)         4.11
                                                    -------------------------   ------------ --------------
         Outstanding, at the end of year                 575,000   $     2.56      440,000      $   2.79
                                                    =========================   ===========================

</TABLE>

                                       48
<PAGE>

On March 28, 2002, the Company recorded a deferred charge of $318,000 for the
issuance of 100,000 fully vested warrants to purchase common stock relating to a
financing agreement with one of its stockholders to fund up to $2.5 million
through March 31, 2003 (see Note 2). The fair value of the deferred charge was
estimated at the date of grant using a Black-Scholes option pricing model with
the following assumptions: risk free interest rate of 4.65%, volatility factor
of the expected market price of the Company's common stock of 1.385, a dividend
yield of zero, and a weighted average expected life of 3 years. The warrants
have an exercise price of $4.05, which was equal to quoted market value on the
date of grant. 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, 2004 and 2003, the Company had amortized
approximately $45,000 and $80,000 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 for the
issuance of 125,000 fully vested warrants to purchase common stock relating to a
second financing agreement with the same stockholder to fund up to $3.5 million
through December 31, 2004 (see Note 2). The fair value of the deferred charge
was estimated at the date of grant using a Black-Scholes option pricing model
with the following assumptions: risk free interest rate of 2.24%, volatility
factor of the expected market price of the Company's common stock of 1.142, a
dividend yield of zero, and a weighted average expected life of 4 years. The
warrants have an exercise price of $2.25, which was equal to quoted market value
on the date of grant. The deferred charge is being amortized over the repayment
period of 21.5 months. During the year ended December 31, 2004, the Company had
amortized approximately $94,000 of such costs, which is included in interest
expense in the accompanying 2004 consolidated statement of operations.

On November 21, 2003, the Company extended the life of a director's warrant to
purchase 100,000 shares of common stock that was issued in December 1999 and was
fully vested. The expiration date of the warrant was extended from December 2003
to December 2004. The fair value of the modified warrant was estimated at the
date of grant using a Black-Scholes option pricing model with the following
assumptions: risk free interest rate of 1.33%, volatility factor of the expected
market price of the Company's common stock of .367, a dividend yield of zero,
and a weighted average expected life of 1 year. The warrants have an exercise
price of $1.00. The difference in the fair value of the old award and the new
award was estimated to be $2,000, and is included in selling and administrative
expenses in the accompanying 2003 consolidated statement of operations.

On December 15, 2004, the Company extended the life of this same 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.

14. MAJOR CUSTOMERS

During 2004 and 2003, two and three customers together accounted for
approximately 37% and 45%, respectively, of the Company's net sales. In 2004
there were two customers that individually accounted for greater than 10% of net
sales, or approximately $523,000 and $397,000, while in 2003 there were three
customers that individually accounted for greater than 10% of net sales, or
approximately $334,000, $300,000 and $221,000. There were three customers in
2004 whose trade receivable balances equaled or exceeded 5% of total
receivables, representing approximately 29%, 21%, and 12% respectively, of total
accounts receivable. The loss of business from one or a combination of the
Company's significant customers could adversely affect its operations.

                                       49
<PAGE>

15. GEOGRAPHIC INFORMATION

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

                                                     YEAR ENDED DECEMBER 31
                                                      2004            2003
                                                   ---------------------------

       Net sales:
         United States                              $1,686,775      $1,318,180
         United Kingdom                                785,284         588,337
                                                   ---------------------------
                                                    $2,472,059      $1,906,517
                                                   ===========================

       Long-lived assets by area:
         United States                              $  495,386
         United Kingdom                                 52,433
                                                   -----------
                                                    $  547,819

                                                   ===========

16. SUBSEQUENT EVENTS

On April 14, 2005, the repayment dates of the notes payables to stockholder,
dated March 28, 2002 and March 14, 2003, were extended from December 31, 2005 to
December 31, 2006. As consideration of this extension, this shareholder 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. The fair value of the warrants was estimated
at $74,000.



                                       50