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, 1996
                                      ------------------------------
[ ]   TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
      OF 1934 (No Fee Required)

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

                               T/F Purifiner, Inc.
--------------------------------------------------------------------------------
                 (Name of small business issuer in its charter)

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

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

Issuer's telephone number (561) - 547-9499
                          ----------------
      
Securities registered under Section 12(b) of the Exchange Act:

           Title of each class                   Name of each  exchange
                                                   on which registered
------------------------------------      --------------------------------------
------------------------------------      --------------------------------------

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

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

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

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

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. [  ]


State issuer's revenues for its most recent fiscal year.    $1,327,230  .
                                                         --------------- 
State the  aggregate  market  value of the voting  stock held by  non-affiliates
computed by reference  to the price at which the stock was sold,  or the average
bid and asked  prices of such stock,  as of a specified  date within the past 60
days.

Common stock, par value $.001 per share ("Common Stock"),  was the only class of
voting stock of the Registrant  outstanding  on February 28, 1997.  Based on the
closing bid price of the Common  Stock on the National  Association  of Security
Dealers,  Inc., OTC Bulletin Board as reported on February 28, 1997 ($9.25), the
aggregate  market value of the 1,536,072  shares of the Common Stock held by the
persons other than officers, directors and persons known to the Registrant to be
the beneficial  owner (as that term is defined under the rules of the Securities
and Exchange  Commission)  of more than five percent of the Common Stock on that
date was approximately $14,208,666.  By the foregoing statements, the Registrant
does not intend to imply that any of these  officers,  directors  or  beneficial
owners are affiliates of the Registrant or that the aggregate  market value,  as
computed pursuant to rules of the Securities and Exchange Commission,  is in any
way  indicative  of the amount which could be obtained for such shares of Common
Stock.

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

Check  whether the issuer has filed all  documents  and  reports  required to be
filed by Section12,  13 or 15(d) of the Exchange Act after the  distribution  of
securities under a plan confirmed by a court. Yes        No 
                                                  -----    ----- 
                   (APPLICABLE ONLY TO CORPORATE REGISTRANTS)
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date: February 28, 1997: 5,143,455.

This report contains a total of 59 pages.


<PAGE>


                                    PART I

All  discussions  herein give effect to a 57:1 forward  stock split  effected on
July 1, 1996 and a 2.5:1 forward stock split for all  stockholders  of record as
of January 1,  1997,  except as  otherwise  specifically  set forth.  Unless the
context otherwise implies, the term "Company" refers to T/F Purifiner,  Inc. and
T/F Systems, Inc., as described more fully below.


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

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

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

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

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

Background and Formation of T/F Purifiner, Inc.
-----------------------------------------------

      The patents  issued on the oil  purification  system that,  after  further
development,  has evolved into the current  Purifiner units,  were issued in the
early  1980's.  The  owners of such  patents  attempted  to market  and sell the
original system under various other  tradenames,  but were not  successful.  The
factors to which that could be attributed,  include (a) the failure of potential
customers to understand the  importance or possibility of continually  clean oil
and belief that extended drain interval could be practical; (b) lack of consumer
awareness  of the  importance  of the  environmental  benefits  inherent  in the
Purifiner;  (c) the absence of acceptance and  endorsement by engine and vehicle


<PAGE>

manufacturers;  (d) general  disbelief that the product would perform as claimed
and  could  provide  benefits  in  a  cost-effective   manner;   (e)  inadequate
capitalization, and (f) limited management experience.

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

      In February 1988, T/F Purifiner,  Inc. was  incorporated in Delaware under
the name "Econology Systems,  Inc." On October 16, 1990, the name was changed to
"T/F  Purifiner,  Inc." T/F  Purifiner,  Inc. was inactive  until 1991,  when it
obtained the  distribution and marketing rights to the Purifiner by virtue of an
assignment from Systems (at the time owned equally by Messrs. Ford and Taylor) .
However,  System's  ownership of the rights to the Purifiner  were  contested in
court as to other third  parties  who were also  manufacturing  and  marketing a
device similar to the Purifiner and using the Purifiner  trademark.  Eventually,
the court  ruled in favor of  Systems  with  respect  to its  manufacturing  and
marketing  rights,  and in May  1993  all  appeals  by the  other  parties  were
exhausted.  During the period of this  litigation,  T/F  Purifiner  continued to
market the Purifiner,  but success was limited due to various factors  including
the  pending   litigation  and  the  actions  by  these  other  parties  in  the
marketplace.

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

      Prior to Mr.  Taylor's  death in May 1993,  Mr.  Taylor and Mr. Ford had
each  contributed  equal  amounts of working  capital to the  Company and each
owned  50%  of  the  issued  and  outstanding  capital  stock.  Following  Mr.
Taylor's death, despite Mr. Ford's subsequent  investments in the Company, the
business   activities  and  growth  of  the  Company  have  been  hampered  by
insufficient capital.

Strategy
--------

      As the Purifiner had limited acceptance in the marketplace,  the Company's
strategy has been to obtain  product  credibility  by  disproving  the long-held


<PAGE>

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

      The Company has expanded  its  distribution  network and  direct-marketing
activities,  primarily in the heavy-duty truck and industrial marketplaces, both
in the U.S. and  internationally.  To date the Company has approximately 75 U.S.
and Canadian distributors,  and approximately 17 international distributors. The
Company also formed a foreign joint venture effective January 1, 1996, to market
the Purifiner through Europe,  the Middle East, the former Soviet Union,  Egypt,
and South Africa. (See "Distribution").

      The  Company  plans on  continuing  to expand  its  distribution  channels
worldwide,  as well as the number of market  segments on which it  focuses.  The
Company  continues to (a) employ  additional direct sales personnel to establish
more  distributors,  (b)  market  its  products  to certain  major  accounts  in
conjunction with its distributors,  (c) to consider additional joint ventures to
manufacture  and/or  market its  products in various  parts of the world and (d)
work to  encourage  original  equipment  manufacturers  ("OEM's") to install the
Purifiner on their product at their factories (See "Marketing").

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

Products
--------

      The Purifiner Oil  Purification  System  dramatically  extends the life of
lubricating  oil in gas and diesel  engines as well as  hydraulic  fluid used in
industrial machinery. The core product, the Purifiner, is easily attached to any
engine.  In essence,  it works like a dialysis machine that filters blood to rid
it of impurities, so it keeps the oil in engines continually clean. Whenever the
engine or machinery is operating, the Purifiner is extracting from the oil solid
particles  down to one micron  (1/49  millionth  of an inch),  as well as liquid
contaminants (water, fuel and antifreeze). As the Purifiner dramatically extends
the useful  life of the oil, it also  protects  engines  from the  harmful  wear
caused by contaminants  in oil. As dirty,  damaging oil does not come in contact
with the engine,  the result is less down time for maintenance and longer engine
life.  Further,  not only are oil  purchases  drastically  reduced,  but as used
hydraulic  fluids are recovered and no waste oil is generated,  the need for and
cost of disposal decline  dramatically.  Thus, the Purifiner reduces maintenance
costs by decreasing oil consumption,  engine wear,  increased fuel economy,  and
the necessity for overhauls and certain other types of general maintenance.  All
these  savings are achieved from  utilizing  the  Purifiner  which has a typical
payback period of less than one year. Accordingly,  the Purifiner achieves great
savings and, therefore, increased profits for its end users.


<PAGE>

      The Purifiner is manufactured in six different sizes ranging from 8 to 240
quarts;  the size  varies  according  to the oil sump  capacity of the engine or
equipment on which it is placed. The Purifiner also can be used in multiples for
larger oil sumps.  Qualified  personnel  can usually  install the  Purifiner  on
engines and other equipment in 1 1/2 to 2 hours.

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

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

      The Purifiner  consists of a canister that can be mounted on the firewall,
fender well, frame of a vehicle or on other convenient  locations,  depending on
the  particular  application.  The  canister  inlet is  connected  either to the
engine's  oil-pressure sending unit or, for hydraulic  applications,  a pressure
line. The outlet is connected to the sump.  The canister  houses the Element and
an evaporation  chamber heated by an enclosed  heating  element.  Under pressure
from the engine or equipment,  engine oil enters the canister via a metering jet
that regulates the flow of oil to approximately  three and six gallons per hour,
depending  on the size of the  Purifiner.  The oil  passes  slowly  through  the
Element,  where solid contaminants in the oil are trapped.  The Element contains
compacted long-strand natural cotton fibers that retain solid particles as small
as  approximately  one micron.  A  conventional  paper oil filter will typically
remove  particles down to 25-40 microns.  According to a paper  published by the
Society of Automotive Engineers in its SAE Paper No. 660081, dated January 1966,
"[f]iltering the used oil through a 5-micron filter did not significantly reduce
the wear rate;  however,  when the oil was filtered  through a 1 micron  filter,
there was a significant  reduction." The 100% natural cotton  filtering media in
the Element also absorbs water, traps sulfur and neutralizes the acids which are
left in the oil by  conventional  paper filters.  The slow rate at which the oil
passes through the Element helps ensure maximum contaminant retention.

      After  filtration  the oil flows slowly over the diffuser plate located in
the  dry-heated  evaporation  chamber  where it is  heated to a  temperature  of
approximately  200  degrees  Fahrenheit  (slightly  higher on the HBS  model) to
enable the removal of the liquid contaminants including water, fuel and coolant.
The stainless  steel  heating  element is sealed in aluminum and, for safety is,
completely  isolated from direct  contact with the oil. The liquid  contaminants
are evaporated  and then vented out of the Purifiner  before they can recondense
in the oil.  These  gases and water  vapor are  vented  back into the  induction
system and are consumed in the combustion process.  (On hydraulic  applications,
the water vapor is vented into the  atmosphere.) The cleaned oil then flows back
to the engine  crankcase  via gravity.  These  processes  continue  whenever the
equipment or engine is operating.


<PAGE>

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

     The Company estimates that the current costs of an oil and full flow-filter
change  (assuming a person does not do the oil change  himself or herself) costs
$15.00 or more for  automobiles,  $100 or more for heavy duty trucks and $200 or
more per engine for diesel  powered marine  engines.  These costs vary depending
on, among other things, the type of engine and application, labor and oil costs,
and costs of waste oil disposal. Depending on the size of the Purifiner Element,
the current  suggested  prices for retail  end-users of the Elements  range from
approximately $13.00 to $42.00 and the cost of an oil analysis purchased through
the Company currently costs approximately $8.50 per sample.

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

     When the  Element  is  changed,  make-up  oil is added to  replace  any oil
retained in the used Element or consumed in the normal engine combustion process
and also to replenish the oil's additives.  The Company's performance warranties
for product used in the United States and Canada  generally  require the user to
take a small sample of the used oil for submission to an oil testing  laboratory
at the same intervals that the OEM recommends/approves for an oil change, but at
least once a year. (See  "Warranties.") The Purifiner has an oil sample valve to
expedite  the taking of the oil  sample.  There are some local  independent  oil
testing  laboratories  and a number of larger users of the Purifiner have access
to other testing facilities.  The Company also sells prepaid oil sample kits and
has arrangements  with Ana  Laboratories,  Inc. in New Jersey and United Testing
Group, Inc., in Georgia, with facilities in Atlanta, Georgia, Chicago, Illinois,
and Reno,  Nevada, to test samples sent to them via the Company' s prepaid kits.
(There are other independent testing  laboratories  available to perform testing
of the oil samples other than those described above).  The current customer cost
of testing an oil sample  ranges from de minimis (if a customer  has access to a
testing  facility) to approximately  $8.50. The cost of an oil sample may exceed
$8.50 in certain foreign countries.


<PAGE>

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

      The Purifiner has no moving parts and consequently requires no significant
ongoing  maintenance.  The Purifiner has an in-line  pre-strainer to prevent the
metering jet from becoming clogged by large  contaminant  particles.  As long as
the  Elements  are  changed  at  the  recommended/approved  intervals  or as oil
analyses  dictate,  and other  standard  preventive  maintenance  procedures are
performed,  the Company  believes  that the Purifiner can perform as designed in
excess of ten years (10 years is the material and  workmanship  warranty  period
for the Purifiner). Purifiners used for hydraulic applications do not require as
frequent  Element  changes  since  hydraulic oil  applications  typically do not
contain  the  level of  contaminants  as  other  oil  applications.  In order to
maintain the Company's performance  warranties,  users must, among other things,
change the full flow filters once a year or every 50,000 to 60,000 miles or 1500
hours,  depending on the particular  application  of the Purifiner.  The cost of
changing a full flow filter is part of the cost of an oil change,  as  discussed
above.

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


<PAGE>

Marketing
---------

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

      To date, the Company has not expended any material amounts to advertise or
promote its products in the  marketplace and has relied upon  editorials,  trade
shows and other  methods to promote its products.  In May 1995,  the Company was
featured on CNN's Future Watch, a program broadcast  throughout the world, which
resulted in the addition of several new distributors and, more important,  added
to the credibility of the Company's  products.  The Company was also featured on
CNN's EARTH  MATTERS  program in early 1996.  In addition,  numerous  magazines,
including  BUSINESS WEEK,  DEFENSE NEWS,  EQUIPMENT TODAY,  MOTOR TREND, CAR AND
DRIVER and others have featured stories on the Company's  products.  During 1994
and  subsequently,   the  Company's  products  have  achieved  recognition  from
well-known sources,  including (i) certification by the California Environmental
Protection  Agency's  Department of Toxic Substances as a "Pollution  Prevention
Technology",  (ii)  receipt  of the State of  Florida'  s 1995  Governor'  s New
Product Award (Small Business  Category) , (iii) receipt of the National Society
of  Professional  Engineers  1996  New  Product  Award  "for  innovative  use of
engineering  principals and materials,  improved function and savings in use and
benefit to the national economy" (Small Business Category) ; and (iv) receipt of
the World Trade Center's (Ft.  Lauderdale,  Florida) 1996 Award for  Outstanding
Achievement in International  Trade  (Manufacturing) . Management  believes that
such  recognition  has and will  continue  to enable  the  Company to expand its
distribution  channels  and  increase  the  credibility  and  acceptance  of its
products.

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

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


<PAGE>

      With this arrangement, the Company and its distributor network are able to
provide  to  its  customers  a  complete  product  package,  that  includes  the
Purifiner,  installation  assistance  and  financing.  Management  believes  the
ability  to  provide  a  turnkey  program  should  provide  the  Company  with a
competitive  edge.  However,  no assurance  can be given that this approach will
result in increased revenues to the Company.

      The Company relies on management's  ability to determine the existence and
extent of available markets for its product.  Company management and consultants
have  considerable  marketing  and sales  backgrounds  and devote a  significant
portion of their time to marketing-related  activities. The Company has marketed
its products at various national trade shows,  including the International Truck
Show in Las Vegas, Nevada,  Mid-America Truck Show in Louisville,  Kentucky, the
Maintenance Council Show in Orlando, Florida, the International Workboat Show in
New Orleans,  Louisiana, the ConAgra Show in Las Vegas, Nevada, the Recreational
Vehicle Industry Association Trade Show in Louisville, Kentucky and others.

      Eventually, management would like to sell its products directly to OEMs. A
number of international  and domestic engine,  automobile,  truck, bus and other
OEMs  are  currently  evaluating  the  Company'  s  products,   among  them  are
Volvo-Sweden  (trucks)  ,  Navistar   International   Corporation   ("Navistar")
(trucks),  Freightliner Corporation (trucks), Perkins Engine Company (engines) ,
Hyster (forklifts) and Blue Bird Corporation (buses).  There can be no assurance
that  these or other  OEMs will  accept  the  Company's  products  for  original
placement on their  equipment.  To date, the Company's  customers have requested
that the  Purifiners be installed at a Volvo USA factory  (North  Carolina) on a
very  limited  number  of  vehicles.  Certain  other  manufacturers,   including
Freightliner  Corporation,  Navistar  and Ford  Motor  Company,  have  agreed to
install the Purifiner at their production  facilities if their customers request
such installation.

      The Purifiner is installed on a Navistar and Mobil Oil Company show truck,
which is on display at some of the major truck shows in the United States.

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

      The Company  currently  distributes its products  through several channels
under the Purifiner  trademark.  To date,  purchasers of the Company's  products
have included  Coca-Cola  Enterprises,  Inc.,  Ford Motor Company,  Sysco Foods,
Vulcan Chemicals, the U.S. Air Force and others.

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


<PAGE>


      The Company has approximately 75 active warehouse  distributors located in
the United States and Canada, primarily in the heavy-duty trucking industry. The
remaining are located primarily in South America,  England (See  "Distribution")
and the Far East. These distributors  purchase product directly from the Company
and sell to their  existing or new  customers.  The Company  currently  also has
contracts or arrangements  with 8 manufacturer's  representatives,  primarily in
the  heavy-duty   trucking   industry,   whose   responsibilities   include  the
establishment and servicing of warehouse  distributors and introducing Company's
Products to selected fleets in the  representative's  defined  territories.  The
Company pays its  manufacturer's  representatives  negotiated  commission rates,
depending on the level of services provided.  The manufacturer's  representative
contracts  are  typically for one year and can be canceled by either party on 30
to 120 days notice. The Company recently established  representatives in defined
territories for certain other market segments,  including marine, industrial and
recreational vehicle industries.

     During  1996,  nine  customers  accounted  for  approximately  56%  of  the
Company's net sales,  of which TF Purifiner  Ltd., the Company's  joint venture,
accounted  for  approximately  19% of the  Company's  net  sales.  There  are no
assurances that each or all of these customers will continue to do business with
the  Company  and the loss of any one of these  customers  could have a material
adverse affect on the Company's revenues.

     TF Purifiner  Ltd.  Pursuant to a joint  venture  agreement  (the  "Centrax
Agreement") dated December 18, 1995 (but effective January 1, 1996), the Company
became a stockholder in TF Purifiner Ltd.  ("Ltd.") , an English company limited
by shares and formed under England's  Company's Act 1985. The other stockholders
and parties to the agreement  include Centrax,  Ltd., The Barr family (the "Barr
Family")  who includes  Messrs.  Richard H.H.  Barr,  C. Robert Barr,  the Chief
Executive  Officer of Centrax,  and Richard A. Barr and the current director and
general  manager of Ltd.,  Albert N.  Davies,  of Devon,  England (who is not an
affiliate of Centrax or the Barr Family) . Centrax,  located in Devon,  England,
had sales of approximately $70 million for 1996 from its worldwide activities in
power   generation  and  specialist   aero-engine   components.   The  principal
stockholders  of  Centrax  include  Richard  H. H.  Barr,  C.  Robert  Barr (See
"Management  - Board of  Advisors")  and Richard A. Barr (the Barr Family) , who
are also directors of Centrax.

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

      The Company owns  approximately 45% of Ltd. and has a 50% voting interest.
Forty-five  (45%)  percent is owned by Centrax and the Barr Family (or a company
representing  the Barr Family) and the remaining  approximately  10% is owned by
Mr. Davies.  The Company is not obligated to fund any of the operations of Ltd.,
which, pursuant to the Centrax Agreement, shall be provided (i) by borrowings by


<PAGE>

Ltd.  from a bank;  (ii)  from  Centrax;  or (iii)  from the Barr  Family,  such
borrowings  or guarantees by the Barr Family or Centrax shall be made until such
time  as  Ltd.  is  self-funding.  If the  Barr  Family  does  not  fund  Ltd.'s
operations,  the  Company  has the  right  to take  back  Ltd.'s  manufacturing,
marketing and  distribution  rights,  as well as any patent and trademark rights
assigned or to be assigned to Ltd. by the Company for this  Territory.  To date,
Ltd. is negotiating to establish,  and/or has established  distributors or taken
over the  servicing  of  existing  Company  distributors  in various  countries,
including the United  Kingdom,  Greece,  Italy,  France,  Turkey,  the Czech and
Slovak Republics, Norway, Denmark, Spain and Portugal. There can be no assurance
that such  distributors will be successful in introducing the Purifiner in their
territories  as they will face  obstacles  similar to those the  Company and its
other  distributors have encountered in introducing an innovative  technology in
their territories. Further, there can be no assurance that Ltd's other 45% owner
(Centrax),  which is responsible for the ultimate funding of Ltd., will continue
to fund Ltd.'s  operations;  discontinuing  such  funding  could have a material
adverse  effect on the  Company's  operations in this  Territory.  Ltd. has also
commenced or completed various Purifiner evaluation programs, including those on
a large United Kingdom ("U.K.") based fleet. This U.K. test was recommended by a
large international engine manufacturer and has been successfully completed.

      Ltd.  currently is negotiating  for the rights to patents pending filed by
Centrax on a product consisting of a full flow and bypass oil filter, all housed
in one Purifiner unit, as well as a side-by-side  full-flow and Purifiner bypass
filter  design.  These patent  pending  products  were  designed  primarily  for
original  equipment  placement by OEMs. The Company is negotiating  with Centrax
for the right to distribute these products  everywhere other than the Territory.
The Company  has the right to  distribute  any new  products  developed  by Ltd.
everywhere other than the Territory

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

      The Company entered into aftermarket  programs with Navistar in the United
States and Canada as part of its agreement to provide  Navistar dealers with the
Company's  product line. The  aftermarket  program has provided the Company with
the  opportunity to be invited to participate in Navistar trade fairs,  but that
program is not party of any written  agreement between the Company and Navistar.
However,  the Company's Products are included in Navistar's catalog programs for
the United  States and for Canada which are sent to Navistar  dealers.  Finally,
the Company may be given the opportunity to participate in advertising  programs
initiated  by  Navistar,  but to date has  only  done so on a  limited  basis in
Canada.  These  aftermarket  programs are administered by Navistar and, to date,
have not resulted in a  significant  number of new Navistar  dealers  purchasing
Product from the Company.  Management believes that the lack of participation is
primarily due to the Company not allocating sufficient time or money to reaching
Navistar  dealers;  it intends to do so in the foreseeable  future if sufficient
resources are available.

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


<PAGE>

Sales
-----

     DIRECT  SALES.  The  Company  directly  and/or with the  assistance  of its
manufacturer's  representatives,  warehouse distributors or other agents markets
its products directly to national accounts which will eventually be sold through
its distribution  channel.  Typically these larger  customers,  and some smaller
customers,  have required an evaluation  period,  usually  ranging from three to
nine  months,  to ensure  that the  Company's  products  perform as  advertised.
Management believes that this evaluation period will continue to be shortened as
the  Company's  products  gain wider  acceptance  and  support  from  well-known
customers and groups,  such as Ford Motor Company,  AOC,  Navistar,  Perkins and
others.

      Currently,  the  Company'  s  products  are being  evaluated  by  numerous
potential  end users,  including  Ford Motor  Company,  Murphy  Farms,  CF Motor
Freight,  New  Orleans  Transit  Authority,  City of  Detroit,  Chicago  Transit
Authority,  Pepsi-Cola  Company,  Motor Cargo,  United States Air Force,  United
States Postal Services, Waste Management, Bell South and others. There can be no
assurance that such evaluations will be successful and, even if successful, that
they will result in sales for the Company.

      In July 1995,  the  Company'  s products  were  issued  National  Stocking
Numbers by the General Services  Administration;  the Company believes this will
enable the Company to more efficiently sell its products to the U.S.
Government and its agencies.

      INTERNATIONAL  SALES.  The Company  directly and/or with the assistance of
commission based  manufacturer's  representatives has established  exclusive and
non-exclusive distributors in various countries, including Australia, Singapore,
Malaysia,  Indonesia,  Thailand,  South Korea,  Colombia,  Panama,  El Salvador,
Venezuela,  Chile,  Mexico,  China,  Hong  Kong,  Brazil and  others.  Exclusive
distributors are required to purchase minimum  quantities of product to maintain
their exclusive status. The majority of these  distributorships were established
in 1995 and  later;  therefore,  the  ultimate  success  of these  and the other
distributors  depends upon, among other 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.  See "TF  Purifiner  Ltd." There can be no
assurance that the Company's  international  distributors  will be successful in
distributing the Company's products in their territories.

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

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

      The Company currently single sources (i.e. purchases each raw material and
component part from a specific  vendor)  substantially  all of its raw materials


<PAGE>

and component parts from various vendors in the United States. Substantially all
the tools and dies used by certain  of the  Company's  vendors  are owned by the
Company.  The Company believes that there are alternative sources of supply, and
the Company does not anticipate  that the loss of any single supplier would have
a material  long term adverse  effect on its  business,  operations or financial
condition.  Management intends, subsequent to obtaining sufficient financing, to
obtain  additional  tooling  and dies and to  upgrade  certain  of its  existing
manufacturing  equipment,  and as its volume of sales  increase,  may expand its
vendor  network for the purpose of limiting  its  exposure to its single  source
suppliers.  However,  there can be no assurances that such additional  financing
will be obtained or will be  obtainable,  on terms that are in the best interest
of the Company or its stockholders.

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

      The Purifiner carries a six-month performance  warranty,  and is generally
warranted to the original user to be free of defects in material and workmanship
for ten years, except for the heating element which is warranted for five years.
The Company also offers limited  250,000-mile  and  100,000-mile  continuous oil
purification  performance warranties for Class VII and VIII trucks in the United
States and Canada and limited performance  warranties for recreational vehicles,
including a twelve-month  performance warranty. The Company maintains $2,000,000
aggregate product liability insurance coverage.

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

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

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

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

      The  Company  has a license  and  royalty  agreement  (See Item 3 - "Legal
Proceedings")  with the owner of four of the U.S. patents covering the Company's
existing  Purifiners.  These patents expire in November 1997, September 1998 and
June 2008.  This  agreement  also covers  several  foreign issued and pending in
several  other  countries,  the earliest of which will expire in June 2004.  The
term of the  agreement  is for  the  life of the  patents  and any  improvements
thereto and requires  the payment of a 5% royalty  based on the net sales price,
as  defined,  of the  covered  products.  This  agreement  also  covers the U.S.
trademark for which the Company pays a 1% royalty based on net Element sales, as


<PAGE>

defined. The Company is primarily  responsible for maintaining and defending the
integrity of these patents and trademarks.

     The Company has registered its trademark and/or logo in  substantially  all
the  countries of the  industrialized  world  (other than in the United  States,
where the Company's licensor has registered the trademark).

     The Company has  patents  pending for the TFP Filter Plus and a  redesigned
Purifiner in substantially all industrialized countries of the world; these were
filed by the Company in 1994 through  1996,  and to date have been issued in the
United States and certain other  countries.  In 1996, the Company filed for U.S.
patent  protection  for its new oil flow  meter  which  will  enable the user to
visually  determine that the oil is flowing  through the Purifiner at the proper
rate.  The oil flow meter patent was  approved in the U.S. in early 1997.  There
can be no assurance that such patents pending will be issued.

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

      The  Company's   products   typically  do  not  require  any  governmental
approvals.   As  part  of  the   certification   process  under  the  California
Environmental  Protection  Agency's  Department of Toxic Substances,  in July of
1994,  the  Company  has  obtained  an  Executive  Order  issued by the State of
California  Air Resources  Board stating that the Purifiner  does not reduce the
effectiveness  of  applicable  vehicle  pollution  control  systems,  and may be
installed on all 1993 and older model year vehicles with pressure oil systems.

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

      The  Company  has one  employee  who  focuses  solely on  engineering  and
development. He is the inventor and originator of two U.S. patents issued to the
Company in 1996, as well as of the most recently  issued patent  licensed to the
Company.  During the last two years he has devoted substantially all of his time
to the engineering, development and enhancement of the Company's products.

Employees.
----------

      At  February  28,  1997,  the Company  had 42  employees,  16 of whom were
engaged in manufacturing,  assembly,  warehousing and shipping, 18 in marketing,
technical  and  installation  assistance  and  sales,  one  in  engineering  and
development  and 7 in  administrative  positions.  None  of  the  employees  are
represented by a labor union.  The Company  believes its employee  relations are
good.

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

     Substantially all of the Company's operations are conducted from its 14,500
square foot facility located in Boynton Beach,  Florida.  The facility is leased
for a term  ending  March 31,  1999 at a current  annual  rate of  approximately
$85,000.


<PAGE>

ITEM 3.     LEGAL PROCEEDINGS.
            -----------------
Legal Proceedings.
------------------

Premo Litigation.

      On December 8, 1994,  the Company,  as exclusive  licensee of two patents,
(one which was granted in 1980 and one  granted in 1990,  both of which are used
in connection  with  substantially  all of the Company's  current  Products) and
Robert C. Malt,  the patent owner,  filed an action  against  Premo  Lubrication
Technologies,   Inc.   ("Premo")  and  Charles   Borzarelli   (collectively  the
"Defendants")  in the United States District Court for the Southern  District of
Florida.  The  Company  and Mr.  Malt  have  alleged  that the  Defendants  have
infringed on one of its patents  issued on October 14, 1980 (the other patent is
no longer at issue),  and that they have  manufactured  and sold these  patented
devices.  The  Plaintiffs  are seeking  adjudication  that (i)  Defendants  have
willfully  infringed this patent (and requesting damages for lost profits or, at
a minimum,  royalties together with an amount equal to three times these damages
plus interest),  (ii) Defendants be permanently  enjoined from the making, using
or selling the infringing oil reclamation  devices and (iii) infringing  devices
in Defendants' possession be forfeited.

      The  Defendants  subsequently  filed  counterclaims,  as amended,  against
Plaintiffs alleging that (i) the subject patents are unenforceable and, further,
(ii) that under certain legal doctrines the Plaintiffs are barred from asserting
their claims.  Additionally,  the Defendants  allege that the Company engaged in
antitrust  violations  and various kinds of unfair trade  practices and that the
Company and certain of its employees have libeled the  Defendant's  business and
unlawfully interfered with its business  relationships.  The case is anticipated
to go to trial in 1997 and management believes that it has meritorious  defenses
to all of the counterclaims and that the Company will eventually  prevail in the
litigation.  However, there can be no assurance that the Company will prevail in
the litigation,  and if not, the outcome could have a material adverse effect on
the Company's operations.

Stockholder Litigation.
-----------------------

      On August 26, 1994, the Company and its principal stockholder,  Richard C.
Ford  ("Ford"),  filed an action  against the  representatives  of the Estate of
Willard  Taylor in the Circuit  Court for the  Seventeenth  Judicial  Circuit in
Broward County,  Florida.  The suit sought a declaratory judgment essentially to
confirm the validity of the Company's various issuance's of Common Stock to Ford
and  members of his family in 1994.  Prior to the Common  Stock  issuances,  the
Company obtained an independent  appraisal of the value of its Common Stock, and
the Fords paid a purchase price  consistent with that valuation and the Taylor's
were  provided  with  the  same  opportunity  to  invest  in  the  Company.  The
representatives  of the Estate of Willard  Taylor had  contested the validity of
the Common Stock issuances and the  constitution of the Board of Directors,  and
filed a counterclaim seeking to invalidate the issuances and the constitution of
the Board of Directors,  claiming a breach of fiduciary  duty and requesting the
appointment of a receiver.



<PAGE>

      Additionally,  in June 1995 the Estate demanded  repayment of its advances
to the Company in the amount of $502,026  (and  $268,742 of advances made to T/F
Systems,  Inc.  which  have not been  assumed  by the  Company  pursuant  to the
purchase of assets of T/F Systems,  Inc.). In a separate,  related  action,  the
Estate was also seeking  repayment  of certain  loans made to Richard C. Ford by
Willard Taylor prior to Mr.  Taylor's death in the principal  amount of $508,250
which,  in turn,  were also  advanced to the Company by Ford.  On September  19,
1996,  Mr. Ford and the Estate  reached an agreement as to the repayment of such
personal loans and unpaid  accrued  interest and such legal action was dismissed
with prejudice.

      In  September  1996,  the Company  entered  into an  Agreement  in Partial
Settlement  of T/F  Purifiner,  Inc.  Issues  ("Agreement")  which  released the
Company,  with  prejudice,  from all litigation  pending or  contemplated by the
Taylor Family,  the beneficiaries of the Estate,  against the Company related to
any actions taken by the Company  before the date of the  Agreement.  In return,
the Company agreed to repay the Estate's loans of $502,026 as follows:  $167,342
due 90 days after any equity  financings  which raise in excess of $5,000,000 of
gross proceeds;  $167,342 on the first and second  anniversaries  of such equity
financings.  If the equity financings are less than $5,000,000 the amount of the
periodic debt repayment  will be reduced and the term extended  proportionately.
The Estate has agreed not to commence  any action for loan  repayment as long as
the Company is in compliance  with the Agreement and raises gross proceeds of at
least  $2,000,000  within one year of the  Agreement.  To date,  the Company has
complied with the Agreement and has raised in excess of $2,000,000.  See Item 11
- "Security Ownership of Certain Beneficial Owners and Management".

Malt Litigation:

      On January 13, 1997,  Robert C. Malt, as owner of certain patents licensed
to the Company,  filed an action  against T/F  Purifiner,  Inc. and T/F Systems,
Inc.  (collectively the "Defendants") in the Circuit Court of the 15the Judicial
Circuit  of  Florida  in Palm  Beach  County.  Mr.  Malt  has  alleged  that the
Defendants are in breach of their license agreement with Malt. Malt is seeking a
(1)  permanent  injunction  to enjoin  the  Defendants  from  manufacturing  and
marketing the covered Purifiner  products and use of the U.S.  trademark and (2)
approximately  $21,000 for alleged past-due breaches of the license  agreements.
The Company  has filed an answer to this case and is  proceeding  to  discovery.
Although the Company  believes it has  meritorious  defenses with respect to the
monetary  amounts  alleged by the licensor patent owner, it has agreed to pay to
the latter such alleged unpaid royalties,  which amount relates primarily to the
timing of the royalty payment and legal fees regarding defending certain patents
pending of the licensor.  The Company, upon advise of counsel,  does not believe
that the Plaintiffs  will be in a  position to obtain an injunction  against the
Company's  selling of the Purifiner  products.  The Company  believes  that  the
licensor  patent  owner  initiated  litigation  in order  to extract a favorable
settlement.

Searcy, Denny, Scarola  et. al and Related Claims:

      The Company was informed in late 1996 that Searcy,  Denny, Scarola et. al.
("Scarola"),   former  legal  counsel  of  T/F  Systems,  Inc.  ("Systems")  was

<PAGE>

considering  filing an action against both T/F Systems,  Inc. and T/F Purifiner,
Inc. for past due legal fees and costs amounting to approximately $285,000. Such
liability   relates  to  Scarola's   representing   Systems  in  obtaining   the
manufacturing  and marketing rights to the Purifiner from certain parties in May
1993.  (See "Item 1 - Description  of Business - Background and Formation of T/F
Purifiner, Inc.")

      In late 1996,  TF Systems,  Inc.'s former law firm claimed that it was due
approximately  $285,000  in  legal  fees  related  primarily  to  obtaining  the
manufacturing and marketing rights to the Purifiner for TF Systems, Inc. ("TFS")
and the Company.  TFS was awaiting the judgment of an appellate  court which, if
adjudicated in TFS's favor, would have provided TFS with sufficient funds to pay
such legal fees and other  possible legal fee claims  aggregating  approximately
$100,000.  On February  26, 1997,  the  appellate  court ruled  against TFS and,
accordingly,  the funds  discussed  above are not currently  available to TFS to
satisfy such claims.  T/F  Purifiner,  Inc. did not assume these  obligations as
part of its purchase of Systems and management believes such amounts are not the
responsibility  of T/F  Purifiner,  Inc.  However,  the ultimate  outcome of the
claims against the Company cannot be determined at this time.

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

      Not Applicable.

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

      As of February 28, 1997,  there were  approximately  278  stockholders  of
record of the Company's  stock. The closing bid price quoted on the OTC Bulletin
Board sheets for the Company's Common Stock at March 17, 1997 was $8.50.

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

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

      The following table sets forth for the period indicated,  the high and low
closing  prices for the  period  from  October  2, 1996 (the date first  quoted)
through December 31, 1996 and from January 1, 1997 through February 28, 1997.
 
                                                Common Stock
                                             High         Low
                                             ----         ---

      October 2, 1996 - December 31, 1996   $9.05        $6.30
      January 1, 1997 - February 28, 1997   10.00         7.90

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


<PAGE>

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

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


GENERAL

      The Company was formed in 1987, and commenced  limited  operations in 1991
when it obtained  worldwide  manufacturing and marketing rights to the Purifiner
products.  The  growth  in the  Company  is  primarily  due  to  the  increasing
acceptance of the Company's products by the marketplace.  This acceptance is the
result of various factors, including the increased credibility of the product as
a result of its commercial relationship with well-known entities and the growing
desire of users to reduce maintenance costs, extend engine life and preserve the
environment.

RESULTS OF OPERATIONS

The  following  table sets forth for the periods  indicated  the  percentage  of
revenues  represented by certain items reflected in the Company's  statements of
operations.


                                               Percentage of Revenues
                                               ----------------------
                                                       Year
                                                 Ended December 31,
                                                 ------------------
                                                 1995         1996
                                                 ----         ----
Net sales                                        100%         100%
Operating costs and expenses:
  Cost of sales                                  (48)         (72)
  Selling expenses                               (42)         (97)
  General and administrative expenses            (36)         (77)
  Other                                           -            (1)
                                                -----        -----
Total operating costs and expenses              (126)        (247)
                                                -----        -----

Operating loss                                  (26)%        (147)%
                                                =====        ======


<PAGE>


YEAR ENDED DECEMBER 31, 1996 COMPARED WITH YEAR ENDED DECEMBER 31, 1995

      Net  Sales.  Net  sales  decreased  by 10%  from  $1,480,037  in  1995  to
$1,327,230 in 1996.  This decrease was primarily  attributable  to the effect of
the  Company's  price  reductions  implemented  in 1996 and related  merchandise
credits.  During 1996, the Company had approximately  $254,000 of sales to Ltd.,
the  Company's  newly formed  joint  venture in 1996  compared to  approximately
$85,000  to one of  Ltd.'s  shareholders  in  1995.  Approximately,  $17,000  of
intercompany  profit on these sales to Ltd.  have been  deferred at December 31,
1996.

      Effective October 15, 1996, the Company  implemented a new product pricing
strategy  to reduce the  Company's  selling  prices to thus  enable end users to
obtain a significantly improved return on investment.  The Company believes this
new  strategy  will  promote the sale of the  Company's  products  and result in
increased  long-term  revenues from unit and  replacement  filter sales and also
provide the Company  with the  ability to reduce its  product  costs,  primarily
through  1)  volume   purchase   discounts,   2)utilization   of  excess   fixed
manufacturing capacity and 3) improved production processes. If the Company does
not realize these cost savings, its gross margin will be adversely effected.  In
the  fourth  quarter  of 1996,  as a result  of this  price  reduction,  various
merchandise credits were issued by the Company, to those of its distributors who
met certain conditions.  These merchandise credits have had an adverse effect on
the Company's results of operations in such period.

      Cost of Sales.  Cost of sales  increased  by 34% from  $712,714 in 1995 to
$956,628  in 1996.  The  Company's  gross  margin  decreased  from 51.8% to 28%,
substantially  all due to the 19% of 1996  sales made to Ltd.  at  substantially
lower  sales  prices  than  the  Company's  existing   exclusive   international
distributor pricing,  and the significant price reductions  implemented in 1996.
To the extent that  additional  sales are made by the Company to Ltd., or if its
international  distributors  account for an increasing  proportion of sales, the
Company's aggregate gross margin will be adversely affected as compared to prior
periods.

      Selling Expenses. Selling expenses increased by 109% from $616,569 in 1995
to $1,290,563 in 1996. The primary  reasons for this increase were the increases
in other selling expenses such as salaries for new personnel, compensatory stock
options, commissions,  brochures and catalogs, consulting, travel and trade show
expenses in 1996 versus 1995.  Additionally,  in the fourth quarter of 1996, the
Company received approval of its United States patent for the next generation of
the  Purifiner.  Accordingly,  the Company wrote off  approximately  $200,000 of
patent costs related to its prior  generation of Purifiners.  As a percentage of
revenues, selling expenses increased from 42% in 1995 to 97% in 1996.

      General and Administrative  Expenses.  General and administrative expenses
increased by 92% from  $531,646 in 1995 to  $1,022,475 in 1996 and, as a percent
of revenues,  increased from 36% to 77%. This dollar  increase was generally due
to the increased level of business activity, specifically including increases in
personnel, compensatory stock options, travel and professional fees.

      Operating  Loss. As a result of the foregoing,  the Company's  operating
loss increased from $380,892 in 1995 to $1,959,759 in 1996.


<PAGE>

      Interest Expense.  Interest expense decreased by 12% from $28,915 for 1995
to $25,354 for the 1996.  This change  resulted from a decrease in average short
and long term borrowings  outstanding in 1996,  versus the comparable period for
1995.  The loans were used to finance a portion of the  Company's  activities in
1995 and 1996.

      Net  Loss.  As a  result  of  the  foregoing,  the  Company's  net  loss
increased from $409,807 for 1995 to $1,983,270 for 1996.

Year Ended December 31, 1995 Compared with Year Ended December 31, 1994
-----------------------------------------------------------------------

     Net  Sales.  Net  sales  increased  by 42%  from $  1,038,960  in  1994  to
$1,480,037  in 1995.  This  increase  was  attributable  to the  addition of new
distributors  in 1995 and  increased  sales  to  existing  distributors  and new
customers.  Of this amount,  approximately  $207,000  resulted from sales to one
foreign  distributor in 1995.  Export sales increased from 48% of total revenues
in 1994 to 55% of total revenues in 1995. This increase  resulted from increased
sales of TFP products to existing and new foreign distributors.

     Cost of Sales.  Cost of sales  increased  by 48% from  $480,834  in 1994 to
$712,714 in 1995. This increase is primarily attributable to the 42% increase in
sales between the comparable periods.  Additionally,  the Company's gross margin
decreased  to  51.8%  in  1995  from  53.7%  in  1994,  the  decrease  primarily
attributable  to the increase in export sales  (having a lower gross margin than
domestic sales) from $503,000 in 1994 to $821,000 in 1995.

      Selling Expenses.  Selling expenses increased by 29% from $477,470 in 1994
to $616,569 in 1995.  This increase was  attributable  in part to an increase in
trade-show related expenses, from approximately $27,000 in 1994 to approximately
$42,000 in 1995. The increased  selling  expenses were also  attributable to the
increased commissions and sales department salaries from approximately  $221,000
in 1994 to $292,000 in 1995, and a general increase in sales-related activities.
As a percentage of sales,  selling expenses decreased from 46% in 1994 to 42% in
1995.

      General and Administrative  Expenses.  General and administrative expenses
increased  by 8% from  $491,094  in 1994 to  $531,646  in 1995.  As a result  of
additional  employees and consultants,  salary and consulting expenses increased
from  approximately  $209, 000 in 1994 to approximately  $252, 000 in 1995. As a
percentage of sales,  general and administrative  expenses decreased from 47% in
1994 to 36% in 1995.

      Operating  Loss.  The Company's  operating  loss decreased from $410,438
in 1994 to $380,892 in 1995.

      Interest Expense. Interest expense amounted to $28,915 in 1995 as compared
with interest expense of $9,952 in 1994. The increase in 1995 over 1994 resulted
from increased average short-and long-term borrowings outstanding.


<PAGE>

      Net  Loss.  As a  result  of the  foregoing,  the  Company'  s net  loss
decreased from $424,197 in 1994 to $409,807 in 1995.

LIQUIDITY AND CAPITAL RESOURCES

      To  date,  the  Company's  capital  requirements  in  connection  with its
business  activities have been and will continue to be significant.  To fund its
activities,  the Company has been  dependent  upon available cash generated from
operations,   the  proceeds  of  sales  of  its   securities  to  investors  and
stockholders,  and other loans.  The Company's 1996 auditors  report included an
explanatory  paragraph  which  stated that  because  the  Company has  sustained
recurring  operating  losses and negative cash flows from operating  activities,
these factors raise substantial doubt about the Company's ability to continue as
a going concern.

      At December 31, 1996,  the Company had working  capital of $1,727,933  and
its  current  ratio  (current  assets to current  liabilities)  was 3.1 to 1, as
compared  with a working  capital  deficiency of $894,117 and a current ratio of
 .25 at December 31, 1995. At December 31, 1996, the Company had $928,960 of cash
and subscription  receivables of $1,041,594 collected subsequent to December 31,
1996.  Outstanding short-term debt from lenders and shareholders was $180,767 at
December 31, 1996 and included a shareholder  loan of $167,342 due to the Estate
of Willard Taylor (See Note 4 to the Notes to Financial Statements and "Part I -
Item 3. Legal Proceedings - Stockholder  Litigation" relating to repayment terms
to the Estate). The balance of long term debt was $360,648 at December 31, 1996,
and included a shareholder loan of $334,684 due to the Estate of Willard Taylor.

      At December 31, 1996, the Company owed  approximately  $426,000 in current
liabilities  to various  trade and other  unrelated  creditors.  Of this  amount
approximately $84,000 was owed to various legal and other professional firms for
services  provided to the Company.  These  professionals and vendors continue to
provide  services to the Company;  however,  there can be no assurance that they
will  continue  to do so in the future  while all or a portion  of such  amounts
remains outstanding.  The Company has made certain payments and intends to use a
portion of  existing  funds and future  financings  to repay the  amounts due to
creditors.

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


<PAGE>

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

      The Company  currently is not generating  sufficient  revenues to fund its
existing and planned expansion of its operations.  Accordingly,  the Company has
embarked and is  implementing  plans to raise  additional  capital.  The Company
intends to use such  additional  financing to increase its  marketing  and sales
efforts,  including the hiring of additional  sales and technical  personnel and
related  costs,   implementation  of  advertising,   promotional  and  marketing
programs,  and  additional  fleet testing  programs.  Additionally,  the Company
intends  to   continue   hiring   additional   manufacturing,   operating,   and
administrative  personnel and acquire additional capital equipment and leasehold
improvements to meet expected production increases.

      The  above  is not an  all  inclusive  listing  of the  Company's  planned
expenditures. In the event that the proceeds from future offerings or financings
are not received,  the Company will not be able to implement its current  plans.
The inability to obtain  additional  financing when needed would have a material
adverse  effect on the  Company,  including  possibly  requiring  the Company to
curtail or cease its 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.  Consequently, the Company's product revenues may vary significantly by
quarter  and  the  Company's   operating  results  may  experience   significant
fluctuations.



<PAGE>





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

                               T/F Purifiner, Inc.

                                    Contents





                                                                           Page
                                                                           ----

Report of Independent Auditors .............................................F-2

Audited  Financial Statements

Balance Sheet as of December 31, 1996.......................................F-3
Statements of Operations for the years ended December 31, 1995 and 1996.....F-4
Statements of Changes in Stockholders Equity (Capital Deficiency)
   for the years ended December 31, 1995 and 1996...........................F-5
Statements of Cash Flows for the years ended December 31, 1995 and 1996.....F-6
Notes to  Financial Statements..............................................F-7



















                                     F-1



<PAGE>


REPORT OF INDEPENDENT AUDITORS

Board of Directors and Shareholders of
  T/F Purifiner, Inc.

      We have audited the accompanying  balance sheet of T/F Purifiner,  Inc. as
at December  31,  1996,  and the related  statements of  operations,  changes in
stockholders'  equity (capital  deficiency) and cash flows for each of the years
in the two-year period ended December 31, 1996.  These financial  statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.

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

      In our opinion, the financial statements  enumerated above present fairly,
in all material respects,  the financial  position of T/F Purifiner,  Inc. as at
December 31, 1996 and the results of its  operations and its cash flows for each
of the years in the two-year  period ended December 31, 1996 in conformity  with
generally accepted accounting principles.

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



Richard A. Eisner & Company, LLP

New York, New York
February 14, 1997

With respect to last paragraph Note 9
February 26, 1997

                                       F-2


<PAGE>
                               T/F Purifiner, Inc.
                                  Balance Sheet
                                December 31, 1996

Assets
Current assets:
  Cash and cash equivalents                                         $   928,960
  Subscriptions receivable                                            1,041,594
  Trade accounts receivable, net of allowance for doubtful
       accounts of $40,000                                              126,806
  Inventories                                                           440,239
  Prepaid expenses and other current assets                              18,037
                                                                    -----------
Total current assets                                                  2,555,636

Property and equipment, net                                             172,370
Patents and trademarks, net of $12,855 of accumulated
   amortization                                                         152,770
Costs in excess of net assets acquired, net of $5,589
   of accumulated amortization                                          132,686
Other assets                                                             26,218
                                                                    -----------
                                                                    $ 3,039,680
                                                                    ===========

Liabilities and Stockholders' Equity
Current liabilities:
  Accounts payable - trade                                          $   314,234
  Accrued expenses                                                       77,077
  Customer deposits and other                                           255,625
  Current portion of note payable and capital lease obligations          13,425
  Shareholder loans                                                     167,342
                                                                    -----------
Total current liabilities                                               827,703

Shareholder loans                                                       334,684
Capital lease obligations                                                25,964
Deferred rent                                                            13,390
Liability to equity investee                                             23,351
                                                                    -----------
Total liabilities                                                     1,225,092

Commitments and contingencies

Stockholders' Equity:
  Common Stock, $.001 par value, 20,000,000 shares
      authorized, 5,097,080 issued and outstanding                        5,097
  Preferred Stock, $.001 par value, 500,000 shares authorized              --
  Additional paid-in capital                                          6,323,505
  Unearned compensatory options                                        (123,114)
  Accumulated deficit                                                (4,390,900)
                                                                    -----------
                                                                      1,814,588
                                                                    -----------
                                                                    $ 3,039,680
                                                                    ===========
See accompanying notes to financial statements.

                                       F-3

<PAGE>



                               T/F Purifiner, Inc.

                            Statements of Operations

                     Years ended December 31, 1995 and 1996


                                                        1995            1996
                                                        ----            ----

Net sales                                           $ 1,480,037     $ 1,327,230
Cost of sales                                           712,714         956,628
                                                    -----------     -----------
Gross profit                                            767,323         370,602

Operating expenses:
  Selling                                               616,569       1,290,563
  General and administrative                            531,646       1,022,475
  Deferred profit                                          --            17,323
                                                    -----------     -----------
                                                      1,148,215       2,330,361
                                                    -----------     -----------

Operating loss                                         (380,892)     (1,959,759)

Other income (expenses):
  Interest expense                                      (28,915)        (25,354)
  Interest income                                          --             1,843
                                                    -----------     -----------

Net loss                                            $  (409,807)    $(1,983,270)
                                                    ===========     ===========

Loss per common share                               $      (.15)    $      (.60)
                                                    ===========     ===========

Weighted average common shares outstanding            2,768,775       3,322,250
                                                    ===========     ===========


See accompanying notes to financial statements.











                                       F-4


<PAGE>

<TABLE>
<CAPTION>
                                                         T/F Purifiner, Inc.

                                            Statements of Changes in Stockholders' Equity
                                                         (Capital Deficiency)
                                                                                                                           Total
                                 Redeemable                                                                            Stockholders'
                                Common Stock    Common Stock     Additional   Unearned                                    Equity    
                             --------------- -----------------    Paid-In-   Compensatory  Accumulated   Subscription    (Capital
                             Shares   Amount   Shares   Amount    Capital      Options        Deficit     Receivables   Deficiency)
                             -------------------------------------------------------------------------------------------------------
<S>                         <C>      <C>     <C>        <C>       <C>        <C>          <C>             <C>          <C>         
Balance at January 1, 1995       -   $    -  2,736,000  $2,736    $955,748   $    -       $(1,997,823)    $      -     $(1,039,339)

Issuance of common stock,
  net of issuance costs          -        -     57,000      57       4,951        -                 -       (7,000)         (1,992)

Net loss                         -        -          -       -           -        -          (409,807)           -        (409,807)
                            --------------------------------------------------------------------------------------------------------
Balance at December 31, 1995     -        -  2,793,000   2,793     960,699        -        (2,407,630)      (7,000)     (1,451,138)

Proceeds from sale of
  redeemable Common Stock,
  net                      393,443  594,000          -       -     (23,163)       -                 -            -         (23,163)

Issuance of Common Stock
  to acquire D.B.  Filters       -        -     90,773      91     136,909        -                 -            -          137,000

Accrued interest on
  redeemable Common Stock        -   30,335          -       -     (30,335)       -                 -            -          (30,335)

Collection of subscription
  receivables                    -        -          -       -           -        -                 -        7,000            7,000

Other issuances of
  Common Stock                   -        -     24,738      25      54,773        -                 -            -           54,798

Proceeds from sale of
  Common Stock, net              -        -  1,331,453   1,331   3,085,671        -                 -            -        3,087,002

Issuance of Common Stock
  in exchange for
  notes payable                  -        -    338,673     339     828,562        -                 -            -          828,901

Proceeds from exercise of
   stock options, net            -        -    125,000     125     244,160        -                 -            -          244,285
Issuance of compensatory
    stock options                -        -          -       -     442,287  (123,114)               -            -          319,173

Expiration of redeemable
  common stock put option (393,443)(624,335)   393,443     393     623,942        -                 -            -          624,335

Net loss                         -        -          -       -           -        -        (1,983,270)           -       (1,983,270)
            ------------------------------------------------------------------------------------------------------------------------

Balance at
  December 31, 1996              - $      - 5,097,080   $5,097  $6,323,505 $(123,114)     $(4,390,900)       $   -      $ 1,814,588
                   =================================================================================================================

</TABLE>



























See accompanying notes to financial statements.

                                                                       F-5

<PAGE>

                               T/F Purifiner, Inc.
                            Statements of Cash Flows
                     Years ended December 31, 1995 and 1996
<TABLE>
<CAPTION>
                                                                   1995           1996
                                                                   ----           ----
<S>                                                           <C>            <C>         
Operating activities                                          
Net loss                                                      $  (409,807)   $(1,983,270)   
Adjustments to reconcile net loss to net cash
   used in operating activities:
    Amortization                                                    5,255         22,009
    Write off of patent costs                                        --          200,000
    Issuances of Common Stock and compensatory options               --          341,628
    Depreciation and amortization of property and equipment        25,823         39,365
    Changes in operating assets and liabilities:
      Trade accounts receivable, net                              (26,490)       (42,684)
      Inventories                                                 (12,729)      (270,612)
      Prepaid expenses and other current assets                     8,839        (10,088)
      Other assets                                                (15,300)        10,691
      Accounts payable - trade                                     27,648        121,049
      Accrued expenses                                             76,051        (88,281)
      Customer deposits and other                                  86,572        121,648
      Accrued interest and other payables - related parties        52,477        (61,663)
      Deferred rent                                                 3,959         (8,903)
                                                              -----------    -----------
Net cash used in operating activities                            (177,702)    (1,609,121)

Investing activities
Patents and trademarks                                            (92,199)      (227,146)
Purchases of property and equipment                               (16,302)       (89,920)
Increase in other assets                                             --          (22,033)
Acquisition of DB Filters                                            --           (1,275)
                                                              -----------    -----------
Net cash used in investing activities                            (108,501)      (340,374)

Financing activities
Decrease (increase) in deferred issuance costs                     (1,992)         4,224
Proceeds from issuances of Common Stock
  and exercise of stock options, net                                 --        2,892,873
Collection of subscription receivables                               --            7,000
Proceeds from notes payable                                       495,000        300,000
Payment on notes payable and capital lease obligations           (199,676)      (312,407)
Proceeds from shareholder loans                                    75,500         23,458
Payment on shareholder loans                                      (85,000)       (58,671)
Borrowing from investee                                            51,340         64,400
Repayment to investee                                             (18,235)       (74,154)
                                                              -----------    -----------
Net cash provided by financing activities                         316,937      2,846,723
                                                              -----------    -----------
Increase in cash and cash equivalents                              30,734        897,228
Cash at beginning of year                                             998         31,732
                                                              -----------    -----------
Cash and cash equivalents at end of year                      $    31,732    $   928,960
                                                              ===========    ===========
Cash paid for interest                                        $    13,052    $    19,366
                                                              ===========    ===========

</TABLE>

During 1995 and 1996, the Company entered into capital lease  obligations in the
amount of approximately $2,000 and $27,200, respectively. See Notes 4, 6, and 15
for description of non-cash issuances of Common Stock.

See accompanying notes to financial statements.

                                       F-6

<PAGE>


                               T/F Purifiner, Inc.

                          Notes to Financial Statements

                           December 31, 1995 and 1996


1.   THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

THE COMPANY

T/F Purifiner Inc. ("TFP" or the "Company"), a Delaware corporation,  is engaged
in the  manufacturing,  distribution and sale of oil purification  systems under
the trademark "Purifiner" (See Note 11).

The Company holds the exclusive worldwide manufacturing and marketing rights for
the Purifiner products pursuant to licenses for various patents (see Note 8) and
through direct ownership of various issued and pending patents.

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

The Company has  completed  several  private  placements of its Common Stock and
expects  to  complete  additional  financings  in  1997.  However,  there  is no
assurance that the Company can complete these proposed  issuances or that it can
obtain  adequate  additional  financing  from other  sources or that  profitable
operations  can  be  achieved.  The  financial  statements  do not  include  any
adjustments  relating to the recoverability of recorded asset amounts that might
be necessary as a result of the above uncertainty.

USE OF ESTIMATES

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













                                       F-7

<PAGE>


                             T/F Purifiner, Inc.
                    Notes to Financial Statements (continued)

1.   THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

REVENUE RECOGNITION

Sales are  recognized  upon  shipment.  Cash  received by the  Company  prior to
shipment is recorded as a customer deposit.  Sales are made to certain customers
under terms allowing  certain limited rights of return and other limited product
and performance  warranties for which no material provision has been made in the
accompanying financial statements. Management believes, based on past experience
and future expectations, that such limited return rights and warranties will not
have a material adverse effect on the Company's financial statements.

INVENTORIES

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

PROPERTY AND EQUIPMENT

Property and  equipment is stated at cost.  Depreciation  is provided  using the
straight-line  method over the  estimated  useful  lives of the related  assets.
Leasehold improvements are amortized over the shorter of the useful lives of the
improvement  or the term of the related  lease.  The  estimated  useful lives of
property and equipment is 5 years.

PATENTS AND TRADEMARKS

Patents and  trademarks  are stated at cost,  including  legal costs incurred to
defend patent rights,  and are amortized using the straight-line  method over 10
to 15 years.

ENGINEERING AND DEVELOPMENT

In 1995 and  1996,  engineering  and  development  expenses  were  approximately
$61,000 and $75,000, respectively, and are expensed as incurred.

IMPAIRMENT

The Company has adopted the provisions of Financial  Accounting  Standards Board
Statement  ("FASB") No. 121 "Accounting for the Impairment of Long-Lived  Assets
and for  Long-Lived  Assets to be Disposed  Of".  Management  reviews long lived
assets  and  intangible  assets  for  impairment  whenever  events or changes in
circumstances   indicate  the  carrying   amount  of  such  assets  may  not  be
recoverable.  Recoverability  of these assets is  determined  by  comparing  the
forecasted undiscounted net cash flows estimated to be generated by those assets





                                      F-8

<PAGE>

                               T/F Purifiner, Inc.
                    Notes to Financial Statements (continued)

1.   THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

IMPAIRMENT (CONTINUED)

to the  asset's  carrying  amount.  In the fourth  quarter  of 1996 the  Company
received approval of its U.S. patent for the next generation of Purifiner units.
Accordingly,  the Company  wrote off  approximately  $200,000  related to patent
costs incurred primarily to defend the prior generation patent rights which have
been included in selling expenses.

COMPENSATORY STOCK OPTIONS

The  Company  accounts  for the  difference  between the issue or grant price of
compensatory  stock  and  warrants  and  fair  value as  "Unearned  Compensatory
Options," which the Company charges to operations over their vesting period.

STOCK BASED COMPENSATION

During 1996, the Company adopted Statement of Financial Accounting Standards No.
123,  "Accounting for Stock-Based  Compensation" (SFAS No.123). The provision of
SFAS No. 123 allow companies to either expense the estimated fair value of stock
options or to continue  to follow the  intrinsic  value  method set forth in APB
Opinion No. 25, "Accounting for Stock Issued to Employees" (APB 25) but disclose
the pro forma effects on net income (loss) at the fair value of the options been
expensed.  The Company has elected to continue to apply APB 25 in accounting for
its stock option plan. (See Note 16).

CREDIT RISK

The Company  minimizes the concentration of credit risk associated with cash and
cash  equivalents  by  maintaining  its cash and  cash  equivalents  with a high
quality federally insured financial institution.  At December 31, 1996, deposits
in  excess  of  federally  insured  limits  are  approximately   $829,000.  Cash
equivalents  consist of investments with original  maturities of three months or
less.

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 are sufficient to cover potential credit losses. (See
Note 10.)








                                       F-9


<PAGE>

                               T/F Purifiner, Inc.
                    Notes to Financial Statements (continued)

1.   THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

LOSS PER SHARE

Loss per share is calculated by dividing net loss by the weighted average number
of common  shares  outstanding  during each period.  The effect of the Company's
stock options and warrants  have not been included in the Company's  computation
of loss per share since they are anti-dilutive.

INCOME TAXES

Prior to April 1996, the Company had elected to be treated as an "S" corporation
under the  provisions  of the Internal  Revenue Code ("IRC").  Accordingly,  its
taxable  income or loss was  includable  in the  current  taxable  income of its
shareholders,  and no federal or state income tax  provision or benefit had been
recorded in the accompanying financial statements.

If the Company had been subject to  corporate  income taxes for 1995 and for the
first  quarter of 1996,  it would not have  recorded  any income tax  expense or
benefit in its statements of operations. On April 1, 1996, the Company ceased to
qualify under Subchapter S of the IRC and, accordingly,  is subject to corporate
income taxes commencing April 1, 1996.

2.   INVENTORIES

At December 31, 1996, inventories consist of the following:


            Raw materials                        $291,957
            Finished goods                        139,245
            Supplies                                9,037
                                                 --------
                                                 $440,239
                                                 ========


3.   PROPERTY AND EQUIPMENT

At December 31, 1996, property and equipment consists of the following:













                                     F-10

<PAGE>

                             T/F Purifiner, Inc.
                  Notes to Financial Statements (continued)

3.   PROPERTY AND EQUIPMENT (CONTINUED)  

            Machinery and equipment              $229,482
            Furniture and fixtures                 37,603
            Leasehold improvements                 33,486
                                                 --------
                                                  300,571
            Less accumulated depreciation and
                amortization                     (128,201)
                                                 --------         
                                                 $172,370
                                                 ========

At December 31, 1996, machinery and equipment includes  approximately $49,000 of
equipment held under capital  leases with related  accumulated  amortization  of
approximately $13,300.

4.   SHAREHOLDER LOANS AND OTHER NOTES PAYABLE

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





                                      F-11


<PAGE>

                              T/F Purifiner, Inc.
                    Notes to Financial Statements (continued)

5.  SHAREHOLDER LOANS AND OTHER NOTES PAYABLE (CONTINUED)

On July 31,  1996,  a  shareholder  received  49,770  shares of Common  Stock in
exchange for his loans and unpaid  interest in the aggregate  amount of $99,540.
These loans bore  interest at 10% per annum ($9,711 in 1995 and $6,132 in 1996).
On August 1, 1996, the Company's principal  shareholder  received 251,013 shares
of Common Stock in exchange for his non interest  bearing  shareholder  loans in
the aggregate amount of $502,026.

In 1996, the Company issued  unsecured notes payable in the aggregate  amount of
$275,000 to several  parties,  $125,000 of which bore interest at 10% per annum.
The  principal  and  interest on these notes were repaid  prior to December  31,
1996.

At December 31, 1995, the Company had a total of $35,213 of unsecured  loans due
to its principal shareholder bearing interest at 10% per annum. These loans were
repaid in April 1996.  During 1995 and 1996, the Company incurred  approximately
$4,000 and $500,  respectively,  of interest  expense on  principal  shareholder
loans.

6.   COMMON STOCK

In June 1995,  pursuant to  agreements  entered into on December  15, 1994,  TFP
issued an aggregate of 57,000 shares of its Common Stock to two  employees,  one
of which is related to the principal shareholder, for their estimated fair value
at  December  15,  1994 of $7,000.  The  Company  agreed to  provide  additional
compensation, including the effect of tax consequences, to such parties in order
for them to repay the subscription receivables, prior to their December 31, 1996
due date.  In June 1995,  the Board of  Directors  of the  Company  approved  an
increase in  authorized  shares from 2,000 to 100,000,  approved a change in the
par value of Common  Stock from no par value to $.01 par value,  and  approved a
100 to 1 stock split.

On July 1, 1996,  the Board of Directors of the Company  approved an increase in
authorized Common Stock from 100,000 to 20,000,000, approved a change in the par
value of Common  Stock from $.01 par value to $.001 par value and  approved a 57
to 1 stock split distribution for common stockholders of record on such date. In
July 1996, the Board of Directors of the Company  approved the  authorization of
up to 500,000 shares of preferred  stock (none issued or outstanding at December
31, 1996). On January 1, 1997, the Board of Directors and shareholders  approved










                                      F-12


<PAGE>

                               T/F Purifiner, Inc.
                    Notes to Financial Statements (continued)

6.   COMMON STOCK (CONTINUED)

a 2.5:1 stock split distribution for common stockholders of record on such date.
All share and per share data presented in the accompanying  financial statements
have been restated to reflect the above actions.

In 1996,  the Company issued 17,500 shares of its Common Stock to one of its law
firms in payment for approximately $40,000 of professional services rendered.

In 1996,  the  Company  issued  7,238  shares of its  Common  Stock for  nominal
consideration to certain employees, distributors, a not-for-profit environmental
group,  and other  parties for past  services  and support  given to the Company
which has been recorded based upon the estimated fair value of such Common Stock
($5.00 per share) as determined by the Board of Directors.

In 1996, the Company sold 1,331,453  shares of its Common Stock for net proceeds
(including   subscription   receivables  collected  in  1997)  of  approximately
$3,087,000  through various  private  placements at prices ranging from $2.00 to
$3.40 per share.  At December 31, 1996,  subscription  receivables of $1,041,594
had  been  recorded  in  the  accompanying  balance  sheet,  all of  which  were
subsequently collected.

In October 1996, a noteholder received 37,890 shares of Common Stock in exchange
for outstanding loan and unpaid interest, due at 10% per annum, in the aggregate
amount of $227,340.

See Notes 4, 14, 15 and 16 for discussions of additional common stock issuances.

7.   LEASES

In August  1993,  TFP entered  into a five-year  noncancelable  operating  lease
agreement,  as amended,  for the Company's  manufacturing,  warehouse and office
facilities.  The lease commenced on April 1, 1994,  with payments  commencing on
July 1, 1994 and increasing  lease payments over the second through fourth years
of its term.  The  Company has  accounted  for these  lease  payments  using the
straight-line  method over the term of this lease and  recorded a deferred  rent
payable.  At December 31, 1996,  the schedule of future  minimum lease  payments
under this lease is as follows:

                  1997              $85,000
                  1998               87,000
                  1999               22,000
                                   --------
                                   $194,000
                                   ========







                                      F-13

<PAGE>

                               TF Purifiner, Inc.
                  Notes to Financial Statements (continued)

7.   LEASES (CONTINUED)

Total rent  expense  was  approximately  $75,000  and $72,000 for 1995 and 1996,
respectively.

The Company  also has entered into several  obligations  for certain  office and
manufacturing  equipment  which have been  accounted for as capital  leases.  At
December 31, 1996, future minimum  commitments under this noncancelable  capital
lease are as follows:

                  1997                                          $18,497
                  1998                                           18,497
                  1999                                           12,570
                  2000                                              891
                                                               --------

                  Total minimum lease payments                   50,455

                  Less amount representing interest at 16%      (12,238)
                  Present value of minimum lease payments
                      ($12,253 due in 1996)                     $38,217
                                                               ========

8.   ROYALTIES

In  connection  with the  Company  being  granted  worldwide  manufacturing  and
marketing  rights  for  certain of the  Purifiner  products  in 1990,  a royalty
agreement  was entered  into,  the term of which mirrors the life of the related
patents or any  improvements  thereto.  Pursuant to this royalty agreement,  the
owner of the patents will receive 5% of the units net sale price, as defined, of
all covered Purifiner products,  as defined.  Additionally,  1% of the net sales
price of replacement  oil filter  elements will be paid as a royalty for the use
of the Purifiner U.S. trademark.

In May  1994,  the  Company  and the  patent  owner  entered  into a  settlement
agreement  relating to the appropriate method of calculating and disbursing both
future and retrospective  royalties.  As a result of this agreement,  the patent
owner is entitled  to a minimum  annual  royalty of $24,000,  payable in monthly
installments of $2,000.  The monthly royalty may exceed,  but never be less than
$2,000,  unless the current  calendar year monthly  average is more than $2,000.
Royalty  expense  for  1995  and 1996 was  approximately  $49,000  and  $48,000,
respectively.

In January 1997,  this patent holder filed an action against the Company for non
payment of approximately  $21,000 of unpaid royalties claimed by him and seeking
a permanent  injunction  against the Company's  manufacturing and selling of the
covered Purifiner products.  The Company has filed an answer to this case and is
proceeding to discovery. Although the




                                      F-14

<PAGE>

                             T/F Purifiner, Inc.
                  Notes to Financial Statements (continued)


8.   ROYALTIES (CONTINUED)

Company  believes  it has  meritorious  defenses  against the  monetary  amounts
alleged by the licensor  patent  owner,  it has agreed to pay the patent  holder
such alleged unpaid  royalties,  which amount relates primarily to the timing of
the royalty payment and legal fees regarding  defending  certain patents pending
of the  licensor.  The  Company,  upon advice of  counsel,  does not believe the
license  holder  will be in a  position  to obtain  an  injunction  against  the
Company's  manufacturing  and  selling  of the  Purifiner products.  The Company
believes  that  the  licensor  patent  holder  initiated  litigation in order to
extract a favorable settlement.

9.   CONTINGENCIES

During  1995,  the  Company  commenced  a patent  infringement  case  against  a
competitor.  The competitor  subsequently asserted certain counterclaims against
the  Company  and  certain  of its  employees.  The  ultimate  outcome  of these
counterclaims  cannot  currently  be  determined  at this  time but the  Company
believes  it has  meritorious  defenses  and will  eventually  prevail  in these
actions.

In  April  1996,  the  Company  became a party  to an  action  filed by a former
independent  contractor  claiming certain  commissions and other damages due him
pursuant to an  agreement.  Pursuant to the  agreement,  as  adjudicated  by the
Court, the Company will resolve this case through  arbitration and, although the
ultimate  outcome of this matter cannot be determined at this time, the Company,
upon advice of counsel, believes it has meritorious defenses and will eventually
prevail in this matter. No action has been taken by the plaintiff on this matter
since mid 1996.

In late 1996,  TF Systems,  Inc.'s (See Note 11) former law firm claimed that it
was due approximately  $285,000 in legal fees related primarily to obtaining the
manufacturing and marketing rights to the Purifiner for TF Systems, Inc. ("TFS")
and the Company.  TFS was awaiting the judgment of an appellate  court which, if
adjudicated in TFS's favor, would have provided TFS with sufficient funds to pay
such legal fees and other  possible legal fee claims  aggregating  approximately
$100,000.  On February  26, 1997,  the  appellate  court ruled  against TFS and,
accordingly,  the funds  discussed  above are not currently  available to TFS to
satisfy such claims.  T/F  Purifiner,  Inc. did not assume these  obligations as
part of its purchase of Systems and management believes such amounts are not the
responsibility  of T/F  Purifiner,  Inc.  However,  the ultimate  outcome of the
claims  against the Company  cannot be determined at this time. No liability has
been recorded for this claim in the accompanying balance sheet.





                                      F-15

<PAGE>

                               T/F Purifiner, Inc.
                    Notes to Financial Statements (continued)


10.   MAJOR CUSTOMERS AND EXPORT SALES

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

During 1995, six customers  accounted for approximately 36% of the Company's net
sales,  one of which accounted for  approximately  14% of this amount.  In 1995,
export sales aggregated approximately $821,000 in geographic regions as follows:
South America ($343,000), Europe ($241,000),  Asia/Pacific ($207,000) and others
($30,000).  During 1996, nine customers  accounted for  approximately 56% of the
Company's net sales, one of which accounted for approximately 19% of this amount
(See Note 13).  In 1996,  export  sales  amounted to  approximately  $662,000 in
geographic regions as follows: South America ($159,000),  Europe ($254,000), and
Asia/Pacific  ($249,000).  The loss of business from one or a combination of the
Company's  significant  customers could adversely effect its operations.  During
1995,  the Company had net sales of  approximately  $8,400 to an  affiliate of a
minority shareholder.

11.  ACQUISITION OF T/F SYSTEMS, INC.

On December 31, 1995, TFP purchased all the operating assets and assumed all the
operating  liabilities  for  T/F  Systems,   Inc.  ("TFS"),   except  for  TFS's
shareholder  loans of $537,484,  and TFS's assets and liabilities  related to an
ongoing  litigation  matter.  TFP assigned all its rights and  interests to such
litigation matter in return for TFS's net operating assets. This transaction has
been  accounted  for  in  a  manner  similar  to  a  pooling-of-interests   and,
accordingly,  all  financial  statements  have been  retroactively  restated  to
include the acquired assets, liabilities and operations of TFS, except as stated
above.   Both  TFP  and  TFS  were  under  common  control  and  have  the  same
shareholders.

Prior to this acquisition,  TFS owned the exclusive manufacturing rights for the
Purifiner  products and TFP held the marketing  rights which were granted to TFP
by TFS. TFS's only revenues prior to this  acquisition  were sales of product to
TFP which have been eliminated in accounting for this acquisition.











                                      F-16


<PAGE>

                               T/F Purifiner, Inc.
                    Notes to Financial Statements (continued)


12.   FINANCIAL INSTRUMENTS

At December 31,  1996,  the carrying  amounts and  estimated  fair values of the
Company's  financial  instruments  which  consist  of  cash,  cash  equivalents,
accounts and  subscription  receivables,  accounts  payable and debt,  excluding
capital leases and $502,026 of shareholder loans, approximated $2,745,000 due to
the short-term  maturity and interest rates of these instruments.  The Company's
noninterest  bearing shareholder loans have a carrying amount of $502,026 and an
estimated fair value of approximately $450,000 (See Note 4).

13.   JOINT VENTURE

Effective  January 1, 1996, the Company  entered into a joint venture  agreement
whereby such venture,  TF Purifiner Ltd.  ("Ltd"),  will sell and distribute the
Company's product in Europe, the Middle East and certain African countries.  The
Company  has an  approximate  45%  interest  in  Ltd's  operations  (50%  voting
interest) and is accounting for Ltd using the equity method.  The Company is not
required to fund Ltd and will sell product to Ltd until such time as Ltd decides
to  exercise  its  rights  under the  agreement  to  manufacture  the  Company's
products.  Ltd was initially  capitalized with approximately $88,000 provided by
one of its  shareholders.  In December  1995 and 1996,  Ltd advanced the Company
approximately  $51,000 and  $64,000,  respectively,  to be used to fund  certain
patent and trademark filings for the venture's exclusive territory.  At December
31, 1996,  approximately  $23,000  remained  unexpended.  In 1995 and 1996,  the
Company  had sales of  approximately  $254,000  and $85,000 to Ltd and to one of
Ltd's  shareholders,  respectively,  at negotiated prices. At December 31, 1996,
approximately  $17,000  has been  recorded  as  unrealized  intercompany  profit
related to the  inventory  sold to Ltd which is included in Ltd's  inventory  at
December 31, 1996.

At  December  31,  1996  and for  the  year  then  ended,  summarized  financial
information of Ltd is as follows:

      Total assets                            $555,000
      Total liabilities (1)                  1,059,000
      Capital deficiency                       504,000
      Total revenues                           198,000
      Gross profit                              76,000
      Net loss                                (562,000)

(1)  Includes  approximately  $856,000  of  loans  due to one of  Ltd's  foreign
shareholders, collateralized by substantially all the tangible assets of Ltd.










                                      F-17

<PAGE>

                               T/F Purifiner, Inc.
                    Notes to Financial Statements (continued)


14.   REDEEMABLE COMMON STOCK

During  1996,  the Company  sold  393,443  shares of its Common  Stock for gross
proceeds of $594,000.  The subscription  agreements provided that if the Company
had not  registered any amount of class of its Common Stock under the Securities
Act of 1933 or the Securities  and Exchange Act of 1934, as amended,  within two
years,  the  shareholders  would  have an option to put the  shares  back to the
Company  at their  original  purchase  price plus 10% per annum from the date of
issuance.  Accordingly, such Common Stock was being treated as Redeemable Common
Stock until the expiration of the put options and the redemption price was being
accreted  at the rate of 10% and  charged  to  additional  paid in  capital.  On
September 28, 1996, the Company registered Common Stock under the Securities Act
of 1934,  as amended,  and,  therefore,  the put option  expired and such Common
Stock  was no  longer  redeemable  and has been reclassified in the accompanying
balance sheet.

15.   ACQUISITION OF DB FILTERS

On May 20, 1996, the Company acquired all the common stock of DB Filters,  Inc.,
an inactive company which has been  subsequently  dissolved ("DB Filters"),  for
$1,275 in cash and 90,773  shares of its Common  Stock  with an  estimated  fair
value of  approximately  $137,000.  DB Filters was owned by two employees of the
Company,  one of which was a Director.  DB Filter's only assets,  at the time of
the acquisition, was the right to future royalties related to the Company's then
patent  pending  filter  technology and certain  restricted,  as defined,  North
American filter manufacturing rights. The Company accounted for this acquisition
using the purchase  method of accounting  and assigned all of its purchase price
to cost in excess of net assets  acquired and is amortizing such costs using the
straight  line  method  over 15 years.  DB  Filters  had no  material  assets or
liabilities  at December 31, 1994 and 1995 and no material  operations  in 1994,
1995 and from January 1, 1996 to May 20, 1996.

16.   STOCK OPTION PLAN AND WARRANTS

On July 31, 1996,  the Company's  Board of Directors  approved the adoption of a
stock option plan (the "1996 Option  Plan"),  which provides for the granting of
up to 1,625,000  options for both incentive and  non-qualified  stock options to
key personnel,  including officers,  directors,  consultants and advisors to the
Company,  based upon the  determination of the Board of Directors.  The exercise
price of the options  may be no less than fair value of the Common  Stock on the
date of grant for  incentive  stock  options  and 25% less  than fair  value for
non-qualified  stock  options,  and the option  term may not exceed  five or ten
years.  Generally,  options to employees  vest over four years at 25% per annum,









                                     F-18


<PAGE>
                               T/F Purifiner, Inc.
                    Notes to Financial Statements (continued)

16.   STOCK OPTION PLAN AND WARRANTS (CONTINUED)

except  for  certain  grants  to  employees  which  vested  50%  upon grant with
remaining  amounts  over  two years  at  25%  per  annum.  At December 31, 1996,
1,500,000 shares of Common Stock have been reserved for issuance  under the 1996
Option Plan.

Additional  information  concerning  the  activity in the 1996 Option Plan is as
follows:

                                                   Number of    Weighted Average
                                                     Shares      Exercise Price
                                                   ---------     --------------
     Options outstanding, January 1, 1996                        
          Granted                                  1,593,750          $2.67
          Exercised                                 (125,000)         $2.00
          Cancelled                                 (108,750)         $4.76
                                                   ---------
     Options outstanding, December 31, 1996        1,360,000          $2.57
                                                   =========
     Options exercisable at December 31, 1996        524,898          $2.78
                                                   =========
     Options available for grant at
          December 31, 1996                         140,000
                                                   =========


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

<TABLE>
<CAPTION>
                                Options Outstanding                          Options Exercisable
                 -----------------------------------------------------  ------------------------------
                                 Weighted Average        Weighted                        Weighted
Range of         Number        Remaining Contractual  Average Exercise     Number     Average Exercise
Exercise Price   Outstanding      Life (in Years)          Price        Exercisable        Price
--------------   -----------   ---------------------  ----------------  -----------   ----------------
<C>               <C>                <C>                  <C>             <C>              <C>  
$2.00 - $2.20     1,161,625          5.70                 $2.02           415,273          $2.02

$4.00 - $6.00       198,375          4.75                  5.81           109,625           5.66
                 ----------                                               -------
                  1,360,000                                               524,898
                 ==========                                               =======
</TABLE>

The  Company  applies  APB 25 in  accounting  for  its  1996  Option  Plan  and,
accordingly, recognizes compensation expense for the difference between the fair
value of the  underlying  common  stock and the grant price of the option at the
date of grant. The effect of applying SFAS No. 123 on 1996 proforma net loss and
recognizing  compensation  expense for  consultants and the Board of Advisors as
stated below are not necessarily  representative  of the effects on reported net
loss for future years due to, among other things,  (1) the vesting period of the
stock  options  and the (2) fair  value of  additional  stock  options in future
years.  Had  compensation  cost for the  Company's  1996  Option  Plan grants to
employees been determined based upon the fair value at the grant date for awards
under  the  1996  Option Plan  consistent with the  methodology prescribed under

                                     F-19

<PAGE>

                               T/F Purifiner, Inc.

                    Notes to Financial Statements (continued)

16.   STOCK OPTION PLAN AND WARRANTS (CONTINUED)

SFAS No.  123,  the  Company's  net loss in 1996 would  have been  approximately
$2,119,000 or $.64 per share. The fair value of the options granted to employees
during  1996 are  estimated  as $.44 per share,  on the date of grant  using the
Black-Scholes   option-pricing   model  with  the  following   weighted  average
assumptions:  dividend yield 0%, volatility of 40%,  risk-free  interest rate of
5.8% and expected life of 1.8 years.

During 1996, the Company expensed approximately $243,800 related to the granting
of 1,091,250 stock options to various consultants and the Board of Advisors. The
fair  value of these  options  granted  was $.34 on the date of grant  using the
Black-Scholes   Option  Pricing  model  with  the  following   weighted  average
assumptions:  dividend yield 0%, volatility 40%, risk free interest rate of 5.6%
and expected life of 1 year.

Further,  during 1996, the Company  expensed  $75,400 related to the granting of
47,125  stock  options to officers and an employee at $1.60 less than the quoted
market value ($7.60) of the Company's Common Stock.

During 1996,  the Company  granted a  consultant  250,000  options  (included in
1,091,250  discussed  above) to purchase Common Stock at $2.00 per share,  which
are  outstanding,  and not  exercisable,  at December 31, 1996.  The Company has
reserved 250,000 shares of Common Stock related to this option.  At December 31,
1996, this option has a remaining contractual life of seven months.

At December 31, 1996,  the Company had 325,000  warrants  outstanding  issued in
connection  with a private  placement  which are exercisable at $2 per share and
expire on December 31, 1999.

17.   INCOME TAXES

At December 31, 1996, the  Company  has a net  operating  loss  carryforward  of
approximately  $1,480,000  for income tax purposes which expires in 2011. Due to
the Company's  net losses,  no provision was made for income taxes from April 1,
1996 to December 31, 1996.

The significant components of the net deferred tax asset as of December 31, 1996
are as follows:












                                      F-20


<PAGE>

                               T/F Purifiner, Inc.

                    Notes to Financial Statements (continued)

17.   INCOME TAXES  (CONTINUED)

      Deferred tax assets:

            Net operating loss                $557,000
            Excess tax basis of
              manufacturing rights acquired
              from Systems                      70,000
            Other                              136,000
                                              -------- 
                                              $763,000

            Valuation allowance               (763,000)
                                              --------
            Net deferred tax asset            $      -
                                              ========
 
The difference between the statutory tax rate of 34% and the Company's effective
tax rate of 0% is due to the valuation allowance of $763,000.

During 1995 and the first quarter of 1996,  the  differences  between  financial
statement  loss and taxable loss related  primarily to the treatment of the gain
recognized  for tax purposes upon the  acquisition  of TF Systems,  Inc. and the
timing of the  deductibility  of certain  related  party  accrued  expenses.  At
December 31, 1995, the Company's tax basis in its inventories and  manufacturing
rights acquired from TF Systems,  Inc. were approximately  $215,000 in excess of
their financial statement basis.


18.   SUBSEQUENT EVENTS

In January 1997, as amended,  the Company  loaned Richard C. Ford, its President
and principal shareholder, $200,000 bearing interest at 10% per annum and due in
June 1997 secured by 40,000  shares of the  Company's  Common Stock owned by Mr.
Ford.

From January 1, 1997 to February 14, 1997, the Company  granted  207,500 options
to purchase  Common Stock to various  employees at exercise  prices ranging from
$8.50 to $10.00 per share and options to a  consultant  for 40,000  shares at an
exercise price of $9.50 per share.











                                      F-21


<PAGE>



                                    PART III


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

              Not applicable.

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

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

      Name              Age         Position
---------------        -----        --------

Richard C. Ford         53          President, Treasurer, Chief
                                    Executive and Chief Financial
                                    Officer and Director

Byron Lefebvre          59          Director

Richard J. Ford         25          Vice President, Secretary, Director



RICHARD C. FORD has been President,  Chief Executive Officer,  Treasurer and a
Director  of the  Company  since its  inception  in 1988.  Mr.  Ford is also a
Director of TF  Purifiner  Ltd. He served as Secretary of the Company from its
inception until August 1996.

BYRON  LEFEBVRE has been a Director of the Company  since  February 1994 and has
been an employee of the Company since 1994 and has served as a consultant to the
Company  since  late  1993.  From 1985 to 1990,  he was  President  of  Refineco
Manufacturing  Company,  Inc., the Company which  manufactured  and marketed the
Purifiner prior to the Company. He is the inventor of the Purifiner TF-8 spin-on
unit and also the inventor of the new TFP Filter Plus and redesigned  Purifiner.
During  the period  from 1990 to May 20,  1996,  Mr.  Lefebvre  controlled  D.B.
Filters,  Inc., an inactive company since October 1993, which had limited rights
to  manufacture  the Elements  used in the  Purifiner in North America and owned
certain  royalty  rights  related to the TFP Filter Plus.  On May 28, 1993,  Mr.
Lefebvre filed for personal  bankruptcy with the United States  Bankruptcy Court
for the Southern  District of Florida.  The case was discharged on September 27,
1993.  Mr.  Lefebvre  who served in the United  States Air Force,  oversees  the
engineering, development and evaluation of all of the Company's new products and
product enhancements.


<PAGE>


RICHARD  J.  FORD has  been  with  the  Company  since  January  1994,  a Vice
President of the Company since October 1995,  and the Secretary and a Director
of the  Company  since  August  1996.  Mr.  Ford has worked in the  marketing,
communications  and public  relations  areas,  and undertaken  various special
projects  for the Company.  Mr. Ford is also a Director of TF  Purifiner  Ltd.
Mr.  Ford  received  a  Bachelor's   degree  in  English  from  Florida  State
University in 1993.  He is the son of Richard C. Ford.

Board of Advisors
-----------------

      The Company formed a Board of Advisors in August 1996. The Company's Board
of  Advisors   provides  guidance  to  the  Company's  Board  of  Directors  and
Management, but does not function in a policymaking capacity.

The following  individuals  currently serve as members of the Company's Board of
Advisors:

C.R.  BARR is the Chief  Executive  Officer,  a director  and  stockholder  of
Centrax.  Mr. Barr is a mechanical  engineer and member of the Regional  Board
of the Engineering  Employers  Federation in England and is a frequent speaker
at  aerospace   industry   meetings.   (See  "Description  of  Business  -  TF
Purifiner, Ltd.)

GENERAL DAVID C. JONES,  USAF (RET), was Chief of Staff of the United States Air
Force from June 1974 to June 1978;  from June 1978 to June 1982,  General  Jones
was Chairman of the Joint Chiefs of Staff, and served as Senior Military Advisor
to the President,  the National  Security  Council and the Secretary of Defense.
General Jones is the Chairman of the Board of the National Education Corporation
and has served on the Board of Directors of General  Electric,  NBC,  RCA,  USX,
Kemper Insurance, USAir Group and Hay Systems.

JOYCE  SHIELDS,  PH.D.,  is  the  Vice  President  and  General  Manager  of Hay
Management  Consultants  --Southeast,  where she  manages  and  directes  client
services  in the  areas of human  resources  planning,  performance  management,
organization    change,    and   design   and   implementation   of   integrated
competency-based   human  resource  systems.  Dr.  Shields  has  consulted  with
organizations such as Armco, Bell Atlantic, Boeing, British Petroleum, CSX, IBM,
Phillip  Morris,  Shell,  Xerox,  the U.S. Army, U.S Air Force and Department of
Defense.

ERNST VOLGENAU, PH.D., is President of SRA International,  Inc., a company which
provides  computer,   communications  and  management  consulting  services  and
software to business and government organizations.


<PAGE>

KANG YAO is currently  Advisor of the Swire Group of Hong Kong and is a director
of Hambro Pacific  Holdings Ltd., a subsidiary of Hambro Bank of United Kingdom,
a director of Cathay  Pacific  Airways Ltd.,  John Swire and Sons (Hong Kong and
China) Ltds. and Hsin Chong  Construction  Group,  Ltd. Mr. Yao also serves as a
director of BC Development Co. Ltd. in China,  which holds a number of Coca-Cola
bottling  franchises  in China and of Sing Tao Holdings  Ltd.,  which  controls,
among  other  things,  a leading  English  newspaper  in Hong Kong and a leading
Chinese newspaper worldwide.

Each of the  members  of the  current  Advisory  Board  were  issued  options to
purchase 12,500 shares of Common Stock through August 2, 2006 at $2.00, of which
4,167 Shares vested on August 2, 1996,  4,167 shall vest on August 2, 1997,  and
4,166 shall vest on August 2, 1998; provided that vesting shall occur so long as
each is a member of the  Advisory  Board or serves  with the  Company in another
capacity as of the vesting date.

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

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

      The following  table shows,  for the three year period ended  December 31,
1996, the cash and other  compensation  paid by the Company to its President and
Chief Executive Officer and to each of the executive officers of the Company who
had annual compensation in excess of $100,000.


                           Summary Compensation Table
<TABLE>
<CAPTION>

Name and                                          Other                                   All
Principal                                         Annual         Options/    LTIP        Other
Position            Year     Salary    Bonus   Compensation(l)      (#)     Payouts  Compensation(2)
--------            ----     ------    ------  ---------------  ----------- -------  ---------------

<S>                 <C>     <C>          <C>     <C>              <C>        <C>       <C>    
Richard C. Ford(3)  1996    $120,000(1) -0-      $1,200           275,000     -        $11,000
President, CEO      1995    $104,000    -0-      $1,370             -         -        $12,000
Treasurer, CFO      1994    $104,000    -0-      $1,355             -         -        $12,000

</TABLE>

(1)   This amount  represents  payments made by the Company for health insurance
      premiums. Mr. Ford's current annual salary is $156,000.

(2)   This amount  represents  payments made to Mr. Ford for performing  various
      product field testing.

(3)   Mr. Ford served as Secretary of the Company until August 1996.

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

The  Company  currently  does not  have  employment  agreements  with any of its
executive officers but does intend to enter into written agreements with certain
of them in the future.


<PAGE>

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

      The following  table sets forth  information  with respect to the grant of
options to purchase shares of Common Stock during the fiscal year ended December
31, 1996 to each person named in the Summary Compensation Table.



                  Number of      % of total
                  Securities     Options
                  Underlying     Granted to     Exercise or
                  Options        Employees in   Base Price      Expiration
Name              Granted (#)    Fiscal year    ($ / Shares)       Date  
----              -----------    -----------    ------------       ----  

Richard C. Ford     275,000          17%        $2.00/200,000  August 2006
                                                $2.20/50,000   August 2001
                                                $6.00/25,000   August 2006

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

     The Board of Directors and a majority of the Company's stockholders adopted
the  Company's  1996 Stock  Option  Plan (the  "Plan") on July 31,  1996 and the
approval was ratified at the Company's Annual Meeting held on August 28, 1996.

      The Plan will work to increase  proprietary interest in the Company of the
employees',  Board of Advisors,  consultants, and non-employee Directors' and to
align  more  closely  their  interests  with  the  interests  of  the  Company's
stockholders.  The Plan will also maintain the Company's  ability to attract and
retain  the  services  of  experienced  and  highly   qualified   employees  and
non-employee directors.

     Under the Plan,  the Company had reserved an aggregate of 1,625,000  shares
of Common Stock for issuance  pursuant to options  granted under the Plan ("Plan
Options") . The Board of Directors or a Committee of the Board of Directors (the
"Committee")  of  the  Company  will  administer  the  Plan  including,  without
limitation,  the selection of the persons who will be granted Plan Options under
the Plan,  the type of Plan Options to be granted,  the number of shares subject
to each Plan Option and the Plan Option price.

      Plan Options  granted  under the Plan may either be options  qualifying as
incentive stock options ("Incentive  options") under Section 422 of the Internal
Revenue  Code  of  1986,  as  amended,   or  options  that  do  not  so  qualify
("Non-Qualified  Options") . In addition, the Plan also allows for the inclusion
of a reload option provision ("Reload Option"), which permits an eligible person
to pay the  exercise  price of the Plan Option with shares of Common Stock owned
by the  eligible  person and  receive a new Plan  Option to  purchase  shares of
Common  Stock  equal in number to the  tendered  shares.  Any  Incentive  Option
granted under the Plan must provide for an exercise  price of not less than 100%
of the fair market value of the underlying shares on the date of such grant, but
the  exercise  price of any  Incentive  Option  granted to an eligible  employee
owning  more than 10% of the  Company'  s Common  Stock must be at least 110% of



<PAGE>

such fair market value as determined on the date of the grant.  The term of each
Plan Option and the manner in which it may be  exercised  is  determined  by the
Board of the  Directors or the  Committee,  provided  that no Plan Option may be
exercisable  more than 10 years  after the date of its grant and, in the case of
an Incentive Option granted to an eligible  employee owning more than 10% of the
Company's Common Stock, no more than five years after the date of the grant.

      The exercise  price of  Non-Qualified  Options  shall be determined by the
Board of Directors or the Committee and cannot be less than 75% of the Company's
Common Stock fair value.

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

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

     All Plan Options are 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 shall
lapse to the extent unexercised on the earlier of the expiration date or 30 days
following the date of  termination.  If the optionee dies during the term of his
employment, the Plan Option granted to him 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  lapses to the  extent
unexercised  on the  earlier  of the  expiration  date of the option or one year
following the date of such disability.

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


<PAGE>

     As of December 31, 1996, incentive stock options to purchase 396,625 shares
of Common Stock were outstanding and  non-qualified  options to purchase 963,375
shares of Common Stock were outstanding under the Plan.

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

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

     On August 2, 1996,  the  Company  granted  Richard J. Ford  incentive  Plan
Options to purchase an aggregate  of 18,750  shares of Common Stock at $2.20 per
Share through August 2, 2001, of which 9,375 vest on August 2, 1996,  4,688 vest
on August 2, 1997,  and 4,687 vest on August 2, 1998.  On December 3, 1996,  the
Company granted Richard J. Ford nonqualified options to purchase an aggregate of
3,375 shares of Common Stock at $6.00 per share through December 3, 2006, all of
which  vested on December  3, 1996.  On January 16,  1997,  the Company  granted
Richard J. Ford  nonqualified  options to purchase an aggregate of 62,500 shares
of Common Stock at $8.75 per share through January 16, 2007 of which 31,250 vest
on January 16, 1997,  15,625 vest on January 16, 1998 and 15,625 vest on January
16, 1999.

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

      The following table sets forth information with respect to the exercise of
options to purchase shares of Common Stock during the fiscal year ended December
31,  1996 to  each  person  named  in the  Summary  Compensation  Table  and the
unexercised options held as of the end of the 1996 fiscal year.



<PAGE>


             AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND
                            FY-END OPTION/SAR VALUES

<TABLE>
<CAPTION>
                                                         Securities         Value of
                               Number of                 Underlying         Unexercised
                               Shares                    Unexercised        in-the-Money
                               Acquired                  Options/SARS       Options/SARs
                               on              Value     at FY-End (#)      at FY-End ($)
                               Exercise      Realized    Exercsiable/       Exercisable/
           Name                   (#)              ($)   Unexercisable      Unexercisable (1)
---------------------------------------------------------------------------------------------
<S>                            <C>           <C>         <C>               <C>     
Richard C. Ford                     -              -     150,000/125,000   $787,500/$738,750
President, Chief Executive
Officer, Treasurer, and CFO

</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 $7.95, the closing price reported on December 31, 1996.

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

</TABLE>

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

      The following table sets forth certain information  regarding the Company'
s Common Stock  beneficially owned on February 28, 1997 for (i) each stockholder
known by the Company to be the beneficial  owner of five (5%) percent or more of
the Company's  outstanding  Common Stock,  (ii) each of the Company's  executive
officers and  directors,  and (iii) all  executive  officers and  directors as a
group. In general,  a person is deemed to be a "beneficial  owner" of a security
if that  person  has or shares  the power to vote or direct  the  voting of such
security, or the power to dispose or to direct the disposition of such security.
A person is also deemed to be a beneficial  owner of any securities of which the
person has the right to acquire beneficial  ownership within sixty (60) days. At
February 28, 1997, there were 5,143,455 shares of Common Stock outstanding.  The
address of each of the persons  set forth  below is 3020 High Ridge Road,  Suite
100, Boynton Beach, Florida 33426, except as otherwise noted.


<PAGE>

                                     No. of Shares        Percent of
Name and Address or                  of Common Stock      Beneficial
Identity of Group                    Beneficially Owned   Ownership
-----------------                    ------------------   ---------

Richard C. Ford (l)(2)                   1,719,708          32.2%
Richard J. Ford (2)(3)                     427,000           8.2%
Traci M. Ford (2)                          380,750           7.4%
Jennifer D. Ford/Roe (2)                   364,250           7.1%
Byron Lefebvre (4)                         107,175           2.1%
J.W. Taylor (2) (5)(6)                     285,000           5.5%
Garo Armen (7)                             850,000          15.2%
Harvey Stober (8)                          275,000           5.3%
All Executive Officers
and Directors as
a group (3 persons)                      2,253,883          41.6%



(1)  Mr. Ford is the Company's President,  Treasurer,  Chief Executive and Chief
     Financial Officer and a Director. Includes 37,875 shares owned by Catherine
     Ford,  Mr. Ford's wife, of which Mr. Ford disclaims  beneficial  ownership.
     Also  includes  options to purchase  (i) 25,000  shares of Common  Stock at
     $2.20 per Share through  August 2, 2001;  100,000 shares of Common Stock at
     $2.00 per Share through  August 2, 2006;  and 25,000 shares of Common Stock
     at $6.00 per share through  December 3, 2006,  (iii) options issued to Mrs.
     Catherine  Ford to purchase  31,250 shares of Common Stock at $8.75 through
     January  16,  2007 and  18,750  shares of  Common  Stock at $6.00 per share
     through December 3, 2006 for which Mr.
     Ford disclaims beneficial ownership.

(2)  Ownership of approximately  1,100,000 shares owned by Mr. R.C. Ford and his
     children was being  contested by members of the Taylor  Family.  On January
     23,  1997,  the Taylor  Family,  the  Company,  Systems and Richard C. Ford
     entered into a Memorandum of  Settlement  which  provided for,  among other
     things,  the dismissal of any remaining  litigation against Systems and the
     Ford Family  provided that Mr. Ford obtains a buyer for the Taylor Family's
     285,000 shares of T/F Purifiner, Inc. Common Stock. Such commitment extends
     to May 6, 1997  and  Mr.  Ford  believes he will be in a position to locate
     purchasers  for such shares or obtain an  extension  of time to obtain such
     buyers.

(3)  Mr. Ford is a Vice President,  the Secretary and a Director of the Company.
     Includes  options to  purchase  9,375  shares of Common  Stock at $2.20 per
     Share through  August 2, 2006 and 3,375 shares of Common Stock at $6.00 per
     share  through  December 3, 2006 and 31,250 shares of Common Stock at $8.75
     through January 16, 2007.


<PAGE>

(4)  Mr.  Lefebvre is a Director of the  Company.  Includes  options to purchase
     32,500 shares of Common Stock at $2.00 per Share through August 2, 2006.

(5)  Includes  71,250  shares owned by each of Margaret A. Taylor,  Barbara A.
     Taylor and John F. Taylor, of which James W. Taylor has voting power.

(6)  The  address  is  c/o  N.A.  Taylor  and  Company,   10  W.  9th  Avenue,
     Gloversville, N.Y. 12078.

(7)  Includes 325,000 and 50,000 shares of Common Stock owned by Armen Partners,
     L.P.  and Armen  Partners  Offshore  Fund Ltd.  of which  Garo Armen is the
     general partner.  Includes warrants to purchase 162,500,  25,000 and 12,500
     shares of Common Stock at $2.00 per share  through  December 31, 1999 owned
     by Armen Partners, L.P., Armen Partners Offshore Fund Ltd., and Garo Armen,
     respectively.  Includes  options to purchase 250,000 shares of Common Stock
     at $2.00 per share through August 2, 1998 owned by Armen Capital Management
     Corp.

(8)  Includes  150,000  shares of Common Stock and  Warrants to purchase  75,000
     shares of Common Stock at $2.00 per share  through  December 31, 1999 owned
     by Greystone Partners, LP.

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, 1996, all Section 16
(a) filing requirements  applicable to its officers,  directors and greater than
ten percent (10%)  beneficial  owners were completed  except that Mr. Garo Armen
did not timely file his initial statement of beneficial ownership on Form 3.

ITEM 12.   CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
           ----------------------------------------------
 
TRANSACTION  WITH  TAYLOR  FAMILY.   During  1995,  the  Company  had  sales  of
approximately  $8,400 to N.A.  Taylor and  Company,  an  affiliate of the Taylor
Family. Such affiliate is a current warehouse  distributor for the Company. From
February  24, 1994 to October 6, 1995,  this  company was the  exclusive  master
distributor  of the Company's  products for the State of New York and also acted
as the Company's  manufacturer's  representative  for the State of New York, for
which it received certain price concessions from the Company.


<PAGE>

RELATIONSHIP  OF THE COMPANY TO T/F  SYSTEMS,  Inc. On December  31,  1995,  the
Company  acquired all of the  operating  assets and assumed all of the operating
liabilities of T/F Systems, Inc., except as previously described.  At such time,
T/F  Systems,  Inc.  was  owned  approximately  75% by  Richard  C. Ford and his
immediately  family and  substantially  all the other  shares  were owned by the
Taylor Family.

LOANS AND ISSUANCES OF SECURITIES TO AFFILIATES.  During 1994, the Company and
Systems received  stockholder loans of approximately  $462,000 from Richard C.
Ford,  the Company's  principal  stockholder,  and his  children,  Richard J.,
Traci M. and  Jennifer  D. Ford.  Such loans bore  interest  at 10% per annum.
In 1994,  $266,000 of such loans were converted  into 2,166,000  shares of the
Company's Common Stock.

During  1994,  the  Company  and its  principal  shareholder,  Richard  C. Ford,
instituted  legal action against the estate of a former 50% owner of the Company
("the Estate").  This  litigation  sought a declaratory  judgment  approving the
dilution of the Estate's  interest in the Company from 50% to approximately  10%
as a result of the issuance of additional  Common Stock in 1994 to the principal
shareholder  and his children.  Subsequently,  the  beneficiaries  of the Estate
filed  counterclaims  against the Company and its principal  shareholder and his
children seeking declaratory relief,  cancellation of additional stock issuances
by the Company,  an  injunction  against  further  issuances,  appointment  of a
receiver  and  damages  against  Ford  individually.  In June  1995,  the Estate
demanded  repayment of the non  interest  bearing  shareholder  loans due to the
Estate for which there were no stated due dates ($502,026 at December 31, 1996).
In September 1996, the Company  entered into an Agreement in Partial  Settlement
of T/F Purifiner,  Inc. Issues  ("Agreement")  which released the Company,  with
prejudice, from all litigation pending or contemplated by the Taylor Family, the
beneficiaries of the Estate,  and  individually,  against the Company related to
any actions taken by the Company  before the date of the  Agreement.  In return,
the Company agreed to repay the Estate's loans of $502,026 as follows:  $167,342
due 90 days after any equity  financings  which raise in excess of $5,000,000 of
gross proceeds;  $167,342 on the first and second  anniversaries  of such equity
financings.  If the equity financings are less than $5,000,000 the amount of the
periodic debt repayment  will be reduced and the term extended  proportionately.
The Estate has agreed not to commence  any action for loan  repayment as long as
the Company is in compliance  with the Agreement and raises gross proceeds of at
least  $2,000,000  within one year of the  Agreement.  The  Company has made all
required  payments  to the  Estate  and has  raised in excess of  $2,000,000  as
required by the Agreement.  See "Part I, Item 3 - Legal  Proceedings-Stockholder
Litigation."

      Additionally,  in 1995, Mr. Richard C. Ford loaned the Company and Systems
$75,500 at 10% per annum.  For 1996,  Mr. Ford loaned the Company an  additional
$23,458.  During 1995 and 1996, the Company  incurred  approximately  $4,000 and
$500  respectively,  of interest  expense related to these and other loans.  See
"Note 4 to the Notes to Financial Statements".


<PAGE>

      Mr. Richard C. Ford,  during 1995 and 1996, was repaid an aggregate amount
of $85,000 and $58,671 on all  outstanding  loans.  At December  31,  1995,  the
amount of outstanding non interest  bearing  obligations from the Company to Mr.
Ford was $502,026. On August 1, 1996, Mr. Ford received 251,013 shares of Common
Stock in exchange for his shareholder loans in the amount of $502,026.

      In January 1997, as amended,  the Company  loaned Richard C. Ford $200,000
bearing  interest at 10% per annum and due in June 1997 secured by 40,000 shares
of the Company's Common Stock owned by Mr. Ford.

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

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

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



<PAGE>




ITEM 13.    EXHIBITS AND REPORTS ON FORM 8-K
            --------------------------------
 
A)    Index to Exhibits

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

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

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

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

10.1        Stock Option Plan (1).

10.2        Agreement  between T/F Systems,  Inc. and T/F Purifiner,  Inc. dated
            March 1, 1991 (with exhibits) (1).

10.3        Asset  Purchase   Agreement  between  T/F  Systems,   Inc.  and  T/F
            Purifiner, Inc. dated December 31, 1995 (1).

10.4        Stock Exchange Agreement between D.B. Filters,  Inc., Byron Lefebvre
            and Robert Meyer, and T/F Purifiner, Inc. (with exhibits) (1).

10.5        Joint Venture  Agreement  between T/F Purifiner,  Inc., T/F Systems,
            Inc., Centrax Limited, The Barr Family and A.N. Davies (1).

10.6        Lease Agreement between Papeyco Trading International,  Inc. and T/F
            Purifiner, Inc. dated August 23, 1993 (1).

10.7        Master  Distributor  Agreement  dated  April  6,  1995  between  KLC
            Corporation and the Company (1).

10.8        Exclusive  Distributor  Agreement / Colombia Effective Date March 1,
            1996, between Al Pacific Cali and the Company (1).

10.9        Exclusive  Agreement for Distributorship in Singapore dated February
            6, 1996 between Kian Seng Hardware Trading Pte. Ltd. and the Company
            (1).

10.10       Exclusive  Agreement for  Distributorship in Malaysia dated February
            5, 1995 between Kian Seng Hardware Trading Pte. Ltd. and the Company
            (1).


<PAGE>


10.11       Exclusive  Agreement for  Distributorship in Thailand dated November
            17, 1995  between  N.Haven  Group  International  Co.  Ltd.  and the
            Company (1).

10.12       Exclusive  Agreement for Distributorship in Indonesia dated February
            5, 1996 between PT Hista Bayhu and the Company (1).

10.13       Master  Distributor  Agreement dated January 11, 1995 between Trimex
            Korea and the Company (1).

10.14       Promissory Note dated December 21, 1995 between the Company, Richard
            C. Ford,  individually,  T/F Systems, Inc. as maker and Bassett Boat
            Company of Florida in the principal amount of $200,000 (1).

24.1        Consent of Independent Auditors (3).

27          Financial Data Schedule (3).

99.1        Final Judgment in T/F Systems,  Inc. v. Southeast Capital Financing,
            Inc.,  Case  No.  CL  90-12772AE  in the  Circuit  Court of the 15th
            Judicial Circuit in and for Palm Beach County, Florida (1).

____________________

(1)   Incorporated  by reference  from the Exhibits to the Company's  Form 10-SB
      Registration  Statement,  as  amended,  as filed with the  Securities  and
      Exchange Commission.
(2)   Incorporated  by  reference  from the Exhibit to the  Company's  Form 8-K,
      January 9, 1997, as filed with the Securities and Exchange Commission.
(3)   Filed herewith.



B)    Report on Form 8-K.
      None





















<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.

                                                             T/F Purifiner, Inc.
                                                                  (Registrant)
                                    
                                    
Date:  March 25, 1997               
                                                        By:  /s/ Richard C. Ford
                                                        ------------------------
                                                                 Richard C. Ford
                                                          Chairman of the Board,
                                           President and Chief Financial Officer
                                  
In  accordance  with the Exchange  Act, this report has been signed below by the
following  persons on behalf of the  registrant and in the capacities and on the
date indicated.

Date:  March 25, 1997
                                                        By:  /s/ Richard C. Ford
                                                        ------------------------
                                                                 Richard C. Ford
                                                          Chairman of the Board,
                                           President and Chief Financial Officer
                                    
Date:  March 25, 1997               
                                                             /s/ Richard J. Ford
                                                             -------------------
                                                                 Richard J. Ford
                                                     Vice President and Director
                                  
Date:  March 25, 1997
                                                              /s/ Byron Lefebvre
                                                              ------------------
                                                                  Byron Lefebvre
                                                                        Director
                                    
Date:  March 25, 1997               
                                                              /s/ Larry Freedman
                                                              ------------------
                                                                  Larry Freedman
                                                                      Controller