Cautionary Statements Regarding Forward Looking Information

Certain statements in this report contain or may contain forward-looking statements that are subject to known and unknown risks, uncertainties and other factors which may cause actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. These forward-looking statements were based on various factors and were derived utilizing numerous assumptions and other factors that could cause the Company's actual results to differ materially from those in the forward-looking statements. These factors include, but are not limited to, the Company's ability to operate as a going concern and to raise sufficient capital to fund its operations, acceptance of the Company's products, the Company's dependence on distributors and a few significant customers, risks associated with international operations and international distribution and other factors. Most of these factors are difficult to predict accurately and are generally beyond our control. You should consider the areas of risk described in connection with any forward-looking statements that may be made herein. Readers are cautioned not to place undue reliance on these forward-looking statements and readers should carefully review this report in its entirety. Except for the Company's ongoing obligations to disclose material information under the Federal securities laws, we undertake no obligation to release publicly any revisions to any forward-looking statements, to report events or to report the occurrence of unanticipated events. These forward-looking statements speak only as of the date of this report and you should not rely on these statements without also considering the risks and uncertainties associated with these statements and our business.

Overview

General

Sales of the Company's products, the puraDYNฎ bypass oil filtration system (the "Puradyn") and replaceable filter elements will depend principally upon end user demand for such products and acceptance of the Company's products by original equipment manufacturers ("OEMs"). The oil filtration industry has historically been competitive and, as is typically the case with innovative products, the ultimate level of demand for the Company's products is subject to a high degree of uncertainty. Developing market acceptance for the Company's existing and proposed products will require substantial marketing and sales efforts and the expenditure of a significant amount of funds to inform customers of the perceived benefits and cost advantages of its products. As a result of our limited resources, to date we have not had adequate funds available to undertake these necessary marketing efforts.

• A competitively priced, value-added product based on an advanced, patented technology;
• An alternative solution to the rising costs and national concerns over dependence on foreign oil; and
• Providing an operational maintenance solution to end users in conjunction with existing and reasonably foreseeable federal environmental legislation such as new regulation affecting diesel engines and diesel fuels, mandating cleaner diesel engines which first went into effect January 1, 2007. Additional and more stringent federal legislation is anticipated in 2010.

We focus our sales strategy on individual sales and distribution efforts as well as on the development of a strong nationwide distribution network that will not only sell but also install and support our product. We currently have approximately 60 domestic and 35 international active distributors. However there are additional potential distributors that participate in other programs; such as Freightliner, Western Star, Paccar and John Deere. While not all of these potential distributors actively promote our products, all of these dealers have access to our product and have the capability to sell our product

We continue to focus our sales and marketing efforts to target industries more open to innovative methods to reduce oil maintenance operating costs. These industries are searching for new and progressive ways, including bypass oil filtration, to maintain their equipment.

This strategy includes focus on:

• The expansion of existing strategic relationships we have with John Deere, Avis and others;
• Continued development and expansion of our distribution network with qualified distributors in order to establish a sales- and service-oriented nationwide infrastructure
• Continuing to target existing and new industrial/construction equipment fleets and major diesel engine and generator set OEMs
• Creating customer 'pull-through', a sustained level of request for our product on the OEM level
• Converting customer evaluations into sales, both immediate and long term

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

• The November 2009 announcement that Puradyn has established yet another relationship in the oil and gas services industry and has received a purchase order for approximately 200 Puradyn systems for delivery that month.

• The May 2009 announcement that a major oil drilling company, operating land drilling and offshore rigs in over 30 countries, has started a program to outfit its drilling platforms with the Puradyn systems. Worldwide equipment fleet of over 2,700 has been targeted for retrofit.

• The March 2009 announcement that the Company has entered into an exclusive sales representative agreement for the country of Nigeria and adjacent waters, effectively opening a new market for the Puradyn system.

• 2008 announcement that the Avis Budget Group is installing the Puradyn system as standard on its fleet of 300+ heavy duty buses. Avis is the first in the car rental industry to use bypass oil filtration.

• 2008 announcement that John Deere Forestry Division is factory-installing Puradyn systems in Joensuu, Finland on equipment to be utilized in Russia and other countries where high sulfur fuel is used.

• 2008 announcement of initial and repeat orders received from the Foreign Military Sales program, the government method for selling U.S. defense equipment, services, and training, to supply the Puradyn system for the line haul fleet.

• U.S. Army contract received to supply the Puradyn system to outfit JERRV vehicles used in combat in Iraq and Afghanistan.

We believe that the renewed interest shown in the technology of bypass oil filtration as an economic alternative to significantly rising oil prices, dependence upon foreign oil, with the added benefit of being environmentally beneficial, will timely and favorably position the Company as a manufacturer of a cost efficient "green" product.

We also believe that although industry acceptance will continue to grow in the remainder of 2009, the impact of the global economy will continue to affect our revenue levels during the fourth quarter of 2009; however, there can be no assurance that any of our sales efforts or strategic relationships will meet management's expectations or result in actual revenues. Even with the above announcements, business revenue during the first and third quarters of 2009 were below management expectations, due to the lead-time involved in manufacturing special order requirements.

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

We believe international sales are especially well suited to our product given that environmental controls are not as regulated in countries outside North America. Certain applications representing a higher return on investment are more prevalent in use outside of North America and end-users consequently are more receptive to the total maintenance package, including the use of oil analysis, which the Puradynsystem requires to verify oil condition. In the first nine months of 2009, total international sales accounted for approximately 22% of the Company's consolidated net sales as compared to 57% for the first nine months of 2008. As discussed elsewhere herein, we believe that the decline in international sales in the current fiscal year is attributable to the global economic uncertainty, which we estimate have negatively impacted our sales for this year approximately $1,020,000. Given the fact that our product saves money and companies are looking to save costs as oil prices increase, we expect the global economic uncertainly will continue to negatively affect our sales revenues through part of the last quarter of 2009 and diminish thereafter

Optimizing our limited resources and obtaining sufficient capital will be key to accomplishing our goals. We will need to remain focused on working with OEMs, continue developing the independent distributors we have onboard and maintain growth within the major accounts using our system. To accomplish these tasks, we will need to obtain capital funding and add appropriate sales and marketing support to be sure our distributors and customers are served. Subject to the receipt of additional funding, we will be adding application engineers and product engineers as we grow our OEM account list. A second application engineer and product engineer will be needed as we add our third OEM and a new major distributor. The expansion into the OEM area, even though it is very demanding due to response time needed to meet their needs, is also rewarding in the aspect that it provides a steady flow of material requirements for our manufacturing area giving us more stability in manufacturing personnel, a stronger supply chain with steady production, economies of scale and the ability to better utilize our overhead with higher average material turn rates.

As described elsewhere herein, we continue to address our liquidity and working capital issues as we continue to seek to raise additional capital from institutional and private investors and current stockholders. Historically, we have faced difficulties in raising adequate capital and we anticipate that those efforts will continue given the uncertainties facing the capital markets in the U.S. We also continue to implement cost reductions in an effort to improve margins, including securing alternative suppliers for raw materials and manufacturing and we anticipate these cost reductions will impact our results of operations during the balance of 2009 and beyond. However, due to raw material price increases and the recent economic environment, the Company has been able to pass on only a portion of these costs as product price increases and has been forced to absorb some of these increases. The Company does not expect this increase to be offset by customer price increases until mid-year 2010. Although the Company's margins have declined throughout 2009 and the cost of sales exceeded sales in the three-month period ending September 30, 2009, this is attributable to the allocation of fixed and variable factory costs over significantly fewer sales. The Company expects to achieve improved margins beginning in the fourth quarter of 2009 and restore margins to 2008 levels by mid-year 2010.

Our financial statements have been prepared on the basis that we will operate as a going concern, which contemplates the realization of assets and satisfaction of liabilities in the normal course of business. We have incurred net losses each year since inception and have relied on the sale of our stock from time to time and loans from third parties and from related parties to fund our operations. These recurring operating losses, liabilities exceeding assets and the reliance on cash inflows from an institutional investor and current stockholder have led our independent registered public accounting firm Webb & Company P.A. to include a statement in its audit report relating to ours audited consolidated financial statements for the years ended December 31, 2008, December 31, 2007 and December 31, 2006 expressing substantial doubt about our ability to continue as a going concern. Our ability to continue as a going concern is dependent upon our ability to obtain the necessary financing to meet our obligations and repay our liabilities when they become due and to generate profitable operations in the future. We plan to continue to provide for our capital requirements through the sale of equity securities, however, we have no firm commitments from any third party to provide this financing and we cannot assure you we will be successful in raising working capital as needed. There are no assurances that we will have sufficient funds to execute our business plan, pay our obligations as they become due or generate positive operating results.

Critical Accounting Policies and Estimates

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

We believe the following critical accounting policies affect us more significant judgments and estimates used in the preparation of our consolidated financial statements.

Allowance for doubtful accounts

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

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

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

Estimation of inventory obsolescence

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

Impairment of long-lived assets

We periodically evaluate the recoverability of the carrying amount of our long-lived assets under the guidelines of FASB ASC 360, Accounting for the Impairment or Disposal of Long-Lived Assets. Factors that we consider in making this evaluation include estimating the undiscounted net cash flows estimated to result from the assets over their remaining useful life. Should our estimates of these factors change, our results of operations and financial condition could be adversely impacted.

Revenue recognition

Revenue is recognized when earned. Our revenue recognition policies are in compliance with the provisions issued in FASB ASC 605, Revenue Recognition in Financial Statements. Revenue from product sales to customers, distributors and resellers is recorded when products that do not require further services or installation us are shipped, when there are no uncertainties surrounding customer acceptance and for which liability is reasonably assured. We provide for sales returns based on an historical analysis of returns. The estimate is updated for current return activity and the provision is adjusted accordingly. Should actual returns exceed management's estimates, the provision may require further adjustment and accordingly, net sales may decrease.

Product returns

Consistent with industry practices, we may accept limited product returns or provide other credits in the event that a distributor holds excess inventory of our products. During the three-months ended September 30, 2009 and September 30, 2008, product returns totaled $9,055 and $16,353, respectively. During the nine-months ended September 30, 2009 and 2008, product returns totaled $13,165 and $34,268, respectively. Increased product returns during 2008, over 2007, was primarily attributable to one customer's excess inventory purchases acquired during 2007. Our sales are made on credit terms, which vary depending on the nature of the sale. We believe we have 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 our reserves.

Results of Operations for the Three-months Ended September 30, 2009 Compared to the Three-months Ended September 30, 2008

The following table sets forth the amount of increase or decrease represented by certain items reflected in our condensed consolidated statements of operations in comparing the three-months ended September 30, 2009 to the three-months ended September 30, 2008:

(in thousands)                    Three Months Ended September 30,
                                2009            2008          Change
Net sales                    $       398    $        597    $      (199 )
Costs and expenses:
Cost of products sold                430             538           (108 )
Salaries and wages                   236             258            (22 )
Selling and administrative           226             398           (172 )
Total costs and expenses             892           1,194           (302 )

Other (expense) income:
Interest income                        -               1             (1 )
Interest expense                     (40 )           (74 )           34
Total other expense                  (40 )           (73 )          (33 )
Net loss                     $      (534 )  $       (670 )  $       136

Net Sales

     The following table outlines details related to sales and sales returns and
the amount of increase or decrease reflected in net sales in comparing the
three-months ended September 30, 2009 to the three-months ended September 30,
2008:


(in thousands)                     Three Months Ended September 30,
                                  2009            2008          Change
Gross sales                    $       397     $       608     $   (211 )
Sales returns and allowances             1             (11 )         12
Net Sales                              398             597         (199 )

US domestic sales                      273             287          (14 )
US international sales                 123             222          (99 )
UK sales                                 2              88          (86 )
Net Sales                      $       398     $       597     $   (199 )

Net sales decreased by approximately $199,000 or 33% from approximately $597,000 in 2008 to approximately $398,000 in 2009.

During the three-month period ending September 30, 2009, the cumulative historical rate of returns sales returns increased from 3.50% to 3.54% resulting in a credit to sales returns of $1,000. During the three-month period ending September 30, 2008, the return rate remained at 3.88%. Overall, historical return rates have continued to decline as improvements have been made to the products.

Sales to three customers accounted for approximately $65,000, $53,000 and $38,000, or 16%, 13% and 10% (for a total of 39%) respectively of the consolidated net sales for the three-months ended September 30, 2009. Sales to three customers individually accounted for approximately 16%, 11% and 10% (for a total 37%) of net sales for the three-months ended September 30, 2008.

The US international sales decreased approximately $99,000 or 45%, from approximately $222,000 for the period ending September 30, 2008 to approximately $123,000 for the period ending September 30, 2009. This decrease is due almost entirely from the decline in sales from a single customer, which has been significantly affected by the global economy. Their requirement for our product still exists due to the use of fuels, which effect the oil replacement intervals which should produce similar sales as in the past once the economic conditions improve, although there can be no assurances.

The UK subsidiary's sales decreased by approximately $86,000 (approximately 98%), from approximately $88,000 to approximately $2,000 for the three-month period ended September 30, 2009 compared to the three-month period ended September 30, 2008. This decrease is primarily attributable to the decrease in sales to two customers by approximately $40,000 and $39,000, respectively. International sales totaled approximately $125,000 (31%) of the net consolidated sales for the three-month period ended September 30, 2009 as compared to approximately $310,000 (52%) for the comparable period in 2008.

Cost of products sold, as a percentage of sales, increased from approximately 90% in 2008 to approximately 108% in 2009. The increase in cost of goods sold as a percentage of sales is attributable to the significant decrease in sales and allocation of fixed and variable factory costs over fewer sales. There was an increase of approximately $18,000 attributable to increases in inventory allowance, which was offset by a decrease in direct and indirect factory wages and benefits of approximately $22,000, due to layoffs as well as a freight expense decrease of approximately $13,000, due to lower sales volumes.

Salaries and Wages

Salaries and wages decreased approximately $22,000, or approximately 9%. Approximately $13,000 of the decrease is due to an Engineering vacancy and a warehouse reduction while approximately $7,000 of this decrease is the result of the closing of the UK office closing in 2008. The Company anticipates the warehouse reduction to remain through the end of 2009, while the Engineering vacancy is temporarily filled.

Selling and Administrative Expenses

Selling and administrative expenses decreased by approximately $172,000, or approximately 43%. This decrease is due to a decrease in exchange rate losses, decreases in UK office expenses, bad debt expenses and professional fees of approximately $118,000, $32,000, $28,000 and $19,000, respectively. These decreases were partially offset by an increase in stock based compensation expenses of approximately $40,000. The Company expects to continue to see overall decreases in selling and administrative costs through the remainder of 2009.

Interest Income

Interest income decreased slightly, less than $1,000. This decrease is due to lower interest rates and earnings on the Company's checking accounts balances.

Interest Expense

Interest expense decreased by approximately $34,000, or approximately 46%, as a result of a decrease in the interest rate and the outstanding balance of the stockholder notes payable. The Company pays interest monthly on the notes payable to stockholder at a weighted average of two facilities, one is based on a minimum of 2.75% or prime rate less .5% and the other is based on Libor plus 1.40, with rates reset as often as the Federal Reserve changes interest rates. The weighted average interest rate of the two notes was 2.51% as of September 30, 2009 as opposed to 4.77% as of September 30, 2008.

Results of Operations for the Nine-months Ended September 30, 2009 Compared to the Nine-months Ended September 30, 2008

The following table sets forth the amount of increase or decrease represented by certain items reflected in the our condensed consolidated statements of operations in comparing the nine-months ended September 30, 2009 to the nine-months ended September 30, 2008:

(in thousands)                   Nine Months ended September 30,
                                 2009            2008        Change
Net sales                    $      1,426    $      2,153    $  (727 )
Costs and expenses:
Cost of products sold               1,408           1,805       (397 )
Salaries and wages                    719             765        (46 )
Selling and administrative            670             882       (212 )
Total costs and expenses            2,797           3,452       (655 )
Other income (expense):
Interest income                      (176 )             2       (178 )
Interest expense                     (120 )          (243 )      123
Total other expense                  (296 )          (241 )      (55 )

Net loss                     $     (1,667 )  $     (1,540 )  $  (237 )

Net Sales

The following table outlines details related to sales and sales returns and the
amount of increase or decrease reflected in net sales in comparing the
nine-months ended September 30, 2009 to the nine-months ended September 30,
2008:


. . .