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.

Going Concern

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

These recurring operating losses, liabilities exceeding assets and the reliance on cash inflows from an institutional investor and current stockholder led the Company's independent auditors Webb & Company, P.A., to include a statement in its audit report relating to the Company's audited consolidated financial statements for the year ended December 31, 2007 expressing substantial doubt about the Company's ability to continue as a going concern.

Additionally, the Company continues to address liquidity concerns because of inadequate revenue growth. As a result, cash flow from operations is insufficient to cover our liquidity needs for the immediate future. The Company is in the process of aggressively seeking to raise capital and is exploring financing availability and options with investment bankers, funds, private sources, members of management and existing stockholders. The Company has implemented measures to preserve its ability to operate, including organizational changes, a reduction and/or deferral of salaries, reduction in personnel and renegotiating creditor and collection arrangement. There can be no assurances that the Company will be able to raise the additional capital needed or reduce the level of expenditures in order to sustain operations.

General

Sales of the Company's products, the puraDYNŽ 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.

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A competitively priced, value-added product based on an advanced, patented technology

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An alternative solution to the rising costs and national concerns over dependence on foreign oil

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Providing an operational maintenance solution to end users in conjunction with existing and reasonably foreseeable federal environmental applications

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

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

This strategy includes focus on:

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The expansion of existing strategic relationships

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Continued development and expansion of our distribution network with qualified distributors in order to establish a sales- and service-oriented nationwide infrastructure

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Continuing to target existing and new industrial/construction equipment fleets and major diesel engine and generator set OEMs

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Creating customer 'pull-through', a sustained level of request for our product on the OEM level

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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:

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2008 announcement that an international distributor placed purchase orders totaling over $1.1 million for shipment over 2008 and 2009. This is the Company's first order to date of this magnitude.

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2007 announcement that a fleet of 100 trucks have exceeded 100 million miles without an oil-related oil change during the course of an 8-year period using the Puradyn system.

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2007 announcement that initial orders have been placed for the Puradyn system by one of the largest global providers of innovative mechanical solutions, technology, and services for the oil and gas industry.

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2007 announcement that the Puradyn system has been approved by Cascade Sierra Solutions as a recommended product for inclusion in its outreach centers, which provide information, technology and products for transportation specialists geared to conservation of oil and energy.

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2007 announcement that Wastequip, Inc., the leading manufacturer of waste handling, recycling, and material handling equipment has been named exclusive distributor of the Puradyn system in the waste industry.

We believe that the renewed interest shown in the technology of bypass oil filtration as an economic alternative to 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 industry acceptance resulting in sales will continue to grow in 2008; however, there can be no assurance that any of our sales efforts or strategic relationships will meet management's expectations or result in actual revenues.

The Company's sales effort not only involves educating the potential customer on the benefits of our product, but also allowing the 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.

International sales are especially well suited to our product given that environmental controls are not as regulated in countries outside North America.
Certain applications representing a higher return on investment are more prevalent in use outside of North America and end-users consequently are more receptive to the total maintenance package, including the use of oil analysis, which the Puradyn system requires to verify oil condition. In the first quarter of 2008, total international sales accounted for approximately 55.1% of the Company's consolidated net sales.

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

Consistent with industry practices, the Company may accept limited 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 depending on the nature of the sale. The Company believes it has established sufficient reserves to accurately reflect the amount or likelihood of product returns or credits and uncollectable receivables. However, there can be no assurance that actual returns and uncollectable receivables will not exceed the Company's reserves.

Results of Operations for the Three-months Ended March 31, 2008 Compared to the Three-months Ended March 31, 2007

The following table sets forth the amount of increase or decrease represented by certain items reflected in the Company's condensed consolidated statements of operations in comparing the three-months ended March 31, 2008 to the three-months ended March 31, 2007:

         (In thousands)                   Three Months Ended March 31,
                                           2008         2007      Change
         Net sales                       $      763   $    766  $      (3)

         Costs and expenses:
          Cost of products sold                 625        648        (23)
          Salaries and wages                    256        261         (5)
          Selling and administrative            262        368       (106)
         Total costs and expenses             1,143      1,277       (134)

         Other (expense) income:
           Interest income                        1         13        (12)
           Interest expense                     (91)      (213)       122
         Total other (expense) income           (90)      (200)       110
         Net loss                        $     (470)  $   (711) $     241

Net Sales

Net sales decreased by approximately $3,000 from approximately $766,000 in 2007 to approximately $763,000 in 2008. Gross sales decreased approximately $55,000 from approximately $771,000 for the three-month period ending March 31, 2007 as compared to approximately $716,000 for the three-month period ending March 31, 2008. Approximately $21,000 of this decrease is related to a decrease in Rentar sales. Rentar sales have been declining, as the Company is no longer a distributor for this product. During the period ending March 31, 2008, the sales returns and allowances decreased approximately $47,000 due to a decrease in the cumulative historical rate of returns. Historical return rates have continued to decline as improvements have been made to the products. During the period ended March 31, 2007, the company recorded approximately $5,000, or .6% of gross sales, in allowance for sales returns.

Cost of Products Sold

Cost of products sold decreased by approximately 4% from approximately $648,000 in 2007 to approximately $625,000 in 2008. Cost of products sold, as a percentage of sales, decreased from approximately 85% in 2007 to approximately 82% in 2008. This decrease is mainly attributable to an increase in product prices, which were effective beginning January 1, 2008.

Salaries and Wages

Salaries and wages decreased approximately $5,000, or 2%. This decrease is the result of a decrease in salaries and wages of approximately $32,000 generated in the UK office, as the UK Director resigned December 1, 2007. This decrease was partially offset by additional salaries and wages expenses incurred in the US office, in the areas of engineering hours, quality personnel, as well as general cost of living salary increases.

Selling and Administrative Expenses

Selling and administrative expenses decreased by approximately $106,000, or 29%. This decrease was due to a decrease in travel, entertainment and meals expense, patents, bad debt and rent expense, of $49,000, $34,000, $29,000 and $24,000, respectively. The majority of the decrease in travel related expenses was attributable to the UK office resignation of their director. Bad debt expense decrease was primarily attributable to the reserves established for one delinquent international customer, which the company reversed the sale during the quarter ending December 31, 2007. These decreases were partially offset by an increase in stock based compensation expense of approximately $27,000, which was $45,000 and $22,000 for the three-months ended March 31, 2008 and 2007, respectively, related to certain variable equity awards and other stock based compensation.

Interest Income

Interest income decreased approximately $12,000, from income of approximately $13,000 for the period ending March 31, 2007 to approximately $1,000 for the period ending March 31, 2008. This decrease is attributable to a reserve established, effective October 1, 2007, against shareholder loan interest that was previously accruing at approximately $12,000 per quarter.

Interest Expense

Interest expense decreased by approximately $122,000. Approximately $80,000 of this decrease is attributable to a reserve established during the period ending March 31, 2007, toward the accumulation of interest recorded on a shareholder notes receivable. The remaining decrease is a result of a decrease in the interest rate on outstanding balance of the stockholder notes payable. The Company pays interest monthly on the notes payable to stockholder at the prime rate, which was 4.75% as of March 31, 2008 as opposed to 8.25% as of March 31, 2007.

Liquidity and Capital Resources

As of March 31, 2008, the Company had cash and cash equivalents of approximately $77,000. For the three-month period ended March 31, 2008, net cash used in operating activities was approximately $781,000 which primarily resulted from the net loss of approximately $470,000. There was approximately $2,000 cash used in investing activities for the purchase of property and equipment. Net cash provided by financing activities was approximately $742,000 for the period, due to $324,000 of proceeds received from stock issued for cash.

The Company has incurred net losses each year since its inception and has relied on the sale of its stock from time to time and loans from third parties and from related parties to fund its operations.

At March 31, 2008, the Company had working capital of approximately $716,000 and its current ratio (current assets to current liabilities) was 1.45 to 1. The Company anticipates increased cash flows from 2008 sales activity; however, additional cash will still be needed to support operations and meet working capital needs. If budgeted sales levels are not achieved and/or significant unanticipated expenditures occur, the Company may have to modify its business plan, reduce or discontinue some of its operations or seek a buyer for part of its assets to continue as a going concern through 2008. There can be no assurance that the Company will be able to raise additional capital or that sales will increase to the level required to generate profitable operations to provide positive cash flow from operations. If the Company is not able to raise capital as needed to fund it operating expenses and pay its obligations as they become due, it is possible the Company may be required to curtail some or all of its operations. In that event, it is possible that stockholders could lose their entire investment in the Company.

Critical Accounting Policy

New Accounting Standards

In June 2006, the Financial Accounting Standards Board ("FASB") issued Interpretation No. 48 ("FIN 48"), "Accounting for Uncertainty in Income Taxes," which prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. In accordance with FIN 48, the Company must adjust its financial statements to reflect only those tax positions that are more-likely-than-not to be sustained as of the adoption date. The effective date of FIN 48 for the Company is January 1, 2007. The adoption of FIN 48 has not had a material impact on the Company's condensed consolidated financial statements.

In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements" ("SFAS 157"), which clarifies the definition of fair value, establishes guidelines for measuring fair value, and expands disclosures regarding fair value measurements. SFAS 157 does not require any new fair value measurements and eliminates inconsistencies in guidance found in various prior accounting pronouncements. . SFAS 157 was effective for the Company on January 1, 2008. The adoption of SFAS No. 157 has not had a material impact of adopting SFAS 157 on its financial position, cash flows, and results of operations.

In February 2007, the Financial Accounting Standards Board (FASB) issued SFAS No. 159, "The Fair Value Option for Financial Assets and Financial Liabilities - Including an Amendment of FASB Statement No. 115". This statement permits entities to choose to measure many financial instruments and certain other items at fair value. Most of the provisions of SFAS No. 159 apply only to entities that elect the fair value option. However, the amendment to SFAS No. 115 "Accounting for Certain Investments in Debt and Equity Securities" applies to all entities with available-for-sale and trading securities. SFAS No. 159 is effective as of the beginning of an entity's first fiscal year that begins after November 15, 2007. Early adoption is permitted as of the beginning of a fiscal year that begins on or before November 15, 2007, provided the entity also elects to apply the provision of SFAS No. 157, "Fair Value Measurements". The adoption of this statement has not had a material effect on the Company's financial statements.

In December 2007, the Financial Accounting Standards Board (FASB) issued SFAS No. 160, "Noncontrolling Interests in Consolidated Financial Statements - an amendment of ARB No. 51". This statement improves the relevance, comparability, and transparency of the financial information that a reporting entity provides in its consolidated financial statements by establishing accounting and reporting standards that require; the ownership interests in subsidiaries held by parties other than the parent and the amount of consolidated net income attributable to the parent and to the noncontrolling interest be clearly identified and presented on the face of the consolidated statement of income, changes in a parent's ownership interest while the parent retains its controlling financial interest in its subsidiary be accounted for consistently, when a subsidiary is deconsolidated, any retained noncontrolling equity investment in the former subsidiary be initially measured at fair value, entities provide sufficient disclosures that clearly identify and distinguish between the interests of the parent and the interests of the noncontrolling owners. SFAS No. 160 affects those entities that have an outstanding noncontrolling interest in one or more subsidiaries or that deconsolidate a subsidiary. SFAS No. 160 is effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2008. Early adoption is prohibited. The adoption of this statement is not expected to have a material effect on the Company's financial statements.

In March 2008, the FASB issued SFAS No. 161, "Disclosures about Derivative Instruments and Hedging Activities, an amendment of FASB Statement No. 133" (SFAS 161). This statement is intended to improve transparency in financial reporting by requiring enhanced disclosures of an entity's derivative instruments and hedging activities and their effects on the entity's financial position, financial performance, and cash flows. SFAS 161 applies to all derivative instruments within the scope of SFAS 133. "Accounting for Derivative Instruments and Hedging Activities" (SFAS 133) as well as related hedged items, bifurcated derivatives, and nonderivative instruments that are designed and qualify as hedging instruments.

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. The impact of fluctuations in foreign currency has not been significant. The exchange rate, the Great British pound to the U.S. dollar fluctuated from 1.9973 on December 31, 2007 to 1.9951 on March 31, 2008 as compared to 1.9266 on December 31, 2006 to 1.9625 on March 31, 2007.

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