10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

———————

FORM 10-Q

———————

(Mark One)

þ	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
	ACT OF 1934
For the quarterly period ended: June 30, 2012
Or
¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
	ACT OF 1934
For the transition period from: _____________ to _____________

COMMISSION FILE NUMBER: 001-11991

PURADYN FILTER TECHNOLOGIES INCORPORATED

(Name of registrant as specified in its charter)

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

2017 HIGH RIDGE ROAD, BOYNTON BEACH, FL 33426

(Address of principal executive offices) (Zip Code)

(561) 547-9499

(Registrant's telephone number, including area code)

NOT APPLICABLE

(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 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.
			þ	Yes	¨	No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
			þ	Yes	¨	No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer	¨	Accelerated filer			¨
Non-accelerated filer	¨	Smaller reporting company			þ
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
			¨	Yes	þ	No
Indicated the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. 47,288,457 shares of common stock are issued and outstanding as of August 13, 2012.

TABLE OF CONTENTS

Page No.

PART I. - FINANCIAL INFORMATION

PART II. - OTHER INFORMATION

2

OTHER PERTINENT INFORMATION

Our web site is www.puradyn.com.  The information which appears on our web site is not part of this report.

When used in this report, the terms "Puradyn," the "Company," "we," "our," and "us" refers to Puradyn Filter Technologies Incorporated, a Delaware corporation, and our subsidiaries.

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 our actual results to differ materially from those in the forward-looking statements. These factors include, but are not limited to:

· our history of losses and uncertainty that we will be able to continue as a going concern,

· our ability to generate net sales in an amount to pay our operating expenses,

· our need for additional financing and uncertainties related to our ability to obtain these funds,

· our ability to repay the outstanding debt of $7.9 million at June 30, 2012 due our Chairman and CEO,

· our reliance on sales to a limited number of customers,

· our dependence on a limited number of distributors,

· our ability to compete,

· our ability to protect our intellectual property,

· market overhang issues, and

· the application of penny stock rules to the trading in our stock.

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 our Annual Report on Form 10-K for the year ended December 31, 2011, including the risks described in Part I. Item 1A. Risk Factors, together with our subsequent filings with the Securities and Exchange Commission in their entirety.  Except for our 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.

3

PART I - FINANCIAL INFORMATION

ITEM 1.

FINANCIAL STATEMENTS.

PURADYN FILTER TECHNOLOGIES INCORPORATED

CONDENSED CONSOLIDATED BALANCE SHEETS

	June 30, 2012			December 31, 2011
	(Unaudited)
Assets
Current assets:
Cash and cash equivalents	$	15,777		$	51,152
Accounts receivable, net of allowance for uncollectible accounts of $18,153 and $24,355, respectively		367,720			309,962
Inventories, net		713,775			677,127
Prepaid expenses and other current assets		138,311			46,538
Total current assets		1,235,583			1,084,779
Property and equipment, net		96,930			97,013
Other noncurrent assets		111,244			111,244
Deferred financing costs, net		1,515			2,945
Total assets		1,445,272			1,295,981
Liabilities and stockholders’ deficit
Current liabilities:
Accounts payable		291,666			204,422
Accrued liabilities		1,492,449			1,414,279
Current portion of capital lease obligation		7,126			2,800
Note Payables - stockholders		100,000			100,000
Total current liabilities		1,891,241			1,721,501
Capital lease obligation, less current portion		15,169			10,042
Notes Payable -  stockholders		7,899,017			7,429,017
Total Long Term Liabilities		7,914,186			7,439,059
Total Liabilities		9,805,427			9,160,560
Commitments and contingencies (see note 7)
Stockholders’ deficit:
Preferred stock, $.001 par value: Authorized shares – 500,000; None issued and outstanding		—			—
Common stock, $.001 par value: Authorized shares – 100,000,000 Issued and outstanding – 47,243,002 and 46,830,504, respectively		47,243			46,830
Additional paid-in capital		46,580,202			46,459,374
Notes receivable from stockholders		(756,250	)		(790,785	)
Accumulated deficit		(54,231,350	)		(53,726,253	)
Accumulated other comprehensive income		—			146,255
Total stockholders’ deficit		(8,360,155	)		(7,864,579	)
Total liabilities and stockholders’ deficit	$	1,445,272		$	1,295,981

See accompanying notes to unaudited condensed consolidated financial statements

4

PURADYN FILTER TECHNOLOGIES INCORPORATED

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

 (UNAUDITED)

	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2012			2011			2012			2011
Net sales	$	804,099		$	499,423		$	1,555,601		$	1,382,815
Costs and expenses:
Cost of products sold		514,526			397,146			1,086,745			986,319
Salaries and wages		269,079			268,628			551,279			542,792
Selling and administrative		251,477			243,475			487,029			549,122
		1,035,082			909,249			2,125,053			2,078,233
Loss from operations		(230,983	)		(409,826	)		(569,452	)		(695,418	)
Other income (expense):
Realized Gain on Foreign Currency		—			—			146,255			—
Interest income		—			1			—			1
Interest expense		(42,136	)		(41,704	)		(81,900	)		(82,549	)
Total other expense, net		(42,136	)		(41,703	)		64,355			(82,548	)
Loss before income taxes		(273,119	)		(451,529	)		(505,097	)		(777,966	)
Income tax expense		—			—			—			—
Net loss	$	(273,119	)	$	(451,529	)	$	(505,097	)	$	(777,966	)
Basic and diluted loss per common share
	$	(0.01	)	$	(0.01	)	$	(0.01	)	$	(0.02	)
Weighted average common shares outstanding (basic and diluted)		47,185,445			46,546,062			47,119,622			46,471,940

See accompanying notes to unaudited condensed consolidated financial statements

5

PURADYN FILTER TECHNOLOGIES INCORPORATED

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

 (UNAUDITED)

	Six Months Ended June 30
	2012			2011
Operating activities
Net loss	$	(505,097	)	$	(777,966	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization		23,741			23,670
Realized gain on foreign currency adjustment		(146,255	)		—
Provision for bad debts		(6,202	)		402
Amortization of deferred financing costs included in interest expense		251			503
Deferred compensation		36,591			70,783
Compensation expense on stock-based arrangements with employees, consultants, investors and vendors		116,433			106,009
Changes in operating assets and liabilities:
Accounts receivable		(51,555	)		(15,975	)
Inventories		(36,648	)		(36,125	)
Prepaid expenses and other current assets		(91,773	)		(50,611	)
Other Assets		—			37,900
Accounts payable		87,244			136,004
Accrued liabilities		41,578			86,200
Deferred revenues		—			(2,050	)
Net cash used in operating activities		(531,692	)		(421,256	)
Investing activities
Purchases of property and equipment		(23,658	)		(6,190	)
Net cash used in investing activities		(23,658	)		(6,190	)
Financing activities
Additions to deferred financing costs		1,179			—
Proceeds from sale of common stock		—			100,000
Proceeds from exercise of warrants		4,808			—
Proceeds from issuance of notes payable to stockholders		470,000			350,000
Proceeds from shareholder note receivable		34,535			—
Borrowings on capital lease		12,569			—
Payment of capital lease obligations		(3,116	)		(1,989	)
Net cash provided by financing activities		519,975			448,011
Effect of exchange rate changes on cash and cash equivalents		—			105
Net increase (decrease) in cash and cash equivalents		(35,375	)		20,670
Cash and cash equivalents at beginning of period		51,152			49,813
Cash and cash equivalents at end of period		15,777			70,483
Supplemental cash flow information:
Cash paid for interest	$	73,387		$	78,939

See accompanying notes to unaudited condensed consolidated financial statements

6

PURADYN FILTER TECHNOLOGIES INCORPORATED

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(UNAUDITED)

	Three Months Ended June 30,						Six Months Ended June 30,
	2012			2011			2012			2011
Net loss	$	(273,119	)	$	(451,529	)	$	(505,097	)	$	(777,966	)
Other comprehensive income (loss):
Foreign currency translation adjustment		—			(359	)		(146,255	)		105
Comprehensive loss	$	(273,119	)	$	(451,888	)	$	(651,352	)	$	(777,861	)

See accompanying notes to unaudited condensed consolidated financial statements

7

PURADYN FILTER TECHNOLOGIES INCORPORATED

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ DEFICIT

FOR THE SIX MONTHS ENDED JUNE 30, 2012

(UNAUDITED)

	Common Stock					Additional Paid-in Capital		Notes Receivable From Stockholders			Accumulated Deficit			Accumulated Other Comprehensive Income (Loss)			Total Stockholders' Deficit
	Shares			Amount
Balance at December 31, 2011		46,830,504		$	46,830	$	46,459,374	$	(790,785	)	$	(53,726,253	)	$	146,255		$	(7,864,579	)
Foreign currency translation adjustment		—			—		—		—			—			(146,255	)		(146,255	)
Net loss		—			—		—		—			(505,097	)		—			(505,097	)
Total comprehensive loss		—			—		—		—			—			—			(651,352	)
Common stock issued for private placement, net of issuance costs		(361	)		—		—		—			—			—			—
Issuance of shares and warrants to vendors		176,799			177		25,823		—			—			—			26,000
Exercise of stock warrants		236,060			236		4,572		—			—			—			4,808
Payments of notes receivable from stockholders		—			—		—		34,535			—			—			34,535
Compensation expense associated with unvested option awards		—			—		90,433		—			—			—			90,433
Balance at June 30, 2012		47,243,002		$	47,243	$	46,580,202	$	(756,250	)	$	(54,231,350	)		—			(8,360,155	)

.

See accompanying notes to unaudited condensed consolidated financial statements

8

PURADYN FILTER TECHNOLOGIES INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

1. Basis of Presentation, Going Concern and Summary of Significant Accounting Policies

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim information and with the instructions to Form 10-Q and Regulation S-K. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. In the opinion of management, all adjustments consisting of a normal and recurring nature considered necessary for a fair presentation have been included. Operating results for the three and six month periods ended June 30, 2012 may not necessarily be indicative of the results that may be expected for the year ending December 31, 2012.

For further information, refer to Puradyn Filter Technologies Incorporated’s (the “Company”) consolidated financial statements and footnotes thereto included in the Form 10-K for the year ended December 31, 2011.

Since its formation June 1, 2000, Puradyn Filter Technologies, Ltd. (“Ltd.”), the Company’s United Kingdom subsidiary, has been included in the Company’s condensed consolidated financial statements. In March, 2009, Ltd.’s office in the UK was closed and all assets, except for bank cash accounts, were transferred to the United States. Effective January, 2012, Ltd., ceased as a legal entity and all cash accounts were closed.

Use of Estimates

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

Basic and Diluted Loss Per Share

FASB ASC 260, Earnings Per Share, requires a dual presentation of basic and diluted earnings per share. However, because of the Company's net losses, the effect of outstanding stock options and warrants would be anti-dilutive and, accordingly, is excluded from the computation of diluted loss per share. The number of such shares excluded from the computation of loss per share totaled 7,788,730 for the three months and six months ended June 30, 2012 and 6,759,777 for the three months and six months ended June 30, 2011.

Stock Compensation

The Company adopted FASB ASC 718, Compensation – Stock Compensation, effective January 1, 2006 using the modified prospective application method of adoption which requires us to record compensation cost related to unvested stock awards as of December 31, 2005, recognizing the amortized grant date fair value in accordance with provisions of FASB ASC 718 on straight line basis over the service periods of each award.  We have estimated forfeiture rates based on our historical experience.  Stock option compensation expense for the periods ended June 30, 2012 and June 30, 2011 have been recognized as a component of cost of goods sold and general and administrative expenses in the accompanying Condensed Consolidated Financial Statements.

Stock options and warrants issued to consultants and other non-employees as compensation for services provided to the Company are accounted for based on the fair value of the services provided or the estimated fair market value of the option or warrant, whichever is more reliably measurable in accordance with FASB ASC 718 and FASB ASC 505 Equity, including related amendments and interpretations. The related expense is recognized over the period the services are provided.

Inventories

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

9

PURADYN FILTER TECHNOLOGIES INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)

Inventories consisted of the following at June 30, 2012 and December 31, 2011, respectively:

	June 30 2012			December 31, 2011
	(unaudited)
Raw materials	$	891,272		$	885,781
Work In Progress		21,293			3,222
Finished goods		142,226			134,016
Valuation allowance		(341,016	)		(345,892	)
Inventory, net	$	713,775		$	677,127

Deferred Financing Costs

The Company capitalizes financing costs and amortizes them using the straight-line method, which approximates the effective interest method, over the term of the related debt. Amortization of deferred financing costs is included in interest expense.

	Three Months Ended June 30,				Six Months Ended June 30,
	2012		2011		2012		2011
Amortization of Deferred Financing Costs	$	715	$	251	$	1,430	$	503
Accumulated Amortization of Deferred Financing Costs	$	682,084	$	679,640	$	682,084	$	679,640

Revenue Recognition

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 when collectability is reasonably assured in accordance with FASB ASC 605, Revenue Recognition, as amended and interpreted. Cash received by the Company prior to shipment is recorded as deferred revenue. Sales are made to customers under terms allowing certain limited rights of return and other limited product and performance warranties for which provision has been made in the accompanying condensed consolidated financial statements.

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

Product Warranty Costs

As required by FASB ASC 460, Guarantor’s Guarantees, the Company is including the following disclosure applicable to its product warranties.

The Company accrues for warranty costs based on the expected material and labor costs to provide warranty replacement products. The methodology used in determining the liability for warranty cost is based upon historical information and experience.  The Company's warranty reserve is included in accrued liabilities in the accompanying condensed consolidated financial statements and is calculated as the gross sales multiplied by the historical warranty expense return rate. As of June 30, 2012, management estimates the existing warranty reserve balances were sufficient to absorb any warranty costs that might be incurred from the sales activity for the period.

10

PURADYN FILTER TECHNOLOGIES INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)

Comprehensive Income

FASB ASC 220, Comprehensive Income establishes rules for reporting and displaying of comprehensive income and its components. Comprehensive income is the sum of net loss as reported in the consolidated statements of operations and other comprehensive income transactions. Other comprehensive income transactions that currently apply to the Company result from changes in exchange rates used in translating the financial statements of its wholly owned subsidiary, Ltd.. Comprehensive loss as of June 30, 2012 and 2011 is not shown net of taxes because the Company’s deferred tax asset has been fully offset by a valuation allowance. There was no comprehensive income or loss attributable to the six months ended June 30, 2012 as Ltd’s business license was surrendered with the British authorities in January, 2012 and all accounts were closed.

Comprehensive loss consisted of the following for the three and six-months ended June 30, 2012 and 2011:

	Three Months Ended June 30,						Six Months Ended June 30,
	2012			2011			2012			2011
Net loss	$	(273,119	)	$	(451,529	)	$	(505,097	)	$	(777,966	)
Other comprehensive income (loss):
Foreign currency translation adjustment		—			(359	)		(146,255	)		105
Comprehensive loss	$	(273,119	)	$	(451,888	)	$	(651,352	)	$	(777,861	)

Recent Accounting Pronouncements

ASU 2011-11, “Balance Sheet (Topic 210) - “Disclosures about Offsetting Assets and Liabilities.” ASU 2011-11 amends Topic 210, “Balance Sheet,” to require an entity to disclose both gross and net information about financial instruments, such as sales and repurchase agreements and reverse sale and repurchase agreements and securities borrowing/lending arrangements, and derivative instruments that are eligible for offset in the statement of financial position and/or subject to a master netting arrangement or similar agreement. ASU 2011-11 is effective for annual and interim periods beginning on January 1, 2013, and is not expected to have a significant impact on the Company’s financial statements.

2. Going Concern

The Company's financial statements have been prepared on the assumption that it will continue as a going concern, which contemplates the realization of assets and satisfaction of liabilities in the normal course of business. The Company has sustained losses since inception and used net cash in operations of $531,692 and $421,256 during the six-months ended June 30, 2012 and 2011, respectively. As a result, the Company has had to rely principally on private placements of equity and debt securities, including the conversion of debt into stock, as well as stockholder loans to fund its activities to date.

11

PURADYN FILTER TECHNOLOGIES INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)

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 registered public accounting firm, 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, 2011 expressing substantial doubt as to the Company’s ability to continue as a going concern. The financial statements do not include any adjustments that may result from the outcome of this uncertainty.

The Company has been addressing the liquidity and working capital issues and continues to attempt to raise additional capital with institutional and private investors and current stockholders. Cost reductions were and continue to be implemented by the Company, including acquiring alternative suppliers for raw materials and volume purchase discounts when appropriate. The Company expects to see results from these reductions, as well as other cost reduction plans through 2012.

3. Common Stock

As partial compensation per an agreement dated May 19, 2011 and subsequently renewed on May 19, 2012 for consultant work, the Company issued to Monarch Communications, Inc. the following:

	Shares Issued		Per Share Value
April 19, 2012		33,334		$	0.12
June 4, 2012		23,529			0.17
June 21, 2012		37,500			0.16

On April 5, 2012 the Company issued 28,846 and 207,214 shares of its common stock valued at $0.17 per share in connection with previously received payment of $4,808 and $34,536, respectively, from two stockholders for the exercise of previously issued warrants.

4. Stock Options.

For the three months and six months ended June 30, 2012 the Company recorded stock-based compensation expense of $44,518 and $90,433, respectively For the three months and six months ended June 30, 2011 the Company recorded stock-based compensation expense of $36,106 and $80,009, respectively. These expenses were related to unvested employee stock options.  

Stock options and warrants issued to consultants and other non-employees as compensation for services provided to the Company are accounted for based on the fair value of the services provided or the estimated fair market value of the option or warrant, whichever is more reliably measurable in accordance with FASB ASC 505, Equity, and FASB ASC 718, Compensation – Stock Compensation. The related expense is recognized over the period the services are provided. Unrecognized expense remaining at June 30, 2012 and 2011 for the employee stock options is $262,894 and $223,860, respectively and will be recognized through March 2015.

12

PURADYN FILTER TECHNOLOGIES INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)

A summary of the Company’s stock option plans as of June 30, 2012, and changes during the six-month period then ended is presented below:

	Six Months Ended June 30, 2012
	Number of Options		Weighted Average Exercise Price
Options outstanding at December 31, 2011		2,993,972	$	.37
Options granted		905,000		.14
Options exercised		—		-
Options cancelled		10,000		.14
Options expired		10,000		.37
Options at end of period		3,878,972		.32
Options exercisable at June 30, 2012		2,107,528		.42

A summary of the Company’s stock option plans as of June 30, 2012, and changes during the three-month period then ended is presented below:

	Three Months Ended June 30, 2012
	Number of Options		Weighted Average Exercise Price
Options outstanding at March 31, 2012		3,888,972	$	.37
Options exercised		—		—
Options cancelled		—		—
Options expired		10,000		.37
Options at June 30, 2012		3,878,972		.32
Options exercisable at June 30, 2012		2,107,528		.42

Changes in the Company’s unvested options for the six months ended June 30, 2012 are summarized as follows:

	Six Months Ended June 30, 2012
	Number of Options		Weighted Average Exercise Price
Non-Vested options at December 31, 2011		1,561,699	$	.25
Options granted		905,000		.14
Options vested		685,255		.35
Options cancelled		10,000		.14
Non-Vested options at June 30, 2012		1,771,444		.13

13

PURADYN FILTER TECHNOLOGIES INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)

Changes in the Company’s unvested options for the three months ended June 30, 2012 are summarized as follows:

	Three Months Ended June 30, 2012
	Number of Options		Weighted Average Exercise Price
Non-Vested options at March 31, 2012		2,168,444	$	.14
Options granted		—		—
Options vested		387,000		.29
Options cancelled		10,000		.14
Non-Vested options at June 30, 2012		1,771,444		.13

	Options Outstanding						Options Exercisable
Range of Exercise Price	Number Outstanding		Remaining Average Contractual Life  (In Years)		Weighted Average Exercise Price		Number Exercisable		Weighted Average Exercise Price
$  .14 – $1.70		3,834,972		3.88	$	.30		2,063,528	$	.25
$1.99 – $2.60		44,000		.83		2.31		44,000		2.31
Totals		3,878,972		6.15	$	.32		2,107,528	$	.42

5. Warrants

At June 30, 2012, 3,899,758 warrants with an average exercise price of $0.77 remain outstanding and were fully vested.

A summary of the Company’s warrant activity as of June 30, 2012 and changes during the six month and three month periods then ended is presented below:

	Six Months Ended June 30, 2012
	Weighted Average Exercise
	Warrants		Price
Warrants outstanding at December 31, 2011		4,096,476	$	.97
Granted		—		—
Exercised		196,718		.17
Expired		—		—
Warrants outstanding at June 30, 2012		3,899,758	$	.77

	Three Months Ended June 30, 2012
	Weighted Average Exercise
	Warrants		Price
Warrants outstanding at March 31, 2012		3,899,758	$	.77
Granted		—		—
Exercised		—		—
Expired		—		—
Warrants outstanding at June 30, 2012		3,899,758	$	.77

14

PURADYN FILTER TECHNOLOGIES INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)

	Warrants Outstanding
Range of Exercise Price	Number Outstanding		Remaining Average Contractual Life (In Years)		Weighted Average Exercise Price
$0.35 - $0.75		2,446,483		2.49	$	.48
$1.25		1,453,275		.95		1.25
Totals		3,899,758		2.07	$	.77

6. Notes Payable to Stockholders

Beginning on March 28, 2002 the Company executed a binding agreement with one of its principal stockholders, who is also the Chairman of the Board and an executive officer, to fund up to $6,100,000. Under the terms of the agreements, the Company can draw amounts as needed to fund operations. Amounts drawn bear interest at the BBA LIBOR Daily Floating Rate plus 1.4 percentage points (1.641% per annum at June 30, 2012), payable monthly and were to become due and payable on December 31, 2005 or upon a change in control of the Company or consummation of any other financing over $7,000,000. Beginning in March 2006, annually, through February 2012, the maturity date for the agreement was extended annually from December 31, 2007 to December 31, 2013.

At March 31, 2012 the Company had drawn the full funding amount under the agreement of $6,100,000 plus an additional $1,549,017, which included a direct loan in the amount of $220,000. During the three months ended June 30, 2012, the stockholder loaned the Company an additional $250,000 directly, for a total amount due of $7,899,017.  

Additionally, the Company has loans outstanding from one board member, who is also a significant stockholder and consultant, totaling $100,000 at June 30, 2012 and December 31, 2011. The outstanding debt obligation at June 30, 2012 matures January 1, 2013 and is included in Current Liabilities.

For the three-months ended June 30, 2012 and 2011, the Company recorded $40,370 and $40,769, respectively, and for the six-months ended June 30, 2012 and 2011, the Company recorded $78,865 and $81,190, respectively, of interest expense related to the notes payable to stockholders, which is included in interest expense in the accompanying condensed consolidated statements of operations.

7. Commitments and Contingencies

On October 20, 2009, we entered into a consulting agreement with Boxwood Associates, Inc., whereby we pay $2,000 monthly for management and strategic development services performed.  The contract will remain in effect until terminated by either party providing 30 days’ written notice.  Mr. Telesco, a member of our board of directors, is the President of Boxwood Associates, Inc.

On May 19, 2012, we renewed a consulting agreement with Monarch Communications, Inc. for services rendered as public relations firm and media relations consultants for the Company. The term of the agreement is for twelve months.  As compensation for their services, Monarch will receive a fee of $7,000 per month, for the first six months, payable as $2,000 cash and $5,000 in shares of common stock. For the final six months of the agreement, Monarch will receive a fee of $7,000, payable as $3,000 in cash and $4,000 in shares of common stock.  Either party may terminate the agreement with 30 days’ notice. The recipient is an accredited or otherwise sophisticated investor who had such knowledge and experience in business matters and was capable of evaluating the merits and risks of the prospective investment in our securities.  The issuance of the shares is exempt from registration under the Securities Act of 1933 in reliance on an exemption provided by Section 4(2) of that act.

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PURADYN FILTER TECHNOLOGIES INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)

8. Subsequent Events

On July 30, 2012 the Company issued to Monarch Communications, Inc. 45,455 shares of common stock valued at $0.11 per share as partial compensation per the agreement for consultant work.

On July 11, 2012, the Company received a loan in the amount of $100,000, from the Company’s Chairman and CEO, as an advance for working capital needs. This loan bears interest at the same rate of interest as the credit facility provided by the stockholder under the note dated March 28, 2002. This advance does not have a specific due date but is to be paid based on management’s determination of the Company’s ability to pay and cash flow. We are using the proceeds for working capital.

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ITEM 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

Overview

Sales of the Company’s products, the puraDYN® bypass oil filtration system and replaceable filter elements depend principally upon end user demand for such products and acceptance of the Company’s products by OEMs. The oil filtration industry has historically been competitive and, as is typically the case with any inventive and/or alternative technology, 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 continued research and development, and laboratory and field testing for validity and performance credibility, as well as substantial marketing and sales efforts to inform customers of the perceived benefits and cost advantages of its products, all of which require a significant amount of funds.  As a result of our limited resources, we have not had adequate funds available to undertake all of these necessary marketing efforts.

To our knowledge, currently no bypass oil filtration system has captured a substantial share of the market. We believe we are in a unique position to capitalize on the acceptance of bypass oil filtration given that our product and our Company are positioned as, including, but not limited to:

· 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 the growing trend toward ‘greening’ of existing technologies.

· Providing an operational maintenance solution to end users currently dealing with the existing federal environmental regulation and the pending new more stringent regulation slated for the near future..  These regulations mandating cleaner engine emissions for all on- and off-highway equipment calls for closer engine tolerance.  These new closer tolerances will require cleaner oil to maintain the engines performance.

· Providing significant operational savings which will reduce engine life cycle costs

· Providing overall engine efficiency and potential fuel efficiency due to a reduction of friction in the engine components from continuously clean lubricating oil.

We focus our sales strategy on end user fleet sales and distribution efforts as well as on the development of a nationwide distribution network that will not only sell but also install and support our product. We currently have over 100 active distributors in the U.S. and internationally. The number of distributors will frequently change as we add new distributors as well as when OEMs come onboard with their distribution network.

We continue to focus our sales and marketing efforts to target industries open to innovative methods to reduce oil maintenance operating costs. These industries are searching for new and progressive ways, including bypass oil filtration, to extend optimum operating performance. This strategy includes focus on:

· The expansion of existing strategic relationships we have with John Deere, Avis, and others;

· Continued development of our distribution network with distributors who have an established customer base;

· Continued development of relationships with identified and targeted market segment OEMs;

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

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

· In the third quarter of 2011 the Company was named an authorized supplier of its Puradyn system for John Deere Construction and Forestry Division. The product was selected after over four years of evaluation and testing.

· Increased inquiry activity in the open pit mining industry.

· Increased activity in both sales and inquiries, in Europe, Asia, and South and Central America.

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We believe that the renewed interest shown in our bypass oil filtration technology as an economic alternative to combat significantly rising oil prices, dependence upon foreign oil, coupled with the added benefits of being environmentally beneficial and a means to conserve oil, has timely and favorably positioned the Company as a manufacturer of a cost efficient “green” product.

Our customers have found that bypass oil filtration technology affords the same benefits of the claims made by alternative energy source providers – reduce significant oil consumption and minimize a company’s carbon footprint. The advantages our Company offers vs. alternative energy source providers to existing and potential customers include not having to invest in new equipment; continued use of existing fleet equipment, and offering a relatively low-cost aftermarket product, installation, training, and support.

Recognizing that a level of oil consumption is not 100% avoidable, we promote our technology as environmentally-friendly in that it provides a practical and more intelligent use of oil as opposed to the accepted norm of oil, which is currently considered a disposable and infinite resource. By keeping engine and hydraulic oil continuously clean, equipment runs at optimum efficiency and the oil can be kept in use, possibly extending the life of the oil by numerous oil drain cycles.

We believe that industry acceptance resulting in sales will continue to grow in 2012; 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; however, the addition of several large engine users as customers and the naming of the Company as an official supplier to John Deere may help in achieving high end user confidence levels to reduce evaluation times.

We believe international sales are especially well suited to our product for a number of reasons, including the fact that lubricating oil products in foreign countries are usually more expensive than in the United States.  Also, a number of countries at this time outside of North America and the European Union are not mandated to use low-sulfur fuels, and a higher sulfur content typically deteriorates the engine oil’s chemical balance more rapidly.

Our focus on specific industries several years earlier has continued to demonstrate an impact on sales through 2012, notwithstanding the general recessed economic environment.  These industries demonstrated early signs of recovery from the economy’s current situation, and we are beginning to benefit from their recovery.

Optimizing our limited resources and obtaining sufficient capital is pivotal 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 specific niche industries using our system. To accomplish these tasks, we may need to obtain capital funding and add appropriate sales and marketing support to be sure our distributors and customers are served. We anticipate the short term need for at least one more sales person plus one sales support person. Sales revenue from the OEM area is rewarding in that it provides a steady flow of material requirements for our manufacturing facility. Additionally, OEM business allows us more stability in retaining trained 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.

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. in general and our company in particular. 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 2012 and beyond. We also review cost of material increases on an ongoing basis, exploring new sources and vendors to avoid or minimize product price increases wherever possible.

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Going Concern

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 a current stockholder and executive officer and director, have led our independent registered public accounting firm Webb & Company P.A. to include a statement in its audit report relating to audited consolidated financial statements for the years ended December 31, 2011 and 2010 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.  We are also materially dependent upon loans from related parties to provide working capital. 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 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 our 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 continue to 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 are exhausted, the determination for charging off uncollectible receivables is made.

Estimation of Product Warranty Cost

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 costs or service delivery costs differ from our estimates, revisions to the estimated warranty liability would be required.

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Inventory and estimation of inventory obsolescence

Inventories are valued at the lower of cost or market using the first in, first out (FIFO) method. Valuation allowances for obsolete and excess inventory and shrinkage are also recorded. Shrinkage is estimated as a percentage of sales for the period from the last physical inventory date to the end of the applicable period. Such estimates are based on experience and the most recent physical inventory results. The valuation allowances for obsolete and excess inventory in multiple stages of processing, requires management judgment and estimates that may impact the ending inventory valuation and valuation allowances that may affect the reported gross margin for the period.

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, Property, Plant and Equipment.  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. Revenue from product sales to customers, distributors and resellers is recorded when products that do not require further services or installation by us are shipped, when there are no uncertainties surrounding customer acceptance and for which collectability 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.

Recent Accounting Pronouncements

Information concerning recently issued accounting pronouncements is set forth in Note 1 of our Notes to Condensed Consolidated Financial Statements under Item 1. “Financial Statements” and is incorporated herein by reference.

Results of Operations for the Three-months Ended June 30, 2012 Compared to the Three-months Ended June 30, 2011

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 June 30, 2012 to the three-months ended June 30, 2011:

	Three Months Ended June 30,
	2012			2011			Change
Net sales	$	804,099		$	499,423		$	304,676
Costs and expenses:
Cost of products sold		514,526			397,146			117,380
Salaries and wages		269,079			268,628			451
Selling and administrative		251,477			243,475			8,002
Total costs and expenses		1,035,082			909,249			125,833
Other (expense) income:
Interest income		—			1			(1	)
Interest expense		(42,136	)		(41,704	)		(432	)
Total other expense		(42,136	)		(41,703	)		(433	)
Net loss	$	(273,119	)	$	(451,529	)	$	178,410

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Net Sales

Net sales increased 61% in the three months ending June 30, 2012 compared to the three months ending June 30, 2011.  The increase in sales was attributable to two existing customers who doubled their purchases compared to their purchases for the same time period last year and one new distributor. Approximately 17% of the $304,676 increase in our net sales revenue for the three months ended June 30, 2012 from the comparable period in 2011 was from the price increase effective September 15, 2011.

Sales to four customers accounted for 15.2%, 14.5%, 11.4% and 10.9% (for a total of 52%) of net sales for the three-months ended June 30, 2012. Sales to four customers accounted for 13%, 13%, 13% and 12% (for a total of 51%) of net sales for the three-months ended June 30, 2011.

Cost of Products Sold

Gross profit, the amount of profit to the Company after cost of products sold is deducted from net sales, as a percentage of net sales, increased from 20.5% in the three months ending June 30, 2011 to 36.0% in the three months ending June 30, 2012.  The decrease in cost of goods sold, which generates a higher gross profit, is primarily attributable to the fixed manufacturing overhead costs that are absorbed under higher sales volumes. During the three months ending June 30, 2011, we experienced rework charges in the amount of $15,269 as compared to $623 in the three months ending June 30, 2012. We anticipate lower gross profits in the third quarter from reduced sales during that period. Fourth quarter gross profits should be at comparable levels to the current reporting period.

Salaries and Wages

Salaries and wages increased 0.2% for the three months ending June 30, 2012 compared to the three months ending June 30, 2011.  This minor variance resulted from an increase in benefit costs.

Salaries and wages, as a percentage of net sales, were 33.5% for the three months ending June 30, 2012 and 53.8% for the three months ending June 30, 2011. The decrease in salaries and wages as a percentage of net sales was due primarily to the increase in net sales for the three months ending June 30, 2012 compared to the same period in 2011.

Management does not anticipate any changes to our salaries and wages at our current sales volume.

Selling and Administrative Expenses

Selling and administrative expenses increased by 3.3% for the three months ended June 30, 2012 from the comparable period in 2011.  The increased expenses primarily resulted from higher employee benefit costs and travel/marketing expense. These increased costs were primarily offset by lower patent, engineering and professional expenses.

The following table lists the major categories of expenses included in Selling and Administrative expenses:

	Three Months Ended June 30,
	2012			2011		Change
Employee Benefits	$	66,878		$	56,354	$	10,524
Travel & Marketing		45,633			39,513		6,120
Depreciation & Amortization		8,997			9,172		(175	)
Engineering		(1,888	)		1,451		(3,339	)
Professional Fees		54,517			59,732		(5,215	)
Investor Relations		1,204			—		1,204
Occupancy Expense		28,573			26,178		2,395
Patent Expense		25,917			34,121		(8,204	)
Stock Compensation		1,440			1,585		(145	)
Bad Debts		419			164		255
Other Expenses		19,787			15,205		4,582
Total	$	251,477		$	243,475	$	8,001

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Engineering expenses for the three months ended June 30, 2012 are a negative amount as a result of standard engineering fee assessed in the production of units, which exceeded the costs of engineering incurred during this period.

Professional fees decreased during the three months ended June 30, 2012 compared to 2011 primarily due to software vendor services provided in 2011 which were not utilized in 2012 and legal expenses that were incurred in 2011 which were associated with SEC filings.

We anticipate expenses for the remainder of 2012 should be similar to those incurred in the three months ending June 30, 2012.

Interest Expense

Interest expense remained relatively constant for the three months ending June 30, 2012 compared to the three months ending June 30, 2011. The increase in interest expense resulted from increased borrowings.

Results of Operations for the Six-months Ended June 30, 2012 Compared to the Six-months Ended June 30, 2011

The following table sets forth the amount of increase or decrease represented by certain items reflected in the condensed consolidated statements of operations in comparing the six-months ended June 30, 2012 to the six-months ended June 30, 2011:

	Six Months Ended June 30,
	2012			2011			Change
Net sales	$	1,555,601		$	1,382,815		$	172,786
Costs and expenses:
Cost of products sold		1,086,745			986,319			100,426
Salaries and wages		551,279			542,792			8,487
Selling and administrative		487,029			549,122			(62,093	)
Total costs and expenses		2,125,053			2,078,233			46,820
Other (expense)  income:
Realized gain on Foreign Currency		146,255			—			146,255
Interest income		—			1			(1	)
Interest expense		(81,900	)		(82,549	)		649
Total other (expense) income		64,355			(82,548	)		146,903
Net loss	$	(505,097	)	$	(777,966	)	$	272,869

Net Sales

Net sales increased 12.5% in the six months ending June 30, 2012 compared to the six months ending June 30, 2011.  The majority of our sales increase resulted from one distributor and one OEM customer. Approximately 58% of the $172,786 increase in our net sales revenue for the six months ended June 30, 2012 from the comparable period in 2011, was from the price increase effective September 15, 2011.

Sales to four customers individually accounted for 18.8, 11.8%, 11.4% and 9.7% (for a total of 51.7%) for the six months ending June 30, 2012. Sales to three customers individually accounted for 19%, 15% and 11% (for a total of 45%) for the six months ending June 30, 2011.

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Cost of Products Sold

Gross profit, as a percentage of sales, increased from 28.7% in the six months ending June 30, 2011 to 30.1% in the six months ending June 30, 2012. The higher gross profit percentage results from fixed manufacturing costs allocated over a higher volume of activity. The reduced costs which resulted from lower overhead allocations were offset by higher freight out costs and higher scrap and rework costs incurred during the period. We anticipate that the gross profit will be lower in the third quarter of this year, but will remain consistent with the current reporting period at December 31, 2012.

Salaries and Wages

Salaries and wages increased 1.6% for the six months ending June 30, 2012 compared to the six months ending June 30, 2011.  This increase was primarily due to increased benefit costs. Salaries and wages, as a percentage of sales, were 35.4% for the six months ending June 30, 2012 and 39.3% for the six months ending June 30, 2011. Management does not anticipate any changes to our salaries and wages at our current sales volume.

Selling and Administrative Expenses

Selling and administrative expenses decreased 11.4% for the six months ending June 30, 2012 compared to the six months ending June 30, 2011. The following table represents the major components of Selling and Administrative expenses for the six months ended June 30, 2012 and 2011 and the change of those components over their respective periods:

	Six Months Ended June 30,
	2012			2011		Change
Employee Benefits	$	132,327		$	120,603	$	11,724
Travel & Marketing		89,920			76,506		13,414
Depreciation & Amortization		18,421			18,365		56
Engineering		(1,207	)		4,103		(5,310	)
Professional Fees		106,577			115,267		(8,690	)
Investor Relations		1,518			18,013		(16,495	)
Occupancy Expense		55,055			53,801		1,254
Patent Expense		42,953			110,505		(67,552	)
Stock Compensation		2,863			3,285		(422	)
Bad Debts		896			164		732
Other Expenses		37,706			29,243		8,462
Total	$	487,029		$	549,854		(62,826	)

Increased medical insurance premiums and stock option costs contributed to the increase in employee benefits for the six months ending June 30, 2012 compared to the six months ending June 30, 2011.

Travel & Marketing increased 17.5% for the six months ending June 30, 2012 compared to the six months ending June 30, 2011. This increase resulted from the engagement of Monarch Communications effective May, 2011, to assist us in the marketing and communication of our products and our public relation needs.

Engineering expenses decreased as a result of allocation of engineering costs to products produced. During the six months ending June 30, 2012, the standard allocation amount exceeded engineering expenses incurred for that period.

Professional fees decreased 7.5% for the six months ending June 30, 2012 compared to the six months ending June 30, 2011. We incurred higher professional fees in 2011 as a result of legal expenses that were incurred in 2011 which were associated with SEC filings and software vendor services provided in 2011 which were not incurred in 2012.

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Our investor relations expense decreased as a result of the cancellation of our contract with Emerging Markets. We anticipate that our expenses for investor relations will remain at or below 2012 levels for the remainder of the current year.

Patent expense for the six months ending June 30, 2012 compared to the six months ending June 30, 2011 was substantially lower as we had several new patent applications and submission of certain existing patents for international recognition in 2011 but not in 2012. We anticipate that these costs will remain at 2012 levels for the balance of the year.

In May 2011 we entered into an agreement with Monarch Communications, Inc., to pay a portion of our public relations firm fees in stock. This agreement was renewed in May of 2012. This amount has been reported as a marketing expense. Amounts reported as stock compensation for 2012 represent the value of options issued to Directors pursuant to our 2000 Non-Employee Directors Stock Option Plan. We do not anticipate issuing stock for services other than for those marketing services and Director compensation through the end of the current year.

Interest Expense

Interest expense remained relatively constant for the period ending June 30, 2012 as compared to the period ending June 30, 2011 and was incurred primarily on the outstanding balance of the notes payable to an executive officer, director and stockholder. The Company pays interest monthly on the notes payable at the prime rate less one-half percent, which was a weighted average of 1.99% as of June 30, 2012 as opposed to 2.54% as of June 30, 2011.

Liquidity and Capital Resources

Liquidity is the ability of a company to generate adequate amounts of cash to meet its obligations. As of June 30, 2012, the Company had cash and cash equivalents of $15,777, as compared to $51,152 at December 31, 2011. At June 30, 2012, we had negative working capital of ($655,658) and our current ratio (current assets to current liabilities) was 0.65 to 1.  At December 31, 2011 we had negative working capital of ($636,722) and our current ratio was 0.63 to 1.  The increase in our working capital deficit and the decrease in our current ratio is primarily attributable to the increase in accounts payable and accrued liabilities, offset by an increase in accounts receivable.

We have incurred net losses each year since inception and at June 30, 2012 we had an accumulated deficit of $54,231,350.  Our net sales are not sufficient to fund our operating expenses.  Historically, we 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.  During 2011, we raised a total of $100,000 in capital from an institutional investor and current stockholder. Other than $4,808 received from the exercise of warrants, we did not raise any capital during the six months ending June 30, 2012.  During the six months ending June 30, 2012, we borrowed an additional $470,000 from our principal stockholder, who is also an executive officer and director of our company. At June 30, 2012, we owe this executive officer and director of our company $7,899,017. Interest expense from debt owed to stockholders, executive officer and directors was $78,865 for the six months ending June 30, 2012. Subsequent to June 30, 2012, we borrowed an additional $100,000 from our principal stockholder, who is also an executive officer and director of our company.  We are using these funds for general working capital.

We do not currently have any commitments for capital expenditures.  Our current cash position is insufficient to cover our current operating needs for the next twelve months and we do not have any external sources of working capital. While we anticipate cash flows from 2012 sales activity, additional cash will still be needed to support operations, meet our working capital needs and satisfy our obligations as they become due. While we are actively seeking additional equity investments, we have no firm commitments from any third parties and there are no assurances we will be successful in attracting additional capital.  In addition, as set forth above, at June 30, 2012 we owed our principal stockholder who is also an executive officer and director a total of $7.899 million which is due on December 31, 2013 or (i) at such time as we have raised an additional $7 million over the $3.5 million raised in prior offerings, or (ii) at such time as we are operating within sufficient cash flow parameters to sustain operations, or (iii) until a disposition of our company, such as an acquisition or merger, occurs. We do not have sufficient funds to pay this loan when it becomes due and there are no assurances the note holder will extend the due date.

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We have implemented measures to preserve our ability to operate, including organizational changes, a reduction and/or deferral of salaries, reduction in personnel and renegotiating creditor and collection arrangements. If we are not successful in raising additional capital in the near future, it is possible we will be required to accelerate our contingent plans to more aggressively reduce spending, including drastic reductions in our work force, severe cutbacks in our production facilities and elimination of overhead costs that do not contribute to our level of sales activity. If budgeted sales levels are not achieved and/or significant unanticipated expenditures occur, or if we are not able to raise additional investment capital, we may have to modify our business plan, reduce or discontinue some of our operations or seek a buyer for part of our assets to continue as a going concern through 2012. There can be no assurance that we 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. In that event, it is possible that stockholders could lose their entire investment in our company.  These factors raise substantial doubt about our ability to continue as a going concern.

Operating activities

For the six-month period ended June 30, 2012 net cash used in operating activities was $531,692, which primarily resulted from the net loss of $505,097.  In addition to the net loss, an increase in accounts receivable, inventories and prepaid expenses contributed to the higher cash used in operations.

Investing activities

For the six months ending June 30, 2012, $23,658 cash was used in investing activities for the purchase of computer equipment.

Financing activities

Net cash provided by financing activities was $519,975 for the six months ending June 30, 2012, composed of borrowings on capital leases, proceeds from a shareholder note receivable related to warrants exercised, proceeds from the exercise of warrants and $470,000 of advances under the line of credit from our stockholder as described above less $3,116 in payment of capital lease obligations.

Critical Accounting Policies and Estimates

General

The preparation of financial statements requires management to utilize estimates and make judgments that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosure of contingent assets and liabilities. These estimates are based on historical experience and on various other assumptions that management believes to be reasonable under the circumstances. The estimates are evaluated by management on an ongoing basis, and the results of these evaluations form a basis for making decisions about the carrying value of assets and liabilities that are not readily apparent from other sources. Although actual results may differ from these estimates under different assumptions or conditions, management believes that the estimates used in the preparation of our financial statements are reasonable. The critical accounting policies affecting our financial reporting are summarized in Note 1 to the consolidated financial statements included elsewhere in this report.

Impact of Inflation and Foreign Currency Translation

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. Effective January, 2012, we no longer have operations or bank accounts in any foreign country and are therefore not impacted by foreign currency translations.

25

Off Balance Sheet Financing

The Company has not entered into any other financial guarantees or other commitments to guarantee the payment obligations of any third parties, nor has it entered into any derivative contracts that are indexed to our shares and classified as stockholder’s equity or that are not reflected in our consolidated financial statements. Furthermore, the Company does not have any retained or contingent interest in assets transferred to an unconsolidated entity that serves as credit, liquidity or market risk support to such entity. We do not have any variable interest in any unconsolidated entity that provides financing, liquidity, market risk or credit support to us or engages in leasing or hedging services with us.

ITEM 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

Not applicable for a smaller reporting company.

ITEM 4.

CONTROLS AND PROCEDURES.

Evaluation of Disclosure Controls and Procedures

Our management, which includes our CEO and our Vice President who serves as our principal financial and accounting officer, have conducted an evaluation of the effectiveness of our disclosure controls and procedures (as defined in Rule Ana-14(c) promulgated under the Securities and Exchange Act of 1934, as amended) as of a date (the "Evaluation Date") as of the end of the period covered by this report. Our management does not expect that our disclosure controls and procedures will prevent all error and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. The design of any system of controls is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions.

Based on their evaluation as of the end of the period covered by this report, our CEO and our Vice President who also serves as our principal financial and accounting officer have concluded that our disclosure controls and procedures were effective such that the information relating to our company, required to be disclosed in our Securities and Exchange Commission reports (i) is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms and (ii) is accumulated and communicated to our management, including our Chief Executive Officer and our Vice President who serves as our principal financial and accounting officer, to allow timely decisions regarding required disclosure as a result of material weaknesses in our internal controls over financial reporting.

Changes in Internal Control over Financial Reporting

There have been no changes in our internal control over financial reporting identified in connection with the evaluation that occurred during the last fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

26

PART II.   OTHER INFORMATION

ITEM 1.

LEGAL PROCEEDINGS.

None.

ITEM 1A.

RISK FACTORS.

Risk factors describing the major risks to our business can be found under Item 1A, “Risk Factors”, in our Annual Report on Form 10-K for the year ended December 31, 2011. There has been no material change in our risk factors from those previously discussed in the Annual Report on Form 10-K.

ITEM 2.

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.

On June 4, 2012, the Company issued 23,529 shares of its common stock valued at $0.17 per share to Monarch Communications, Inc. as partial compensation per an agreement dated June 8, 2012 for consultant work.  The recipient is an accredited or otherwise sophisticated investor who had such knowledge and experience in business matters and was capable of evaluating the merits and risks of the prospective investment in our securities.  The issuance of the shares is exempt from registration under the Securities Act of 1933 in reliance on an exemption provided by Section 4(2) of that act.

On June 21, 2012, the Company issued 37,500 shares of its common stock valued at $0.16 per share to Monarch Communications, Inc. as partial compensation per an agreement dated June 8, 2012 for consultant work.  The recipient is an accredited or otherwise sophisticated investor who had such knowledge and experience in business matters and was capable of evaluating the merits and risks of the prospective investment in our securities.  The issuance of the shares is exempt from registration under the Securities Act of 1933 in reliance on an exemption provided by Section 4(2) of that act.

ITEM 3.

DEFAULTS UPON SENIOR SECURITIES.

None.

ITEM 4.

MINE SAFETY DISCLOSURE.

Not Applicable to our Company.

ITEM 5.

OTHER INFORMATION.

On May 19, 2012, we renewed a consulting agreement with Monarch Communications, Inc. for services rendered as public relations firm and media relations consultants for the Company. The term of the agreement is for 12 months.  As compensation for their services, Monarch will receive a fee of $7,000 per month, for the first six months, payable as $2,000 cash and $5,000 in shares of common stock. For the final six months of the agreement, Monarch will receive a fee of $7,000, payable as $3,000 in cash and $4,000 in shares of common stock.  Either party may terminate the agreement with 30 days’ notice. The recipient is an accredited or otherwise sophisticated investor who had such knowledge and experience in business matters and was capable of evaluating the merits and risks of the prospective investment in our securities.  The issuance of the shares is exempt from registration under the Securities Act of 1933 in reliance on an exemption provided by Section 4(2) of that act.

On July 11, 2012, the Company received a loan in the amount of $100,000, from the Company’s Chairman and CEO, as an advance for working capital needs. This loan bears interest at the same rate of interest as the credit facility provided by the stockholder under the note dated March 28, 2002. This advance does not have a specific due date but is to be paid based on management’s determination of the Company’s ability to pay and cash flow. We are using the proceeds for working capital.

27

ITEM 6.

EXHIBITS.

10.13	Agreement Monarch Communications, Inc.*
31.1	Rule 13a-14(a)/15d-14(a) certification of Chief Executive Officer
31.2	Rule 13a-14(a)/15d-14(a) certificate of principal financial officer
32.1	Section 1350 certification of Chief Executive Officer
32.2	Section 1350 certification of principal financial officer
101.INS	XBRL Instance Document
101.SCH	XBRL Taxonomy Extension Schema Document
101.CAL	XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF	XBRL Taxonomy Extension Definition Linkbase Document
101.LAB	XBRL Taxonomy Extension Label Linkbase Document
101.PRE	XBRL Taxonomy Extension Presentation Linkbase Document

———————

*	filed herewith.
**	In accordance with Regulation S-T, the XBRL-formatted interactive data files that comprise Exhibit 101 in this Quarterly Report on Form 10-Q shall be deemed “furnished” and not “filed”.

28

SIGNATURES

 Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	PURADYN FILTER TECHNOLOGIES INCORPORATED
Date:  August 14, 2012	By:	/s/ Joseph V. Vittoria
		Joseph V. Vittoria, Chairman and Chief Executive Officer, principal executive officer

Date:  August 14, 2012	By:	/s/ Alan J. Sandler
		Alan J. Sandler, Secretary to the Board, Vice President and principal financial officer and principal accounting officer

29

EX-10.13

EXHIBIT 10.13

445 Central Avenue. Suite 356

Cedarhurst, NY 11516

June 8, 2012

Mr. Joseph Vittoria

Puradyn Filter Technologies

2017 High Ridge Road

Boynton Beach, FL 33426

Dear Joe:

Monarch Communications  (Monarch) is very pleased to provide financial public relations services on behalf ofPuradyn Filter Technologies (Puradyn) under the terms and conditions which are set forth in this Agreement.

I. Services: Monarch, during the term of this Agreement, shall provide Puradyn with financial public relations services and activities and will act as media relations counsel.

II. Fees: Monarch will bill for our services as follows.

For the first six months, a fixed fee of $7,000 per month, payable as $2,000 cash and $5,000 in Puradyn common stock. For the second six month period, the fee structure will be comprised of $3,000 in cash and $4,000 in Puradyn stock. The first installment is due upon receipt of this document. The official start of our contract shall be deemed to have started May 19, 2012, and we will provide an invoice at the start of each month. The fixed fee shall cover the services described above. Monarch will provide a written summary of public relations activities on or around the 19th of each month.

If, for any reason, either party should elect to discontinue our business relationship, the party that wishes to terminate the agreement shall give the second party thirty (30) days notice.

III. Expenses:  Monarch will obtain your authorization before making any commitments for any expenditure in excess of $200 on your behalf.  Monarch will maintain records of expenses incurred and will bill you monthly for all incidental and other expenses incurred on your behalf, including, but not limited to, items such as travel, messengers, press mailings, copies of video and written transcripts, printing, etc. You agree to reimburse these expenses within ten days of Monarch's submission for payment.

IV. Term: The term of this agreement be deemed to have commenced as of May 19m 2012, and shall continue for a period of twelve (12) months.

V. Indemnification: Puradyn agrees to hold Monarch and all of its officers, employees and agents harmless from and against all liabilities, losses, damages or expenses, including reasonable attorneys' fees and costs, which Monarch or such other party may incur as the result of any claim, suit or proceeding brought or threatened arising out of any agreement or assertions we may make on your behalf, including assertions about your organization and your members, in any materials we may prepare for you if the assertions are based on information, representations, reports, data or releases supplied to us by or through you, or which you have previously approved.

VI. Confidential  Information: Monarch and Puradyn agree to keep confidential and not to disclose or use for their own benefit or for the benefit of any third party, any information, documents or materials which are identified by a party, at the time that they are made available, to be proprietary or confidential. The obligations of this agreement shall survive termination and shall continue for a period of 24 months after the effective date of termination of this contract.

VII. Publicity Disclosure: Monarch may publicize our agreement to work with you in the form of press releases and announcements and may include your name in our client roster for the purpose of further business developments efforts. If requested by you, you will be given reasonable opportunity to review and approve all information pertaining to your company prior to public disclosure.

VIII. Dispute Resolution:  In the event that a dispute arises between us, we both agree to make a good faith effort to resolve our differences by negotiation. In the event that the dispute is not resolved by our mutual efforts and within 30 days, we agree to arbitrate any dispute arising under this agreement before an arbitrator under the auspices of the American Arbitration Association in the County of Palm Beach, State of Florida.  In such arbitration, the prevailing party shall have its costs associated with the arbitration, including its reasonable attorneys' fees, paid by the other party.

IX. Limitation of Liability: Except as specifically set forth in this letter Agreement, Monarch makes no express or implied warranties of any kind, whether alleged to arise by law, by reason of custom or usage in the trade or by course of dealing. In no event will Monarch be liable for any loss of profits, business interruption or any form of special, incidental, consequential or punitive damages of any kind arising out of or relating to performance under this agreement, unless caused by gross negligence or intentional acts.

X. Miscellaneous: Monarch is an independent contractor. Nothing contained in this Agreement shall create any partnership or joint venture between the parties. Monarch will be acting as your agent when purchasing materials or services on your behalf.

This Agreement may only be assigned with the prior written approval of the other party. This Agreement embodies the entire Agreement between parties hereto and may not be

amended or modified except by a writing signed by both parties. Each party acknowledges that it has not relied upon any promise or representation not specifically set forth herein.

This Agreement shall be construed and governed by the laws of the State of New York. If the above comports with your understanding of our agreement, please sign below where indicated and return a copy to me, keeping the original for your files.

Monarch looks forward to a very successful and mutually beneficial relationship with Puradyn.

Sincerely,

Jeff Siegel

Approved:

Jeff Siegel	Date: June 8, 2012
Mr. Jeff Siegel
President
Monarch Communications
/s/ Joseph Vittoria	Date: June 8, 2012
Mr. Joseph Vittoria
Chairman & CEO
Puradyn Filter Technologies

EX-31.1

Exhibit 31.1

Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

I, Joseph V. Vittoria, certify that:

1.

I have reviewed this quarterly report on Form 10-Q for the six months ended June 30, 2012 of Puradyn Filter Technologies Incorporated;

2.

Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.

Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.

The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) an 15d-15(f)) for the registrant and have:

(a)

Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b)

Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c)

Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d)

Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.

The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function):

(a)

All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and

(b)

Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

Date: August 14, 2012

By:	/s/ Joseph V. Vittoria
	Joseph V. Vittoria
	Chairman and Chief Executive Officer, principal executive officer

EX-31.2

Exhibit 31.2

Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

I, Alan J. Sandler, certify that:

1.

I have reviewed this quarterly report on Form 10-Q for the six months ended June 30, 2012 of Puradyn Filter Technologies Incorporated;

2.

Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.

Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.

The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) an 15d-15(f)) for the registrant and have:

(a)

Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b)

Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c)

Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d)

Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.

The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function):

(a)

All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and

(b)

Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

Date: August 14, 2012

By:	/s/ Alan J. Sandler
	Alan J. Sandler, Secretary to the Board,
	Vice President and principal financial and principal accounting officer

EX-32.1

Exhibit 32.1

Section 1350 certification of Chief Executive Officer

In connection with the quarterly report of Puradyn Filter Technologies Incorporated (the "Company") on Form 10-Q for the six-month period ended June 30, 2012 as filed with the Securities and Exchange Commission (the "Report"), I, Joseph V. Vittoria, Chairman and Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. SS. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

1.

The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

2.

The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company.

Dated:  August 14, 2012

By:	/s/ Joseph V Vittoria
	Joseph V. Vittoria
	Chairman and Chief Executive Officer,
	principal executive officer

A signed original of this written statement required by Section 906, or other document authenticating, acknowledging, or otherwise adopting the signature that appears in typed form within the electronic version of this written statement has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.

EX-32.2

Exhibit 32.2

Section 1350 certification of Chief Financial Officer

In connection with the quarterly report of Puradyn Filter Technologies Incorporated (the "Company") on Form 10-Q for the six-month period ended June 30, 2012 as filed with the Securities and Exchange Commission (the "Report"), I, Alan J. Sandler, Secretary to the Board, Vice President and principal financial officer, certify, pursuant to 18 U.S.C. SS. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

1.

The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

2.

The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company.

Dated:  August  14, 2012

By:	/s/ Alan J. Sandler
	Alan J. Sandler
	Secretary to the Board, Vice President
	and principal financial and accounting officer

A signed original of this written statement required by Section 906, or other document authenticating, acknowledging, or otherwise adopting the signature that appears in typed form within the electronic version of this written statement has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.

XML

Subsequent Events (Details) (USD $)	0 Months Ended
	Jul. 30, 2012	Jun. 21, 2012	Jun. 04, 2012	Apr. 19, 2012	Jul. 11, 2012
Subsequent Events [Abstract]
Shares issued to consulting firm per compensation agreement	45,455	37,500	23,529	33,334
Per share value	$ 0.11	$ 0.16	$ 0.17	$ 0.12
Loan received from related party, face amount					$ 100,000

XML

Going Concern (Details) (USD $)	6 Months Ended
	Jun. 30, 2012	Jun. 30, 2011
Going Concern [Abstract]
Net cash used in operating activities	$ (531,692)	$ (421,256)

XML

Going Concern

6 Months Ended

Jun. 30, 2012

Going Concern [Abstract]

Going Concern

2. Going Concern

The Company's financial statements have been prepared on the assumption that it will continue as a going concern, which contemplates the realization of assets and satisfaction of liabilities in the normal course of business. The Company has sustained losses since inception and used net cash in operations of $531,692 and $421,256 during the six-months ended June 30, 2012 and 2011, respectively. As a result, the Company has had to rely principally on private placements of equity and debt securities, including the conversion of debt into stock, as well as stockholder loans to fund its activities to date.

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 registered public accounting firm, 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, 2011 expressing substantial doubt as to the Company's ability to continue as a going concern. The financial statements do not include any adjustments that may result from the outcome of this uncertainty.

The Company has been addressing the liquidity and working capital issues and continues to attempt to raise additional capital with institutional and private investors and current stockholders. Cost reductions were and continue to be implemented by the Company, including acquiring alternative suppliers for raw materials and volume purchase discounts when appropriate. The Company expects to see results from these reductions, as well as other cost reduction plans through 2012.

XML

Warrants (Summary of Warrants Activity) (Details) (USD $)	3 Months Ended	6 Months Ended
	Jun. 30, 2012	Jun. 30, 2012
Warrants [Abstract]
Warrants outstanding	3,899,758	3,899,758
Warrants outstanding, exercise price	$ 0.77	$ 0.77
Warrants outstanding, beginning	3,899,758	4,096,476
Granted
Exercised		196,718
Expired
Warrants outstanding, ending	3,899,758	3,899,758
Warrants outstanding beginning, weighted average exercise price	$ 0.77	$ 0.97
Granted, weighted average exercise price
Exercised, weighted average exercise price		$ 0.17
Expired, weighted average exercise price
Warrants outstanding ending, weighted average exercise price	$ 0.77	$ 0.77

XML

Stock Options (Summary of Options Outstanding by Price Range) (Details) (USD $)	6 Months Ended
	Jun. 30, 2012
Share-based Compensation, Shares Authorized under Stock Option Plans, Exercise Price Range [Line Items]
Number outstanding	3,878,972
Remaining average contractual life (in years)	6.15
Weighted average exercise price	$ 0.32
Number exercisable	2,107,528
Weighted average exercise price, options exercisable	$ 0.42
Stock Option Exercise Range One [Member]
Share-based Compensation, Shares Authorized under Stock Option Plans, Exercise Price Range [Line Items]
Range of exercise price, lower limit	$ 0.14
Range of exercise price, upper limit	$ 1.7
Number outstanding	3,834,972
Remaining average contractual life (in years)	3.88
Weighted average exercise price	$ 0.3
Number exercisable	2,063,528
Weighted average exercise price, options exercisable	$ 0.25
Stock Option Exercise Range Two [Member]
Share-based Compensation, Shares Authorized under Stock Option Plans, Exercise Price Range [Line Items]
Range of exercise price, lower limit	$ 1.99
Range of exercise price, upper limit	$ 2.6
Number outstanding	44,000
Remaining average contractual life (in years)	0.83
Weighted average exercise price	$ 2.31
Number exercisable	44,000
Weighted average exercise price, options exercisable	$ 2.31

XML

Warrants (Summary of Warrants Outstanding by Price Range) (Details) (USD $)	6 Months Ended
	Jun. 30, 2012
Share-based Compensation, Shares Authorized under Stock Option Plans, Exercise Price Range [Line Items]
Number Outstanding	3,899,758
Remaining Average Contractual Life (In Years)	2.07
Weighted Average Exercise Price	$ 0.77
Warrant, Exercise Range, One [Member]
Share-based Compensation, Shares Authorized under Stock Option Plans, Exercise Price Range [Line Items]
Range of exercise price, lower limit	$ 0.35
Range of exercise price, upper limit	$ 0.75
Number Outstanding	2,446,483
Remaining Average Contractual Life (In Years)	2.49
Weighted Average Exercise Price	$ 0.48
Warrant, Exercise Range, Two [Member]
Share-based Compensation, Shares Authorized under Stock Option Plans, Exercise Price Range [Line Items]
Range of exercise price, lower limit	$ 1.25
Range of exercise price, upper limit	$ 1.25
Number Outstanding	1,453,275
Remaining Average Contractual Life (In Years)	0.95
Weighted Average Exercise Price	$ 1.25

XML

Notes Payable to Stockholders (Details) (USD $)	3 Months Ended		6 Months Ended
	Jun. 30, 2012	Jun. 30, 2011	Jun. 30, 2012	Jun. 30, 2011	Jul. 11, 2012	Dec. 31, 2011	Jun. 30, 2012 Note Payable to Chairman of Board	Mar. 31, 2012 Note Payable to Chairman of Board	Mar. 28, 2002 Note Payable to Chairman of Board	Jun. 30, 2012 Note Payable to Board Member [Member]	Dec. 31, 2011 Note Payable to Board Member [Member]	Jun. 30, 2012 Direct Loan from Chairman of Board [Member]	Mar. 31, 2012 Direct Loan from Chairman of Board [Member]	Dec. 31, 2011 Direct Loan from Chairman of Board [Member]
Debt Instrument [Line Items]
Face amount of debt instrument					$ 100,000				$ 6,100,000
Percent in addition to BBA LIBOR									1.40%
Effective annual rate							1.641%
The maximum amount of additional financing the company may obtain that will effect the repayment provisions of the debt instrument									7,000,000
Notes Payable - stockholders	7,899,017		7,899,017			7,429,017		6,100,000				250,000	220,000	250,000
Additional amount of borrowings on debt instrument above face amount of debt agreement								1,549,017
The aggregate amount of debt from notes payable and direct loans owed to stockholder							7,899,017
Note Payables - stockholders	100,000		100,000			100,000				100,000	100,000
Interest expense	$ 40,370	$ 40,769	$ 78,865	$ 81,190

XML

Basis of Presentation, Going Concern and Summary of Significant Accounting Policies

6 Months Ended

Jun. 30, 2012

Basis of Presentation, Going Concern and Summary of Significant Accounting Policies [Abstract]

Basis of Presentation, Going Concern and Summary of Significant Accounting Policies

1. Basis of Presentation, Going Concern and Summary of Significant Accounting Policies

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim information and with the instructions to Form 10-Q and Regulation S-K. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. In the opinion of management, all adjustments consisting of a normal and recurring nature considered necessary for a fair presentation have been included. Operating results for the three and six month periods ended June 30, 2012 may not necessarily be indicative of the results that may be expected for the year ending December 31, 2012.

For further information, refer to Puradyn Filter Technologies Incorporated's (the "Company") consolidated financial statements and footnotes thereto included in the Form 10-K for the year ended December 31, 2011.

Since its formation June 1, 2000, Puradyn Filter Technologies, Ltd. ("Ltd."), the Company's United Kingdom subsidiary, has been included in the Company's condensed consolidated financial statements. In March, 2009, Ltd.'s office in the UK was closed and all assets, except for bank cash accounts, were transferred to the United States. Effective January, 2012, Ltd., ceased as a legal entity and all cash accounts were closed.

Use of Estimates

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

Basic and Diluted Loss Per Share

FASB ASC 260, Earnings Per Share, requires a dual presentation of basic and diluted earnings per share. However, because of the Company's net losses, the effect of outstanding stock options and warrants would be anti-dilutive and, accordingly, is excluded from the computation of diluted loss per share. The number of such shares excluded from the computation of loss per share totaled 7,788,730 for the three months and six months ended June 30, 2012 and 6,759,777 for the three months and six months ended June 30, 2011.

Stock Compensation

The Company adopted FASB ASC 718, Compensation - Stock Compensation, effective January 1, 2006 using the modified prospective application method of adoption which requires us to record compensation cost related to unvested stock awards as of December 31, 2005, recognizing the amortized grant date fair value in accordance with provisions of FASB ASC 718 on straight line basis over the service periods of each award. We have estimated forfeiture rates based on our historical experience. Stock option compensation expense for the periods ended June 30, 2012 and June 30, 2011 have been recognized as a component of cost of goods sold and general and administrative expenses in the accompanying Condensed Consolidated Financial Statements.

Stock options and warrants issued to consultants and other non-employees as compensation for services provided to the Company are accounted for based on the fair value of the services provided or the estimated fair market value of the option or warrant, whichever is more reliably measurable in accordance with FASB ASC 718 and FASB ASC 505 Equity, including related amendments and interpretations. The related expense is recognized over the period the services are provided.

Inventories

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

Inventories consisted of the following at June 30, 2012 and December 31, 2011, respectively:

	June 30 2012			December 31, 2011
	(unaudited)
Raw materials	$	891,272		$	885,781
Work In Progress		21,293			3,222
Finished goods		142,226			134,016
Valuation allowance		(341,016	)		(345,892	)
Inventory, net	$	713,775		$	677,127

Deferred Financing Costs

The Company capitalizes financing costs and amortizes them using the straight-line method, which approximates the effective interest method, over the term of the related debt. Amortization of deferred financing costs is included in interest expense.

	Three Months Ended June 30,				Six Months Ended June 30,
	2012		2011		2012		2011
Amortization of Deferred Financing Costs	$	715	$	251	$	1,430	$	503
Accumulated Amortization of Deferred Financing Costs	$	682,084	$	679,640	$	682,084	$	679,640

Revenue Recognition

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 when collectability is reasonably assured in accordance with FASB ASC 605, Revenue Recognition, as amended and interpreted. Cash received by the Company prior to shipment is recorded as deferred revenue. Sales are made to customers under terms allowing certain limited rights of return and other limited product and performance warranties for which provision has been made in the accompanying condensed consolidated financial statements.

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

Product Warranty Costs

As required by FASB ASC 460, Guarantor's Guarantees, the Company is including the following disclosure applicable to its product warranties.

The Company accrues for warranty costs based on the expected material and labor costs to provide warranty replacement products. The methodology used in determining the liability for warranty cost is based upon historical information and experience. The Company's warranty reserve is included in accrued liabilities in the accompanying condensed consolidated financial statements and is calculated as the gross sales multiplied by the historical warranty expense return rate. As of June 30, 2012, management estimates the existing warranty reserve balances were sufficient to absorb any warranty costs that might be incurred from the sales activity for the period.

Comprehensive Income

FASB ASC 220, Comprehensive Income establishes rules for reporting and displaying of comprehensive income and its components. Comprehensive income is the sum of net loss as reported in the consolidated statements of operations and other comprehensive income transactions. Other comprehensive income transactions that currently apply to the Company result from changes in exchange rates used in translating the financial statements of its wholly owned subsidiary, Ltd.. Comprehensive loss as of June 30, 2012 and 2011 is not shown net of taxes because the Company's deferred tax asset has been fully offset by a valuation allowance. There was no comprehensive income or loss attributable to the six months ended June 30, 2012 as Ltd's business license was surrendered with the British authorities in January, 2012 and all accounts were closed.

Comprehensive loss consisted of the following for the three and six-months ended June 30, 2012 and 2011:

	Three Months Ended June 30,						Six Months Ended June 30,
	2012			2011			2012			2011
Net loss	$	(273,119	)	$	(451,529	)	$	(505,097	)	$	(777,966	)
Other comprehensive income (loss):
Foreign currency translation adjustment		-			(359	)		(146,255	)		105
Comprehensive loss	$	(273,119	)	$	(451,888	)	$	(651,352	)	$	(777,861	)

Recent Accounting Pronouncements

ASU 2011-11, "Balance Sheet (Topic 210) - "Disclosures about Offsetting Assets and Liabilities." ASU 2011-11 amends Topic 210, "Balance Sheet," to require an entity to disclose both gross and net information about financial instruments, such as sales and repurchase agreements and reverse sale and repurchase agreements and securities borrowing/lending arrangements, and derivative instruments that are eligible for offset in the statement of financial position and/or subject to a master netting arrangement or similar agreement. ASU 2011-11 is effective for annual and interim periods beginning on January 1, 2013, and is not expected to have a significant impact on the Company's financial statements.

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Commitments and Contingencies (Details) (USD $)	0 Months Ended
	Oct. 20, 2009 Consulting Agreement with Boxwood Associates, Inc. [Member]	May 19, 2012 Consulting Agreement with Monarch Communications, Inc., First Six Months [Member]	May 19, 2012 Consulting Agreement With Monarch Communications, Inc., Last Six Months [Member]
Purchase Commitment, Excluding Long-term Commitment [Line Items]
Monthly fee under agreement	$ 2,000	$ 7,000	$ 8,000
Required notice for termination of the contract	30 days	30 days
Term of agreement		12 months
Cash portion of payment		$ 2,000	$ 3,000
Share-based portion of payment		5,000	5,000

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CONDENSED CONSOLIDATED BALANCE SHEETS (USD $)	Jun. 30, 2012	Dec. 31, 2011
Current assets:
Cash and cash equivalents	$ 15,777	$ 51,152
Accounts receivable, net of allowance for uncollectible accounts of $18,153 and $24,355, respectively	367,720	309,962
Inventories, net	713,775	677,127
Prepaid expenses and other current assets	138,311	46,538
Total current assets	1,235,583	1,084,779
Property and equipment, net	96,930	97,013
Other noncurrent assets	111,244	111,244
Deferred financing costs, net	1,515	2,945
Total assets	1,445,272	1,295,981
Current liabilities:
Accounts payable	291,666	204,422
Accrued liabilities	1,492,449	1,414,279
Current portion of capital lease obligation	7,126	2,800
Note Payables - stockholders	100,000	100,000
Total current liabilities	1,891,241	1,721,501
Capital lease obligation, less current portion	15,169	10,042
Notes Payable - stockholders	7,899,017	7,429,017
Total Long Term Liabilities	7,914,186	7,439,059
Total Liabilities	9,805,427	9,160,560
Commitments and contingencies (see note 7)
Stockholders' deficit:
Preferred stock, $0.001 par value: Authorized shares - 500,000; None issued and outstanding
Common stock, $.001 par value: Authorized shares - 100,000,000 Issued and outstanding - 47,243,002 and 46,830,504, respectively	47,243	46,830
Additional paid-in capital	46,580,202	46,459,374
Notes receivable from stockholders	(756,250)	(790,785)
Accumulated deficit	(54,231,350)	(53,726,253)
Accumulated other comprehensive income		146,255
Total stockholders' deficit	(8,360,155)	(7,864,579)
Total liabilities and stockholders' deficit	$ 1,445,272	$ 1,295,981

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CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (USD $)	3 Months Ended		6 Months Ended
	Jun. 30, 2012	Jun. 30, 2011	Jun. 30, 2012	Jun. 30, 2011
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME [Abstract]
Net loss	$ (273,119)	$ (451,529)	$ (505,097)	$ (777,966)
Other comprehensive income (loss):
Foreign currency translation adjustment		(359)	(146,255)	105
Total comprehensive loss	$ (273,119)	$ (451,888)	$ (651,352)	$ (777,861)

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Basis of Presentation, Going Concern and Summary of Significant Accounting Policies (Schedule of Inventories) (Details) (USD $)	Jun. 30, 2012	Dec. 31, 2011
Basis of Presentation, Going Concern and Summary of Significant Accounting Policies [Abstract]
Raw materials	$ 891,272	$ 885,781
Work in Progress	21,293	3,222
Finished goods	142,226	134,016
Valuation allowance	(341,016)	(345,892)
Inventory, net	$ 713,775	$ 677,127

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Basis of Presentation, Going Concern and Summary of Significant Accounting Policies (Schedule of Comprehensive Loss) (Details) (USD $)	3 Months Ended		6 Months Ended
	Jun. 30, 2012	Jun. 30, 2011	Jun. 30, 2012	Jun. 30, 2011
Basis of Presentation, Going Concern and Summary of Significant Accounting Policies [Abstract]
Net loss	$ (273,119)	$ (451,529)	$ (505,097)	$ (777,966)
Other comprehensive income (loss):
Foreign currency translation adjustment		(359)	(146,255)	105
Total comprehensive loss	$ (273,119)	$ (451,888)	$ (651,352)	$ (777,861)

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CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' DEFICIT (USD $)	Total	Common Stock [Member]	Additional Paid-in Capital [Member]	Notes Receivable From Stockholders [Member]	Accumulated Deficit [Member]	Accumulated Other Comprehensive Income (Loss) [Member]
Balance at Dec. 31, 2011	$ (7,864,579)	$ 46,830	$ 46,459,374	$ (790,785)	$ (53,726,253)	$ 146,255
Balance, shares at Dec. 31, 2011	46,830,504	46,830,504
Foreign currency translation adjustment	(146,255)					(146,255)
Net loss	(505,097)				(505,097)
Total comprehensive loss	(651,352)
Common stock issued for private placement, net of issuance costs
Common stock issued for private placement, net of issuance costs, shares		(361)
Issuance of shares and warrants to vendors	26,000	177	25,823
Issuance of shares and warrants to vendors, shares		176,799
Exercise of stock warrants	4,808	236	4,572
Exercise of stock warrants, shares		236,060
Proceeds from shareholder note receivable	34,535			34,535
Compensation expense associated with unvested option awards	90,433		90,433
Balance at Jun. 30, 2012	$ (8,360,155)	$ 47,243	$ 46,580,202	$ (756,250)	$ (54,231,350)
Balance, shares at Jun. 30, 2012	47,243,002	47,243,002

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CONDENSED CONSOLIDATED BALANCE SHEETS (Parenthetical) (USD $)	Jun. 30, 2012	Dec. 31, 2011
CONDENSED CONSOLIDATED BALANCE SHEETS [Abstract]
Allowance for uncollectible accounts of accounts receivable	$ 18,153	$ 24,355
Preferred stock, par value per share	$ 0.001	$ 0.001
Preferred stock, shares authorized	500,000	500,000
Preferred stock, shares issued
Preferred stock, shares outstanding
Common stock, par value per share	$ 0.001	$ 0.001
Common stock, shares authorized	100,000,000	100,000,000
Common stock, shares issued	47,243,002	46,830,504
Common stock, shares outstanding	47,243,002	46,830,504

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Basis of Presentation, Going Concern and Summary of Significant Accounting Policies (Tables)

6 Months Ended

Jun. 30, 2012

Basis of Presentation, Going Concern and Summary of Significant Accounting Policies [Abstract]

Schedule of Inventories

	June 30 2012			December 31, 2011
	(unaudited)
Raw materials	$	891,272		$	885,781
Work In Progress		21,293			3,222
Finished goods		142,226			134,016
Valuation allowance		(341,016	)		(345,892	)
Inventory, net	$	713,775		$	677,127

Schedule of Deferred Financing Costs

	Three Months Ended June 30,				Six Months Ended June 30,
	2012		2011		2012		2011
Amortization of Deferred Financing Costs	$	715	$	251	$	1,430	$	503
Accumulated Amortization of Deferred Financing Costs	$	682,084	$	679,640	$	682,084	$	679,640

Schedule of Comprehensive Income (Loss)

	Three Months Ended June 30,						Six Months Ended June 30,
	2012			2011			2012			2011
Net loss	$	(273,119	)	$	(451,529	)	$	(505,097	)	$	(777,966	)
Other comprehensive income (loss):
Foreign currency translation adjustment		-			(359	)		(146,255	)		105
Comprehensive loss	$	(273,119	)	$	(451,888	)	$	(651,352	)	$	(777,861	)

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Document and Entity Information	6 Months Ended
	Jun. 30, 2012	Aug. 13, 2012
Document and Entity Information [Abstract]
Document Type	10-Q
Entity Registrant Name	PURADYN FILTER TECHNOLOGIES INC
Document Period End Date	Jun. 30, 2012
Amendment Flag	false
Entity Central Index Key	0001019787
Current Fiscal Year End Date	--12-31
Entity Common Stock, Shares Outstanding		47,288,457
Entity Filer Category	Smaller Reporting Company
Document Fiscal Year Focus	2012
Document Fiscal Period Focus	Q2

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Common Stock (Tables)

6 Months Ended

Jun. 30, 2012

Common Stock [Abstract]

Schedule of Common Stock Issued to Consultant

	Shares Issued		Per Share Value
April 19, 2012		33,334		$	0.12
June 4, 2012		23,529			0.17
June 21, 2012		37,500			0.16

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CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (USD $)	3 Months Ended		6 Months Ended
	Jun. 30, 2012	Jun. 30, 2011	Jun. 30, 2012	Jun. 30, 2011
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS [Abstract]
Net sales	$ 804,099	$ 499,423	$ 1,555,601	$ 1,382,815
Costs and expenses:
Cost of products sold	514,526	397,146	1,086,745	986,319
Salaries and wages	269,079	268,628	551,279	542,792
Selling and administrative	251,477	243,475	487,029	549,122
Total costs and expenses	1,035,082	909,249	2,125,053	2,078,233
Loss from operations	(230,983)	(409,826)	(569,452)	(695,418)
Other income (expense):
Realized Gain on Foreign Currency			146,255
Interest income		1		1
Interest expense	(42,136)	(41,704)	(81,900)	(82,549)
Total other expense, net	(42,136)	(41,703)	64,355	(82,548)
Loss before income taxes	(273,119)	(451,529)	(505,097)	(777,966)
Income tax expense
Net loss	$ (273,119)	$ (451,529)	$ (505,097)	$ (777,966)
Basic and diluted loss per common share	$ (0.01)	$ (0.01)	$ (0.01)	$ (0.02)
Weighted average common shares outstanding (basic and diluted)	47,185,445	46,546,062	47,119,622	46,471,940

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Warrants

6 Months Ended

Jun. 30, 2012

Warrants [Abstract]

Warrants

5. Warrants

At June 30, 2012, 3,899,758 warrants with an average exercise price of $0.77 remain outstanding and were fully vested.

A summary of the Company's warrant activity as of June 30, 2012 and changes during the six month and three month periods then ended is presented below:

	Six Months Ended June 30, 2012
	Weighted Average Exercise
	Warrants		Price
Warrants outstanding at December 31, 2011		4,096,476	$	.97
Granted		-		-
Exercised		196,718		.17
Expired		-		-
Warrants outstanding at June 30, 2012		3,899,758	$	.77

	Three Months Ended June 30, 2012
	Weighted Average Exercise
	Warrants		Price
Warrants outstanding at March 31, 2012		3,899,758	$	.77
Granted		-		-
Exercised		-		-
Expired		-		-
Warrants outstanding at June 30, 2012		3,899,758	$	.77

	Warrants Outstanding
Range of Exercise Price	Number Outstanding		Remaining Average Contractual Life (In Years)		Weighted Average Exercise Price
$0.35 - $0.75		2,446,483		2.49	$	.48
$1.25		1,453,275		.95		1.25
Totals		3,899,758		2.07	$	.77

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Stock Options

6 Months Ended

Jun. 30, 2012

Stock Options [Abstract]

Stock Options

4. Stock Options.

For the three months and six months ended June 30, 2012 the Company recorded stock-based compensation expense of $44,518 and $90,433, respectively For the three months and six months ended June 30, 2011 the Company recorded stock-based compensation expense of $36,106 and $80,009, respectively. These expenses were related to unvested employee stock options.

Stock options and warrants issued to consultants and other non-employees as compensation for services provided to the Company are accounted for based on the fair value of the services provided or the estimated fair market value of the option or warrant, whichever is more reliably measurable in accordance with FASB ASC 505, Equity, and FASB ASC 718, Compensation - Stock Compensation. The related expense is recognized over the period the services are provided. Unrecognized expense remaining at June 30, 2012 and 2011 for the employee stock options is $262,894 and $223,860, respectively and will be recognized through March 2015.

A summary of the Company's stock option plans as of June 30, 2012, and changes during the six-month period then ended is presented below:

	Six Months Ended June 30, 2012
	Number of Options		Weighted Average Exercise Price
Options outstanding at December 31, 2011		2,993,972	$	.37
Options granted		905,000		.14
Options exercised		-		-
Options cancelled		10,000		.14
Options expired		10,000		.37
Options at end of period		3,878,972		.32
Options exercisable at June 30, 2012		2,107,528		.42

A summary of the Company's stock option plans as of June 30, 2012, and changes during the three-month period then ended is presented below:

	Three Months Ended June 30, 2012
	Number of Options		Weighted Average Exercise Price
Options outstanding at March 31, 2012		3,888,972	$	.37
Options exercised		-		-
Options cancelled		-		-
Options expired		10,000		.37
Options at June 30, 2012		3,878,972		.32
Options exercisable at June 30, 2012		2,107,528		.42

Changes in the Company's unvested options for the six months ended June 30, 2012 are summarized as follows:

	Six Months Ended June 30, 2012
	Number of Options		Weighted Average Exercise Price
Non-Vested options at December 31, 2011		1,561,699	$	.25
Options granted		905,000		.14
Options vested		685,255		.35
Options cancelled		10,000		.14
Non-Vested options at June 30, 2012		1,771,444		.13

Changes in the Company's unvested options for the three months ended June 30, 2012 are summarized as follows:

	Three Months Ended June 30, 2012
	Number of Options		Weighted Average Exercise Price
Non-Vested options at March 31, 2012		2,168,444	$	.14
Options granted		-		-
Options vested		387,000		.29
Options cancelled		10,000		.14
Non-Vested options at June 30, 2012		1,771,444		.13

	Options Outstanding						Options Exercisable
Range of Exercise Price	Number Outstanding		Remaining Average Contractual Life (In Years)		Weighted Average Exercise Price		Number Exercisable		Weighted Average Exercise Price
$ .14 - $1.70		3,834,972		3.88	$	.30		2,063,528	$	.25
$1.99 - $2.60		44,000		.83		2.31		44,000		2.31
Totals		3,878,972		6.15	$	.32		2,107,528	$	.42

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Basis of Presentation, Going Concern and Summary of Significant Accounting Policies (Schedule of Amortization of Deferred Financing Costs) (Details) (USD $)	3 Months Ended		6 Months Ended
	Jun. 30, 2012	Jun. 30, 2011	Jun. 30, 2012	Jun. 30, 2011
Basis of Presentation, Going Concern and Summary of Significant Accounting Policies [Abstract]
Amortization of deferred financing costs included in interest expense	$ 715	$ 1,430	$ 251	$ 503
Accumulated Amortization of Deferred financing costs	$ 682,084	$ 679,640	$ 682,084	$ 679,640

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Stock Options (Tables)

6 Months Ended

Jun. 30, 2012

Stock Options [Abstract]

Schedule of Stock Option Activity

A summary of the Company's stock option plans as of June 30, 2012, and changes during the six-month period then ended is presented below:

	Six Months Ended June 30, 2012
	Number of Options		Weighted Average Exercise Price
Options outstanding at December 31, 2011		2,993,972	$	.37
Options granted		905,000		.14
Options exercised		-		-
Options cancelled		10,000		.14
Options expired		10,000		.37
Options at end of period		3,878,972		.32
Options exercisable at June 30, 2012		2,107,528		.42

A summary of the Company's stock option plans as of June 30, 2012, and changes during the three-month period then ended is presented below:

	Three Months Ended June 30, 2012
	Number of Options		Weighted Average Exercise Price
Options outstanding at March 31, 2012		3,888,972	$	.37
Options exercised		-		-
Options cancelled		-		-
Options expired		10,000		.37
Options at June 30, 2012		3,878,972		.32
Options exercisable at June 30, 2012		2,107,528		.42

Schedule of Nonvested Share Activity

Changes in the Company's unvested options for the six months ended June 30, 2012 are summarized as follows:

	Six Months Ended June 30, 2012
	Number of Options		Weighted Average Exercise Price
Non-Vested options at December 31, 2011		1,561,699	$	.25
Options granted		905,000		.14
Options vested		685,255		.35
Options cancelled		10,000		.14
Non-Vested options at June 30, 2012		1,771,444		.13

Changes in the Company's unvested options for the three months ended June 30, 2012 are summarized as follows:

	Three Months Ended June 30, 2012
	Number of Options		Weighted Average Exercise Price
Non-Vested options at March 31, 2012		2,168,444	$	.14
Options granted		-		-
Options vested		387,000		.29
Options cancelled		10,000		.14
Non-Vested options at June 30, 2012		1,771,444		.13

Schedule of Shares Authorized under Stock Option Plans, by Exercise Price Range

Options Outstanding						Options Exercisable
Range of Exercise Price	Number Outstanding		Remaining Average Contractual Life (In Years)		Weighted Average Exercise Price		Number Exercisable		Weighted Average Exercise Price
$ .14 - $1.70		3,834,972		3.88	$	.30		2,063,528	$	.25
$1.99 - $2.60		44,000		.83		2.31		44,000		2.31
Totals		3,878,972		6.15	$	.32		2,107,528	$	.42

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Subsequent Events

6 Months Ended

Jun. 30, 2012

Subsequent Events [Abstract]

Subsequent Events

8. Subsequent Events

On July 30, 2012 the Company issued to Monarch Communications, Inc. 45,455 shares of common stock valued at $0.11 per share as partial compensation per the agreement for consultant work.

On July 11, 2012, the Company received a loan in the amount of $100,000, from the Company's Chairman and CEO, as an advance for working capital needs. This loan bears interest at the same rate of interest as the credit facility provided by the stockholder under the note dated March 28, 2002. This advance does not have a specific due date but is to be paid based on management's determination of the Company's ability to pay and cash flow. We are using the proceeds for working capital.

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Notes Payable to Stockholders

6 Months Ended

Jun. 30, 2012

Notes Payable to Stockholders [Abstract]

Notes Payable to Stockholders

6. Notes Payable to Stockholders

Beginning on March 28, 2002 the Company executed a binding agreement with one of its principal stockholders, who is also the Chairman of the Board and an executive officer, to fund up to $6,100,000. Under the terms of the agreements, the Company can draw amounts as needed to fund operations. Amounts drawn bear interest at the BBA LIBOR Daily Floating Rate plus 1.4 percentage points (1.641% per annum at June 30, 2012), payable monthly and were to become due and payable on December 31, 2005 or upon a change in control of the Company or consummation of any other financing over $7,000,000. Beginning in March 2006, annually, through February 2012, the maturity date for the agreement was extended annually from December 31, 2007 to December 31, 2013.

At March 31, 2012 the Company had drawn the full funding amount under the agreement of $6,100,000 plus an additional $1,549,017, which included a direct loan in the amount of $220,000. During the three months ended June 30, 2012, the stockholder loaned the Company an additional $250,000 directly, for a total amount due of $7,899,017.

Additionally, the Company has loans outstanding from one board member, who is also a significant stockholder and consultant, totaling $100,000 at June 30, 2012 and December 31, 2011. The outstanding debt obligation at June 30, 2012 matures January 1, 2013 and is included in Current Liabilities.

For the three-months ended June 30, 2012 and 2011, the Company recorded $40,370 and $40,769, respectively, and for the six-months ended June 30, 2012 and 2011, the Company recorded $78,865 and $81,190, respectively, of interest expense related to the notes payable to stockholders, which is included in interest expense in the accompanying condensed consolidated statements of operations.

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Commitments and Contingencies

6 Months Ended

Jun. 30, 2012

Commitments and Contingencies [Abstract]

Commitments and Contingencies

7. Commitments and Contingencies

On October 20, 2009, we entered into a consulting agreement with Boxwood Associates, Inc., whereby we pay $2,000 monthly for management and strategic development services performed. The contract will remain in effect until terminated by either party providing 30 days' written notice. Mr. Telesco, a member of our board of directors, is the President of Boxwood Associates, Inc.

On May 19, 2012, we renewed a consulting agreement with Monarch Communications, Inc. for services rendered as public relations firm and media relations consultants for the Company. The term of the agreement is for twelve months. As compensation for their services, Monarch will receive a fee of $7,000 per month, for the first six months, payable as $2,000 cash and $5,000 in shares of common stock. For the final six months of the agreement, Monarch will receive a fee of $7,000, payable as $3,000 in cash and $4,000 in shares of common stock. Either party may terminate the agreement with 30 days' notice. The recipient is an accredited or otherwise sophisticated investor who had such knowledge and experience in business matters and was capable of evaluating the merits and risks of the prospective investment in our securities. The issuance of the shares is exempt from registration under the Securities Act of 1933 in reliance on an exemption provided by Section 4(2) of that act.

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Basis of Presentation, Going Concern and Summary of Significant Accounting Policies (Policy)

6 Months Ended

Jun. 30, 2012

Basis of Presentation, Going Concern and Summary of Significant Accounting Policies [Abstract]

Use of Estimates

Use of Estimates

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

Basic and Diluted Loss Per Share

Basic and Diluted Loss Per Share

FASB ASC 260, Earnings Per Share, requires a dual presentation of basic and diluted earnings per share. However, because of the Company's net losses, the effect of outstanding stock options and warrants would be anti-dilutive and, accordingly, is excluded from the computation of diluted loss per share. The number of such shares excluded from the computation of loss per share totaled 7,788,730 for the three months and six months ended June 30, 2012 and 6,759,777 for the three months and six months ended June 30, 2011.

Stock Compensation

Stock Compensation

The Company adopted FASB ASC 718, Compensation - Stock Compensation, effective January 1, 2006 using the modified prospective application method of adoption which requires us to record compensation cost related to unvested stock awards as of December 31, 2005, recognizing the amortized grant date fair value in accordance with provisions of FASB ASC 718 on straight line basis over the service periods of each award. We have estimated forfeiture rates based on our historical experience. Stock option compensation expense for the periods ended June 30, 2012 and June 30, 2011 have been recognized as a component of cost of goods sold and general and administrative expenses in the accompanying Condensed Consolidated Financial Statements.

Stock options and warrants issued to consultants and other non-employees as compensation for services provided to the Company are accounted for based on the fair value of the services provided or the estimated fair market value of the option or warrant, whichever is more reliably measurable in accordance with FASB ASC 718 and FASB ASC 505 Equity, including related amendments and interpretations. The related expense is recognized over the period the services are provided.

Inventories

Inventories

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

Inventories consisted of the following at June 30, 2012 and December 31, 2011, respectively:

	June 30 2012			December 31, 2011
	(unaudited)
Raw materials	$	891,272		$	885,781
Work In Progress		21,293			3,222
Finished goods		142,226			134,016
Valuation allowance		(341,016	)		(345,892	)
Inventory, net	$	713,775		$	677,127

Deferred Financing Costs

Deferred Financing Costs

The Company capitalizes financing costs and amortizes them using the straight-line method, which approximates the effective interest method, over the term of the related debt. Amortization of deferred financing costs is included in interest expense.

	Three Months Ended June 30,				Six Months Ended June 30,
	2012		2011		2012		2011
Amortization of Deferred Financing Costs	$	715	$	251	$	1,430	$	503
Accumulated Amortization of Deferred Financing Costs	$	682,084	$	679,640	$	682,084	$	679,640

Revenue Recognition

Revenue Recognition

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 when collectability is reasonably assured in accordance with FASB ASC 605, Revenue Recognition, as amended and interpreted. Cash received by the Company prior to shipment is recorded as deferred revenue. Sales are made to customers under terms allowing certain limited rights of return and other limited product and performance warranties for which provision has been made in the accompanying condensed consolidated financial statements.

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

Product Warranty Costs

Product Warranty Costs

As required by FASB ASC 460, Guarantor's Guarantees, the Company is including the following disclosure applicable to its product warranties.

The Company accrues for warranty costs based on the expected material and labor costs to provide warranty replacement products. The methodology used in determining the liability for warranty cost is based upon historical information and experience. The Company's warranty reserve is included in accrued liabilities in the accompanying condensed consolidated financial statements and is calculated as the gross sales multiplied by the historical warranty expense return rate. As of June 30, 2012, management estimates the existing warranty reserve balances were sufficient to absorb any warranty costs that might be incurred from the sales activity for the period.

Comprehensive Income

Comprehensive Income

FASB ASC 220, Comprehensive Income establishes rules for reporting and displaying of comprehensive income and its components. Comprehensive income is the sum of net loss as reported in the consolidated statements of operations and other comprehensive income transactions. Other comprehensive income transactions that currently apply to the Company result from changes in exchange rates used in translating the financial statements of its wholly owned subsidiary, Ltd.. Comprehensive loss as of June 30, 2012 and 2011 is not shown net of taxes because the Company's deferred tax asset has been fully offset by a valuation allowance. There was no comprehensive income or loss attributable to the six months ended June 30, 2012 as Ltd's business license was surrendered with the British authorities in January, 2012 and all accounts were closed.

Comprehensive loss consisted of the following for the three and six-months ended June 30, 2012 and 2011:

	Three Months Ended June 30,						Six Months Ended June 30,
	2012			2011			2012			2011
Net loss	$	(273,119	)	$	(451,529	)	$	(505,097	)	$	(777,966	)
Other comprehensive income (loss):
Foreign currency translation adjustment		-			(359	)		(146,255	)		105
Comprehensive loss	$	(273,119	)	$	(451,888	)	$	(651,352	)	$	(777,861	)

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Basis of Presentation, Going Concern and Summary of Significant Accounting Policies (Details)	3 Months Ended		6 Months Ended
	Jun. 30, 2012	Jun. 30, 2011	Jun. 30, 2012	Jun. 30, 2011
Basis of Presentation, Going Concern and Summary of Significant Accounting Policies [Abstract]
Shares excluded from computation loss per share	7,788,730	6,759,777	7,788,730	6,759,777

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Common Stock (Details) (USD $)	0 Months Ended
	Jul. 30, 2012	Jun. 21, 2012	Jun. 04, 2012	Apr. 19, 2012	Apr. 05, 2012 Stockholder One [Member]	Apr. 05, 2012 Stockholder Two [Member]
Equity Transactions [Line Items]
Shares issued to consulting firm per compensation agreement	45,455	37,500	23,529	33,334
Per share value of common stock issued	$ 0.11	$ 0.16	$ 0.17	$ 0.12	$ 0.17	$ 0.17
Common stock issued to stockholder during period					28,846	207,214
Payment received from stockholder for exercise of warrants					$ 4,808	$ 34,536

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CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (USD $)	6 Months Ended
	Jun. 30, 2012	Jun. 30, 2011
Operating activities
Net loss	$ (505,097)	$ (777,966)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization	23,741	23,670
Realized gain on foreign currency adjustment	(146,255)
Provision for bad debts	(6,202)	402
Amortization of deferred financing costs included in interest expense	251	503
Deferred compensation	36,591	70,783
Compensation expense on stock-based arrangements with employees, consultants, investors and vendors	116,433	106,009
Changes in operating assets and liabilities:
Accounts receivable	(51,555)	(15,975)
Inventories	(36,648)	(36,125)
Prepaid expenses and other current assets	(91,773)	(50,611)
Other Assets		37,900
Accounts payable	87,244	136,004
Accrued liabilities	41,578	86,200
Deferred revenues		(2,050)
Net cash used in operating activities	(531,692)	(421,256)
Investing activities
Purchases of property and equipment	(23,658)	(6,190)
Net cash used in investing activities	(23,658)	(6,190)
Financing activities
Additions to deferred financing costs	1,179
Proceeds from sale of common stock		100,000
Proceeds from exercise of warrants	4,808
Proceeds from issuance of notes payable to stockholders	470,000	350,000
Proceeds from shareholder note receivable	34,535
Borrowings on capital lease	12,569
Payment of capital lease obligations	(3,116)	(1,989)
Net cash provided by financing activities	519,975	448,011
Effect of exchange rate changes on cash and cash equivalents		105
Net increase (decrease) in cash and cash equivalents	(35,375)	20,670
Cash and cash equivalents at beginning of period	51,152	49,813
Cash and cash equivalents at end of period	15,777	70,483
Supplemental cash flow information:
Cash paid for interest	$ 73,387	$ 78,939

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Common Stock

6 Months Ended

Jun. 30, 2012

Common Stock [Abstract]

Common Stock

3. Common Stock

As partial compensation per an agreement dated May 19, 2011 and subsequently renewed on May 19, 2012 for consultant work, the Company issued to Monarch Communications, Inc. the following:

	Shares Issued		Per Share Value
April 19, 2012		33,334		$	0.12
June 4, 2012		23,529			0.17
June 21, 2012		37,500			0.16

On April 5, 2012 the Company issued 28,846 and 207,214 shares of its common stock valued at $0.17 per share in connection with previously received payment of $4,808 and $34,536, respectively, from two stockholders for the exercise of previously issued warrants.

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Stock Options (Summary of Stock Options Activity) (Details) (USD $)	3 Months Ended		6 Months Ended
	Jun. 30, 2012	Jun. 30, 2011	Jun. 30, 2012	Jun. 30, 2011
Stock Options [Member]
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Unrecognized expense for employee stock options	$ 262,894	$ 223,860	$ 262,894	$ 223,860
Options outstanding, beginning	3,888,972		2,993,972
Options granted			905,000
Options exercised
Options cancelled			10,000
Options expired	10,000		10,000
Options outstanding, ending	3,878,972		3,878,972
Options outstanding beginning, weighted average exercise price	$ 0.37		$ 0.37
Options granted, weighted average exercise price			0.14
Options exercised, weighted average exercise price
Options cancelled, weighted average exercise price			0.14
Options expired, weighted average exercise price	0.37		0.37
Options outstanding ending, weighted average exercise price	$ 0.32		$ 0.32
Options exercisable	2,107,528		2,107,528
Options exercisable, weighted average exercise price	$ 0.42		$ 0.42
Nonvested Stock Options [Member]
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Compensation expense associated with unvested option awards	$ 44,518	$ 36,106	$ 90,433	$ 80,009
Options outstanding, beginning	2,168,444		1,561,699
Options granted			905,000
Options vested	387,000		685,255
Options cancelled	10,000		10,000
Options outstanding, ending	1,771,444		1,771,444
Options outstanding beginning, weighted average exercise price	$ 0.14		$ 0.25
Options granted, weighted average exercise price			0.14
Options exercised, weighted average exercise price
Options vested, weighted average exercise price	$ 0.29		$ 0.35
Options cancelled, weighted average exercise price	0.14		0.14
Options outstanding ending, weighted average exercise price	$ 0.13		$ 0.13

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Warrants (Tables)

6 Months Ended

Jun. 30, 2012

Warrants [Abstract]

Schedule of Warrants Outstanding

	Six Months Ended June 30, 2012
	Weighted Average Exercise
	Warrants		Price
Warrants outstanding at December 31, 2011		4,096,476	$	.97
Granted		-		-
Exercised		196,718		.17
Expired		-		-
Warrants outstanding at June 30, 2012		3,899,758	$	.77

	Three Months Ended June 30, 2012
	Weighted Average Exercise
	Warrants		Price
Warrants outstanding at March 31, 2012		3,899,758	$	.77
Granted		-		-
Exercised		-		-
Expired		-		-
Warrants outstanding at June 30, 2012		3,899,758	$	.77

Schedule of Warrant Activity by Exercise Price Range

Warrants Outstanding
Range of Exercise Price	Number Outstanding		Remaining Average Contractual Life (In Years)		Weighted Average Exercise Price
$0.35 - $0.75		2,446,483		2.49	$	.48
$1.25		1,453,275		.95		1.25
Totals		3,899,758		2.07	$	.77