The better solution (the one that will actually work) is to find a pneumatic or
industrial parts supplier and get a coalescing filter unit of the appropriate
size. The standard filtration rate in the Wilkerson units that I used to sell
was .1 microns, although you can get cartridges that will filter down to .003
microns. The standard filtration rate for Home Depot/Lowe's/HF units is 60-40
microns.

The setup that I'd use would be to go from the compressor tank, through a
standard industrial-quality piggyback filter/reg., into a receiver tank (made
of a 7-gal inflator tank modified with a few push-to-connect fittings. Then
out of the receiver tank, through the coalescer, through another reg. if you
need it, and then into the tool. That's the setup that is used on most of the
industrial machines that I now work in, and should eliminate most of the
problems you are having. I'd also definately locate that compressor inside in
a clean area. Outside compressors suck in a lot of junk and moisture. Be sure
that your air line includes a drop-leg or a tank drain somewhere, and that all
of your air take-offs are located on the top side of your fixed air line.

Harry "former pneumatic systems specialist" Frey