##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-Q
  þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended June 30, 2007
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 For the transition period from  to
 Commission File No. 000-24455
 TORVEC, INC.
  New York
    
    16-1509512(State or other jurisdiction of
    
    (I.R.S. Employer Identification No.)incorporation or organization)
 1169 Pittsford Victor Road, Suite 125 Pittsford, New York 14534
(Address of principal executive offices and Zip Code)
(585) 248-0740   Not Applicable
  þ o
  o o þ
  o þ
 APPLICABLE ONLY TO CORPORATE ISSUERS:
  Number of Shares Outstanding atClass
    
    August 10, 2007Common Stock, $.01 par value
    
    31,451,025Options Outstanding1,823,895




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##### 



INDEX
 PAGEPART I  FINANCIAL INFORMATIONItem 1.
    
    Financial StatementsTorvec, Inc. and Subsidiaries Condensed Consolidated Balance Sheets  June 30, 2007
(Unaudited) and December 31, 2006 (Derived from Audited Financial Statements)
    
    
    3Torvec, Inc. and Subsidiaries Condensed Consolidated Statements of Operations Three
and Six Months Ended June 30, 2007 and 2006 (Unaudited) and September 25, 1996
(Inception) through June 30, 2007
    
    
    4Torvec, Inc. and Subsidiaries Condensed Consolidated Statements of Cash Flows 
Three and Six Months Ended June 30, 2007 and 2006 (Unaudited) and September 25, 1996
(Inception) through June 30, 2007
    
    
    5Notes to Condensed Consolidated Financial Statements
    
    
    6 - 29Item 2.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    30Item 3.
    
    Quantitative and Qualitative Disclosures About Market Risk
    
    
    36Item 4.
    
    Controls and Procedures
    
    
    37PART II  OTHER INFORMATIONItem 1.
    
    Legal Proceedings
    
    
    38Item 1A.
    
    Risk Factors
    
    
    40Item 2.
    
    Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    40Item 3.
    
    Defaults Upon Senior Securities
    
    
    40Item 4.
    
    Submission of Matters to a Vote of Security Holders
    
    
    40Item 5.
    
    Other Information
    
    
    40Item 6.
    
    Exhibits
    
    
    41 - 46SIGNATURES PAGE
    
    
    47EXHIBIT INDEX
    
    
    48EX-31.1EX-32EX-31.1EX-32




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3 
 PART I  FINANCIAL INFORMATION
 
 Item 1. FINANCIAL STATEMENTS
 
 
 June 30, 2007
    
    
    December 31, 2006(Derived fromAudited Financial(Unaudited)
    
    
    Statements)ASSETSCurrent assets:Cash
    
    $
    638,000
    
    
    $
    720,000Accounts receivable
    
    
    28,000
    
    
    
    Prepaid expenses and other receivable
    
    
    69,000
    
    
    
    73,000Total current assets
    
    
    735,000
    
    
    
    793,000Property and Equipment:Office equipment
    
    
    44,000
    
    
    
    44,000Shop equipment
    
    
    126,000
    
    
    
    126,000Leasehold improvements
    
    
    3,000
    
    
    
    3,000Transportation equipment
    
    
    106,000
    
    
    
    106,000279,000
    
    
    
    279,000Less accumulated depreciation and amortization
    
    
    144,000
    
    
    
    123,000Net property and equipment
    
    
    135,000
    
    
    
    156,000Other Assets:Deposits
    
    
    2,000
    
    
    
    252,000Total Other Assets
    
    
    2,000
    
    
    
    252,000$
    872,000
    
    
    $
    1,201,000LIABILITIESCurrent liabilities:Notes payable, current portion
    
    $
    14,000
    
    
    $
    14,000Accounts payable
    
    
    153,000
    
    
    
    145,000Accrued liabilities
    
    
    1,632,000
    
    
    
    1,541,000Advance from stockholder
    
    
    
    
    
    
    250,000Total current liabilities
    
    
    1,799,000
    
    
    
    1,950,000Deferred revenue
    
    
    500,000
    
    
    
    150,000Notes payable, net of current portion
    
    
    53,000
    
    
    
    59,000Total liabilities
    
    
    2,352,000
    
    
    
    2,159,000Commitments and other mattersSTOCKHOLDERS DEFICIENCYPreferred stock, $.01 par value, 100,000,000 shares authorized3,300,000 designated as Class A, Non-voting, cumulative
dividend $.40 per share, per annum, convertible,
732,493 shares issued and outstanding (liquidation preference
$3,554,898)
    
    
    9,000
    
    
    
    9,000300,000 designated as Class B, Non-voting, cumulative
dividend $.50 per share, per annum, convertible,
97,500 shares issued and outstanding (liquidation preference
$287,511)
    
    
    
    
    
    
    Common stock, $.01 par value, 400,000,000 shares authorized,
31,401,415 and 31,307,792 issued and outstanding, at June 30,
2007 and December 31, 2006, respectively
    
    
    314,000
    
    
    
    313,000Additional paid-in capital
    
    
    45,002,000
    
    
    
    43,767,000Deficit accumulated during the development stage
    
    
    (46,805,000
    )
    
    
    (45,047,000
    )(1,480,000
    )
    
    
    (958,000
    )$
    872,000
    
    
    $
    1,201,000
 See notes to condensed consolidated financial statements




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4 
 
 September 25,1996(Inception)Three Months Ended
    
    
    Six Months Ended
    
    
    ThroughJune 30,
    
    
    June 30,
    
    
    June 30,2007
    
    
    2006
    
    
    2007
    
    
    2006
    
    
    2007Revenue
    
    $
    28,000
    
    
    $
    
    
    
    $
    28,000
    
    
    $
    
    
    
    $
    28,000Cost of goods sold
    
    
    26,000
    
    
    
    
    
    
    
    26,000
    
    
    
    
    
    
    
    26,000Gross profit
    
    
    2,000
    
    
    
    
    
    
    
    2,000
    
    
    
    
    
    
    
    2,000Cost and expenses:Research and development
    
    
    155,000
    
    
    
    521,000
    
    
    
    390,000
    
    
    
    918,000
    
    
    
    14,480,000General and administrative
    
    
    904,000
    
    
    
    1,211,000
    
    
    
    1,500,000
    
    
    
    1,667,000
    
    
    
    32,658,000Asset impairment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,071,000Loss from operations
    
    
    (1,057,000
    )
    
    
    (1,732,000
    )
    
    
    (1,888,000
    )
    
    
    (2,585,000
    )
    
    
    (48,207,000
    )Other incomeOther income
    
    
    130,000
    
    
    
    
    
    
    
    130,000
    
    
    
    
    
    
    
    130,000Loss before minority interest
    
    
    (927,000
    )
    
    
    (1,732,000
    )
    
    
    (1,758,000
    )
    
    
    (2,535,000
    )
    
    
    (48,077,000
    )Minority interest in loss of consolidated
subsidiary
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    8,000
    
    
    
    1,272,000Net loss
    
    
    (927,000
    )
    
    
    (1,732,000
    )
    
    
    (1,758,000
    )
    
    
    (2,593,000
    )
    
    
    (46,805,000
    )Preferred stock beneficial conversion feature
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    763,000Preferred stock dividend
    
    
    85,000
    
    
    
    57,000
    
    
    
    170,000
    
    
    
    112,000
    
    
    
    698,000Net loss attributable to common
stockholders
    
    $
    (1,012,000
    )
    
    $
    (1,789,000
    )
    
    $
    (1,928,000
    )
    
    $
    (2,705,000
    )
    
    $
    (48,266,000
    )Basic and diluted net loss
attributable to common stockholders per share
    
    $
    (0.03
    )
    
    $
    (0.06
    )
    
    $
    (0.06
    )
    
    $
    (0.09
    )Basic and diluted weighted average number of shares of common
stock
    
    
    31,370,515
    
    
    
    30,305,000
    
    
    
    31,352,029
    
    
    
    30,217,000
 See
notes to condensed consolidated financial statements




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5 
 
 September 25,1996(Inception)Six Months Ended
    
    
    ThroughJune 30,
    
    
    June 30,2007
    
    
    2006
    
    
    2007Cash flows from operating activities:Net loss
    
    $
    (1,758,000
    )
    
    $
    (2,593,000
    )
    
    $
    (46,805,000
    )Adjustments to reconcile net loss to net cash used in operating activities:Depreciation and amortization
    
    
    21,000
    
    
    
    448,000
    
    
    
    2,357,000Loss on impairment of license
    
    
    
    
    
    
    
    
    
    
    1,071,000Impairment
of Goodwill
    
    
    19,000
    
    
    
    
    
    
    
    19,000Gain on sale of fixed assets
    
    
    
    
    
    
    
    
    
    
    (10,000
    )Minority interest in loss of consolidated subsidiary
    
    
    
    
    
    
    (8,000
    )
    
    
    (1,272,000
    )Compensation expense attributable to common stock in Subsidiary
    
    
    
    
    
    
    
    
    
    
    619,000Common stock issued for services
    
    
    417,000
    
    
    
    589,000
    
    
    
    11,023,000Shares issued for future consulting services
    
    
    
    
    
    
    (11,000
    )
    
    
    103,000Stockholder contribution of services
    
    
    150,000
    
    
    
    150,000
    
    
    
    2,259,000Compensatory common stock, options and warrants
    
    
    650,000
    
    
    
    1,106,000
    
    
    
    17,252,000Changes in:Accounts receivable
    
    
    (28,000
    )
    
    
    
    
    
    
    (28,000
    )Prepaid expenses
    
    
    4,000
    
    
    
    (13,000
    )
    
    
    92,000Deposits
    
    
    
    
    
    
    (250,000
    )
    
    
    (2,000
    )Accounts payable and accrued expenses
    
    
    99,000
    
    
    
    (10,000
    )
    
    
    369,000Deferred revenue
    
    
    350,000
    
    
    
    
    
    
    
    500,000Net cash used in operating activities
    
    
    (76,000
    )
    
    
    (592,000
    )
    
    
    (9,129,000
    )Cash flows from investing activities:Purchase of property and equipment
    
    
    
    
    
    
    
    
    
    
    (279,000
    )Cost of acquisition
    
    
    
    
    
    
    
    
    
    
    (16,000
    )Proceeds from sale of fixed asset
    
    
    
    
    
    
    
    
    
    
    10,000Net cash used in investing activities
    
    
    
    
    
    
    
    
    
    
    (285,000
    )Cash flows from financing activities:Net proceeds from sales of common stock and upon exercise of options and
warrants
    
    
    
    
    
    
    4,000
    
    
    
    6,500,000Net proceeds from sales of preferred stock
    
    
    
    
    
    
    334,000
    
    
    
    3,537,000Net proceeds from sale of subsidiary stock
    
    
    
    
    
    
    
    
    
    
    234,000Proceeds from long  term borrowings
    
    
    
    
    
    
    250,000
    
    
    
    85,000Repayments of long  term debt
    
    
    (6,000
    )
    
    
    (2,000
    )
    
    
    (42,000
    )Proceeds from stockholders loans-net
    
    
    
    
    
    
    
    
    
    
    103,000Distributions
    
    
    
    
    
    
    
    
    
    
    (365,000
    )Net cash
(used in) provided by financing activities
    
    
    (6,000
    )
    
    
    586,000
    
    
    
    10,052,000Net
(decrease) increase in cash
    
    
    (82,000
    )
    
    
    (6,000
    )
    
    
    638,000Cash at beginning of period
    
    
    720,000
    
    
    
    51,000Cash at end of period
    
    $
    638,000
    
    
    $
    45,000
    
    
    $
    638,000Supplemental Disclosures:Interest paid
    
    $
    8,000Shares issued for future consulting services
    
    
    
    
    
    $
    192,000Net cash
investing and financing activities:Shares
issued for acquisition of Variable Gear, LLC
    
    
    19,000
    
    
    
    
  See notes to condensed consolidated financial statements




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6 
 
 Note A  The Company and Basis of Presentation




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7 
 Note B  Summary of Significant Accounting Policies
 [1]
    
    Consolidation:The financial statements include the accounts of the company, its
majority-owned subsidiary, Ice Surface Development, Inc. (69.26% owned
at June 30, 2007 and 2006), and its
wholly owned subsidiaries Iso-Torque Corporation, IVT Diesel Corp. and Variable Gear LLC.
All material intercompany transactions and account balances have been
eliminated in consolidation.[2]
    
    Accounts ReceivableAccounts receivable are stated at estimated net realizable value. The
company expects to evaluate its allowance for doubtful accounts based
on a combination of historical experience, aging analysis and
information on specific accounts. Account balances are written off
when collection efforts have been exhausted and the potential for
recovery is considered remote. The company has not recorded an
allowance against receivables based upon managements estimate.[3]
    
    Property and Equipment:Equipment, including a prototype vehicle, is stated at cost less accumulated
depreciation. Depreciation is provided using the straight-line method over the estimated
useful lives of the assets which range from three to seven years. Leasehold improvements
are being amortized over shorter of lease term or useful life.[4]
    
    Research and development and patents:Research and development costs and patent expenses are charged to operations as incurred.[5]
    
    License:Charges for amortization in the three and six month period ended June 30, 2006 were $214,000 and
$428,000. Such amortization expense was included in research and development expense. In
December, 2006, the company concluded that there was an impairment of the Ice technology and has
written off the remaining balance of $1,071,000 in accordance with SFAS No. 144. Effective June
15, 2007, the company assigned the
license to Ice Engineering, LLC. in exchange for Ice Engineerings agreement to pay the
shareholders of the companys majority owned subsidiary, Ice Surface Development, Inc., an
annual royalty equal to 5% of the annual gross revenues generated by the license and its
agreement to assume all of the obligations to Dartmouth
College under the license.[6]
    
    Use of estimates:The preparation of financial statements in conformity with U.S. generally accepted accounting
principles requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenue and expenses during the
reporting period. Such estimates are used in valuing the useful lives of its intangible assets
and the future realizable value of such assets. These estimates are subject to a high degree of
judgment and potential change. Actual results could differ from those estimates.




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8 
 
 Note B  Summary of Significant Accounting Policies (continued)
 [7]
    
    Loss per common share:Statement of Financial Accounting Standards (SFAS) No. 128, Earnings Per Share, requires the
presentation of basic earnings per share, which is based on common stock outstanding, and
dilutive earnings per share, which gives effect to options, warrants and convertible securities
in periods when they are dilutive. At June 30, 2007 and 2006,
the company excluded 4,796,536 and
4,199,859 potential common shares, respectively, relating to convertible preferred stock
outstanding, options and warrants from its diluted net loss per common share calculation because
they are anti-dilutive.
 [8]
    
    Fair value of financial instruments:The carrying amount of cash, prepaid expenses, accounts payable, notes payable, advance from
stockholder and accrued expenses approximates their fair value due to the short maturity of
those instruments.[9]
    
    Stock-based compensation:In December 1997, the Board of Directors of the company approved a
Stock Option Plan (the Plan) which provides for the granting of up
to 2,000,000 shares of common stock, pursuant to which officers,
directors, key employees and key consultants/advisors are eligible to
receive incentive, nonstatutory or reload stock options. Options
granted under the Plan are exercisable for a period of up to 10 years
from date of grant at an exercise price which is not less than the
fair value on date of grant, except that the exercise period of
options granted to a stockholder owning more than 10% of the
outstanding capital stock may not exceed five years and their
exercise price may not be less than 110% of the fair value of the
common stock at date of grant. Options may vest over five years.The Company follows Statement of Financial Accounting Standards
(SFAS) No. 123R, Share Based Payment. SFAS 123R requires all
share-based payments to employees, including grants of employee stock
options, to be recognized as compensation expense over the service
period (generally the vesting period) in the consolidated financial
statements based on their fair values. The impact of forfeitures that
may occur prior to vesting is also estimated and considered in the
amount recognized. In addition, the realization of tax benefits in
excess of amounts recognized for financial reporting purposes will be
recognized as a financing activity in accordance with SFAS 123R.No tax benefits were attributed to the stock-based compensation
expense because a valuation allowance was maintained for
substantially all net deferred tax assets. We follow the alternative
method of calculating the historical pool of windfall tax benefits as
permitted by FASB Staff Position (FSP) No. SFAS 123R, Transition
Election Related to Accounting for the Tax Effects of Share-Based
Payment Awards. This is a simplified method to determine the pool of
windfall tax benefits that is used in determining the tax effects of
stock compensation in the results of operations and cash flow
reporting for outstanding awards.[10]
    
    Revenue recognition policy:The company recognizes revenue when the amounts become fixed and
determinable. Revenue is recognized when product is shipped, title
has passed, collections are reasonably assured and the company has no
further obligation to its customers. All sales are final with no
right of return except for defective product.




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9 
 
 Note B  Summary of Significant Accounting Policies (continued)
 [11]
    
    Shipping and handling costsShipping and handling costs are classified in general and
administrative expenses in the consolidated statements of
operations. Shipping and handling costs were approximately $2,000 and
$5,000 for the three and six months ended June
30, 2007. There were no shipping and handling cost recorded for the three and six months ended June 30,
2006.[12]
    
    Income taxesThe Company adopted Financial Standards Board Interpretation No. 48 Accounting for Uncertainty in Income
Taxes (FIN 48) an interpretation of FASB Statement 109 (SFAS 109) on January 1, 2007. As a result of
the implementation of FIN 48, we recognized no material adjustment to unrecognized tax benefits. At the
adoption date of January 1, 2007, we had $11,764,000 of unrecognized tax benefits, all of which would
affect our effective tax rate if recognized. At June 30, 2007 we
have $12,362,000 unrecognized tax
benefits.We recognize interest and penalties related to uncertain tax positions in general and administrative
expense. As of June 30, 2007, we have not recorded any provisions for accrued interest and penalties
related to uncertain tax positions.Tax years 19992006 remain open to examination by the major taxing jurisdictions to which we are subject.[13]
    
    Recent accounting pronouncements:In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements, to define fair
value, establish a framework for measuring fair value in accordance with generally accepted
accounting principles, and expand disclosures about fair value measurements. SFAS No. 157 will
be effective for fiscal years beginning after November 15, 2007, the beginning of the
companys 2008 fiscal year. The company is assessing the impact the adoption of SFAS No. 157
will have on the companys financial position and results of operations.In February, 2007 the FASB issued SFAS No. 159 The Fair Value Option for Financial Assets and
Financial Liabilities. SFAS No. 159 permits entities to choose to measure many financial
assets and financial liabilities at fair value. Unrealized gains and losses on items for
which the fair value option has been elected are reported in earnings. SFAS no. 159 is
effective for fiscal years beginning after November 15, 2007. We are currently assessing the
impact, if any, that the adoption of SFAS No. 159 may have on our financial position and
results of operations.




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10 
 
 NOTE C  LICENSE FROM THE TRUSTEES OF DARTMOUTH COLLEGE
 On November 28, 2000, the companys subsidiary, Ice
Surface Development, Inc., entered into a 20-year
exclusive license with the Trustees of Dartmouth
College (Dartmouth) for land-based applications to a
novel ice adhesion modification system developed by Dr.
Victor Petrenko at Dartmouths Thayer School of
Engineering. The license agreement provided for a
single payment of $140,000 (paid in 2000) for sponsored
research and a royalty of 3.5% based on the value of
net sales of licensed product with minimum annual
payments of $10,000 for the first two years, $15,000
for the third year and $25,000 per year thereafter. In
addition, the agreement provided for the payment of 50%
of sub-license fee income.Expense for the above agreements totaled $5,750 and
$5,750 for the three month periods ended June 30, 2007
and 2006 and totaled $5,750 and $11,500 for the six
month periods ended June 30, 2007 and 2006. While in
managements opinion, the carrying value of the license
had been impaired as of and for the year ended December
31, 2006, the companys obligations under the license
remained in effect.Effective June 15, 2007, Ice Surface Development, Inc.
assigned the license to an unrelated company, Ice
Engineering, LLC in exchange for Ice Engineerings
agreement to pay the shareholders of the companys
majority owned subsidiary, Ice Surface Development,
Inc., an annual royalty equal to 5% of the annual gross
revenues generated by the license and its agreement to
assume the obligations to Dartmouth College under the
license.Separately, Ice Engineering, LLC agreed to reimburse
approximately $3,500,000 of acquisition and maintenance
costs expended by the company in connection with the
ice technology. Pursuant to the reimbursement
agreement, the company received $500,000 on June 15,
2007. The $3,000,000 balance is to
be paid at the rate of $300,000 per quarter commencing
March 1, 2008, less approximately $91,000 in fees
payable to Dartmouth College accrued through June 14,
2007 to be deducted from the first quarterly
reimbursement amount.
 NOTE D  RELATED PARTY TRANSACTIONS
 [1]
    
    Commencing January 1, 2004, James Y Gleasman and Keith
E. Gleasman (the Gleasman)
entered into
an arrangement with the company to provide consulting
services and assign new patents, existing patent
improvements and all know-how in connection with all
their inventions to the company on a noncompensated
basis. In addition, Keith E. Gleasman will continue to
serve as President and as a director and James Y.
Gleasman will serve as Chief Executive Officer, Interim
Chief Financial Officer and as a director, again on a
noncompensated basis. In accordance with this
arrangement, for the three and six month periods ended
June 30, 2007 and 2006, the company did not pay the
Gleasmans any consulting fees for their services. The
company recorded approximately $75,000 for the
estimated value of these services for each quarterly
period as a contribution to capital based upon approved
time and hours spent. For each quarterly period through
March 31, 2007, the company recorded $50,000 to
research and development and $25,000 to general and
administrative. For the quarterly period ended June 30,
2007, the company recorded $25,000 to research and
development and $50,000 to general and administrative
to
reflect the companys operational shift from
development of its technologies to the promotion and
marketing of its technologies.[2]
    
    Payments to a member of the Gleasman family for
administrative, engineering and technological services
amounted to $ 23,400 and $6,750 for the three month
periods ended June 30, 2007 and 2006 and $41,900 and
$17,790 for the six month periods ended June 30, 2007
and 2006.




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11 
 
 NOTE E  ACCOUNTS PAYABLE AND ACCRUED LIABILITY EXPENSES
  June 30,
    
    
    December 31,2007
    
    
    2006Professional fees
    
    $
    80,000
    
    
    $
    191,000Non-management Directors compensation
    
    
    42,000
    
    
    
    Other accrued expenses
    
    
    168,000
    
    
    
    Salaries to officer/shareholders of Ice (Note C)
    
    
    1,495,000
    
    
    
    1,495,000$
    1,785,000
    
    
    $
    1,686,000
 NOTE F- SHAREHOLDER, OFFICER AND OTHER NOTES PAYABLE
 [1] Notes Payable  Financial Institution
 During the year ended December 31, 2005, the company financed a vehicle as a
prototype and pledged the vehicle as collateral for a loan. The loan in the amount
of $24,000 is paid in monthly installments of $479 consisting of principal and
interest at 6.59% per annum through December 2010.During the year ended December 31, 2006, the company refinanced two vehicles and
pledged the vehicles as collateral for the loan. The loan in the amount of $56,174
is paid in monthly installments of $1,201 consisting of principal and interest at
10.3% per annum through August 2011.The following represents the required minimum payments per annum as of June 30, 2007:
 For
the year ended June 30,2008
    
    $
    21,0002009
    
    
    20,0002010
    
    
    20,0002011
    
    
    17,0002012
    
    
    2,000Total minimum payments
    
    
    80,000Less-amount representing interest
    
    
    13,00067,000Less-Current Maturities
    
    
    14,000Long Term Portion
    
    $
    53,000
 Interest expense for the three and six month periods ended June 30, 2007 and
2006 was $2,000 and $500 and $7,000 and $1,000, respectively.




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##### Table of Contents



12 
 
 NOTE F- SHAREHOLDER, OFFICER AND OTHER NOTES PAYABLE (continued)
 [2] Advance from Shareholder
 On June 19, 2006, a shareholder deposited $250,000 with the Monroe County, New York Treasurer representing
the undertaking required to stay execution of a May 8, 2006 court order with respect to 40,000 common
shares, 245,000 common stock warrants and 511,200 unexercised previous issued stock warrants pending the
appellate courts disposition of the companys appeal of the courts May 8, 2006 order. (See Note I).On July 25, 2006, the shareholder confirmed in writing his agreement to be repaid by the company the full
amount of the advance, plus interest at 8.75% per annum, either by the issuance of the companys Class A
Preferred at $4.00 per share, associated warrants, cash and/or a combination thereof, with both the method
of repayment as well as the timing of repayment totally within the companys discretion.On March 16, 2007, the Appellate Division of the New York State Supreme Court reversed the lower Courts
May 8, 2006 order in its entirety. Pursuant to such reversal, on April 5, 2007, the lower Court ordered the
return of the $250,000 deposit (less administrative costs of $4,032) to the company. The company repaid
the entire $250,000 to the shareholder in April, 2007. Interest expense for the quarter ended June 30,
2007 amounted to $1,334.
 Note
G  STOCKHOLDERS DEFICIENCY
 [1] Class A Preferred stock:
 In January 2002, the company authorized the sale of up to
2,000,000 shares of its Class A Non-Voting Cumulative
Convertible Preferred Stock (Class A Preferred) at $4.00
per share. Each share of Class A Preferred is convertible
into one share of voting common stock and entitles the holder
to dividends, at $.40 per share per annum. The holder has the
right to convert after one year subject to Board approval.Liquidation Rights
 (i)
    
    In the event of any liquidation,
dissolution or winding up of the company,
whether voluntary or involuntary, the
holders of Class A Preferred Shares then
outstanding are entitled to be paid out of
the assets of the company available for
distribution to its shareholders, whether
such assets are capital, surplus or
earnings, before any payment or declaration
and setting apart for payment of any amount
in respect of any shares of any Junior
Stock with respect to the payment of
dividends or distribution of assets on
liquidation, dissolution or winding up of
the company, all accumulated and unpaid
dividends (including a prorated dividend
from the last Dividend Accrual Date) in
respect of any liquidation, dissolution or
winding up consummated except that,
notwithstanding the provisions of Section
B(ii), all of such accumulated and unpaid
dividends will be paid in Class A Preferred
Shares at a rate of 1 Class A Preferred
Share for each $4.00 of dividends. No
fractions of Class A Preferred Shares shall
issue. The company shall pay cash in lieu
of paying fractions of Class A Preferred
Shares on a pro rata basis.(ii)
    
    The Class A Preferred Shares will be
entitled to participate on a pro rata basis
in any distribution of assets as may be
made or paid on Junior Stock upon the
liquidation, dissolution or winding up of
the company.(iii)
    
    A consolidation or merger of the company
with or into any other corporation or
corporations or any other legal entity will
not be deemed to constitute a liquidation,
dissolution or winding up of the company as
those terms are used in this Section C.




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##### Table of Contents



13 
 
 Note
G  Stockholders Deficiency (continued)
 [1]
    
    Class A Preferred stock:(continued)The company has sold an aggregate 773,543 Class A Preferred for
aggregate proceeds of $3,062,046. Class A Preferred shareholders have
converted 41,050 Class A Preferred for an equal number of common
 shares.The company sold 25,000 Class A Preferred to investors for proceeds of
$100,000 during the three month period ended June 30, 2006 and 83,250
Class A Preferred for proceeds of $334,000 during the six month
period ended June 30, 2006. The company issued 25,000 common stock
warrants to investors in connection with the purchase of Class A
Preferred for the three month period ended June 30, 2006 and 43,750
common stock warrants for the six month period ended June 30, 2006.
All such warrants are exercisable at $.01 per common share. 12,500
warrants were exercised during the three and six month period ended
June 30, 2006. The company did not have any sales of preferred stock
or issues of warrants during the three and six month periods ended
June 30, 2007.At June 30, 2007 and 2006, Class A Preferred dividends in arrears
amounted to approximately $629,000 and $350,000, respectively.[2]
    
    Class B Preferred stock:On October 21, 2004, the company authorized the sale of up to 300,000 shares of its Class B
Non-Voting Cumulative Convertible Preferred Stock (Class B Preferred) at $5.00 per share. Each
share of Class B Preferred pays cumulative dividends at $.50 per share per annum and is
convertible into either one share of voting common stock of the company or one share of common
stock of Iso-Torque Corporation under certain circumstances. The holder has the right to convert
after one year subject to Board approval.(1) In the event of any liquidation, dissolution or winding up of the Corporation, whether
voluntary or involuntary, the holders of Class B Preferred Shares then outstanding are entitled to
be paid out of the assets of the Corporation available for distribution to its shareholders,
whether such assets are capital, surplus or earnings, before any payment or declaration and
setting apart for payment of any amount in respect of any shares of any Junior stock with respect
to the payment of dividends or distribution of assets on liquidation, dissolution or winding up of
the Corporation, all accumulated and unpaid dividends (including a prorated dividend from the last
Dividend Accrual Date) in respect of any liquidation, dissolution or winding up consummated except
that, notwithstanding the provisions of Section B(2), all of such accumulated and unpaid dividends
will be paid in Class B Preferred Shares at a rate of 1 Class B Preferred Share for each $5.00 of
dividends. No fractions of Class B Preferred Shares shall be issued. The Corporation shall pay
cash in lieu of paying fractions of Class B Preferred Shares on a pro rata basis.(2) The Class B Preferred Shares will be entitled to participate on a pro rata basis in any
distribution of assets as may be made or paid on Junior Stock upon the liquidation, dissolution or
winding up of the Corporation.The company has sold an aggregate 97,500 Class B Preferred for aggregate proceeds of $ 487,500.
Class B Preferred Shareholders have not converted any Class B Preferred.During the three and six month periods ended June 30, 2007 and 2006, the company did not sell any
Class B Preferred.At June 30, 2007 and 2006, Class B Preferred dividends in arrears amounted to approximately $74,000
and $39,000, respectively.




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##### Table of Contents



14 
 
 Note G  Stockholders Deficiency (continued)
 [3]
    
    Business Consultants Stock Plan:For the three month periods ended June 30, 2007 and 2006, the company
issued 74,646 and 197,098 common shares to business consultants under
the Business Consultants Stock Plan and charged $295,000 and $355,000
to operations in connection with these share issuances. For the six
month periods ended June 30, 2007 and 2006, the company issued 120,623
and 337,163 common shares and charged $661,000 and $592,000 to
operations. Share issuances are valued generally on the date
immediately prior to the date of issuance, except for shares issued to
pay invoices which are valued as of the invoice date and except for
 shares issued under the Nonmanagement Directors Plan which are valued
as of the end of each quarter effective October 13, 2006. As of June
30, 2007, 4,855,029 shares are available for future issuances under
the Business Consultants Stock Plan.[4]
    
    Nonmanagement Directors Plan:On October 1, 2004, the Board of Directors approved a Nonmanagement
Directors Plan pursuant to which each nonmanagement director is
entitled to receive, if certain conditions are met, on an annual basis
for services rendered as a director, warrants to purchase 12,000
shares of the companys common stock at $.01 per share. In addition,
the chairman of the audit committee is entitled to receive, on an
annual basis for services rendered as chairman, additional warrants
for 5,000 shares of the companys common stock at $.01 per share.During the three month period ended June 30, 2006, the company
granted 13,250 warrants under the Nonmanagement Directors Plan and
recorded a charge of approximately $23,000 to general and
administrative expenses. During the six month period ended June 30,
2006, the company granted 26,500 warrants and the company recorded a
charge of approximately $48,000 to general and administrative
expenses. During the three month period ended June, 2006, no warrants
were exercised. During the six month periods ended June 30, 2007 and
2006, 6,000 and 15,000 previously issued warrants were exercised. The
company did not grant any warrants for the three and six months ended
June 30, 2007.On October 13, 2006, the board modified the Plan to provide that,
effective for periods commencing on and after July 1, 2006, a
stipulated sum per annum should be paid to each nonmanagement director
solely for his service as a director, with the amount of such payment
determined by the board from time to time, based upon such
considerations as risk, number of meetings, monitoring and reviewing
company compliance with the Sarbanes-Oxley Act as well as all other
applicable local, state, national and international rules and
regulations,
development and implementation of policies, including establishing and
reviewing executive compensation, longevity, 24-hour a day
availability, as well as oversight of managements pursuit of one or
more commercializing events for the companys technologies. Until
adjusted in accordance with such factors, the board determined that
each nonmanagement director shall be paid $25,200 per annum
exclusively for board and committee service, payable pro rata on a
quarterly basis, provided each such director shall have attended,
either in person or via telephonic conference, 75% of the meetings of
the board and of the committee(s) of which he is a member, such
attendance measured on an annual basis. Such amount shall be paid
either in cash, Business Consultants stock or a combination of both
and is payable to a newly elected director on a prospective basis upon
his election as a director.




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##### Table of Contents



15 
 
 Note G  Stockholders Deficiency (continued)
 [4]
    
    Nonmanagement Directors Plan:(continued)At the same meeting, the board also determined that a stipulated sum per annum should be paid to
those nonmanagement directors serving as chairman of the board, chairman of the executive committee,
chairman of the audit committee, chairman of the nominating committee and chairman of the
compensation and governance committee, exclusively for service rendered in such capacities. Until
further adjusted, the board determined that the chairman of the board shall be paid $7,500 per annum,
the chairman of the executive committee shall be paid $12,000 per annum, the chairman of the audit
committee shall be paid $12,000 per annum, the chairman of the nominating committee shall be paid
$5,100 per annum and the chairman of the compensation and governance committee shall be paid $5,100
per annum. Such amounts are to be paid pro rata on a quarterly basis with payments made in cash,
Business Consultants stock or a combination of both and is payable to a newly elected chairman on a
prospective basis upon his election as chairman. With respect to amounts payable to chairmen for
calendar 2006, such amounts shall be payable retroactively to January 1, 2006 (except for the audit
committee chairman who has received payment for the six month period ended June 30, 2006).Each unexercised, nonmanagement director warrant outstanding as of October 13, 2006 was amended to
provide that such warrants may be exercised only upon the happening of the earlier to occur of the
following events: death or disability of the director, termination of his service as a director,
change in control of the company or the sale, license or other commercial transfer of a substantial
amount of the companys assets, all of such terms to be interpreted in accordance with the provisions
of section 409A of the Internal Revenue Code of 1986 and the regulations promulgated thereunder.For the three month period ended June 30, 2007, the company issued 9,982 common shares pursuant to the
Nonmanagement Directors Plan to satisfy the March 31, 2007 payable in the amount of $41,925 and
recorded a charge of $41,925 during such period.[5]
    
    Shares issued for services and rent:During 1997, the company granted 12,000 and 2,000 shares of common stock for services provided. The
company valued the shares at their fair value of $1.50 and $3.00 per share, respectively. During
1998, the company granted 1,000 shares of common stock, valued at $3.00 per share, for services
provided. During 2003 and 2002, 15,640 and 134,964 restricted shares were issued for services
aggregating approximately $18,000 and $198,000 respectively. During 2005 and 2004, 100,000 and 35,000
restricted shares were issued for services and rent aggregating approximately $259,500 and $194,000.
During the three and six month periods ended June 30, 2007 and 2006, no restricted shares were
issued.[6]
    
    Business, Financial and Engineering Consultants:In connection with its business and financial operations for the three month period
ended June 30, 2006, the company issued 46,750 warrants exercisable for five years at $0.01
per common share to business, financial and engineering consultants. During the six month
periods ended June 30, 2006, the company issued 270,000 warrants exercisable for five years at
$0.01 per common share to such consultants. In connection with the issuance of these warrants,
the company recorded a charge of $91,000 and $463,000 in consulting expense for the three months
and six months ended June 30, 2006. During the three and six month periods ended June 30, 2006,
none of these warrants were exercised.In connection with its business and financial operations for the three month period ended June 30, 2007 the company
issued 100,000 warrants exercisable for ten years at $5.00 per common share to business, financial and engineering
consultants. During the six month period ended June 30, 2007,
the company issued 150,000 warrants exercisable
for ten years at $5.00 per common share to such consultants. In connection with the issuance of these warrants, the company
recorded a charge of $401,000 in consulting expense for the three months ended June 30, 2007 and a charge of
$650,000 for the six month period ended June 30, 2007 and 2006. The 50,000 warrants issued during the first quarter of
2007 require that the company engage in a commercializing event for the warrants to become exercisable. During the three and six
month periods ended June 30, 2007 and 2006, none of these warrants were exercised.




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##### Table of Contents



16 
 
 Note G  Stockholders Deficiency (continued)
 [7]
    
    Stock Option PlanIn December, 1997, the board of directors approved a Stock Option Plan
(the Option Plan) which provides for the grant of up to 2,000,000
common stock options to officers, directors and consultants who are
eligible to receive incentive, nonqualified or reload stock options.
Options granted under the Option Plan are exercisable for a period of
up to ten years from the date of grant at an exercise price which is
not less than the per share trading price of the underlying common
stock on the date of grant, except that the exercise period for
options granted to a greater than 10% shareholder may not exceed five
years and the exercise price may not be less than 110% of such trading
price per share on the date of grant.In 1997, in connection with certain consulting agreements, the company
granted an aggregate 75,000 nonqualified options at an exercise price
of $5.00 per common share. The options vested at a rate of 20% per
annum and are exercisable through November 30, 2007. The company
valued these options using the Black-Scholes option-pricing method.
The fair value of these options was expensed over the term of the
consulting agreements.In 1998, the company granted three directors an aggregate 380,000
options under the Option Plan, all exercisable immediately at $5.00
per common share. These options expire on January 1, 2008.In 2001, the company granted 100,000 options to an officer in his
capacity as a consultant under the Option Plan exercisable immediately
at $5.00 per common share. In connection with this grant, the company
recorded a stock compensation charge of $398,000. The option expires
in August 28, 2011.In 2002, in connection with certain consulting agreements, the company
granted an aggregate 727,047 options under the Option Plan, all
exercisable immediately at $5.00 per common share. The options were
granted in payment of an aggregate $653,000 owed under the consulting
agreements. These options expire on September 30, 2007.In 2003, in connection with the same consulting agreements, the
company granted 166,848 options under the Option Plan, all exercisable
immediately at $5.00 per common share. The options were granted in
payment of an aggregate $265,000 owed under the consulting agreements.
These options expire on December 22, 2013.In 2003, the company granted an aggregate 225,000 options under the
Option Plan to three directors, all immediately exercisable at $5.00
per common share. These options expire on October 15, 2013.In 2003, the company granted 50,000 options to a consultant under the
Option Plan, immediately exercisable at $2.26 per common share. In
connection with this grant, the company recorded a stock compensation
charge of $46,000. These options expire on May 20, 2013.In 2005, the company granted 100,000 options to a consultant under the
Option Plan, immediately exercisable at $5.00 per common share. In
connection with this grant, the company recorded a stock compensation
charge of $247,000 allocated to research and development. These
options expire on June 30, 2015.No options were granted under the Option Plan during the three and six
month periods ended June 30, 2007 and 2006.




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##### Table of Contents



17 
 
 Note G  Stockholders Deficiency (continued)
 [7]
    
    Stock Option Plan (continued)
  Six Months Ended June 30,2007
    
    2006Weighted
    
    
    
    
    
    WeightedAverage
    
    
    
    
    
    AverageExercise
    
    
    
    
    
    ExerciseShares
    
    Price
    
    Shares
    
    PriceOutstanding at beginning of year
    
    
    1,823,895
    
    
    $
    4.92
    
    
    
    1,823,895
    
    
    $
    4.92Granted
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Outstanding at June 30, 2007
    
    
    1,823,895
    
    
    
    4.92
    
    
    
    1,823,895
    
    
    
    4.92Options exercisable June 30, 2007
    
    
    1,823,895
    
    
    
    4.92
    
    
    
    1,823,895
    
    
    
    4.92
   Options Outstanding
    
    
    Options ExercisableWeighted
    
    
    Weighted
    
    
    
    
    
    
    WeightedAverage
    
    
    Average
    
    
    
    
    
    
    AverageExercise
    
    
    Remaining Life
    
    
    
    
    
    
    ExerciseShares
    
    
    Price
    
    
    in Years
    
    
    Shares
    
    
    Price1,773,895
    
    
    $
    5.00
    
    
    
    3.19
    
    
    
    1,773,895
    
    
    $
    5.0050,000
    
    
    
    2.26
    
    
    
    5.92
    
    
    
    50,000
    
    
    
    2.261,823,895
    
    
    
    4.92
    
    
    
    3.34
    
    
    
    1,823,895
    
    
    
    4.92




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##### Table of Contents



18 
 Note G  Stockholders Deficiency (continued)
 [7]
Stock Option Plan
(CONTINUED)
  WeightedWeighted
    
    AverageAverage
    
    Remaining
    
    AggregateExercise
    
    Contractual
    
    IntrinsicShares
    
    Price
    
    Term
    
    ValueNumber of shares under option plan:Outstanding at January 1, 2007
    
    
    1,823,895
    
    
    $
    4.92GrantedExercisedCanceled or expiredOutstanding at June 30, 2007
    
    
    1,823,895
    
    
    $
    4.92
    
    
    
    3.34
    
    
    $
    62,000Exercisable at June 30, 2007
    
    
    1,823,895
    
    
    $
    4.92
    
    
    
    3.34
    
    
    $
    62,000




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##### Table of Contents



19 
 Note G  Stockholders Deficiency (continued)
 [8] Warrants:As of June 30, 2007, outstanding warrants to acquire shares of the companys common stock are as follows:
 Number ofExercise
    
    
    
    SharesPrice
    
    Expiration
    
    Exercisable$1.52
    
    September 18, 2007
    
    
    2,500
    
    
    Note H(2)(a)
    
    (a)
    
    
    125,000
    
    
    (a)$.75
    
    None
    
    
    500,000
    
    
    (b)$.01
    
    None
    
    
    511,200
    
    
    (c)$.01
    
    None
    
    
    54,500
    
    
    (d)$.01
    
    None
    
    
    39,000
    
    
    (e)$5.00
    
    10 years
    
    
    505,000
    
    
    (f)$.01
    
    None
    
    
    6,000
    
    
    (g)$.01
    
    None
    
    
    25,000
    
    
    (h)$1.00
    
    None
    
    
    20,500
    
    
    (i)(j)
    
    (j)
    
    
    (j
    )
    
    (j)$3.27
    
    10 years
    
    
    400,000
    
    
    (k)$3.75
    
    10 years
    
    
    200,000
    
    
    (l)$5.00
    
    10 years
    
    
    50,000
    
    
    (m)$5.00
    
    10 years
    
    
    100,000
    
    
    (n)
 
 (a)
    
    Exercisable only if company has an IPO at the IPO price and exercisable five years from IPO. Through
June 30, 2007, the company has not completed an IPO.(b)
    
    On April 15, 2002, the company issued 1,000,000 warrants to purchase common stock at prices ranging
from $.30 to $.75 to its then chairman of the board of directors and chief executive officer. Of the
total warrants, 250,000 were exercisable at $.30, and 250,000 were exercisable at $.50 on the date
the then board elected the executive to the board and named him chief executive officer. During the
year ended December 31, 2002, 250,000 warrants were exercised for $.30 per share, resulting in
proceeds of $75,000. During the year ended December 31, 2003, 250,000 warrants were exercised for
$.50 per share, resulting in proceeds of $125,000. The remaining 500,000 warrants are exercisable
upon the execution of the company of a binding agreement for the sale, transfer, license or
assignment for value of any and/or all of its companys technology at $.75 per share. The company
will record a charge representing the fair value of the warrants when the warrants become
exercisable.




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##### Table of Contents



20 
 
 Note G  Stockholders Deficiency (continued)
 [8] Warrants: (continued)
 (c)
    
    The company has issued 1,080,000
warrants, exercisable at $.01 per
share, to a management consulting firm
in accordance with agreements between
the company and a management firm.
528,800 of these warrants have been
exercised for aggregate proceeds of
$5,484. In accordance with the court
of original jurisdictions order
rendered on May 8, 2006 in connection
with the litigation against such
consulting firm as more fully described
in Note I, the company was required to
honor immediately the exercise of
40,000 common stock warrants at $.01
per common share, to issue 245,000
common stock warrants, exercisable at
$.01 per common share and to honor, if
and when presented for exercise,
511,200 previously issued unexercised
warrants. The company appealed the
lower courts order to the Appellate
Division of the New York State Supreme
Court. On March 16, 2007, the Appellate
Division unanimously reversed the lower
courts decision. During the pendency
of its appeal, the company had been
required to issue and deposit with the
Clerk of the Court for Monroe County,
New York, 40,000 common shares and
245,000 additional common stock
warrants and deposit $250,000 with the
Monroe County, New York Treasurers
office. As a result of the Appellate
Divisions decision, on April 5, 2007,
the lower court ordered the return of
the 40,000 shares, 245,000 warrants and
$250,000 to the company. Upon such
return, the shares and warrants were
cancelled. Thus, 511,200 warrants does
not include either the 40,000 warrants
or the 245,000 warrants cancelled on
the companys books. See Notes I and J.(d)
    
    The company issued an aggregate 123,500
warrants to its nonmanagement directors
for services rendered to the board
under its Nonmanagement Directors Stock
Plan prior to its amendment on October
13, 2006. For the years ended December
31, 2006, 2005 and 2004, the company
issued 26,500, 44,000 and 53,000
warrants, immediately exercisable for a
ten year term at $.01 per common share.
No further warrants are issuable under
the Plan as modified by the board of
directors on October 13, 2006 (See Note
G [4]). During the three month periods
ended June 30, 2007 and 2006, no
warrants were exercised. During the six
month periods ended June 30, 2007 and
2006, 6,000 and 15,000 of these
warrants were exercised for proceeds of
$60 and $150.(e)
    
    In 2005, the company issued 12,000
warrants to a consultant, immediately
exercisable at .01 per common share.
During 2005, 3,000 warrants were
exercised for proceeds of $30. In 2006,
the company issued 30,000 warrants to
consultants exercisable immediately for
a ten year term at $5.00 per common
share.(f)
    
    During 2005, the company issued 210,000
warrants to certain engineering
consultants, exercisable immediately
for a ten year term at $5.00 per common
share. During 2006, the company issued
295,000 warrants to certain engineering
consultants exercisable over a ten year
term at $5.00 per common share, but
only exercisable if the company sells,
licenses or otherwise transfers one or
more technologies for value. None of
these warrants have been exercised
through June 30, 2007.(g)
    
    During 2005, the company issued 6,000
warrants to a consultant, exercisable
at .01 per common share. None of these
warrants have been exercised through
June 30, 2007.(h)
    
    During 2005, the company issued 62,500
warrants to investors in connection
with their purchase of 62,500 Class A
Preferred, exercisable at $.01 per
common share. 50,000 of these warrants
were exercised in 2005 for proceeds of
$625. During 2006, the company issued
137,932 warrants to investors along
with their purchase 162,000 Class A
Preferred and 20,000 Class B Preferred,
all immediately exercisable at $.01 per
common share. During the year ended
December, 2006, 125,432 of these
warrants were exercised for proceeds of
approximately $1,254. None of these
warrants were exercised during the
three month period ended June 30, 2007.
12,500 of these warrants were exercised
during the six month period ended June
30, 2007 for proceeds of $125.(i)
    
    During 2006, one investor purchased
20,500 warrants immediately exercisable
at $1.00 per common share for a
purchase price of $2,000. None of these
warrants have been exercised through
June 30, 2007.




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##### Table of Contents



21 
 
 Note G  Stockholders Deficiency (continued)
 [8] Warrants: (continued)
 (j)
    
    In connection with its business and financial operations for the year ended December 31, 2006, the
company issued 91,583 warrants, immediately exercisable over a ten year term at $.01 per common
share. During the year ended December 31, 2006, 91,083 of these warrants were exercised for proceeds
of $910. None of these warrants were exercised during the three month period ended June 30, 2007.
500 of these warrants were exercised during the six month period ended June 30, 2007 for net proceeds
of $5.(k)
    
    During 2006, the company issued 400,000 warrants immediately exercisable for ten years at an exercise
price of $3.27 per common share to a business consultant. None of these warrants have been exercised
through June 30, 2007.(l)
    
    During 2006, the company issued 200,000 warrants immediately exercisable for ten years at an exercise
price of $3.75 per common share to its governmental affairs consultant. None of these warrants have
been exercised through June 30, 2007. The company recorded a
charge of $948,000 to general and administrative expenses.(m)
    
    During the quarter ended March 31, 2007, the company issued 50,000 warrants exercisable for a ten year
period at $5.00 per common share upon the happening of a commercializing event. The warrants were
issued to a consultant who assisted the company develop its New York State and national school bus
program. None of these warrants have been exercised through June 30, 2007. The company recorded a
charge of $249,000 to general and administrative expenses.(n)
    
    On April 19, 2007, the company issued 100,000 warrants immediately exercisable for ten years at an
exercise price of $5.00 per common share to two engineering consultants in connection with the
companys
engagement to furnish constant velocity joints to a military contractor. None of these warrants have
been exercised through June 30, 2007. The company recorded a charge of $401,000 to general and
administrative expenses.
  WeightedWeighted
    
    
    AverageAverage
    
    
    Remaining
    
    
    AggregateExercise
    
    
    Contractual
    
    
    IntrinsicWarrants
    
    
    Price
    
    
    Term
    
    
    ValueOutstanding at January 1, 2007
    
    
    2,652,700
    
    
    $
    2.19
    *
    
    7.44 yearsGranted
    
    
    150,000
    
    
    
    5.00
    *
    
    9.85 yearsExercised
    
    
    (19,000
    )
    
    
    0.01Canceled or expired
    
    
    (245,000
    )
    
    
    0.01Outstanding at June 30, 2007
    
    
    2,538,700
    
    
    $
    2.58
    
    
    8.65 years
    
    $
    3,636,633Exercisable at June 30, 2007
    
    
    1,618,700
    
    
    $
    2.49
    
    
    5.34 years
    
    $
    2,261,633




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22 
 Note G  Stockholders Deficiency (continued)
 [9] Issuance of Stock and Warrants by Subsidiary:The following is a summary of warrants outstanding issued by Ice Surface Development, Inc.
 Three Months Ended
June 30,2007

    
    2006Outstanding at the beginning of the period
    
    
    103,948
    
    
    
    103,948Forfeited
    
    
    (103,948
    )
    
    
    Outstanding at the end of the period
    
    
    
    
    
    
    103,948
  [10]
    
    Shares Issued for Consulting ServicesOn September 17, 2005, certain consultants created a trust to enable
them to sell business consultants shares issued to them by the
company under their consultant agreements. The company issued 50,000
business consultant shares valued at $102,000 on September 27, 2005,
contingent on the performance by the consultants of future services
under such consultant agreements. The company fair values the shares
issued to the trust using the closing market price of the companys
common stock on the date immediately prior to the date of issuance.No shares were sold in the trust during the 2005 calendar year.
During the calendar year ended December 31, 2006, the company issued
an aggregate 160,000 business consultant common shares valued in the
aggregate at $419,000 to satisfy the payment of invoices submitted by
the consultants for services rendered. During the year ended December
31, 2006, the trustee sold an aggregate 199,260 business consultant
common shares for aggregate proceeds of $498,990 and distributed the
proceeds from the trust to the consultants in accordance with the
trusts terms.During the three month periods ended June 30, 2007 and 2006, the
company issued 32,500 and 100,000 business consultant common shares
valued at $127,875 and $190,000 to satisfy invoices submitted by the
consultants for services rendered. During the six month periods
ended June 30, 2007 and 2006, the company issued 42,500 and 100,000
business consultant common shares valued at $172,375 and $190,000 to
satisfy invoices submitted by the consultants for services rendered.
During the three month periods ended June 30, 2007 and 2006, the
trustee sold 33,950 and 61,300 business consultant common shares and
distributed $134,216 and $110,696 from the trust to the consultants
in accordance with the trusts terms.The companys payment obligations with respect to the consultant
agreements are met once it has issued shares to the trust in
accordance with directives received from the consultants and the
consultants, not the company, bear the risk of loss in the event the
proceeds of stock sales by the trustee are less than the value of the
stock contributed to the trust by the company on the date of
contribution.




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23 
 
 Note G  Stockholders Deficiency (continued)
 [11]
    
    Commercializing Event PlanOn October 13, 2006, the board of directors adopted a Commercializing Event Plan (Event Plan) designed
to reward the companys directors, executives and certain administrative personnel for the successful
completion of one or more commercializing events. Currently, eight people participate in the Event Plan.
Under the Event Plan, if a commercializing event occurs, each participant will receive 50,000 business
consultants common shares for each one of the technologies commercialized. If a second commercializing
event occurs with respect to the same technology, each participant will receive an additional 25,000
business consultants common shares. No additional shares are issuable for any additional commercializing
event for the same technology. Under the Event Plan, this commercializing event sequence applies
separately to each of the companys eight automotive technologies.In the event the entire company was to be acquired by a third party, regardless of the manner of
acquisition, each participant would receive 400,000 business consultants common shares upon the
consummation of the transaction. This feature of the Event Plan operates independently of the feature
whereby each participant receives shares for a first or second commercializing event. Thus, under the
Event Plan, it is possible for each participant to receive up to 1,000,000 business consultants common
 shares if each and every patented automotive invention was the subject of both a first and second
commercializing event (8x75,000 shares) and then, subsequent to and independent of such events, the entire
company were to be sold.Effective June 15, 2007, the company assigned the license granted by the Trustees of Dartmouth College
pertaining to the ice technology in exchange for a royalty equal to 5% of the gross revenues generated by
the license and the assumption by the assignee of the companys obligations to Dartmouth College under the
license agreement. See Note C. The companys board of directors concluded that this transaction did not
constitute a commercializing event as defined in the Event Plan and no shares were issued or are
issuable under the Event Plan as the result of such assignment.No shares have been issued under the Event Plan since its inception through the period ended June 30, 2007.
 Note H  Commitments and Other Matters
 [1]
    
    Consulting AgreementsOn June 30, 2005, the company entered into a
non-exclusive two year consulting agreement for
engineering design services. Under the terms of
the consulting agreement, the company was
required to issue annually 12,000 fully and
immediately vested $.01 warrants exercisable into
common stock of the company, payable on a
quarterly basis. In addition, the company granted
100,000 stock options under its 1998 Stock Option
Plan to acquire shares of its common stock to its
engineering design consultant during the three
months ended June 30, 2005. The option vested
immediately and has a term of ten years. The
exercise price for the option is $5.00 per share.
The company valued the options at $247,000 using
the Black-Scholes option/pricing model and
charged operations. This agreement was terminated
in the third quarter of 2005.During 2005, the company entered into
non-exclusive two year consulting agreements with
various consultants. Under the terms of the
consulting agreements, the company will issue
payment to be made in cash, business consultants
stock or a combination hereof, in the companys
sole discretion. The consultants were issued
common stock warrants exercisable at $5.00 per
common share. The number of warrants aggregated
210,000. Such warrants are fully vested,
exercisable immediately and have a ten year term.
The company valued the warrants at $377,000 using
the Black-Scholes option/pricing model and
charged operations.




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24 
 
 Note H  Commitments and Other Matters (continued)
 [1]
    
    Consulting Agreements(continued)During the year ended December 31, 2006, the company issued an additional 295,000 warrants exercisable
immediately over a ten year term at $5.00 per common share to the same consultants. The company
valued the warrants at $1,441,095 using the Black-Scholes option/pricing model and charged
operations. The company also issued 200,000 warrants in connection with its engagement of a
governmental affairs consultant. The warrants are immediately exercisable over a 10 year period at an
exercise price of $3.75 per common share. The company valued the warrants at $948,165.No additional securities have been issued under new and/or existing consulting agreements during the
three and six month periods ended June 30, 2007 and no outstanding securities issued under these
consulting agreements were exercised during the three and six month periods ended June 30, 2007.[2]
    
    Variable Gear, LLCUnder the operating agreement of Variable Gear, LLC, the company was required to purchase the 51%
membership interest it does not own in such entity on January 1, 2008 at the then fair market value.
Since inception, Variable Gear, LLC generated no revenues, incurred no expenses and had no
operations. On June 3, 2007, the company and the 51% owner agreed that his membership interest would
be repurchased in exchange for 5,000 common shares of the company, valued at the close of trading on
such date ($3.85 per share) at $19,250. Such repurchase was closed on June 6, 2007.[3]
    
    Leases:The company leased premises for use as its executive offices. The lease was for a period of 3 years,
commencing July 1, 2004 expiring on June 30, 2007 with monthly rental payments of approximately
$2,200. Under the lease, the company was also responsible for its share of real estate taxes, certain
maintenance and repair costs, and increases in utility costs associated with the premises. The
company has not renewed this lease but is occupying the same offices on a month-to-month basis.On August 1, 2004, the company sublet, as a tenant, a portion of a facility located in Webster, New
York for a term of six months at a rental rate of $600 per month. On December 31, 2004, the company
purchased from the previous owner certain assets for approximately $68,000 and assumed the lease of
the underlying tenant for the entire premises. The lease calls for payment of a rental of $2,100 per
month. The initial lease term expired on February 28, 2007 and was renewed for an additional two
years, through February 28, 2009.




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25 
 
 Note H  Commitments and Other Matters (continued)
 [3]
    
    Leases:(continued)For the six month period ended June 30, 2007 and 2006, rent expense
was approximately $28,000 and $29,000.Minimum future obligations under all leases are as follows:
 Year Ending June 30,2008
    
    $
    25,0002009
    
    $
    17,000$
    42,000




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26 
 
 Note I  Management Agreement
   th




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27 
 Note I Management Agreement (continued)




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Note J Litigation




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29 
 Note J Litigation (continued)
      Note K  Subsequent Events




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30 
 
 Item 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS.
 PLAN OF OPERATION
 (a) Overall Business Strategy
  o
    
    to license or sell any one or a number of its
automotive technologies (i.e. the infinitely variable
transmissions, the hydraulic pump/motor system, the
Iso-Torque differential, the constant velocity joint
mechanism, and the full terrain vehicle) in order to
provide the capital management believes is necessary
to commercialize its FTV worldwide, especially in
the Asian, African, South and Central American, and
Eastern European markets.
  o
    
    to continue its working relationship with the National Aeronautics and Space Administration with
respect to that agencys development of a lunar rover to return to the moon by approximately the year 2020;o
    
    to continue refining the companys infinite variable transmissions to maximize the cost savings,
fuel-efficiencies and pollution reduction
capabilities of such transmissions as compared to
conventional automatic transmission technologies;o
    
    to continue its attempt to generate governmental
support for the companys New York State and national
school bus program;o
    
    to initiate working relationships with automotive
manufacturers, first-tier suppliers and local
municipalities, including entering into supply
contracts with such companies and municipalities,
either in preparation for or in concert with one or
more licensing arrangements with such entities;o
    
    to provide constant velocity joint units to a
military contractor for integration in a
newly-designed demonstration vehicle;o
    
    to continue demonstrating the companys automotive
technologies to interested representatives of the
traditional auto industry, government and innovative
auto companies with advanced automotive technologies
for selected, niche markets;o
    
    to adapt and modify the companys automotive
technologies to the specification requirements of
end-users with whom the company may be engaged and as
adapted and modified, to file new patent applications
to the extent necessary and appropriate.
 www.torvec.com




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31 (a) Overall Business Strategy (CONTINUED)
        $
    500,000
    
    
    paid upon closing, June 15, 2007;$
    300,000
    
    
    payable quarterly, commencing March 1, 2008, until entire amount paid*




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32 (b) Current Status of Automotive Product Development
   st




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33 (c) Company Expenses




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34 (d) Liquidity and Capital Resources




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35 (e) Critical Accounting Policies
 Revenue Recognition
  Recent
Accounting Pronouncement
   (f) Impact of Inflation
  (g) Quarterly Fluctuations




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36 
 Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
   Forward-Looking Statements
   a.
    
    the companys ability to raise significant capital to fund its plan of operation;b.
    
    the companys ability to sell and/or commercialize one or more of its
technologies, and/or to enter into collaborative joint working arrangements,
formal joint venture arrangements with domestic and/or foreign governments,
automotive industry manufacturers and suppliers to manufacture and promote the
companys inventions;c.
    
    industry and consumer acceptance of the companys inventions;d.
    
    the level of competition and resistance to the companys inventions in the
automotive and related industries;e.
    
    general economic and competitive conditions in the markets and countries in
which the company will operate, and the risks inherent in any future
international operations;f.
    
    the strength of the U.S. dollar against currencies of other countries where the
company may operate, as well as cross-currencies between the companys future
operations outside of the U.S. and other countries with whom it transacts
business.g.
    
    changes in business, political and economic conditions and the threat of future
terrorist activity in the U.S. and other parts of the world and related military
action.




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37 
 
 Item 4. CONTROLS AND PROCEDURES .
 Evaluation of Disclosure Controls and Procedures
   Changes in Internal Control Over Financial Reporting




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38 
 PART II  OTHER INFORMATION
 
 Item 1. Legal Proceedings




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39




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40 
 Item 1A. Risk Factors .
  
 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds .
  
 Item 3. Defaults Upon Senior Securities .
  
 Item 4. Submission of Matters to a Vote of Security Holders .
  
 Item 5. Other Information .




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41 
 Item 6. Exhibits
   2.1
    
    Agreement and Plan of Merger, dated November 29, 2000 by and among Torvec Subsidiary Corporation, Torvec, Inc.,
UTEK Corporation and ICE Surface Development, Inc. incorporated by reference to Form 8-K filed November 30,
2000 and Form 8K/A filed February 12, 2001.
  3.1
    
    Certificate of Incorporation, incorporated by reference to Form 10-SB/A , Registration
Statement, registering Companys $.01 par value common stock under section 12(g) of the
Securities Exchange Act of 1934;3.2
    
    Certificate of Amendment to the Certificate of Incorporation dated August 30, 2000,
incorporated by reference to Form SB-2 filed October 19, 2000;3.3
    
    Certificate of Correction dated March 22, 2002, incorporated by reference to Form 10-KSB
filed for fiscal year ended December 31, 2002;3.4
    
    By-laws, as amended by shareholders on January 24, 2002, incorporated by reference to
Form 10-KSB filed for fiscal year ended December 31, 2002;3.5
    
    Certification of Amendment to the Certificate of Incorporation dated October 21, 2004
setting forth terms and conditions of Class B Preferred, incorporated by reference to
Form 10-QSB filed for fiscal quarter ended September 30, 2004.3.6
    
    Certificate of Amendment to the Certificate of Incorporation dated January 26, 2007
increasing the authorized common shares from 40,000,000 to 400,000,000 common shares,
incorporated by reference
to annual report ( Form 10-K ) filed for the calendar year ended December 31, 2006.
  None
  None
  10.1
    
    Certain Employment Agreements, Consulting
Agreements, certain assignments of
patents, patent properties, technology
and know-how to the Company, Neri Service
and Space Agreement and Ford Motor
Company Agreement and Extension of Term,
all incorporated by reference to Form
10-SB/A, Registration Statement,
registering Companys $.01 par value
common stock under section 12(g) of the
Securities Exchange Act of 1934;10.2
    
    The Companys 1998 Stock Option Plan and
related Stock Options Agreements,
incorporated by reference to Form S-8,
Registration Statement, registering
2,000,000 shares of the Companys $.01
par value common stock reserved for
issuance thereunder, effective December
17, 1998;




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##### Table of Contents



42 
 10.3
    
    The Companys Business Consultants Stock Plan, incorporated by
reference to Form S-8, Registration Statement, registering 200,000
shares of the Companys $.01 par value common stock reserved for
issuance thereunder, effective June 11, 1999, as amended by
reference to Form S-8 Registration Statements registering an
additional 200,000, 200,000, 100,000, 800,000, 250,000, 250,000,
350,000, 250,000, 2,500,000 and 5,000,000 shares of the Companys
$.01 par value common stock reserved for issuance thereunder,
effective October 5, 2000, November 7, 2001, December 21, 2001,
February 1, 2002, November 12, 2002, January 22, 2003, May 23, 2003,
November 26, 2003, April 20, 2004 and October 13, 2006,
respectively;10.4
    
    Termination of Neri Service and Space Agreement dated August 31,
1999, incorporated by reference to Form 10-QSB filed for the quarter
ended September 30, 1999;10.5
    
    Operating Agreement of Variable Gear, LLC dated June 28, 2000,
incorporated by reference to Form 10-QSB filed for the quarter ended
June 30, 2000;10.6
    
    License Agreement between Torvec, Inc. and Variable Gear, LLC dated
June 28, 2000, incorporated by reference to Form SB-2 filed October
19, 2000;10.7
    
    Investment Agreement with Swartz Private Equity, LLC dated September
5, 2000, together with attachments thereto, incorporated by
reference to Form 8-K filed October 2, 2000;10.8
    
    Extension of and Amendment to Consulting Agreement with James A.
Gleasman, incorporated by reference to Form 10-KSB filed for the
fiscal year ended December 31, 2000;10.9
    
    Extension of and Amendment to Consulting Agreement with Keith E.
Gleasman, incorporated by reference to Form 10-KSB filed for the
fiscal year ended December 31, 2000;10.10
    
    Extension of and Amendment to Consulting Agreement with Vernon E.
Gleasman, incorporated by reference to Form 10-KSB filed for the
fiscal year ended December 31, 2000;10.11
    
    Option and Consulting Agreement with Marquis Capital, LLC dated
February 10, 1999, incorporated by reference to Form 10-QSB filed
for quarter ended March 31, 2001;10.12
    
    Option and Consulting Agreement with PMC Direct Corp., dated
February 10, 1999, incorporated by reference to Form 10-QSB filed
for quarter ended March 31, 2001;10.13
    
    Investment Banking Services Agreement with Swartz Institutional
Finance (Dunwoody Brokerage Services, Inc.) dated December 8, 2000,
incorporated by reference to Form 10-QSB filed for quarter ended
March 31, 2001;10.14
    
    Employment Agreement with Michael Martindale, Chief Executive
Officer, dated August 1, 2001, incorporated by reference to Form
10-QSB filed for fiscal quarter ended September 30, 2001;10.15
    
    Employment Agreement with Jacob H. Brooks, Chief Operating Officer,
dated August 1, 2001, incorporated by reference to Form 10-QSB filed
for fiscal quarter ended September 30, 2001;10.16
    
    Employment Agreement with David K. Marshall, Vice-President of
Manufacturing, dated September 1, 2001, incorporated by reference to
Form 10-QSB filed for fiscal quarter ended September 30, 2001;




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43 
 10.17
    
    Investment Banking Services Agreement with Swartz Institutional
Finance (Dunwoody Brokerage Services, Inc.), as amended, dated
October 23, 2001, incorporated by reference to Form 10-QSB filed for
fiscal quarter ended September 30, 2001;10.18
    
    Stock Option Agreement with Samuel Bronsky, Chief Financial and
Accounting Officer, dated August 28, 2001, incorporated by reference
to Form 10-QSB filed for fiscal quarter ended September 30, 2001;10.19
    
    Pittsford Capital Group, LLC Agreement dated January 30, 2002,
incorporated by reference to Form 10-KSB filed for fiscal year ended
December 31, 2001;10.20
    
    Gleasman-Steenburgh Indemnification Agreement dated April 9, 2002,
incorporated by reference to Form 10-KSB filed for fiscal year ended
December 31, 2001;10.21
    
    Series B Warrant dated April 10, 2002, incorporated by reference to
Form 10-KSB filed for fiscal year ended December 31, 2001;10.22
    
    Billow Butler & Company, LLC investment banking engagement letter
dated October 1, 2003, incorporated by reference to Form 10-QSB
filed for fiscal quarter ended September 30, 2003;10.23
    
    Letter of Acknowledgement and Agreement with U.S. Environmental
Protection Agency dated February 4, 2004, incorporated by reference
to Form 10-KSB filed for fiscal year ended December 31, 2003;10.24
    
    Letter Agreement with CXO on the GO, L.L.C. dated February 20, 2004,
incorporated by reference to Form 10-KSB filed for fiscal year ended
December 31, 2003;10.25
    
    Letter Amendment with CXO on the GO, L.L.C. dated February 23, 2004,
incorporated by reference to Form 10-KSB filed for fiscal year ended
December 31, 2003;10.26
    
    Lease Agreement for premises at Powder Mills Office Park, 1169
Pittsford-Victor Road, Suite 125, Pittsford, New York 14534, dated
July 16, 2004; incorporated by reference to Form 10-QSB filed for
fiscal quarter ended June 30, 2004;10.27
    
    Lease Agreement for testing facility and Mustang dynamometer, dated
July 21, 2004; incorporated by reference to Form 10-QSB filed for
fiscal quarter ended June 30, 2004;10.28
    
    Advisory Agreement with PNB Consulting, LLC, 970 Peachtree
Industrial Blvd., Suite 303, Suwanee, Georgia 30024; incorporated by
reference to Form 10-QSB filed for fiscal quarter ended June 30,
2004;10.29
    
    Agreement between Torvec and ZT Technologies, Inc. dated July 21,
2004, incorporated by reference to Form 10-QSB filed for fiscal
quarter ended September 30, 2004;10.30
    
    Assignment and Assumption of Lease between William J. Green and
Ronald J. Green and Torvec, Inc. effective as of December 31, 2004,
incorporated by reference to Form 10-KSB filed for fiscal year ended
December 31,2004;10.31
    
    Bill of Sale between Dynamx, Inc. and Torvec, Inc. for equipment and
machinery, incorporated by reference to Form 10-KSB filed for fiscal
year ended December 31, 2004;10.32
    
    Lease and Services Agreement between Robert C. Horton as Landlord
and Torvec, Inc. as Tenant dated March 18, 2005, incorporated by
reference to Form 10-KSB filed for fiscal year ended December 31,
2004;




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##### Table of Contents



44 
 10.33
    
    Settlement Agreement and Mutual Release between Torvec, Inc. and ZT
Technologies, Inc. dated March 29, 2005, incorporated by reference
to Form 10-QSB filed for fiscal quarter ended March 31, 2005;10.34
    
    Advisory Agreement between Robert C. Horton and Torvec, Inc. dated
February 15, 2005, incorporated by reference to Form 10-QSB filed
for fiscal quarter ended March 31, 2005;10.35
    
    Lease and Services Agreement between Dennis J. Trask as Landlord and
Torvec, Inc. as Tenant dated April 18, 2005, incorporated by
reference to Form 10-QSB filed for fiscal quarter ended March 31,
2005;10.36
    
    Consulting Agreement with Matthew R. Wrona, dated June 30, 2005,
incorporated by reference to Form 10-QSB filed for fiscal quarter
ended June 30, 2005;10.37
    
    Option Agreement between Matthew R. Wrona and Torvec, Inc. dated
June 30, 2005, incorporated by reference to Form 10-QSB filed for
fiscal quarter ended June 30, 2005;10.38
    
    Trust Agreement between Matthew R. Wrona, Donald Gabel, Lawrence
Clark, Steven Urbanik, Floyd G. Cady,Jr., and Michael Pomponi as
Grantors and Richard B. Sullivan as Trustee, dated September 22,
2005, incorporated by reference to Form 10-QSB filed for fiscal
quarter ended September 30, 2005;10.39
    
    Consultant Agreement with Floyd G. Cady, Jr., dated October 1, 2005,
incorporated by reference to Form 10-QSB filed for fiscal quarter
ended September 30, 2005;10.40
    
    Consultant Agreement with Lawrence W. Clark, dated October 1, 2005,
incorporated by reference to Form 10-QSB filed for fiscal quarter
ended September 30, 2005;10.41
    
    Consultant Agreement with Donald W. Gabel, dated October 1, 2005,
incorporated by reference to Form 10-QSB filed for fiscal quarter
ended September 30, 2005;10.42
    
    Consultant Agreement with Michael A. Pomponi, dated October 1, 2005,
incorporated by reference to Form 10-QSB filed for fiscal quarter
ended September 30, 2005;10.43
    
    Consultant Agreement with Steven Urbanik, dated October 1, 2005,
incorporated by reference to Form 10-QSB filed for fiscal quarter
ended September 30, 2005;10.44
    
    Consultant Agreement with Kiwee Johnson, dated September 30, 2005,
incorporated by reference to Form 10-QSB filed for fiscal quarter
ended September 30, 2005;10.45
    
    Confidentiality Agreement with Joseph B. Rizzo, dated October 24,
2005, incorporated by reference to Form 10-QSB filed for fiscal
quarter ended September 30, 2005.10.46
    
    Minutes of meeting Board of Directors Torvec, Inc., held October 19,
2004, creating the non-management directors plan, incorporated by
reference to Form 10-KSB filed for the fiscal year ended December
31, 2006.10.47
    
    Excerpts from minutes of the meeting of Board of Directors Torvec,
Inc., adopting changes to the non-management directors plan
creating, a commercialized event plan, approving an increase in shares to be issued under business consulting plan and adopting
recommendation that shareholders increase number of authorized common shares from 40,000,000 to 400,000,000 common shares,
incorporated by reference to Form 8-K filed on October 16, 2006.




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45 
 10.48
    
    Order of Supreme Court of the State of New York with respect to litigation between the company and a
management consulting firm, incorporated by reference to Form 8-K filed on June 20, 2006;10.49
    
    Letter agreement with American Continental Group, LLC, executed on October 22, 2006, incorporated
by reference to Form 8-K filed on October 30, 2006;10.50
    
    New York State School Bus Proposal incorporated by reference to Form 10-Q filed for quarter ended
March 31, 2006;10.51
    
    Order of Supreme Court of the State of New York directing the Monroe County Clerk to release back
to the company 40,000 common shares and 245,000 common stock warrants issued to a management
consulting firm with which the company is in litigation and held in escrow by such Clerk by virtue
of a previous court order and directing the return to the company of a $250,000 (less
administrative fee) undertaking deposited with the Monroe County Treasurer in connection with the
same litigation, incorporated by reference to Form 10-Q filed for the quarter ended March 31, 2007;10.52
    
    License Assignment and Transfer Agreement by and between Ice Engineering, LLC and Torvec, Inc. made
effective June 15, 2007 assigning license granted by Dartmouth College with respect to ice
technology from Torvec to Ice Engineering, incorporated by reference to Form 8-K filed on July 18,
2007.
  Not applicable
   None
  None
  None
 
  None




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##### Table of Contents



46 
 (23)
    
    Consents of experts and counsel(23.1)
    
    Eisner LLP Consent(24)
    
    Power of attorneyNone(31)
    
    Rule 13(a)-14(a)/15(d)-14(a) Certifications(32)
    
    Section 1350 Certifications(99)
    
    Additional exhibitsNone




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##### Table of Contents



47 
 SIGNATURES
  TORVEC, INC.Date: August 16, 2007
    By:
    /s/ James Y. GleasmanJames Y. Gleasman, Chief Executive Officer  Dated: August 16, 2007
    By:
    /s/ James Y. GleasmanJames Y. Gleasman, Chief Executive Officer andInterim Chief Financial Officer




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48  
 EXHIBIT INDEX
 EXHIBIT
    
    
    
    
    
    
    
    PAGE(2)
    
    Plan of acquisition, reorganization, arrangement, liquidation, or succession2.1
    
    
    Agreement and Plan of Merger, dated November 29, 2000 by and among Torvec
Subsidiary Corporation, Torvec, Inc., UTEK Corporation and ICE Surface
Development, Inc. incorporated by reference to Form 8-K filed November 30, 2000
and Form 8K/A filed February 12, 2001.
    
    N/A(3)
    
    Articles of Incorporation, By-laws3.1
    
    
    Certificate of Incorporation, incorporated by reference to Form 10-SB/A,
Registration Statement, registering Companys $.01 par value common stock under
section 12(g) of the Securities Exchange Act of 1934;
    
    N/A3.2
    
    
    Certificate of Amendment to the Certificate of Incorporation dated
August 30, 2000, incorporated by reference to Form SB-2 filed
October 19, 2000;
    
    N/A3.3
    
    
    Certificate of Correction dated March 22, 2002, incorporated by reference to Form
10-KSB filed for fiscal year ended December 31, 2002;
    
    N/A3.4
    
    
    By-laws, as amended by shareholders on January 24, 2002, incorporated by reference
to Form 10-KSB filed for fiscal year ended December 31, 2002;
    
    N/A3.5
    
    
    Certification of Amendment to the Certificate of Incorporation dated October 21,
2004 setting forth terms and conditions of Class B Preferred, incorporated by
reference to Form 10-QSB filed for fiscal quarter ended September 30, 2004.
    
    N/A3.6
    
    
    Certificate of Amendment to the Certificate of Incorporation dated January 26,2007
increasing authorized common shares from 40,000,000 to 400,000,000 common shares,
incorporated by reference to annual report Form 10-K filed for the calendar year
ended December 31, 2006.
    
    N/A(4)
    
    Instruments defining the rights of holders including indenturesNone
    
    N/A(9)
    
    Voting Trust AgreementNone
    
    N/A(10)
    
    Material Contracts10.1
    
    
    Certain Employment Agreements, Consulting Agreements, certain
assignments of patents, patent properties, technology and know-how
to the Company, Neri Service and Space Agreement and Ford Motor
Company Agreement and Extension of Term, all incorporated by
reference to Form 10-SB/A, Registration Statement, registering
Companys $.01 par value common stock under section 12(g) of the
Securities Exchange Act of 1934;
    
    N/A




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49 EXHIBIT
    
    
    
    PAGE10.2
    
    The Companys 1998 Stock Option Plan and related Stock Options
Agreements, incorporated by reference to Form S-8, Registration
Statement, registering 2,000,000 shares of the Companys $.01 par
value common stock reserved for issuance thereunder, effective
December 17, 1998;
    
    N/A10.3
    
    The Companys Business Consultants Stock Plan, incorporated by
reference to Form S-8, Registration Statement, registering 200,000
shares of the Companys $.01 par value common stock reserved for
issuance thereunder, effective June 11, 1999 as amended by reference
to Form S-8 Registration Statement registering an additional 200,000,
200,000, 100,000, 800,000, 250,000, 250,000, 350,000, 250,000,2,500,000 and
5,000,000 shares of the Companys $.01 par value common stock reserved for
issuance thereunder, effective October 5, 2000, November 7, 2001, December 21, 2001,
February 1, 2002, November 12, 2002, January 22, 2003, May 23, 2003,
November 26, 2003,April 20, 2004 and October 13, 2006 respectively;
    
    N/A10.4
    
    Termination of Neri Service and Space Agreement dated August 31,
1999, incorporated by reference to Form 10-QSB filed for the quarter
ended September 30, 1999;
    
    N/A10.5
    
    Operating Agreement of Variable Gear, LLC dated June 28, 2000,
incorporated by reference to Form 10-QSB filed for the quarter ended
June 30, 2000;
    
    N/A10.6
    
    License Agreement between Torvec, Inc. and Variable Gear, LLC
dated June 28, 2000, incorporated by reference to Form SB-2 filed
October 19, 2000;
    
    N/A10.7
    
    Investment Agreement with Swartz Private Equity, LLC dated September 5,
2000, together with attachments thereto, incorporated by reference to Form
8-K filed October 2, 2000;
    
    N/A10.8
    
    Extension of and Amendment to Consulting Agreement with James A. Gleasman,
incorporated by reference to Form 10-KSB filed for the fiscal year ended
December 31, 2000;
    
    N/A10.9
    
    Extension of and Amendment to Consulting Agreement with Keith E. Gleasman,
incorporated by reference to Form 10-KSB filed for the fiscal year ended
December 31, 2000;
    
    N/A10.10
    
    Extension of and Amendment to Consulting Agreement with Vernon E. Gleasman,
incorporated by reference to Form 10-KSB filed for the fiscal year ended
December 31, 2000;
    
    N/A10.11
    
    Option and Consulting Agreement with Marquis Capital, LLC dated February 10,
1999, incorporated by reference to Form 10-QSB filed for quarter ended March
31, 2001;
    
    N/A10.12
    
    Option and Consulting Agreement with PMC Direct Corp., dated February 10,
1999, incorporated by reference to Form 10-QSB filed for quarter ended March
31, 2001;
    
    N/A10.13
    
    Investment Banking Services Agreement with Swartz Institutional Finance
(Dunwoody Brokerage Services, Inc.) dated December 8, 2000, incorporated by
reference to Form 10-QSB filed for quarter ended March 31, 2001;
    
    N/A10.14
    
    Employment Agreement with Michael Martindale, Chief Executive Officer,
dated August 1, 2001, incorporated by reference to Form 10-QSB filed
for fiscal quarter ended September 30, 2001;
    
    N/A10.15
    
    Employment Agreement with Jacob H. Brooks, Chief Operating Officer,
dated August 1, 2001, incorporated by reference to Form 10-QSB filed
for fiscal quarter ended September 30, 2001;
    
    N/A10.16
    
    Employment Agreement with David K. Marshall, Vice-President of
Manufacturing, dated September 1, 2001, incorporated by reference to
Form 10-QSB filed for fiscal quarter ended September 30, 2001;
    
    N/A10.17
    
    Investment Banking Services Agreement with Swartz
Institutional Finance (Dunwoody Brokerage Services, Inc.),
as amended, dated October 23, 2001, incorporated by reference to
Form 10-QSB filed for fiscal quarter ended September 30, 2001;
    
    N/A10.18
    
    Stock Option Agreement with Samuel Bronsky, Chief Financial and
Accounting Officer, dated August 28, 2001, incorporated by reference to
Form 10-QSB filed for fiscal quarter ended September 30, 2001;
    
    N/A10.19
    
    Pittsford Capital Group, LLC Agreement dated January 30, 2002, incorporated
by reference to Form 10-KSB filed for fiscal year ended December 31, 2001;
    
    N/A10.20
    
    Gleasman-Steenburgh Indemnification Agreement dated April 9, 2002,
incorporated by reference to Form 10-KSB filed for fiscal year ended
December 31, 2001;
    
    N/A10.21
    
    Series B Warrant dated April 10, 2002, incorporated by reference to Form
10-KSB filed for fiscal year ended December 31, 2001;
    
    N/A10.22
    
    Billow Butler & Company, LLC investment banking engagement letter dated
October 1, 2003, incorporated by reference to Form 10-QSB filed for fiscal
quarter ended September 30, 2003;
    
    N/A10.23
    
    Letter of Acknowledgement and Agreement with U.S. Environmental Protection
Agency dated February 4, 2004, incorporated by reference to Form 10-KSB
filed for fiscal year ended December 31, 2003;
    
    N/A




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50 EXHIBIT
    
    
    
    PAGE10.24
    
    Letter Agreement with CXO on the GO, L.L.C. dated February 20, 2004,
incorporated by reference to Form 10-KSB filed for fiscal year ended
December 31, 2003;
    
    N/A10.25
    
    Letter Amendment with CXO on the GO, L.L.C. dated February 23, 2004,
incorporated by reference to Form 10-KSB filed for fiscal year ended
December 31, 2003;
    
    N/A10.26
    
    Lease Agreement for premises at Powder Mills Office Park, 1169
Pittsford-Victor Road, Suite 125, Pittsford, New York 14534, dated July 16,
2004, incorporated by reference to Form 10-QSB filed for fiscal quarter
ended June 30, 2004;;
    
    N/A10.27
    
    Lease Agreement for testing facility and Mustang dynamometer, dated July 21,
2004; incorporated by reference to Form 10-QSB filed for fiscal quarter
ended June 30, 2004;
    
    N/A10.28
    
    Advisory Agreement with PNB Consulting, LLC, 970 Peachtree Industrial Blvd.,
Suite 303, Suwanee, Georgia 30024; incorporated by reference to Form 10-QSB
filed for fiscal quarter ended June 30, 2004;
    
    N/A10.29
    
    Agreement between Torvec and ZT Technologies, Inc. dated July 21, 2004,
incorporated by reference to Form 10-QSB filed for fiscal quarter ended
September 30, 2004;
    
    N/A10.30
    
    Assignment and Assumption of Lease between William J. Green and Ronald J.
Green and Torvec, Inc. effective as of December 31, 2004, incorporated by
reference to Form 10-KSB filed for fiscal year ended December 31, 2004;
    
    N/A10.31
    
    Bill of Sale between Dynamx, Inc. and Torvec, Inc. for equipment and
machinery, incorporated by reference to Form 10-KSB filed for fiscal year
ended December 31, 2004;
    
    N/A10.32
    
    Lease and Services Agreement between Robert C. Horton as Landlord and
Torvec, Inc. as Tenant dated March 18, 2005, incorporated by reference to
Form 10-KSB filed for fiscal year ended December 31, 2004;
    
    N/A10.33
    
    Settlement Agreement and Mutual Release between Torvec, Inc. and ZT
Technologies, Inc. dated March 29, 2005, incorporated by reference to Form
10-QSB filed for fiscal quarter ended March 31, 2005;
    
    N/A10.34
    
    Advisory Agreement between Robert C. Horton and Torvec, Inc. dated February
15, 2005, incorporated by reference to Form 10-QSB filed for fiscal quarter
ended March 31, 2005;
    
    N/A10.35
    
    Lease and Services Agreement between Dennis J. Trask as Landlord and Torvec,
Inc. as Tenant dated April 18, 2005, incorporated by reference to Form
10-QSB filed for fiscal quarter ended March 31, 2005;
    
    N/A




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##### Table of Contents



51 EXHIBIT
    
    
    
    PAGE10.36
    
    Consulting Agreement with Matthew R. Wrona, dated June 30, 2005,
incorporated by reference to Form 10-QSB filed for fiscal quarter ended June
30, 2005;
    
    N/A10.37
    
    Option Agreement between Matthew R. Wrona and Torvec, Inc. dated June 30,
2005, incorporated by reference to Form 10-QSB filed for fiscal quarter
ended June 30, 2005;
    
    N/A10.38
    
    Trust Agreement between Matthew R. Wrona, Donald Gabel, Lawrence Clark,
Steve Urbanik, Floyd G. Cady, Jr. and Michael Pomponi as Grantors and
Richard B. Sullivan as Trustee, dated September 22, 2005, incorporated by
reference to Form 10-QSB filed for fiscal quarter ended September 30, 2005;
    
    N/A10.39
    
    Consultant Agreement with Floyd G. Cady, Jr., dated October 1, 2005,
incorporated by reference to Form 10-QSB filed for fiscal quarter ended
September 30, 2005;
    
    N/A10.40
    
    Consultant Agreement with Lawrence W. Clark, dated October 1, 2005,
incorporated by reference to Form 10-QSB filed for fiscal quarter ended
September 30, 2005;
    
    N/A10.41
    
    Consultant Agreement with Donald W. Gabel, dated October 1, 2005,
incorporated by reference to Form 10-QSB filed for fiscal quarter ended
September 30, 2005;
    
    N/A10.42
    
    Consultant Agreement with Michael A. Pomponi, dated October 1, 2005,
incorporated b y reference to Form 10-QSB filed for fiscal quarter ended
September 30, 2005;
    
    N/A10.43
    
    Consultant Agreement with Steven Urbanik, dated October 1, 2005,
incorporated by reference to Form 10-QSB filed for fiscal quarter ended
September 30, 2005;
    
    N/A10.44
    
    Consultant Agreement with Kiwee Johnson, dated September 30, 2005,
incorporated by reference to Form 10-QSB filed for fiscal quarter ended
September 30, 2005;
    
    N/A10.45
    
    Confidentiality Agreement with Joseph B. Rizzo, dated October 24, 2005,
incorporated by reference to Form 10-QSB filed for fiscal quarter ended
September 30, 2005
    
    N/A10.46
    
    Minutes of meeting Board of Directors Torvec, Inc., held October 19, 2004,
creating the non-management directors plan, incorporated by reference to Form
10-KSB for fiscal year ended December 31, 2005
    
    N/A10.47
    
    Excerpts from minutes of the meeting of Board of Directors Torvec, Inc., adopting
changes to the non-management directors plan creating a commercializes event
plan, approving an increase in shares to be issued under business consulting plan and
adopting recommendation that shareholders increase number of authorized common
Shares from 40,000,000 to 400,000,000, incorporated by reference to Form 8-K
filed on October 16, 2006.
    
    N/A




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##### Table of Contents



52 EXHIBIT
    
    
    
    
    
    
    
    PAGE10.48
    
    
    Order of Supreme Court of the State of New York with respect to litigation
between the company and a management consulting firm, incorporated by reference
to Form 8-K filed on June 20, 2006;
    
    N/A10.49
    
    
    Letter agreement with American Continental Group, LLC dated October 27, 2006
incorporated by reference to Form 8-K filed on October 30, 2006;
    
    N/A10.50
    
    
    New York State School Bus Proposal, incorporated by reference to Form 10-Q filed
for the quarter ended March 31, 2006;
    
    N/A10.51
    
    
    Order of Supreme Court of the State of New York directing the Monroe County Clerk
to release back to the company 40,000 common shares and 245,000 common stock
warrants issued to a management consulting firm with which the company is in
litigation and held in escrow by such Clerk by virtue of a previous court order
and directing the return to the company of a $250,000 (less administrative fee)
undertaking deposited with the Monroe County Treasurer in connection with the
same litigation, incorporated by reference to Form 10-Q filed for the quarter
ended March 31, 2007;
    
    N/A10.52
    
    
    License Assignment and Transfer Agreement by and between Ice Engineering, LLC and
Torvec, Inc. made effective June 15, 2007 assigning license granted by Dartmouth
College with respect to ice technology to Ice Engineering, incorporated by
reference to Form 8-K filed on July 18, 2007.
    
    N/A(11)
    
    Statement regarding computation of per share earnings (loss)
    
    N/ANot applicable(14)
    
    Code of Ethics
    
    N/A(16)
    
    Letter on change in certifying accountant
    
    N/ANone(18)
    
    Letter regarding change in accounting principles
    
    N/ANone(20)
    
    Other documents or statements to security holders
    
    N/ANone(21)
    
    Subsidiaries of the registrant
    
    N/AIce Surface Development, Inc. (New York)Iso-Torque Corporation (New York)IVT Diesel Corp. (New York)Variable Gear, LLC (New York)




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53 EXHIBIT
    
    
    
    PAGE(22)
    
    Published report regarding matters submitted to vote of security holders
    
    
    N/ANone(23)
    
    Consents of experts and counsel
    
    
    N/A(24)
    
    Power of attorney
    
    
    N/ANone(31.1)
    
    Rule 13(a)-14(a)/15(d)-14(a) Certifications
    
    
    55(32)
    
    Section 1350 Certifications
    
    
    56(99)
    
    Additional exhibits
    
    
    N/ANone