##### Table of Contents



U.S. SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-K
 þ
    
    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 FOR THE FISCAL YEAR ENDED DECEMBER 31, 2006
 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 number 000-24455
 TORVEC, INC.
 (Name of Small Business Issuer in its charter)
 NEW YORK
    
    16-1509512(State or other jurisdiction of
    
    I R S Employer Identification No.incorporation or organization)
 1169 Pittsford-Victor RoadBuilding 3, Suite 125Pittsford, New York
    
    14534(Address of principal executive offices)
    
    (Zip Code)
 Issuers Telephone Number, including Area Code: (585) 248-0740
 Securities registered pursuant to Section 12(b) of the Exchange Act:
 Title of each class
    
    Name of each exchange onwhich registered
 Securities registered pursuant to Section 12(g) of the Exchange Act
 $.01 par value common voting stock
 (Title of class)
  o þ
  o þ
 Note
  þ o
 o
  o o þ
  o þ




---



##### Table of Contents



2




---



##### 



3  
 
 TABLE OF CONTENTS
 PAGEPART IItem 1. Description of Business
    
    
    4- 10Item 1A Risk Factors
    
    
    11- 12Item 2. Properties
    
    
    13Item 3. Legal Proceedings
    
    
    13 -14Item 4. Submission of Matters to a Vote of Security Holders
    
    
    15Item 5 Market for Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
    
    
    16 -28Item 6 Selected Financial Data
    
    
    29Item 7 Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    30- 33Item 7A Quantitative and Qualitative Disclosures About Market Risk
    
    
    33PART II  FINANCIAL INFORMATIONItem 8. Consolidated Financial StatementsReport of Independent Registered Public Accounting Firm
    
    
    F- 2Torvec, Inc. and Subsidiaries Consolidated Balance Sheet as of December 31, 2006 and 2005
    
    
    F -3Torvec, Inc. and Subsidiaries Consolidated Statements of Operations for each of the years
in the
Three-Year Period Ended December 31, 2006 and for the Period from September 25, 1996
(Inception) through December 31, 2006
    
    
    F- 4Torvec, Inc. and Subsidiaries Consolidated Statements of Changes in Stockholders Equity
(Capital Deficit) for the Period from September 25, 1996 (Inception) through December 31, 2006
    
    
    F- 5Torvec, Inc. and Subsidiaries Consolidated Statements of Cash Flows for each of the years in
The Three Year Period Ended December 31, 2006 and for the Period from September 25, 1996
(Inception) through December 31, 2006
    
    
    F -11Notes to Consolidated Financial Statements
    
    
    37- 64Item 9 Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
    
    
    65PART IIIItem 10 Directors, Executive Officers, Promoters and Control Persons; Compliance with Section 16(a)
of the Exchange Act
    
    
    66Item 11 Executive Compensation
    
    
    76Item 12 Security Ownership of Certain Beneficial Owners and Management and Related
Shareholder Matters
    
    
    84Item 13 Certain Relationships and Related Transactions and Director Independence
    
    
    86Item 14 Principal Accountant Fees and Services
    
    
    88Exhibits
    
    
    90- 95SIGNATURES PAGE
    
    
    96EXHIBIT INDEX
    
    
    97EX - 3.6EX - 23.1EX-  31.1EX - 32EX-3.6EX-23.1EX-31.1EX-32




---



##### Table of Contents



4 
 PART I
 
 Item 1. DESCRIPTION OF BUSINESS.
 (a) History and Development of Our Inventions
  (i)
    
    Iso-torque differential;(ii)
    
    infinitely variable transmissions for diesel and gasoline engines;(iii)
    
    steering drive and suspension system for tracked vehicles;(iv)
    
    high speed, steel-reinforced rubber tracks;(v)
    
    hydraulic pump and motor;(vi)
    
    constant velocity joint mechanism.




---



##### Table of Contents



5 (b) Our Automotive Properties
  (1) Full Terrain Vehicle (FTV)
    Automotive News
 (2) IsoTorque Differential
 ®




---



##### Table of Contents



6 (3) Infinitely Variable Transmission  Hydraulic Pump/Motor




---



##### Table of Contents



7




---



##### Table of Contents



8 Constant Velocity Joint Mechanism
    (c) Our Ice Technology
 www.icesurfacedev.com
  (i)
    
    direct current method  through electrolysis,
creates a pressurized gas that breaks up and ejects
ice, which is ideal for initial ice removal;(ii)
    
    alternating current (high frequency) method  melts
interfacial ice with minimal heat exchange to the
surrounding environment thereby reducing power
requirements  this method is capable of
continuously maintaining ice-free surfaces;(iii)
    
    pulse method-creates a short-term water barrier
that enables ice to be easily removed. This method
works well for initial removal and is relatively
simple to produce.




---



##### Table of Contents



9      (d) Current Status of Product Development




---



##### Table of Contents



10 (e) Competition, Industry and Market Acceptance




---



##### Table of Contents



11 
 Item 1A. RISK FACTORS
  (1) The company has no operating history, has not generated any revenues since its founding in
1996 and, currently, is dependent upon sales of its common and various classes of its Preferred
stock to fund its business.
  (2) The companys ability to initiate the first phase of its New York State and National
School Bus Program is conditioned upon the receipt by the company of sufficient monies to acquire a
facility for installation of the third generation infinitely variable transmission and IsoTorque
differential in a reasonable number of school buses to demonstrate the requisite fuel-savings and
improved vehicle handling to justify the program, to acquire a dynamometer of sufficient-size to
conduct fuel-saving testing and to compensate additional engineering personnel needed for the
project.
  (3) The companys ability to sell and/or license all or any one of its non-FTV automotive
technologies at a fair and adequate price is dependent upon its ability to demonstrate that their
technical superiority , their lower manufacturing costs, generally fewer parts and lighter weight,
their beneficial impact upon the worldwide demand for raw materials and their greater affinity for
environmentally  sound applications will generate a significantly greater share of the worlds
automotive markets to an automotive industry that is heavily invested in conventional technologies
and resistant to new technology unless developed by the auto companies themselves.
  (4) The companys ability to sell and/or license its full terrain vehicle at a fair and
adequate price is dependent upon its ability to demonstrate to potential acquirers the FTVs
positive socioeconomic impact, on a year round basis, upon the U.S. and foreign communities in
which it is introduced, for example, the transportation of people and goods in areas where highway
infrastructure is poor or nonexistent, the replacement of tractors and other traditional farm
vehicles, the increased efficiency of search, rescue and emergency vehicles, the opening of
geographically remote areas to civilization and, in the case of the U.S. military, the development
of a new class of vehicle for combat, security and border patrol.




---



##### Table of Contents



12  (5) In the event the company were unable to sell or license any of its automotive
technologies to one or more automotive companies, first-tier suppliers and/or to a government
agency and/or the U.S. military, the company may be required to commercialize one or more of its
technologies itself, a situation which would require considerable additional capital, personnel,
regulatory compliance and other resources.
 (6) The companys common stock is traded on the Over-the-Counter Bulletin Board (OTCBB), an
electronic inter-dealer quotation system, and is not listed for trading on any domestic or foreign
securities exchange, including the National Association of Securities Dealers, Inc. (NASD).
Consequently, the company is not required to meet certain quantative and qualitative listing
standards established by such exchanges for the protection of investors.
 (7) The market for the companys common stock is extremely limited, meaning that at any time
and from time to time, there may not be enough sellers in the market to fill purchase orders and/or
enough buyers in the market to fill sell orders for transactions where a given price is stipulated
(i.e. limit orders). Such orders, therefore, may expire unfilled.
 (8) The companys common stock is volatile, meaning that purchase and/or sell orders for a
numerically small number of shares (e.g.500) may have a disproportionate positive or negative
impact on the trading price at any time during any given trading day but especially, during the
first and the last half-hour of trading.
 (9) The market for the companys common stock is disproportionately influenced by market
makers (i.e. broker/dealers who agree to buy a limited number of the companys common shares [e.g.
500 share blocks] during the course of a given trading day at various specified prices [ the bid"]
) who may negatively affect the trading price by periodically lowering the bid for the companys
common stock without regard to company performance and/or disclosure of material events regarding
the companys activities.
 (10) The price of the companys common stock may be negatively influenced by significant
sell-side pressure initiated by short sellers of the companys stock. Short selling is simply
selling a security you do not own at the time of the sale. Short selling is generally accomplished
by the investor borrowing the shares from an otherwise nonselling shareholder. The short sellers
profit is made when he purchases the number of shares borrowed at a price lower than the price at
which he sold the borrowed shares.
 (11) Unless the trading price for the companys common stock is $5.00 or more, the stock
constitutes penny stock requiring broker/dealers to determine whether the companys stock is a
suitable investment for his customer, requiring disclosure to the customer of certain bids,
offers and quotations at least two days before executing a transaction and additionally requiring
the broker/dealer to deliver certain information regarding the risks generally associated with
penny stocks (e.g. lack of liquidity, volatility and the potential that the investor will lose his
entire investment) at least two days prior to executing a penny stock transaction. These
requirements may reduce the number of individuals who otherwise may purchase the companys common
stock in the open market.
 Item 1B. UNRESOLVED STAFF COMMENTS
 Not Applicable.




---



##### Table of Contents



13 
 Item 2. PROPERTIES.
    
 Item 3. LEGAL PROCEEDINGS.
 Litigation




---



##### Table of Contents



14




---



##### Table of Contents



15 
 Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
  Subsequent Event
  Election of Directors
 Election of Directors
    
    For
    
    WithheldDaniel R. Bickel
    
    
    28,420,502
    
    
    
    134,566Herbert H. Dobbs
    
    
    28,340,548
    
    
    
    214,520Keith E. Gleasman
    
    
    28,407,140
    
    
    
    147,928James Y. Gleasman
    
    
    28,407,390
    
    
    
    147,678Joseph B. Rizzo
    
    
    28,418,370
    
    
    
    136,698Gary A. Siconolfi
    
    
    28,416,570
    
    
    
    138,498David M. Flaum
    
    
    28,416,570
    
    
    
    138,498
  For
    
    Against
    
    Abstained28,503,772
    
    
    32,796
    
    
    
    18,500
  For
    
    Against
    
    Abstained27,928,998
    
    
    542,158
    
    
    
    83,912




---



##### Table of Contents



16 
 Item 5. MARKET FOR COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
 (a) Market Information
    2006
    
    High
    
    Low1st Quarter
    
    $
    2.36
    
    
    $
    1.462nd Quarter
    
    $
    2.26
    
    
    $
    1.503rd Quarter
    
    $
    4.23
    
    
    $
    1.624th Quarter
    
    $
    6.40
    
    
    $
    3.02
 2005
    
    High
    
    Low1st Quarter
    
    $
    6.05
    
    
    $
    3.602nd Quarter
    
    $
    4.07
    
    
    $
    2.353rd Quarter
    
    $
    3.27
    
    
    $
    1.814th Quarter
    
    $
    2.90
    
    
    $
    1.15
 (b) Holders of Common Stock




---



##### Table of Contents



17 (c) Dividend Policy on Common Stock
   (d) Securities Authorized for Issuance Under Equity Compensation Plans
 Number of securitiesto be issued upon
    
    Weighted averageexercise of
    
    exercise price of
    
    Number of securitiesoutstanding options,
    
    outstanding options,
    
    remaining availablewarrants and rights
    
    warrants and rights
    
    for future issuancePlan Category
    
    (a)
    
    (b)
    
    (c)Equity compensation
plans approved by
security holders
    
    
    1,823,895
    
    
    $
    4.29
    
    
    
    176,105
    (1)Equity
compensation plans
not approved by
security holders
    
    
    2,082,700
    
    
    $
    2.28
    
    
    

    (2)-(5)Total
    
    
    3,906,595
    
    
    $
    3.29
    
    
    
    176,105
    (1)-(5)
 
 (1)
    
    Represents number of common stock options available to be granted
under the companys stock option plan as of December 31, 2006.(2)
    
    The company granted 125,000 common stock warrants to a
consultant in connection with a non-exclusive financial
consulting agreement dated February 11, 1997. The warrants are
only exercisable if and when the company has an initial public
offering of its common stock. The company granted 7,500 common
stock warrants to its placement agent in connection with its 2002
private placement of its Class A Preferred Shares. 5,000
warrants have been exercised.(3)
    
    The company has granted 1,325,000 common stock warrants to a
management consulting firm as compensation for services such firm
was supposed to provide to the company. 568,800 of these warrants
have been exercised through December 31, 2006. The company is
litigating that such firm is not legally entitled to any shares
already issued to such consulting firm, to exercise the remaining
unexercised warrants outstanding as well the issuance of an
indeterminate number of additional common stock warrants issuable
under purported agreements with such firm. See footnote J to the
companys financial statements.(4)
    
    The company has granted 123,500 common stock warrants to its
nonmanagement directors under its Nonmanagement Directors Plan.
63,000 warrants have been exercised through December 31, 2006.
The Plan was modified on October 13, 2006 so that no further
warrants are issuable under the Plan.(5)
    
    The company has granted an aggregate 1,709,583 common stock
warrants to a number of business, engineering, financial,
governmental affairs and technical consultants in connection with
its operations. 571,083 warrants have been exercised through
December 31, 2006. See footnote H [12] to the companys financial
statements.




---



##### Table of Contents



18 ( e) Performance GraphComparison of 5 Year Cumulative Total Return among Torvec, Inc.,
 The Russell MicroCap Index and The RDG Technology Composite Index
 COMPARISON
OF 5 YEAR CUMULATIVE TOTAL RETURN*
   
  
 (f) Class A Preferred Stock




---



##### Table of Contents



19 A.
    
    Number of SharesThe number of Class A Preferred Shares initially authorized is
3,300,000 Class A Preferred Shares. The initial number authorized
shall be increased as required to provide Class A Preferred Shares for
payment of dividends as described in Section B, distribution to
holders in accordance with Section C and as described in Section F.B.
    
    Dividends
 (i)
    
    So long as any Class A Preferred Shares are
outstanding, the holders of the Class A Preferred
Shares will be entitled to receive cumulative
preferential dividends in the amount of $.40 per Class
A Preferred Share and no more for each annual dividend
period. The annual dividend period shall commence on
the first day of each March and shall end on the last
day of the immediately succeeding February, which
February date is referred to as the Dividend Accrual
Date.(ii)
    
    When and as declared by the Board, dividends payable
on the Class A Preferred Shares will be paid in cash
out of any funds legally available for the payment of
dividends or, in the discretion of the Board, 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.(iii)
    
    Dividends shall be cumulative from the date of
issuance of Class
A Preferred Shares, whether or not declared and
whether or not, in any annual dividend period(s),
there are net profits or net
assets of the Company legally available for the
payment of dividends.(iv)
    
    Accumulated and unpaid dividends on the Class A
Preferred Shares will not bear interest.(v)
    
    So long as any Class A Preferred Shares are
outstanding, the Company may not declare or pay any
dividend, make any distribution, or fund, set aside or
make monies available for a sinking fund for the
purchase or redemption of, any shares or stock of the
Company ranking junior to the Class A Preferred Shares
with respect to the payment of dividends, including
the $.01 par value common stock of the Company
(Junior Stock), unless all dividends in respect of
the Class A Preferred Shares for all past annual
dividend periods have been paid and such dividends for
the current annual dividend period have been paid or
declared and duly provided for. Subject to the
foregoing, and not otherwise, the dividends (payable
in cash, stock or otherwise) as may be determined by
the Board, may be declared and paid on any Junior
Stock from time to time out of any funds legally
available therefor, and the Class A Preferred Shares
will be entitled to participate in any such dividends,
whether payable in cash, stock or otherwise on a pro
rata basis.




---



##### Table of Contents



20 C.
    
    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.
 D.
    
    Redemption
 (i)
    
    The Company may, in the absolute discretion of its
Board, redeem at any time and from time to time from any
source of funds legally available any and all of the
Class A Preferred Shares at the Redemption Price.(ii)
    
    For each redemption, the Redemption Price for each Class
A Preferred Share shall be equal to amount paid per
Class A Preferred Share payable in cash, plus an amount
payable (not withstanding the provisions of Section B
(ii)) in cash equal to the sum of all accumulated unpaid
dividends per Class A Preferred Share (including a
prorated annual dividend from the last Dividend Accrual
Date) to the respective date for each redemption on
which the Company shall redeem any Class A Preferred
Shares (the Redemption Date).(iii)
    
    In the event of redemption of only a portion of the then
outstanding Class A Preferred Shares, the Company will
affect the redemption pro rata according to the number
 shares held by each holder of Class A Preferred Shares.(iv)
    
    At least 20 days and not more than 60 days prior to the
date fixed by the Board for any redemption of Class A
Preferred Shares, written notice (the Redemption
Notice) will be mailed, postage prepaid, to each holder
of record of the Class A Preferred Shares at his or her
post office address last shown on the records of the
Company. The Redemption Notice will state:




---



##### Table of Contents



21 
 o
    
    Whether all or less than all of the
outstanding Class A Preferred Shares are to
be redeemed and the total number of Class A
Preferred Shares being redeemed;o
    
    the number of Class A Preferred Shares held
by the holder that the Company intends to
redeem;o
    
    the Redemption Date and Redemption Price; ando
    
    that the holder is to surrender to the
Company, in the manner and at the place
designated in Section D(v), his or her
certificate or certificates representing
Class A Preferred Shares to be redeemed.
 (v)
    
    On or before the date fixed for redemption, each holder of Class A
Preferred Shares must surrender the certificate or certificates
representing Class A Preferred Shares to the Company, accompanied by
instruments of transfer satisfactory to the Company and sufficient to
transfer the Class A Preferred Shares being redeemed to the Company
free and clear of any adverse interest, at the place designated in the
Redemption Notice. The Redemption Price for the Class A Preferred
Shares redeemed will be payable in cash on the Redemption Date to the
person whose name appears on the certificate(s) as the owner of such
certificate(s) as of the date of the Redemption Notice. In the event
that less than all of the Class A Preferred Shares represented by any
certificate(s) are redeemed, a new certificate will issued by the
Company representing the unredeemed Class A Preferred Shares to the
same record owner.(vi)
    
    As promptly as practicable after surrender of the certificate(s)
representing the redeemed Class A Preferred Shares, the Company will
pay the Redemption Price to the record holder of the redeemed Class A
Preferred Shares.(vii)
    
    Unless the Company defaults in the payment in full of the Redemption
Price, the obligation of the Company to pay dividends on the Class A
Preferred Shares redeemed shall cease on the Redemption Date, and the
holders of the Class A Preferred Shares redeemed will cease to have
any further rights with respect to such redeemed Class A Preferred
Shares on the Redemption Date, other than to receive the Redemption
Price.(viii)
    
    The holders of the Class A Preferred Shares have no right to seek or
to compel redemption of the Class A Preferred Shares.
 E.
    
    Voting RightsThe holders of Class A Preferred Shares are not be entitled to vote in
any and all elections of directors and with respect to any and all
other matters as to which the vote or consent of shareholders of the
Company shall be required or taken.




---



##### Table of Contents



22 F.
    
    Conversion Privilege
 (i)
    
    The holders of the Class A Preferred Shares have the
right, at each holders option but subject to Board
approval in each case, to convert each Class A
Preferred Share into 1 fully paid and nonassessable
share of the $.01 par value common stock of the
Company (Common Share) without payment of any
conversion price or other consideration. Such 1 for 1
rate of conversion is subject to adjustment as set
forth in F(x).(ii)
    
    The Conversion Privilege set forth in this Section F
may not be exercised by the holder of Class A
Preferred Shares until 1 year shall have elapsed from
the issue date of the Class A Preferred Shares held by
such holder and may not be exercised if the Board
shall not have approved the actual exercise of such
Conversion Privilege by such holder of Class A
Preferred Shares. Such approval shall not be
unreasonably withheld. Upon receipt of the Notice of
Conversion described in Section F(iii) below and the
Boards approval of such conversion, the Company shall
give a Notice of Approval to the holder within 48
hours of the receipt of the Notice of Conversion that
the exercise of the Conversion Privilege by such
holder is approved.(iii)
    
    In order to exercise the Conversion Privilege, the
holder of Class A Preferred Shares must give written
notice to the Company that the holder elects to covert
the number of Class A Preferred Shares as specified in
the Notice of Conversion. The Notice of Conversion
will also state the name(s) and address(es) in which
the certificate(s) for Common Shares issuable upon the
conversion are to be issued. Upon receipt of the
Companys Notice of Approval, the holder of the Class
A Preferred Shares must surrender the certificate(s)
representing the Class A Preferred Shares being
converted to the Company, accompanied by instruments
of transfer satisfactory to the Company and sufficient
to transfer the Class A Preferred Shares being
converted to the Company free and clear of any adverse
interest at the office maintained for such purpose by
the Company. As promptly as practicable after the
surrender of the certificate(s) representing the Class
A Preferred Shares converted, the Company will issue
and deliver to the holder, or to such other person
designated by the holders written order, a
certificate(s) for the number of full Common Shares
issuable upon the conversion of the Class A Preferred
Shares in accordance with the provisions of this
Section F(iii).(iv)
    
    The Conversion Privilege may be exercised in whole or
in part and, if exercised in part, a certificate(s)
will be issued for the remaining Class A Preferred
Shares in any case in which fewer than all of the
Class A Preferred Shares represented by a
certificate(s) are converted to the same record holder
of Class A Preferred Shares converted.




---



##### Table of Contents



23 
 (v)
    
    Each conversion will be deemed to have been effective immediately
prior to the close of business on the date on which the Class A
Preferred Shares will have been so surrendered as provided in
Section F(iii) (the Conversion Date) and the person(s) in whose
name(s) any certificate(s) for Common Shares will be issuable upon
the conversion will be deemed to have become the holder(s) of
record of the Common Shares on the Conversion Date. Effective as
of the Conversion Date, the Company will have no obligation to pay
dividends on the Class A Preferred Shares converted provided that
effective as of the Conversion Date, the Company shall pay all
accumulated and unpaid dividends (including the prorated dividend
from the last Dividend Accrual Date) on the Class A Preferred
Shares converted, payable in the discretion of the Board, in cash
out of any funds legally available for payment of such dividends or
in Class A Preferred Shares.(vi)
    
    The Conversion Privilege shall terminate with respect to Class A
Preferred Shares called for redemption by the mailing of a
Redemption Notice described in Section D(iv) on the close of
business on the date immediately preceding the Redemption Date.(vii)
    
    Notwithstanding the requirement for Board approval and the 1 year
limit set forth in Section F(ii), in case of any consolidation or
merger to which the Company is a party other than a merger or
consolidation in which the Company is the surviving corporation or
in case of any sale or conveyance to another corporation of all or
substantially all of the assets of the Company or in the case of
any statutory exchange of securities representing an excess of 50%
of the total outstanding securities of the Company with another
corporation (including any exchange effected in connection with a
merger of a third corporation into the Company), the holders of
Class A Preferred Shares then outstanding will have the right to
convert the Class A Preferred Shares into the kind and amount of
securities, cash or other property which the holder would have
owned or have been entitled to receive immediately after the
consolidation, merger, statutory exchange, sale or conveyance, had
the Class A Preferred Shares been converted immediately prior to
the effective date of the consolidation, merger, statutory
exchange, sale or conveyance as the case may be.(viii)
    
    Notwithstanding the 1 year holding period set forth in Section
F(ii), in the event the highest bid price for the Companys $.01
par value common stock quoted on any exchange, automated quotation
system or the OTC Bulletin Board on which such stock is actively
traded is $20 or more on 5 consecutive trading days, the holders of
Class A Preferred Shares shall have the right to convert such Class
A Preferred Shares upon Board approval.(ix)
    
    Common Shares delivered upon conversion of Class A Preferred Shares
will be, upon delivery, validly issued, fully paid and
nonassessable, free of all liens and charges and not subject to any
preemptive rights.




---



##### Table of Contents



(x)
    
    In case the Company
 o
    
    Declares a dividend, or makes a distribution, on shares of its $.01
par value common stock in shares of its $.01 par value common stock; oro
    
    Subdivides its outstanding shares of its $.01 par value common stock into a
greater number of shares of its $.01 par value common stock; oro
    
    Combines its outstanding shares of its $.01 par value common stock into a
smaller number of shares of $.01 par value common stock, the number of
Common Shares issuable upon the
conversion of the Class A Preferred
Shares shall be adjusted at the time
of the record date for the dividend or
distribution or the effective date of
the subdivision or a combination so
that after such record or effective
date, the holder of Class A Preferred
Shares will be entitled to receive the
same percentage of ownership of the
Companys $.01 par value common stock
as such holder would have been
entitled to receive immediately prior
to such record or effective date.
    (g) Class B Preferred Stock
    A.
    
    Three hundred thousand (300,000) authorized preferred shares of the
par value of $.01 each as fixed by the Board of Directors, none of
which has been issued, shall be issued in and as a series to be
designated Class B Non-Voting Cumulative Convertible Preferred Shares,
$.01 par value. Said series is hereinafter called Class B Preferred
Shares. The term preferred shares as used herein shall include all
100,000,000 of the preferred shares, $.01 par value authorized by the
Certificate of Incorporation of the Corporation of which Class B
Preferred Shares is the second series.




---



##### Table of Contents



B.
    
    (1) So long as any Class B Preferred Shares are outstanding, the
holders of the Class B Preferred Shares will be entitled to receive
cumulative preferential dividends in the amount of $.50 per Class B
Preferred Share and no more for each annual dividend period. The
annual dividend period shall commence on the first clay of each
September and shall end on the last day of the immediately succeeding
August, which August date is referred to as the Dividend Accrual
Date.(2) When and as declared by the Board, dividends payable on the
Class B Preferred Shares will be paid in cash out of any funds legally
available for the payment of dividends or, in the discretion of the
Board, will be paid in Class B Preferred Shares at a rate of 1 Class B
Preferred Shares 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.(3) Dividends shall be cumulative from the date of issuance of
Class B Preferred Shares, whether or not declared and whether or not,
in any annual dividend period(s), there are net profits or net assets
of the Corporation legally available for the payment of dividends.(4)Accumulated and unpaid dividends on the Class B Preferred
Shares will not bear interest.(5) So long as any Class B Preferred Shares are outstanding, the
Corporation may not declare or pay any dividend, make any
distribution, or fund, set aside or make monies available for a
sinking fund for the purchase or redemption of any shares or stock of
the Corporation ranking junior to the Class B Preferred Shares with
respect to the payment of dividends, including the $.01 par value
common stock of the Class B Preferred Shares for all past annual
dividend periods have been paid and such dividends for the current
annual dividend period have been paid or declared and duly provided
for. Subject to the foregoing, and not otherwise, the dividends
(payable in cash, stock or otherwise) as may be determined by the
Board, may be declared and paid on any Junior Stock from time to time
out of any funds legally available therefore, and the Class B
Preferred Shares will be entitled to participate in any such
dividends, whether payable in cash, stock or otherwise, on a pro rata
basis.C.
    
    The Class B Preferred Shares shall rank junior and be classified as
Junior Stock with respect to the Corporations Class A Preferred
Shares in all respects.D.
    
    (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.




---



##### Table of Contents



(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.E.
    
    (1) The Corporation may in the absolute discretion of its
Board, redeem at any time and from time to time from any source of
funds legally available any and all of the Class B Preferred Shares at
the Redemption Price.(2) For each redemption, the Redemption Price for each Class B
Preferred Share shall be equal to the sum of $5.00 per Class B
Preferred Share payable- in cash, plus an amount payable (not
withstanding the provisions of Section B(2) in cash equal to the sum
of all accumulated unpaid dividends per Class B Preferred Share
(including a prorated annual dividend from the last Dividend Accrual
Date) to the respective date for each redemption on which the
Corporation shall redeem any Class B Preferred Shares (the Redemption
Date).(3) In the event of a redemption of only a portion of the then
outstanding Class B Preferred Shares, the Corporation will affect the
redemption pro rata according to the number shares held by each holder
of Class B Preferred Shares.(4) Unless the Corporation defaults in the payment in full of
the Redemption Price, the obligation of the Corporation to pay
dividends on the Class B Preferred Shares redeemed shall cease on the
Redemption Date, and the holders of the Class B Preferred Shares
redeemed will cease to have any further rights with respect to such
redeemed Class B Preferred Shares on the Redemption Date, other than
to receive the Redemption Price.(5) The holders of the Class B Preferred Shares have no right
to seek or to compel redemption of the Class B Preferred Shares.F.
    
    The holders of Class B Preferred Shares are not to be entitled to vote
in any and all elections of directors and with respect to any and all
other matters as to which the vote or consent of shareholders of the
Corporation shall be required or taken.G.
    
    (1) The holders of the Class B Preferred Shares have the right,
at each holders option but subject to Board approval in each case, to
(i) convert each Class B Preferred Share into 1 fully paid and
nonassessable share of the $.01 par value common stock of the
Corporation (Torvec Common) without payment of any conversion price
or other consideration. Such 1 for 1 rate of conversion is subject to
adjustment as set forth in Section G(10); (ii) convert each Class B
Preferred Share into 1 fully paid and nonassessable share of the $.01
par value common stock of Iso-Torque Corporation (Iso-Torque Common)
without payment of any conversion price or other consideration upon
the happening of any of the following
events:




---



##### Table of Contents








---



##### Table of Contents



(h) Reports to Shareholders
  (i) Transfer Agent and Registrar




---



##### Table of Contents



Item 6. SELECTED FINANCIAL DATA.
  Years Ended As of December 31,2006
    
    
    2005
    
    
    2004
    
    
    2003
    
    
    2002Income Statement Data:Operating revenue
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Operating expense:Research and Development
    
    $
    1,313
    
    
    $
    2,719
    
    
    $
    2,165
    
    
    $
    1,839
    
    
    $
    1,551General & Administrative
    
    
    5,351
    
    
    
    2,999
    
    
    
    7,932
    
    
    
    1,501
    
    
    
    3,312Asset Impairment
    
    
    1,071
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Operating income (Loss)
    
    
    (7,735
    )
    
    
    (5,718
    )
    
    
    (10,097
    )
    
    
    (3,340
    )
    
    
    (4,863
    )Minority interest in loss of consolidated subsidiary
    
    
    8
    
    
    
    273
    
    
    
    292
    
    
    
    413
    
    
    
    286Net Loss
    
    
    (7,727
    )
    
    
    (5,445
    )
    
    
    (9,805
    )
    
    
    (2,927
    )
    
    
    (4,577
    )Preferred stock beneficial conversion feature
    
    
    48
    
    
    
    159
    
    
    
    556
    
    
    
    
    
    
    
    Preferred stock dividend
    
    
    253
    
    
    
    156
    
    
    
    91
    
    
    
    16
    
    
    
    12Net loss attributable to common stockholders
    
    
    (8,028
    )
    
    
    (5,760
    )
    
    
    (10,452
    )
    
    
    (2,943
    )
    
    
    (4,589
    )Basic and Diluted net loss attributable to
common stockholders per share
    
    
    (0.26
    )
    
    
    (0.19
    )
    
    
    (0.37
    )
    
    
    (0.11
    )
    
    
    (0.19
    )Weighted average number of shares of common stock-
basic and diluted
    
    
    30,566
    
    
    
    29,560
    
    
    
    28,515
    
    
    
    26,836
    
    
    
    24,567Balance Sheet Data:Current Assets
    
    
    793
    
    
    
    118
    
    
    
    723
    
    
    
    64
    
    
    
    303Total assets
    
    
    1,201
    
    
    
    2,020
    
    
    
    3,420
    
    
    
    2,806
    
    
    
    3,216Long-term debt (excluding current maturities)
    
    
    59
    
    
    
    19
    
    
    
    
    
    
    
    
    
    
    
    Shareholders equity
    
    
    (958
    )
    
    
    149
    
    
    
    1,176
    
    
    
    927
    
    
    
    1,899




---



##### Table of Contents



Item 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 (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 spherical gearing
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 electronic controls for the
companys generation III infinite variable
transmission and to analyze the fuel-efficiencies and
pollution reduction capabilities of such transmission
as compared to conventional automatic transmission
technologies;o
    
    to utilize such analysis to launch 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 pursue ongoing discussions with local, state and
national governmental officials to provide monies for
the companys New York State and national school bus
program;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




---



##### Table of Contents



(b) Current Status of Product Development
       (c) Company Expenses




---



##### Table of Contents



(d) Liquidity and Capital Resources
        (e) Critical Accounting Policies




---



##### Table of Contents



(f) Impact of Inflation




---



##### Table of Contents



(g) Quarterly Fluctuations
  
 Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK




---



##### Table of Contents



TORVEC, INC.
(a development stage company)
 CONSOLIDATED FINANCIAL STATEMENTS
 DECEMBER 31, 2006 and 2005




---



##### Table of Contents



TORVEC, INC. AND SUBSIDIARIES
 Contents
 PageFinancial StatementsReport of Independent Registered Public Accounting Firm
    
    F-2Consolidated balance sheets as of December 31, 2006 and 2005
    
    F-3Consolidated statements of operations for each of the years in the three-year period ended
    
    F-4December 31, 2006 and for the period from September 25, 1996 (inception) through
December 31, 2006Consolidated statements of changes in stockholders equity (capital deficit) for the period
    
    F-5from September 25, 1996 (inception) through December 31, 2006Consolidated statements of cash flows for each of the years in the three-year period ended
    
    F-11December 31, 2006 and for the period from September 25, 1996 (inception) through
December 31, 2006Notes to consolidated financial statements
    
    37-63




---



##### Table of Contents



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM




---



##### Table of Contents



2006
    
    
    2005ASSETSCurrent assets:Cash
    
    $
    720,000
    
    
    $
    51,000Prepaid expenses and other receivable
    
    
    73,000
    
    
    
    67,000Total current assets
    
    
    793,000
    
    
    
    118,000Property and Equipment:Office equipment
    
    
    44,000
    
    
    
    42,000Shop equipment
    
    
    126,000
    
    
    
    126,000Leasehold improvements
    
    
    3,000
    
    
    
    3,000Transportation equipment
    
    
    106,000
    
    
    
    99,000279,000
    
    
    
    270,000Less accumulated depreciation and amortization
    
    
    123,000
    
    
    
    82,000Net property and equipment
    
    
    156,000
    
    
    
    188,000Other Assets:License, less accumulated amortization of $2,189,000 and $1,548,000
    
    
    
    
    
    
    1,712,000Deposits
    
    
    252,000
    
    
    
    2,000Total Other Assets
    
    
    252,000
    
    
    
    1,714,000$
    1,201,000
    
    
    $
    2,020,000LIABILITIESCurrent liabilities:Notes payable  current
    
    $
    14,000
    
    
    $
    5,000Accounts payable
    
    
    145,000
    
    
    
    148,000Accrued liabilities
    
    
    1,541,000
    
    
    
    1,541,000Advance from stockholder
    
    
    250,000
    
    
    
    Total current liabilities
    
    
    1,950,000
    
    
    
    1,694,000Deferred revenue
    
    
    150,000
    
    
    
    150,000Notes payable  long term
    
    
    59,000
    
    
    
    19,000Total liabilities
    
    
    2,159,000
    
    
    
    1,863,000Minority interest
    
    
    
    
    
    
    8,000Commitments and other mattersSTOCKHOLDERS EQUITY (CAPITAL DEFICIT)Preferred stock, $.01 par value, 100,000,000 shares authorized 3,300,000 designated as
Class A, non-voting, cumulative dividend $.40 per share, per annum, convertible 2006:
732,493 and 2005: 459,243 shares issued and outstanding (liquidation preference 2006: $3,408,634 and
2005: $2,085,179) 300,000 designated as Class B, non-voting, cumulative dividend $.50 per share,
per annum, convertible 2006: 97,500 and 2005: 42,500 shares issued and outstanding
(liquidation preference 2006: $263,235 and 2005: $240,292)
    
    
    9,000
    
    
    
    5,000Common stock, $.01 par value, 400,000,000 shares authorized, 31,307,792 and 30,052,630
issued and outstanding
    
    
    313,000
    
    
    
    300,000Additional paid-in capital
    
    
    43,767,000
    
    
    
    37,267,000Shares issued for consulting services
    
    
    
    
    
    
    (103,000
    )Deficit accumulated during the development stage
    
    
    (45,047,000
    )
    
    
    (37,320,000
    )(958,000
    )
    
    
    149,000$
    1,201,000
    
    
    $
    2,020,000
 See notes to consolidated financial statements




---



##### Table of Contents



September 25,1996(Inception)Year Ended
    
    
    ThroughDecember 31,
    
    
    December 31,2006
    
    
    2005
    
    
    2004
    
    
    2006Revenue
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    Costs and expenses:Research and development
    
    
    1,313,000
    
    
    
    2,719,000
    
    
    
    2,165,000
    
    
    
    14,090,000General and administrative
    
    
    5,351,000
    
    
    
    2,999,000
    
    
    
    7,932,000
    
    
    
    31,158,000Asset Impairment
    
    
    1,071,000
    
    
    
    
    
    
    
    
    
    
    
    1,071,000Loss before minority interest
    
    
    (7,735,000
    )
    
    
    (5,718,000
    )
    
    
    (10,097,000
    )
    
    
    (46,319,000
    )Minority interest in loss of consolidated subsidiary
    
    
    8,000
    
    
    
    273,000
    
    
    
    292,000
    
    
    
    1,272,000Net loss
    
    
    (7,727,000
    )
    
    
    (5,445,000
    )
    
    
    (9,805,000
    )
    
    
    (45,047,000
    )Preferred stock beneficial conversion feature
    
    
    48,000
    
    
    
    159,000
    
    
    
    556,000
    
    
    
    763,000Preferred stock dividend
    
    
    253,000
    
    
    
    156,000
    
    
    
    91,000
    
    
    
    528,000Net loss attributable to common stockholders
    
    $
    (8,028,000
    )
    
    $
    (5,760,000
    )
    
    $
    (10,452,000
    )
    
    $
    (46,338,000
    )Basic and diluted net loss attributable to common
stockholders per share
    
    $
    (0.26
    )
    
    $
    (0.19
    )
    
    $
    (0.37
    )Weighted average number of shares of common
stock  basic and diluted
    
    
    30,566,000
    
    
    
    29,560,000
    
    
    
    28,515,000
 See notes to consolidated financial statements




---



##### Table of Contents



DeficitUnearned
    
    
    AccumulatedAdditional
    
    
    Due
    
    
    Compensatory
    
    
    During the
    
    
    TotalClass A Preferred Stock
    
    
    Class B Preferred Stock
    
    
    Common Stock
    
    
    Paid-in
    
    
    From
    
    
    Stock and
    
    
    Development
    
    
    StockholdersShares
    
    
    Amount
    
    
    Shares
    
    
    Amount
    
    
    Shares
    
    
    Amount
    
    
    Capital
    
    
    Stockholders
    
    
    Options
    
    
    Stage
    
    
    EquityIssuance of shares to founders
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    16,464,400
    
    
    $
    165,000
    
    
    $
    (165,000
    )
    
    $
    
    
    
    
    
    
    
    
    
    
    
    $
    0Issuance of stock for services
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,535,600
    
    
    
    25,000
    
    
    
    381,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    406,000Sale of common stock  November ($1.50 per share)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    64,600
    
    
    
    1,000
    
    
    
    96,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    97,000Sale of common stock  December ($1.50 per share)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    156,201
    
    
    
    1,000
    
    
    
    233,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    234,000Distribution to founders
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (27,000
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (27,000
    )Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    (489,000
    )
    
    
    (489,000
    )Balance  December 31, 1996
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    19,220,801
    
    
    
    192,000
    
    
    
    518,000
    
    
    
    
    
    
    
    
    
    
    
    (489,000
    )
    
    
    221,000Issuance of compensatory stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,000,000
    
    
    
    10,000
    
    
    
    1,490,000
    
    
    
    
    
    
    $
    (1,500,000
    )
    
    
    
    
    
    
    0Issuance of stock for services
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    12,000
    
    
    
    
    
    
    
    18,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    18,000Sale of common stock  January ($1.50 per share)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    58,266
    
    
    
    1,000
    
    
    
    86,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    87,000Sale of common stock  February ($1.50 per share)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    75,361
    
    
    
    1,000
    
    
    
    112,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    113,000Sale of common stock  May ($1.50 per share)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    30,000
    
    
    
    
    
    
    
    45,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    45,000Issuance of stock for services
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,000
    
    
    
    
    
    
    
    6,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6,000Sale of common stock  June ($3.00 per share)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    73,166
    
    
    
    1,000
    
    
    
    219,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    220,000Sale of common stock  July ($3.00 per share)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    13,335
    
    
    
    
    
    
    
    40,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    40,000Sale of common stock  August ($3.00 per share)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    60,567
    
    
    
    1,000
    
    
    
    181,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    182,000Sale of common stock  September ($3.00 per share)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    10,000
    
    
    
    
    
    
    
    30,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    30,000Sale of common stock  October ($3.00 per share)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    7,000
    
    
    
    
    
    
    
    21,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    21,000Sale of common stock  November ($3.00 per share)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    10,000
    
    
    
    
    
    
    
    30,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    30,000Sale of common stock  December ($3.00 per share)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    100,000
    
    
    
    1,000
    
    
    
    299,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    300,000Issuance of compensatory options to consultants
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    234,000
    
    
    
    
    
    
    
    (234,000
    )
    
    
    
    
    
    
    0Compensatory stock and options earned
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    451,000
    
    
    
    
    
    
    
    451,000Distributions to founders
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (338,000
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (338,000
    )Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (922,000
    )
    
    
    (922,000
    )Balance  December 31, 1997
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    20,672,496
    
    
    
    207,000
    
    
    
    2,991,000
    
    
    
    
    
    
    
    (1,283,000
    )
    
    
    (1,411,000
    )
    
    
    504,000Issuance of stock for services
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,000
    
    
    
    
    
    
    
    3,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,000Sale of common stock  May 11 to September 20 ($5.00 per share)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    112,620
    
    
    
    1,000
    
    
    
    562,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    563,000Sale of common stock  September 21 to December 31 ($10.00 per share)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    25,500
    
    
    
    
    
    
    
    255,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    255,000Costs of offering
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (60,000
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (60,000
    )Compensatory stock and options earned
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    578,000
    
    
    
    
    
    
    
    578,000Contribution of services
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    15,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    15,000Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,122,000
    )
    
    
    (2,122,000
    )Balance  December 31, 1998
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    20,811,616
    
    
    
    208,000
    
    
    
    3,766,000
    
    
    
    
    
    
    
    (705,000
    )
    
    
    (3,533,000
    )
    
    
    (264,000
    )Issuance of stock for services
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    45,351
    
    
    
    
    
    
    
    327,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    327,000Sale of common stock  January 1 to August 9 ($10.00 per share)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    80,670
    
    
    
    1,000
    
    
    
    806,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    807,000Sale of common stock  August 10 to November 30 ($5.00 per share)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    84,500
    
    
    
    1,000
    
    
    
    422,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    423,000Issuance of compensatory options to consultants
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,780,000
    
    
    
    
    
    
    
    (2,780,000
    )
    
    
    
    
    
    
    0Common stock issued- exercise of options
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    21,000
    
    
    
    
    
    
    
    105,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    105,000Compensatory stock and options earned
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,050,000
    
    
    
    
    
    
    
    3,050,000Contribution of services
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    15,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    15,000Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (4,788,000
    )
    
    
    (4,788,000
    )Balance  December 31, 1999
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    21,043,137
    
    
    
    210,000
    
    
    
    8,221,000
    
    
    
    
    
    
    $
    (435,000
    )
    
    
    (8,321,000
    )
    
    
    (325,000
    )
 See notes to consolidated financial statements




---



##### Table of Contents



DeficitUnearned
    
    
    AccumulatedAdditional
    
    
    Due
    
    
    Compensatory
    
    
    During the
    
    
    TotalClass A Preferred Stock
    
    
    Class B Preferred Stock
    
    
    Common Stock
    
    
    Paid-in
    
    
    from
    
    
    Stock and
    
    
    Development
    
    
    StockholdersShares
    
    
    Amount
    
    
    Shares
    
    
    Amount
    
    
    Shares
    
    
    Amount
    
    
    Capital
    
    
    Stockholders
    
    
    Options
    
    
    Stage
    
    
    EquityIssuance of stock for services
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    196,259
    
    
    $
    2,000
    
    
    $
    838,000
    
    
    $
    
    
    
    
    
    
    
    
    
    
    
    $
    840,000Sale of common stock  March 29 ($4.51 per share)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    44,321
    
    
    
    
    
    
    
    200,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    200,000Sale of common stock  June 23 ($3.50 per share)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    100,000
    
    
    
    1,000
    
    
    
    349,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    350,000Acquisition of Ice Surface Development
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,068,354
    
    
    
    11,000
    
    
    
    3,394,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,405,000Proceeds from exercise of put option
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    36,735
    
    
    
    1,000
    
    
    
    108,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    109,000Compensatory stock and options earned
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    435,000
    
    
    
    
    
    
    
    435,000Contribution of services
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    15,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    15,000Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    (2,374,000
    )
    
    
    (2,374,000
    )Balance  December 31, 2000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    22,488,806
    
    
    
    225,000
    
    
    
    13,125,000
    
    
    
    
    
    
    
    0
    
    
    
    (10,695,000
    )
    
    
    2,655,000Issuance of stock for liabilities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    126,667
    
    
    
    1,000
    
    
    
    664,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    665,000Issuance of stock for services
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    361,100
    
    
    
    4,000
    
    
    
    1,007,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,011,000Issuance of option to consultant for services
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    398,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    398,000Proceeds from exercise of put option
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    101,910
    
    
    
    1,000
    
    
    
    323,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    324,000Contribution of services
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    15,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    15,000Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3,871,000
    )
    
    
    (3,871,000
    )Balance  December 31, 2001
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    23,078,483
    
    
    
    231,000
    
    
    
    15,532,000
    
    
    
    
    
    
    
    0
    
    
    
    (14,566,000
    )
    
    
    1,197,000Exercise of warrants
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    124,448
    
    
    
    1,000
    
    
    
    126,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    127,000Exercise of warrants
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    250,000
    
    
    
    3,000
    
    
    
    72,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    75,000Loss on sale of minority interest
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (232,000
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (232,000
    )Sale of preferred stock and warrant
    
    
    38,500
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    142,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    142,000Issuance of stock for services
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,001,454
    
    
    
    10,000
    
    
    
    1,224,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,234,000Issuance of options in settlement of liabilities and consulting fees
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    653,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    653,000Issuance of warrants to chairman
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    690,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    690,000Proceeds from exercise of put option ($.90 per share)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    440,000
    
    
    
    5,000
    
    
    
    391,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    396,000Common stock issued in exchange for loan
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    35,461
    
    
    
    
    
    
    
    50,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    50,000Sale of common stock  July ($1.45 per share)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    46,897
    
    
    
    
    
    
    
    68,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    68,000Sale of common stock  August ($1.42 per share)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    211,265
    
    
    
    2,000
    
    
    
    298,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    300,000Sale of common stock  September ($1.42 per share)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    140,845
    
    
    
    1,000
    
    
    
    199,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    200,000Sale of common stock  December ($.91 per share)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    109,890
    
    
    
    1,000
    
    
    
    99,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    100,000Contribution of services
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    15,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    15,000Issuance of warrant for financial services
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    8,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    8,000Warrant issued in lieu of compensation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    633,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    633,000Issuance of shares in settlement of liabilities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    190,965
    
    
    
    2,000
    
    
    
    267,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    269,000Compensatory stock options
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    32,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    32,000Employees/Stockholders Contribution of services in subsidiary
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    519,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    519,000Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (4,577,000
    )
    
    
    (4,577,000
    )Balance  December 31, 2002
    
    
    38,500
    
    
    
    0
    
    
    
    
    
    
    
    
    
    
    
    25,629,708
    
    
    $
    256,000
    
    
    $
    20,786,000
    
    
    $
    
    
    
    $
    0
    
    
    $
    (19,143,000
    )
    
    $
    1,899,000
 See notes to consolidated financial statements




---



##### Table of Contents



DeficitUnearned
    
    
    AccumulatedAdditional
    
    
    Due
    
    
    Compensatory
    
    
    During the
    
    
    TotalClass A Preferred Stock
    
    
    Class B Preferred Stock
    
    
    Common Stock
    
    
    Paid-in
    
    
    from
    
    
    Stockholders
    
    
    Development
    
    
    StockholdersShares
    
    
    Amount
    
    
    Shares
    
    
    Amount
    
    
    Shares
    
    
    Amount
    
    
    Capital
    
    
    Stockholders
    
    
    Options
    
    
    Stage
    
    
    EquitySale of Common Stock  March ($0.90 per share)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    111,112
    
    
    
    1,000
    
    
    $
    99,000
    
    
    $
    
    
    
    $
    
    
    
    
    
    
    
    $
    100,000Sale of Common Stock  June (0.80 per share)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    250,000
    
    
    
    3,000
    
    
    
    197,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    200,000Sale of Common Stock  September ($2.50 per
share)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    8,000
    
    
    
    
    
    
    
    20,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    20,000Advance settled with Common Stock  October
($2.50 per share)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    10,000
    
    
    
    
    
    
    
    25,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    25,000Exercise of warrant for common stock -
(December $0.50 per share)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    250,000
    
    
    
    2,000
    
    
    
    123,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    125,000Issuance of stock for services
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    753,824
    
    
    
    8,000
    
    
    
    842,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    850,000Exercise of Warrants for $.01 per share
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    130,000
    
    
    
    1,000
    
    
    
    (1,000
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Exercise of Warrants for $.01 per share
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    50,000
    
    
    
    1,000
    
    
    
    (1,000
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Exercise of Warrants for $.01 per share
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    8,680
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Exercise of Warrants for $.01 per share
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,500Cashless exercise of put option
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    654,432
    
    
    
    7,000
    
    
    
    (7,000
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Sale of Class A Preferred Stock  September
($4.00 per share)
    
    
    5,575
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    22,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    22,000Sale of Class A Preferred Stock  December
($4.00 per share)
    
    
    10,112
    
    
    $
    1,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    40,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    41,000Issuance of option for services
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    46,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    46,000Issuance of options in settlement of
liabilities and consulting fees
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    265,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    265,000Contribution of services in subsidiary
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    173,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    173,000Adjustment for equity issuances of subsidiary
common stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    79,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    79,000Class A Preferred stock issued
    
    
    2,305
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    9,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    9,000NET LOSS
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,927,000
    )
    
    
    (2,927,000
    )BALANCE AT December 31, 2003
    
    
    56,492
    
    
    $
    1,000
    
    
    
    
    
    
    
    
    
    
    
    27,858,256
    
    
    $
    279,000
    
    
    $
    22,717,000
    
    
    $
    
    
    
    $
    
    
    
    $
    (22,070,000
    )
    
    $
    927,000
 See notes to consolidated financial statements




---



##### Table of Contents



UnearnedCompensatory
    
    
    Deficit Accumulated
    
    
    TotalAdditional Paid-
    
    
    Due from
    
    
    Stockholders
    
    
    During the
    
    
    StockholdersClass A Preferred Stock
    
    
    Class B Preferred Stock
    
    
    Common Stock
    
    
    In Capital
    
    
    Stockholders
    
    
    Options
    
    
    Development Stage
    
    
    EquityShares
    
    
    Amount
    
    
    Shares
    
    
    Amount
    
    
    Shares
    
    
    AmountSale of Common Stock  June, 2004
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    60,000
    
    
    $
    1,000
    
    
    $
    300,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    301,000Issuance of common stock for services
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    469,883
    
    
    
    4,000
    
    
    
    2,348,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,352,000Sale of
Class A Preferred Stock ($4.00 per share)  March
    
    
    203,117
    
    
    $
    2,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    820,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    822,000Sale of
Class A Preferred Stock ($4.00 per share)  April
    
    
    32,653
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    121,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    121,000Conversion of Preferred Stock Class A
    
    
    (41,050
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    41,050
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Preferred
Dividend Class A attributable to converted shares
    
    
    8,031
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Sale of
Class B Preferred Stock ($5.00 per share)  September
    
    
    
    
    
    
    
    
    
    
    20,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    100,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    100,000Sale of
Class B Preferred Stock ($5.00 per share)  October
    
    
    
    
    
    
    
    
    
    
    22,500
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    113,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    113,000Contribution of services
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    450,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    450,000Exercise of warrants
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    268,865
    
    
    
    3,000
    
    
    
    (2,000
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,000Exercise of consultants warrants
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    345,600
    
    
    
    3,000
    
    
    
    
    
    
    
    (3,000
    )
    
    
    
    
    
    
    
    
    
    
    Issuance of
warrants for consulting services
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,794,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,794,000Net Loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (9,805,000
    )
    
    
    (9,805,000
    )Balance at December 31, 2004
    
    
    259,243
    
    
    $
    3,000
    
    
    
    42,500
    
    
    
    
    
    
    
    29,043,654
    
    
    $
    290,000
    
    
    $
    32,761,000
    
    
    $
    (3,000
    )
    
    $
    
    
    
    $
    (31,875,000
    )
    
    $
    1,176,000
 See notes to consolidated financial statements




---



##### Table of Contents



SharesIssued for
    
    
    Deficit Accumulated
    
    
    TotalAdditional
    
    
    Due from
    
    
    Consulting
    
    
    During the
    
    
    StockholdersClass A Preferred Stock
    
    
    Class B Preferred Stock
    
    
    Common Stock
    
    
    Paid-In Capital
    
    
    Stockholder
    
    
    Services
    
    
    Development Stage
    
    
    EquityShares
    
    
    Amount
    
    
    Shares
    
    
    Amount
    
    
    Shares
    
    
    AmountIssuance of common stock for services
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    786,309
    
    
    $
    8,000
    
    
    $
    1,771,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    1,779,000Sale of Class A Preferred Stock ($4.00
per share)  March
    
    
    47,500
    
    
    $
    1,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    189,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    190,000Sale of Class A Preferred Stock ($4.00
per share)  April/May
    
    
    30,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    120,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    120,000Sale of Class A Preferred Stock ($4.00
per share)
    
    
    92,500
    
    
    $
    1,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    369,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    370,000Sale of Class A Preferred Stock ($4.00
per share)  October/November
    
    
    30,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    120,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    120,000Contribution of services
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    300,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    300,000Issuance of
options for consulting services
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    247,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    247,000Exercise of consultants warrants
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    161,000
    
    
    
    2,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,000Issuance of
warrants for consulting services
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,261,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,261,000Issuance of shares for debt repayment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    11,667
    
    
    
    
    
    
    
    28,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    28,000Shares issued for future consulting
services
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    50,000
    
    
    
    
    
    
    
    103,000
    
    
    
    
    
    
    
    (103,000
    )Receipt for common stock par stock
value for amounts paid in
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,000
    )
    
    
    2,000Reclass of due from Stockholder to
other receivable
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,000
    
    
    
    
    
    
    
    
    
    
    
    1,000Net Loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (5,445,000
    )
    
    
    (5,445,000
    )Balance at December 31, 2005
    
    
    459,243
    
    
    $
    5,000
    
    
    
    42,500
    
    
    
    
    
    
    
    30,052,630
    
    
    $
    300,000
    
    
    $
    37,267,000
    
    
    $
    
    
    
    $
    (103,000
    )
    
    $
    (37,320,000
    )
    
    $
    149,000
 See notes to consolidated financial statements




---



##### Table of Contents



Shares
    
    
    Deficit
    
    
    TotalIssued for
    
    
    Accumulated
    
    
    StockholdersAdditional
    
    
    Due from
    
    
    Consulting
    
    
    During the
    
    
    EquityClass A Preferred Stock
    
    
    Class B Preferred Stock
    
    
    Common Stock
    
    
    Paid-In Capital
    
    
    Stockholders
    
    
    Services
    
    
    Development Stage
    
    
    (Capital Deficit)Shares
    
    
    Shares
    
    
    Shares
    
    
    Amount
    
    
    Shares
    
    
    AmountIssuance of common stock for services
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    375,230
    
    
    $
    5,000
    
    
    $
    799,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    804,000Sale of Class A Preferred Stock ($4.00
per share)  January and March 2006
    
    
    58,250
    
    
    $
    1,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    232,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    233,000Sale of Class A Preferred Stock ($4.00
per share)  May 2006
    
    
    25,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    100,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    100,000Sale of Class A Preferred Stock ($4.00
per share)  July and August 2006
    
    
    78,750
    
    
    $
    1,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    314,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    315,000Sale of Class A Preferred Stock ($4.00
per share)  October and November 2006
    
    
    111,250
    
    
    $
    1,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    444,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    445,000Sale of Class B Preferred Stock ($5.00
per share
    
    
    
    
    
    
    
    
    
    
    55,000
    
    
    

    $
    1,000
    
    
    
    
    
    
    
    
    
    274,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    275,000Contribution of services
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    300,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    300,000Exercise of consultants warrants
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    680,932
    
    
    $
    7,000
    
    
    
    3,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    10,000Issuance of warrants for consulting
services
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,614,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,614,000Shares issued for consulting
services
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    160,000
    
    
    $
    1,000
    
    
    
    420,000
    
    
    
    
    
    
    
    103,000
    
    
    
    
    
    
    
    524,000Issuance of Common Stock to Placement
agent for finders fee
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    39,000Net Loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (7,727,000
    )
    
    
    (7,727,000
    )Balance at December 31, 2006
    
    
    732,493
    
    
    $
    8,000
    
    
    
    97,500
    
    
    
    $
    1,000
    
    

    31,307,792
    
    
    $
    313,000
    
    
    $
    43,767,000
    
    
    $
    0
    
    
    $
    0
    
    
    $
    (45,047,000
    )
    
    $
    (958,000
    )
 See notes to consolidated financial statements




---



##### Table of Contents



September 25,1996(Inception)Year Ended
    
    
    ThroughDecember 31,
    
    
    December 31,2006
    
    
    2005
    
    
    2004
    
    
    2006Cash flows from operating activities:Net loss
    
    $
    (7,727,000
    )
    
    $
    (5,445,000
    )
    
    $
    (9,805,000
    )
    
    $
    (45,047,000
    )Adjustments to reconcile net loss to net cash used in
operating activities:Depreciation and amortization
    
    
    682,000
    
    
    
    885,000
    
    
    
    182,000
    
    
    
    2,336,000Loss on impairment of License
    
    
    1,071,000
    
    
    
    
    
    
    
    
    
    
    
    1,071,000Gain on sale of fixed assets
    
    
    
    
    
    
    (10,000
    )
    
    
    
    
    
    
    (10,000
    )Minority interest in loss of consolidated subsidiary
    
    
    (8,000
    )
    
    
    (273,000
    )
    
    
    (292,000
    )
    
    
    (1,272,000
    )Compensation expense attributable to common stock in
Subsidiary
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    619,000Common stock issued for services
    
    
    1,225,000
    
    
    
    1,779,000
    
    
    
    2,352,000
    
    
    
    10,606,000Stockholder contribution of services
    
    
    300,000
    
    
    
    300,000
    
    
    
    450,000
    
    
    
    2,109,000Compensatory common stock, options and warrants
    
    
    3,614,000
    
    
    
    1,508,000
    
    
    
    5,794,000
    
    
    
    16,602,000Shares issued for future consulting services
    
    
    103,000
    
    
    
    
    
    
    
    
    
    
    
    103,000Changes in:Prepaid expenses
    
    
    (6,000
    )
    
    
    83,000
    
    
    
    (141,000
    )
    
    
    88,000Deferred revenue
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    150,000Accounts payable and accrued expenses
    
    
    (3,000
    )
    
    
    (96,000
    )
    
    
    657,000
    
    
    
    3,594,000Other Assets  Deposits
    
    
    
    
    
    
    
    
    
    
    (2,000
    )
    
    
    (2,000
    )Net cash used in operating activities
    
    
    (749,000
    )
    
    
    (1,269,000
    )
    
    
    (805,000
    )
    
    
    (9,053,000
    )Cash flows from investing activities:Purchase of equipment
    
    
    (9,000
    )
    
    
    (66,000
    )
    
    
    (135,000
    )
    
    
    (279,000
    )Cost of acquisition
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (16,000
    )Proceeds from sale of fixed asset
    
    
    
    
    
    
    10,000
    
    
    
    
    
    
    
    10,000Net cash used in investing activities
    
    
    (9,000
    )
    
    
    (56,000
    )
    
    
    (135,000
    )
    
    
    (285,000
    )Cash flows from financing activities:Net proceeds from sales of common stock and upon exercise of
    
    
    10,000
    
    
    
    2,000
    
    
    
    271,000
    
    
    
    6,500,000options and warrantsNet proceeds from sales of preferred stock
    
    
    1,368,000
    
    
    
    800,000
    
    
    
    1,187,000
    
    
    
    3,537,000Net proceeds from sale of subsidiary stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    234,000Proceeds from loan
    
    
    56,000
    
    
    
    
    
    
    
    
    
    
    
    85,000Repayments of loan
    
    
    (7,000
    )
    
    
    
    
    
    
    
    
    
    
    (36,000
    )Proceeds from stockholders loans and advances
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    103,000Distributions
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (365,000
    )Net cash provided by financing activities
    
    
    1,427,000
    
    
    
    802,000
    
    
    
    1,458,000
    
    
    
    10,058,000Net increase (decrease) in cash
    
    
    669,000
    
    
    
    (523,000
    )
    
    
    518,000
    
    
    
    720,000Cash at beginning of period
    
    
    51,000
    
    
    
    574,000
    
    
    
    56,000Cash at end of period
    
    $
    720,000
    
    
    $
    51,000
    
    
    $
    574,000
    
    
    $
    720,000Supplemental disclosure of noncash investing and
financing activities:Issuance of common stock, in
settlement of notes payable
    
    
    
    
    
    $
    28,000Preferred Dividends paid in Preferred Stock
    
    
    
    
    
    
    
    
    
    $
    32,000Reclass due from stockholder to other receivable
    
    
    
    
    
    $
    1,000Shares issued for future consulting services
    
    
    
    
    
    $
    103,000Issuance of Common Stock for a finders fee
    
    $
    225,000Advance from Stockholder
    
    $
    250,000
 See notes to consolidated financial statements




---



##### Table of Contents



Note A  The Company
     Note B  Summary of Significant Accounting Policies
 [1]
    
    Consolidation:The financial statements include the accounts of the company, its majority-owned
subsidiary, Ice (69.26% owned at December 31, 2006 and 2005), and its wholly-owned
subsidiary Iso-Torque Corporation. All material intercompany transactions and account
balances have been eliminated in consolidation.[2]
    
    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. During 2005, the company
sold a full depreciated asset and recognized a gain of $10,000, which is included in
general and administrative expense.[3]
    
    Research and Development and Patents:Research and development costs and patent expenses are charged to operations as incurred. Research and development includes amortization of the Ice technology, purchase of parts, depreciation and consulting services. Depreciation expense in each of the years ended December 31, 2006, 2005 and 2004 was $40,000, $31,000 and $5,000 respectively.




---



##### Table of Contents



Note B  Summary of Significant Accounting Policies (continued)
 [4] License:




---



##### Table of Contents



Note B  Summary of Significant Accounting Policies (continued)
 [4] License: (continued)
   [5] Use of Estimates:
  [6] Loss per Common Share:
  [7] Fair Value of Financial Instruments:




---



##### Table of Contents



Note B  Summary of Significant Accounting Policies (continued)
 [8]
    
    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.Effective January 1, 2006, we adopted Statement of Financial
Accounting Standards (SFAS) No. 123R, Share Based Payment. We
elected to use the modified prospective transition method; therefore,
prior period results were not restated. Prior to the adoption of SFAS
123R, stock-based compensation expense related to stock options was
not recognized in the results of operations if the exercise price was
at least equal to the market value of the common stock on the grant
date, in accordance with Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees.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. Under
the modified prospective method, awards that were granted, modified,
or settled on or after January 1, 2006 are measured and accounted for
in accordance with SFAS 123R. Unvested equity-classified awards that
were granted prior to January 1, 2006 will continue to be accounted
for in accordance with SFAS 123, except that the grant date fair value of all awards are recognized
in the results of operations over the remaining vesting periods. 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 elected to adopt the alternative
method of calculating the historical pool of windfall tax benefits as
permitted by FASB Staff Position (FSP) No. SFAS 123R-c, 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 awards that were outstanding as of the adoption of SFAS
123R.




---



##### Table of Contents



Note B  Summary of Significant Accounting Policies (continued)
 [8]
    
    Stock-based Compensation: (continued)The following table illustrates the effect on net loss attributable to common stockholders and net loss
per share attributable to common stockholders if the fair value based method had been applied to the prior
period.
 Year EndedDecember 31, 2005Reported net loss attributable to common stockholders
    
    $
    (5,760,000
    )Add: Stock-based compensation expense under APB No. 25 included in
net loss, net of related tax effects
    
    
    113,000Stock-based employee compensation determined under the fair value
based method prior to adoption of SFAS 123R, net of related tax
effects
    
    
    (113,000
    )Pro Forma net loss attributable to common stockholders
    
    $
    (5,760,000
    )Loss per share:Basic and diluted attributable to common stockholders  as reported
    
    $
    (0.19
    )Basic and diluted attributable to common stockholders  pro forma
    
    $
    (0.19
    )




---



##### Table of Contents



Note B  Summary of Significant Accounting Policies (continued)
 [9]
    
    Revenue Recognition:Revenue in connection with the granting of a license to Variable Gear
LLC is to be recognized when all conditions for earning such fee is
complete. Revenue from product sales will be recognized when the related products are
shipped, title has passed, selling price is fixed or determinable, collections are reasonably assured and the
company has no further obligation. An allowance for discounts and
returns will be taken as a reduction of sales within the same period
the revenue is recognized. Such allowances will be based on facts and
circumstances.[10]
    
    Impairment of Long-Lived Assets:The company follows Statement of Financial Accounting Standards No.
144, Accounting for the Impairment or Disposal of Long-Lived
Assets. Accordingly, whenever events or circumstances indicate that
the carrying amount of an asset may not be recoverable, management
assesses the recoverability of the assets. Management is also
required the useful lives each reporting period. When events or
circumstances indicate, our long-lived assets, including intangible
assets with finite useful lives, are tested for impairment by using
the estimated future cash flows directly associated with, and that
are expected to arise as a direct result of, the use of the assets.
If the carrying amount exceeds the estimated undiscounted cash flows,
an impairment may be indicated. The carrying amount is then compared
to the estimated discounted cash flows, and if there is an excess,
such amount is recorded as an impairment. See Note B [4].[11]
    
    Recent Accounting Pronouncements:In June 2006, the Financial Accounting Standards Board (FASB) has
issued interpretation No. 48, Accounting for Uncertainty in Income
TaxesAn Interpretation of FASB Statement No. 109 (FIN 48),
regarding accounting for, and disclosure of, uncertain tax positions.
FIN 48 clarifies the accounting for uncertainty in income taxes
recognized in an enterprises financial statements in accordance with
FASB Statement No. 109, Accounting for Income Taxes. FIN 48
prescribes a recognition threshold and measurement attribute for the
financial statement recognition and measurement of a tax position
taken or expected to be taken in a tax return. FIN 48 also provides
guidance on derecognition, classification, interest and penalties,
accounting in interim periods, disclosure, and transition. FIN 48 is
effective for fiscal years beginning after December 15, 2006. The
Company is currently evaluating the impact FIN 48 will have on its
results of operations and financial position.In September 2006, the Securities and Exchange Commission (SEC)
issued Staff Accounting Bulletin 108, Considering the Effects on
Prior Year Misstatements when Quantifying Misstatements in Current
Year Financial Statements, (SAB 108). SAB 108 requires registrants
to quantify errors using both the income statement method (i.e. iron
curtain method) and the rollover method and requires adjustment if
either method indicates a material error. If a correction in the
current year relating to prior year errors is material to the current
year, then the prior year financial information needs to be
corrected. A correction to the prior year results that are not
material to those years, would not require a restatement process
where prior financials would be amended. SAB 108 is effective for
fiscal years ending after November 15, 2006. We do not anticipate
that SAB 108 will have a material effect on our financial position,
results of operations or cash flows.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 with Companys 2008 fiscal year.
The Company is assessing the impact that the adoption of SFAS No. 157
may
have on the Companys financial position and results of operations.




---



##### Table of Contents



Note B  Summary of Significant Accounting Policies (continued)
 [11]
    
    Recent Accounting Pronouncements (continued)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.
 NOTE C  LICENSE FROM THE TRUSTEES OF DARTMOUTH COLLEGE
 In 2000, Ice 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. Under the license agreement the Company made a
single payment of $140,000 (paid in 2000) for sponsored
research and has a royalty obligation 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 through 2021. In
addition, the agreement provides for the payment of 50%
of sub-license fee income.Expense relating to the above agreements totaled $23,000, for
each of the years ended December 31, 2006, 2005 and
2004, respectively. The
companys obligations under the license remain in
effect under such time as the license shall have
terminated in accordance with its terms. See Note B
[4].
 NOTE D  RELATED PARTY TRANSACTIONS
 [1]
    
    On December 1, 1997, the company entered into
three-year consulting agreements with Vernon, Keith and
James Gleasman (major stockholders, directors and
officers) whereby each was obligated to provide
services to the company in exchange for compensation of
$12,500 each per month. In 1997 the company
granted each Vernon, Keith and
James Gleasman 25,000 nonqualified
common stock options, exercisable immediately at $5.00
per common share for ten years (Note H [6]). For the
years ended December 31,2003, 2002, 2001, 2000,1999,
1998 and 1997, the company incurred expenses amounting
to approximately $450,000, $450,000, $450,000,
$522,000, $528,000, $528,000 and $45,000, respectively,
in connection with these agreements(which were extended
for an additional three years, effective December 1,
2000, and amended to provide that compensation
thereunder was payable, in the board of directors
discretion, in common stock, cash or a combination).During 2001, the company issued 126,667 common shares
under the agreements for approximately $665,000 of
accrued consulting fees.On September 30, 2002, the
company granted 727,047 nonqualified common stock
options, all exercisable immediately at $5.00 per
common share, in settlement of approximately $653,000
of accrued consulting fees (see Note H [6]). These
options are exercisable for five years.On December 23, 2003, the company granted 166,848
nonqualified common stock options exercisable
Immediately at $5.00 per common share, in settlement
under the agreements for accrued consulting fees of
approximately $265,000. These options are exercisable
for ten years.The companys consulting agreements with Vernon, Keith and James
Gleasman expired on December 1, 2003 and were not
renewed.




---



##### Table of Contents



NOTE D  RELATED PARTY TRANSACTIONS (continued)
 Commencing January 1, 2004, each of the Gleasmans agreed to provide consulting services and
assign new
patents, existing patent improvements and all know-how in connection with all of their
inventions to the company. In addition, Keith Gleasman agreed to continue as President and
James Gleasman agreed to serve as the companys chief executive officer and interim chief
financial officer. During the years ended December 31, 2006, 2005 and 2004, the company did
not pay the Gleasmans any consulting fees for their services. The company recorded
approximately $300,000, for each of the years ended December 31, 2006, 2005 and 2004,
respectively, for the estimated value of these services based upon the compensation payable
under the previous consulting agreements. The company recorded $225,000 to research and
development and $75,000 to general and administrative in 2006, 2005 and 2004, respectively.[2]
    
    During the years ended December 31, 2006, 2005 and 2004, the company paid $42,990, $23,000
and $17,000, respectively, to a member of the Gleasman family for administrative, technological and
engineering consulting services. Management believes this compensation is reasonable.[3]
    
    During the years ended December 2005 and 2004, the company issued 90,000 and 35,000 common
shares as rent for the companys use of a facility owned by the stockholder valued at approximately
$259,000 and $194,000 respectively, based upon the fair market value of the common stock on the
date of issuance. This arrangement terminated effective February 28, 2006 when we moved to an new facility. No common shares were
issued to the stockholder during the year ended December 31, 2006 and no further amounts are due
under the arrangement.[4]
    
    During the years ended December 31, 2005 and 2004, the company incurred approximately
$298,000 and $615,000 for non-legal consulting services provided to the company by one of its
outside counsel. This arrangement terminated on December 16, 2005. No amounts were paid nor were
any amounts owed under this arrangement for the year ended December 31, 2006.[5]
    
    On August 18, 2006, the company granted 400,000 nonqualified common stock warrants valued
at approximately $1,237,000 to a company of which a director became a member upon his election to
the board. The warrants are immediately exercisable at $3.27 per common share for a period of
ten years.[6]
    
    On June 19, 2006, the company awarded an aggregate 360,000 nonqualified common stock
warrants valued at approximately $629,000 to a director for special services rendered by such
director as chairman of the boards executive committee during 2006.[7]
    
    On August 17, 2005, the company repaid a $28,000
indebtedness to a stockholder by
issuing 11,667 restricted common shares, such number of shares based upon the closing price of
the companys common stock on August 16, 2005.




---



##### Table of Contents



45 
 
 NOTE E
 INCOME TAXES
     Year EndedDecember 31,2006
    
    
    2005
    
    
    2004Computed federal
income tax benefit at
34% rate
    
    $
    (2,627,000
    )
    
    $
    (1,851,000
    )
    
    $
    (3,334,000
    )State tax benefit,
net of federal tax
benefit
    
    
    (408,000
    )
    
    
    (288,000
    )
    
    
    (517,000
    )Nondeductible expenses
    
    
    675,000
    
    
    
    340,000
    
    
    
    68,000Valuation allowance
    
    
    2,360,000
    
    
    
    1,799,000
    
    
    
    3,783,000$
    0
    
    
    $
    0
    
    
    $
    0
 NOTE FACCOUNTS PAYABLE AND ACCRUED LIABILITY EXPENSES
  2006
    
    
    2005Professional fees
    
    $
    191,000
    
    
    $
    194,000Salaries to officer/stockholders of Ice
(Note I[1])
    
    
    1,495,000
    
    
    
    1,495,000$
    1,686,000
    
    
    $
    1,689,000




---



##### Table of Contents



46 
 
 NOTE G  NOTE PAYABLESTOCKHOLDERS, OFFICER AND OTHER NOTES PAYABLE
 [1]
    
    Notes Payable  Financial Institution:During 2001, an existing stockholder loaned the company $50,000 bearing interest at 7.5% with no
specified repayment terms. The principal of this loan was satisfied through the issuance of 35,461
common shares at the then fair market value in April 2002.During 2001, certain officers and stockholders loaned the company $109,000. The loans were
non-interest bearing with no specified repayment terms. During 2002, $81,000 of such loans was
repaid. During 2005, the remaining $28,000 was repaid with the issuance of 11,667 shares of common
stock at the then market price.In August, 2003, an existing stockholder advanced $25,000 to the company. In October, 2003, the
full amount of the advance was repaid with 10,000 shares of the companys common stock valued at
market.During the year ended December 31, 2005, the company financed a vehicle to be used with its
prototype technology and pledged the vehicle as collateral for this 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 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 for each of the loans:
 Period EndingDecember 31,2007
    
    $
    20,0002008
    
    
    20,0002009
    
    
    20,0002010
    
    
    20,0002011
    
    
    10,000Total Minimum payments
    
    
    90,000Less-amount representing interest
    
    
    17,00073,000Less-Current Maturities
    
    
    14,000Long Term Portion
    
    $
    59,000




---



##### Table of Contents



47 
 
 NOTE G  NOTE PAYABLESTOCKHOLDERS, OFFICER AND OTHER NOTES PAYABLE (continued)
 [2]
    
    Advance from Stockholder:On June 19, 2006, a stockholder 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 K.)On July 25, 2006, the stockholder 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.For the year ended December 31, 2006, the company incurred interest charges in the amount of
$8,355 on advance from stockholder.
 Note H
 Stockholders (Capital Deficit) Equity
 [1]
    
    Private Placement:The company received net proceeds of $550,000, $1,230,000(of which $507,000 was received from
the Gleasman family), $758,000, $1,068,000 and $331,000 from private placements of its common
stock for the years ended December 31, 2000, 1999, 1998 and 1997 and for the period ended December
31, 1996, respectively.During 2002, the company sold 508,897 common shares for net proceeds of approximately $668,000.In 2003, an existing stockholder purchased 361,112 common shares for $300,000 and was paid 70,000
common shares at market value on the date of issuance (valued at $158,000) for consulting services
and rent for the companys use of a facility and technicians. The company also sold an additional
8,000 common shares to an unrelated party for $20,000.In 2004, the same existing stockholder purchased 60,000 common shares for $301,000 and was paid
35,000 common shares at market value on the date of issuance(valued at $194,000) as rent for use
by the company of a facility and technicians.In 2005, this stockholder was paid 90,000 common shares at market value on the date of issuance
(valued at $259,000) for consulting services rendered to the company.
 [2]
    
    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). During 2002, the company
sold 38,500 shares at $4.00 per share of its Class A Preferred in a private placement for
approximately $142,000 in net proceeds. 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.




---



##### Table of Contents



48 
 
 
 Note H
 Stockholders (Capital Deficit) Equity (continued)
 [2]
    
    Class A Preferred Stock: (continued)In connection with this offering the company granted the placement agent 5,000 Class A
Warrants, exercisable for five years at an exercise price of $1.52 per share into common
stock. Such warrants were treated as a cost of
the offering. Also, the placement agent was granted 10,000 warrants for providing certain
financial analysis for the company. The warrants are immediately exercisable at $.30 per
share for five years. The warrant contains a cashless exercise feature. The company valued
the warrant at $8,000 using the Black-Scholes option-pricing model and charged operations. The company also granted to these investors 2,500 Class A Warrants, exercisable for
five years at an exercise price of $0.01 per share.
On July 8, August 14, September 11, 2003 and August 4, 2006, the company issued 2,500,
7,480, 1,200 and 2,500 common shares, respectively, to the placement agent upon the exercise
of warrants issued in connection with this offering.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 stockholders, 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.




---



##### Table of Contents



49 
 
 Note H
 Stockholders (Capital Deficit) Equity (continued)
 [3]
    
    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). Each share of Class B
Preferred pays cumulative dividends at $.50 per share per annum and is convertible into either one
share of the companys common stock or one share of the common stock of IsoTorque Corporation. 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.During 2004, the company sold 42,500 Class B Preferred to accredited investors for proceeds of
$212,500.During 2006, the company sold 55,000 Class B Preferred to accredited investors for proceeds of
$275,000.[4]
    
    Initial Public Offering Consultant:In February, 1997, the company entered into a three-year agreement with an IPO consulting firm
(IPO Consultant) to arrange for an initial public offering of the companys common stock and to
provide financial advisory services. In consideration, the company issued an aggregate 1,000,000
restricted common shares to five principals of the IPO Consultant for an aggregate $50. In
addition, the company granted an aggregate 500,000 warrants to the same principals. Such warrants
were only exercisable in the event the company conducted an initial public offering for its common
stock. In such event, the warrants were exercisable for a term of five years after the IPO and were
exercisable at the per share public offering exercise price (unless during the warrant term after
the IPO, at least 50% of the companys assets were acquired by a third party in which case the
exercise price was $1.50 per share).As of December 31, 2006 none of the warrants are exercisable.In February, 1999, the company entered into a one-year consulting agreement directly with two of
the former principals of the IPO Consultant to provide financial advisory services. In connection
with this agreement, the company and the two former principals agreed to convert the 375,000
warrants they owned into 375,000 common stock purchase options exercisable immediately through
February, 2004 at $5.00 per common share. The company valued these options at $2,780,000 using the
Black-Scholes option-pricing model with the following weighted average assumptions for the year
ended December 31, 1999: risk free interest rate of 5%, dividend yield of 0%, volatility of 40% and
expected life of the options granted of 5 years. These options were charged to operations over the
term of the consulting agreement.In February, 1999, 21,000 of these options were exercised for proceeds of $105,000. The term of the
remaining 354,000 options expired in February, 2004.At December 31, 2006 and 2005, dividends in arrears amounted
to $49,000 and $26,000, respectively.




---



##### Table of Contents



50 
 
 
 Note H
 Stockholders (Capital Deficit) Equity (continued)
 [5]
    
    Common Stock Subject to Resale Guarantee:During 2002, the company issued 190,695 common shares to former officers and certain minority
shareholders of Ice in exchange for approximately $269,000 owed to them. If, on the sale of the
shares, the amount realized is less than $269,000, additional shares are required to be issued and
if the amount is greater than $269,000, the excess is to be paid to the company. During 2002, all
of such shares were sold for proceeds of approximately $269,000.[6]
    
    Stock-Option Plan:In 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 (see Note D [1]), 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 term of this option is ten years.In 2002, in connection with the consulting agreements described in Note D [1], 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.




---



##### Table of Contents



51 
 
 
 Note H
 Stockholders (Capital Deficit) Equity (continued)
 [6]
    
    Stock-Option Plan: (continued)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 year ended December 31, 2006.A summary of options granted under the Option Plan is set forth in the following table:
 Year Ended December 31,2006
    
    
    2005Weighted
    
    
    
    
    
    
    WeightedAverage
    
    
    
    
    
    
    AverageExercise
    
    
    
    
    
    
    ExerciseShares
    
    
    Price
    
    
    Shares
    
    
    PriceOutstanding at beginning of
year
    
    
    1,823,895
    
    
    $
    4.92
    
    
    
    1,723,895
    
    
    $
    4.92Granted
    
    
    
    
    
    
    
    
    
    
    100,000
    
    
    
    5.00Outstanding at end of year
    
    
    1,823,895
    
    
    
    4.92
    
    
    
    1,823,895
    
    
    
    4.92Options exercisable at year end
    
    
    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
    
    
    
    3.69
    
    
    
    1,773,895
    
    
    $
    5.0050,000
    
    
    2.26
    
    
    
    6.42
    
    
    
    50,000
    
    
    
    2.261,823,895
    
    
    4.92
    
    
    
    3.84
    
    
    
    1,823,895
    
    
    
    4.92




---



##### Table of Contents



52 
 
 Note H
 Stockholders (Capital Deficit) Equity (continued)
 [6]
    
    Stock-Option Plan: (continued)The following summarizes the activity of the companys stock options for the fiscal year
ended December 31, 2006.
 WeightedWeighted
    
    
    AverageAverage
    
    
    Remaining
    
    
    AggregateExercise
    
    
    Contractual
    
    
    IntrinsicShares
    
    
    Price
    
    
    Term
    
    
    ValueNumber of shares under option plan:Outstanding at January 1, 2006
    
    
    1,823,895
    
    
    $
    4.92GrantedExercisedCanceled or expiredOutstanding at December 31, 2006
    
    
    1,823,895
    
    
    $
    4.92
    
    
    
    3.84
    
    
    $
    593,000Exercisable at December 31, 2006
    
    
    1,823,895
    
    
    $
    4.92
    
    
    
    3.84
    
    
    $
    593,000
  [7]
    
    Business Consultants Stock Plan:In June, 1999, the company adopted the Business Consultants Stock Plan (the Stock Plan). The
Plan, as amended, provides for the issuance of up to 10,000,000 common shares to be awarded from
time to time to consultants in exchange for business, financial, legal, accounting, engineering,
research and development, technical, governmental relations and other similar services.For the years ended December 31, 2006, 2005, 2004, 2003, 2002, 2001, 2000 and 1999, the company
issued 983,230 (including 448,000 business consulting shares issued upon exercise of warrants); 836,309; 469,883; 738,184; 1,057,455(including 190,965 issued in settlement of
amounts owed(see Note H[5]), 361,100; 196,259 and 45,351 common shares, respectively, to business
consultants and other third parties in exchange for services and amounts owed to them.During the years ended December 31, 2006, 2005, 2004, 2003, 2002, 2001, 2000 and 1999, the company
charged $1,861,000 (including $629,000 attributable to business consultant shares issued upon exercise of warrants), $1,874,000, $2,352,000, $832,000, $1,036,000(excluding $269,000; see Note
H[5]), $1,011,000, $840,000 and $327,000, respectively, to operations in connection with the share
issuances.At December 31, 2006, 4,966,629 business consultant common shares were available for future
issuance under the Stock Plan.




---



##### Table of Contents



53 
 
 
 Note H
 Stockholders (Capital Deficit) Equity (continued)
 [8]
    
    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.At December 31, 2005, 83,750 warrants were issued and fully vested. The company issued 44,000
warrants and recorded a charge of $113,000 to general and administrative expenses representing the
excess of the fair market value and $.01 per share of such warrants in 2005. During 2005, two
directors exercised 24,000 warrants granted to them under the Nonmanagement Directors Plan.For the year ending December 31, 2006, the company granted 26,500 warrants under the
Nonmanagement Directors Plan and recorded a charge of approximately $48,000 to general and
administrative expenses representing the fair value for
such warrants in 2006. During 2006, a number of directors exercised 42,000 warrants granted to them
under the Nonmanagement Directors Plan.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.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).




---



##### Table of Contents



54 
 
 
 Note H
 Stockholders (Capital Deficit) Equity (continued)
 [8]
    
    Nonmanagement Directors Plan: (continued)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
under such section.During the year ending ended December 31, 2006, the company issued 21,502 business consultant
shares fair valued at $65,000 for directors fees payable under the Nonmanagement Directors Plan, as amended on October
13, 2006 to general and administrative.[9]
    
    Shares Issued for Services and Rent:During 1998, the company granted 1,000 restricted common shares, valued at $3.00 per share,
for services provided. During 1997, the company granted 12,000 and 2,000 restricted common shares
for services provided. The company valued the shares at their fair value of $1.50 and $3.00 per
share, respectively. During 2003 and 2002, 15,640 and 134,964 restricted common shares were issued
for services aggregating approximately $18,000 and $198,000 respectively. During 2005 and 2004,
100,000 and 35,000 restricted common shares were issued for services and rent aggregating
approximately $259,500 and $194,000. During the year ended December 31, 2006, no restricted common
shares were issued.
 [10]
    
    Business, Financial and Engineering Consultants:During the year ended December 31, 2005, the company issued 210,000 warrants valued at
approximately $377,000 to certain engineering consultants, immediately exercisable over a ten year
term at an exercise price of $5.00 per common share.In connection with its business and financial operations for the year ended December 31, 2006, the
company issued 91,583 valued at approximately $167,000 warrants immediately exercisable at $.01 per common share, each with a ten
year term, to a number of business and financial consultants. During the year ended December 31,
2006, 91,083 of these warrants were exercised for proceeds of $910.In 2006, the company issued 30,000 warrants valued at approximately $168,000 immediately
exercisable over a ten year term at $5.00 per common share to certain design engineers. None of
these warrants were exercised for the year ended December 31, 2006.The company issued 400,000 warrants valued at approximately $1,237,000 to a business consultant on
August 18, 2006, immediately exercisable over a ten year term at an exercise price of $3.27 per
common share. On November 21, 2006, the company issued 200,000 warrants valued at approximately
$948,000 in connection with the engagement of its governmental affairs consultant, immediately
exercisable over a ten year term at an exercise price of $3.75 per common share. None of these
warrants were exercised during the year ended December 31, 2006.During the year ended December 31, 2006, the company issued 295,000 warrants to certain engineering
consultants, exercisable over a ten year term at an exercise price of $5.00 per common share but
only if the company were to consummate a commercializing event involving a transaction or series of
transactions which results in the sale, license or other technology transfer of one or more of its
technologies to a third party for value. These warrants are contingent upon an event occurring in
the future and the Company will fair value these
warrants when the contingency is resolved. The Company has determined that the likelihood of
having a commercializing event is not probable at December 31, 2006.




---



##### Table of Contents



55 
 
 
 Note H
 Stockholders (Capital Deficit) Equity (continued)
 [10]
    
    Business, Financial and Engineering Consultants: (continued)The Company fair valued the warrants issued using the Black-Scholes model with the
following assumptions:
 Year Ended December 31,2006
    
    2005Dividend yield
    
    
    0
    %
    
    
    0
    %Expected volatility
    
    
    1.64
    %
    
    
    1.14
    %Risk free interest rate
    
    
    3.76
    %
    
    
    4.31
    %Expected Life
    
    10 years
    
    10 years
 [11]
    
    Equity Funding Commitment:On September 5, 2000, the company entered into an agreement with Swartz Private Equity,LLC
(Swartz) pursuant to which Swartz granted the company a $50,000,000, three-year equity funding
commitment. The agreement provided that, from time to time, at the companys request, Swartz would
purchase from the company that number of common shares equal to 15% of the number of shares traded
in the market in the 20 business days occurring after the date of the requested purchase. The
purchase price was the lesser of 91% of the average market price during that 20 day period or the
average market price less $.20.As a commitment fee, the company granted Swartz a commitment warrant to purchase, in the aggregate,
960,101 common shares at a price which equaled the lowest closing price of the company common stock
during the five trading days ending on each six-month anniversary of the warrant issue date.During 2002, 76,456 commitment warrants were exercised for proceeds of approximately $60,000.During 2003, Swartz exercised the remaining 883,645 commitment warrants in a cashless exercise
transaction, receiving 647,270 common shares.Swartz was also issued a warrant to purchase one share of the companys common stock for every ten
shares it purchased from the company under the agreement. During 2002, 47,992 of such warrants were
exercised for proceeds of approximately $67,000. In 2003, Swartz exercised the balance of its
purchase warrants (9,875) in a cashless exercise transaction, receiving 7,162 common shares.The agreement with Swartz terminated on September 5, 2003.




---



##### Table of Contents



56 
 
 
 Note H
 Stockholders (Capital Deficit) Equity (continued)
 [12]
    
    Warrants:As of December 31 2006, 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
    
    
    756,200
    
    
    (c)$.01
    
    None
    
    
    60,500
    
    
    (d)(e)
    
    (e)
    
    
    (e
    )
    
    (e)$.01
    
    None
    
    
    39,000
    
    
    (f)$5.00
    
    Ten Years
    
    
    505,000
    
    
    (g)$.01
    
    None
    
    
    6,000
    
    
    (h)$.01
    
    None
    
    
    37,500
    
    
    (i)$1.00
    
    None
    
    
    20,500
    
    
    (j)(k)
    
    (k)
    
    
    (k
    )
    
    (k)$.01
    
    10 years
    
    
    500
    
    
    (l)$3.27
    
    10 years
    
    
    400,000
    
    
    (m)$3.75
    
    10 years
    
    
    200,000
    
    
    (n)
 
 (a)
    
    Exercisable only if company has an IPO at the IPO price and exercisable five years from
IPO. Through December 31, 2006, the company has not conducted 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 the
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.




---



##### Table of Contents



57 
 
 Note H
 Stockholders (Capital Deficit) Equity (continued)
 [12]
    
    Warrants: (continued)
 
 (c)
    
    The company has issued 1,325,000 warrants, exercisable at $.01 per share, to a
management consulting firm in accordance with purported agreements between the company and the
management firm. 568,800 warrants were exercised for proceeds of aggregate $5,484 in accordance
with the purported agreements with the management consulting firm. In accordance with the courts
order rendered on May 8, 2006 in connection with the litigation 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 (all included in
above total). The 40,000 common shares and 245,000 common stock warrants were deposited with the
Monroe County, New York Treasurer and may not be accessed by the firm pending the appellate courts
disposition of the companys appeal of the May 8, 2006 court order. In addition, the exercise by
the firm of the 511,200 unexercised warrants is also stayed pending the companys appeal. (See
Notes H and I)(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 H [8]). During the year ended December 31, 2006, 42,000 of these
warrants were exercised for proceeds of $420. During the year ended December 31, 2005, 21,000 of
these warrants were exercised for proceeds of $210.(e)
    
    During 2005, the company issued 120,000 warrants to a consultant, immediately
exercisable at $ .01 per common share. 48,000 warrants were exercised in 2005. The remaining 72,000
warrants were exercised in 2006. During the years ended December 31, 2006 and 2005, the company
received proceeds of $720 and $480 respectively.(f)
    
    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.(g)
    
    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 December
31, 2006.(h)
    
    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 December 31, 2006.(i)
    
    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.




---



##### Table of Contents



58 
 
 Note H
 Stockholders (Capital Deficit) Equity (continued)
 [12]
    
    Warrants: (continued)
 
 (j)
    
    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 December 31, 2006.(k)
    
    During 2006, the company issued 360,000 warrants to a director for specific services
rendered by such director as chairman of the companys executive committee. These warrants were
exercised on September 1, 2006 and September 11, 2006 at $.01 per common share. The company
received proceeds of $3,600.(l)
    
    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.(m)
    
    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.(n)
    
    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.  WeightedWeighted
    
    
    AverageAverage
    
    
    Remaining
    
    
    AggregateExercise
    
    
    Contractual
    
    
    IntrinsicShares
    
    
    Price
    
    
    Term
    
    
    ValueOutstanding at January 1, 2006
    
    
    1,564,700
    
    
    $
    1.34
    
    
    
    6.6 years
    
    
    $
    2,095,000Granted
    
    
    1,807,432
    
    
    
    2.05Exercised
    
    
    (719,432
    )Canceled or expiredOutstanding at December 31, 2006
    
    
    2,652,700
    
    
    $
    2.19
    
    
    
    7.44 years
    
    
    $
    5,797,000Exercisable at December 31, 2006
    
    
    1,732,700
    
    
    $
    1.90
    
    
    
    5.18 years
    
    
    $
    3,291,000
 [13]
    
    Issuance of Stock and Warrants by Subsidiary:In 2003, the company majority-owned subsidiary, Ice Surface Development ,Inc.(Ice) issued
308,041 of its common stock at $.76 per share realizing aggregate proceeds of $234,000 in a
private placement. These issuances reduced the companys interest in Ice from 72% to approximately
69.26%. Based on the companys accounting policy, the change in the companys proportionate share
of Ices equity resulting from the additional equity raised by the subsidiary is accounted for as
a capital transaction.In connection with the private placement, Ice issued 53,948 warrants to the placement agent
immediately exercisable at $.76 per common share through June 9, 2008. In addition, 50,000
warrants were issued by Ice to a consultant immediately exercisable at $.76 per common share
through June 9, 2008. In connection with the issuance of these warrants, a compensation charge of
$36,000 was recognized.The following table sets forth the warrants outstanding for the Ice subsidiary, exercisable in the
common stock of Ice.
 Year Ended December 312006
    
    
    2005
    
    
    2004Outstanding at the beginning of the year
    
    
    103,948
    
    
    
    103,948
    
    
    
    103,948Granted
    
    
    
    
    
    
    
    
    
    
    Outstanding at the end of the period
    
    
    103,948
    
    
    
    103,948
    
    
    
    103,948




---



##### Table of Contents



59 
 
 Note H
 Stockholders (Capital Deficit) Equity (continued)
 [14]
    
    Shares Issued for Consulting Services:On 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 common shares valued at $102,000 on September 27, 2005,
contingent on the performance by the consultants services under such consultant
agreements. The company fair values the shares issued to the trust using the closing market price
on the date immediately prior to the date of issuance. Amounts in excess of the consulting
invoices are classified as shares issued for consulting services in stockholders
(capital deficit) equity. No shares were sold in the trust in the year ended December 31, 2005.During the year ended December 31, 2006, the company issued an aggregate 160,000 business
consultant common shares valued in the aggregate at $421,000 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 199,620 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.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.[15]
    
    Commercializing Event Plan:On 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. 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.No shares were issuable under the Event Plan for the year ended December 31, 2006.




---



##### Table of Contents



60 
 
 
 Note I  Commitments and Other Matters
 [1]
    
    Consulting Agreements:On June 30, 2005, the company entered into a non-exclusive two year consulting agreement for
engineering design services. As part of the agreement, the company granted 100,000 stock options
under its 1998 Stock Option Plan to acquire common shares 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, although the options were not cancelled and
remain outstanding for their term.During 2005, the company entered into non-exclusive two year consulting agreements with
various engineering consultants. Under the terms of the consulting agreements, the company will
pay the amount of invoices submitted by the engineering consultants for services rendered, with
such payment to be made, at the companys discretion, in cash, business consultants stock or a
combination thereof. In addition, in 2005, the company issued the engineers an aggregate 210,000
warrants exercisable immediately over a ten year term at $5.00 per common share. The company
valued the warrants at $377,000 using the Black-Scholes option/pricing model and charged
operations. See Note H [11].On November 21, 2006, the Company issued 200,000 common stock warrants in connection with its
engagement of a governmental affairs consultant. The warrants are
immediately excisable over a ten year term with an exercise
price of $3.75 per common share and valued at $948,165 using the
Black-Scholes pricing model.[2]
    
    Variable Gear, LLC:On January 1, 2008, the company is required to purchase the 51% membership interest it does
not own in Variable Gear LLC at the then fair market value as defined. The company does not share
in any profit or losses in this entity. At December 31, 2006, such fair market value cannot yet be
reasonably estimated.[3]
    
    Employment Agreements:The company entered into employment agreements with officer-shareholders, two of which
provided for salaries of $150,000 per year and one of which required a salary of $240,000 for year
one, $252,000 for year two and $264,000 for year three and provided for a minimum $15,000 bonus
per quarter for the agreements three year term. These agreements were terminated effective August
1, 2001. However, options issued to such officer-shareholders for an aggregate 380,000 common
shares, exercisable through January 1, 2008 at an exercise price of $5.00 per common share, remain
outstanding. No compensation charge was reflected with respect to the year ended December 31, 2001
as a result of the agreements termination since the individuals were also directors of the
company. Effective January 1, 2002, one of the individuals resigned as a director. Consequently,
the company recorded a charge of $32,000 relating to the estimated fair value of the remaining
vesting of this directors options during 2002.On August 1, 2001, the company entered into three year employment agreements with two individuals
to serve as the companys chief executive officer and its chief operating officer. The agreements
provided for an annual base salary of $240,000 for year one, increasing by $20,000 per year
thereafter and a $60,000 annual bonus in year one, increasing by $60,000 per year thereafter. On
September 1, 2001, the company entered into a three year employment agreement with an individual
to serve as its vice-president of manufacturing. The agreement provided for an annual base salary
of $144,000 for year one, increasing by $16,000 for calendar year 2002 and increasing thereafter
by $30,000 per annum. This agreement provided for annual bonuses of $25,000, $40,000 and $50,000
for the years 2001, 2002 and 2003, respectively.




---



##### Table of Contents



61 
 
 Note I  Commitments and Other Matters (continued)
 [3]
    
    Employment Agreements: (continued)The agreements were terminated as of March 31, 2002 and all amounts accrued thereunder to the
termination date of approximately $633,000 were settled through the issuance of 448, 865 warrants
exercisable at $.01 per common share. During 2003, 180,000 warrants were exercised for proceeds of
$1,800. During 2004, the remaining 268,865 warrants were exercised for proceeds of approximately
$2,689.In connection with their employment agreements, the three individuals were granted 450,000 common
stock options immediately exercisable over a ten year term. These options were exchanged for a 28%
interest in the companys subsidiary, Ice Surface Development, Inc. (Ice) in connection with the
termination of such employment agreements (Note A).Upon the termination of their agreements on March 31, 2002 and their resignation as officers of
the company, the same individuals were appointed to director-officer positions of Ice under
employment agreements with Ice providing for the same terms as those provided under the
previously-terminated agreements with the company. In 2002 and 2003, the individuals contributed
$240,000 and $720,000 respectively of accrued compensation to Ices capital and agreed to forgo
payment of all future monies under their Ice employment agreements until certain
board-discretionary criteria have been realized.During 2003, the company issued 201,298 business consultants common shares at fair market value to
such individuals in exchange for approximately $162,000 of expenses directly incurred by them in
performing services for Ice.[4]
    
    Leases:The company has leased premises for use as its executive offices. The lease is for a period
of 3 years, commencing July 1, 2004 expiring on June 30, 2007 with monthly rental payments of
approximately $2,200. The company is also responsible for its share of real estate taxes, certain
maintenance and repair costs, and increases in utility costs associated with the premises.On August 1, 2004, the company sublet, as a tenant, a portion of a facility 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 term expires on February 28, 2007 with a monthly rental
payment of $2,100.On March 1, 2005, the company entered into a one year
lease with a stockholder pursuant to
which the company rents an office, conference room, shop and manufacturing facility. The company
was also furnished with the services of three engineers and two machine operators at the facility.
The company was obligated to pay 10,000 shares of its common stock on a monthly basis for the
facility and services. This lease was not renewed upon the expiration of its one year term in
February, 2005.Aggregate rent expense for the years ended December 31, 2006, 2005 and 2004 was approximately
$56,000, $311,000 and $18,000, respectively.Minimum future obligations under all leases are as follows:
 Year
Ending December 312007
    
    $
    51,0002008
    
    $
    51,000$
    102,000




---



##### Table of Contents



62 
 
 Note J Management Agreement
   th




---



##### Table of Contents



63 
 
 Note J Management Agreement (continued)
   Note
K Litigation




---



##### Table of Contents



64 
 
 Note K
 Litigation (continued)
 
    Note L
 Subsequent Events




---



##### Table of Contents



65 
 Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE .
  Item 9 (a) CONTROLS AND PROCEDURES
   Item 9B. OTHER INFORMATION




---



##### Table of Contents



66
 
 PART
III
 
 Item 10. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH
SECTION 16(a) OF THE EXCHANGE ACT
 (a) Identification of Directors, Executive Officers And Consultants
  Date of Election
    
    Date of TerminationNominee
    
    Principal Occupation
    
    Age
    
    or Designation
    
    or Resignation(1)
    
    Gary A. Siconolfi
    
    Chairman of the Board
    
    55
    
    10/31/02
    
    **325 Van Voorhis Avenue
    
    DirectorRochester, New York 14617(2)
    
    James Y. Gleasman
    
    Chief Executive
    
    66
    
    02/20/98
    
    **11 Pond View Drive
    
    Officer, Interim ChiefPittsford, New York 14534
    
    Financial OfficerDirector(3)
    
    Keith E. Gleasman
    
    President
    
    59
    
    09/26/96
    
    **11 Pond View Drive
    
    DirectorPittsford, NY 14534(4)
    
    Herbert H. Dobbs
    
    Secretary
    
    75
    
    02/20/98
    
    **448 West Maryknoll Road
    
    DirectorRochester Hills, Mich. 48309(5)
    
    Daniel R. Bickel
    
    Director
    
    58
    
    10/31/02
    
    **39 Whippletree RoadFairport, New York 14450(6)
    
    Joseph B. Rizzo
    
    Director
    
    42
    
    9/9/2005
    
    **39 State Street, Suite 700Rochester, New York 14614(7)
    
    David M. Flaum
    
    Real Estate Developer
    
    57
    
    8/21/06
    
    **39 State Street, Suite 300
    
    DirectorRochester, New York 14614
 
 ** Changes in Control




---



##### Table of Contents



67 (b) Business Experience
 (1)
    
    Mr. Siconolfi was the owner and general manager of Panorama Dodge, Inc., Penfield New York from 1984-1995 and of Panorama Collision, Inc., East Rochester, New York from
1989-1995. He started and managed a highly successful auto/truck dealership and collision business, building the business to annual sales of $20 million, with 5 departments
and 65 employees.Prior to opening the dealership and collision business, Mr. Siconolfi acquired an excellent foundation in the automotive business, working in sales, sales management and
general management at Vanderstyne Ford, Schrieber Buick, Judge Motor Corporation and Meisenzahl Auto Parts, all in the Rochester area. He has completed 100+ programs
sponsored by Chrysler Corporation, Ford Motor Company and General Motors in fields such as management, sales management, sales, customer relations, human resources and
service training. He earned numerous awards given by these companies.A very active participant in his community, Mr. Siconolfi is currently involved in commercial real estate.(2)
    
    James Y. Gleasman has been a consultant of the company since its inception.
His business background includes the following:
 o
    
    life-long entrepreneur;o
    
    skilled in management, finance, strategic planning, organizing and marketing;o
    
    principal inventor of the infinitely variable transmissions; co-inventor of
several other patented inventions;o
    
    established manufacturing of the Torsen® Differential in Argentina, Brazil, etc.;o
    
    former principal with two companies formerly owned by the Gleasman family;o
    
    set business strategies for small companies dealings with large companies;o
    
    joint venture partner with Clayton Brokerage Co. of St. Louis, MO.;o
    
    owned financial-consulting business;o
    
    negotiated with numerous Asian Corporations (including Mitsubishi and Mitsui);o
    
    Educated in Asian philosophy, business practices and culture.
 (3)
    
    Keith E. Gleasman is a co-inventor on Torvec patents. His strengths include his extensive marketing and sales executive experience, in addition to his design and development
knowledge. His particular expertise has been in the area of defining and demonstrating the products to persons within all levels of the automotive industry, race crew
members, educators and students. His experience includes:
 o
    
    as former Vice President of Sales for the unrelated Gleason Corporation (Power Systems Division), he designed and
conducted seminars on vehicle driveline systems for engineers at the U.S. army tank automotive command;o
    
    he designed a complete nationwide after-market program for the Torsen differential, which included trade show
participation for the largest after-market shows in the U.S., SCORE and SEMA;o
    
    he has extensive after-market experience including pricing, distribution, sales catalogs, promotions, trade show booths
designs and vehicle sponsorships;o
    
    he was responsible for over 300 articles in trade magazines highlighting the
Torsen Differential (e.g., Popular Science,
Auto Week, Motor Trend, Off-Road, and Four Wheeler);o
    
    he designed the FTV vehicle from concept to preproduction prototype;o
    
    He assisted in developing engineering and manufacturing procedures for the Torsen differential and for all of the Torvec
prototypes;o
    
    he has instructed race teams on use of the Torsen differential (Indy cars, Formula 1, SCCA Trans-Am, IMSA, GTO, GTU, GT-1,
NASCAR, truck pullers and off-road racers);




---



##### Table of Contents



68 o
    
    he has been trained for up-to-date manufacturing techniques such as NWH, statistical process control and MRP II.
 Mr. Gleasman has extensive technical and practical experience, covering all aspect of the companys products such as, promotion, engineering and manufacturing.(4)
    
    Dr. Dobbs, Ph.D., P.E., has worked at every level from design engineer to technical director of an Army Major Commodity Command at the two-star level. He has worked as a
hands-on engineer and scientist in industry and government, commanded field units, managed Army R & D programs and laboratories and currently has his own practice as a
consultant engineer. He has the broad background needed to guide the companys growth and development.During his career he has:
 o
    
    worked as a manufacturing engineer;o
    
    worked as a design engineer in the aircraft and missile industry;o
    
    managed Army laboratories as a captain, lieutenant colonel and colonel;o
    
    organized, implemented and operated the theater-wide Red Ball Express quick response supply system in Vietnam to get
disabled weapons and other critical equipment repaired and back into combat as rapidly as possible;o
    
    Conducted basic research on multi-phase turbulent fluid dynamics supporting development of the gas turbine primary power
system now used in the M1 Abrams Main Battle Tank (MBT);o
    
    managed advanced development of the laser guided 155mm-artillery shell now known as the Copperhead;o
    
    served in Taiwan as a member of the U.S. Military Assistance Advisory Group
(MAAG) working with the Republic of China Army General Staff;o
    
    served as liaison officer between the Army and Air Force for development of the
laser seeker for the Hellfire missile;o
    
    guided development of a new family of tactical vehicles for the Army, including
the High Mobility Multipurpose Wheeled Vehicle (HMMWV) now known as the
Hummer, which uses the Torsen differential.o
    
    served as Technical Director of U.S. Army Tank-Automotive Command* (TACOM),
which then employed some 6,400 people and is responsible for all support of U.S.
military ground vehicles (a fleet of 440,000) from development to ultimate
disposal with a budget of nearly $10 billion a year. He was also responsible for
negotiation and management of military automotive R&D agreements with the French
and German Ministries of Defense.
 *
    
    Now the U.S. Army Tank-automotive and Armaments Command.
 At the end of 1985, Herbert H. Dobbs left government service and started his own consulting practice and began working with the Gleasmans to develop and market the Gleasman familys
inventions. Herbert H. Dobbs holds a Ph.D. in Mechanical Engineering from the University of Michigan and is a registered professional engineer in Michigan. He holds several patents of
his own and, among many affiliations, is a member of SAE, ASME, NSPE, AAAS, Sigma XI, AUSA, NDIA and the U.S. Army Science Board. The last named organization is a small group of senior
technical and managerial people chosen from industry and academia to provide direct advice to the Secretary of the Army, the Chief of Staff, and the Department of the Army concerning
issues of policy, budgets, doctrine, organization, training and technology.(5)
    
    Daniel R. Bickel is a partner in the accounting firm of Bickel & Dewar, C.P.A.s, an accounting firm providing a variety of accounting services to small to medium sized business. The
services provided include audits, reviews, compilations, business and personal consulting, business acquisition and sale assistance and income tax preparation. Mr. Bickel is a graduate
of the Rochester Institute of Technology. He has been licensed in New York State as a certified public accountant for almost 30 years and is a member of the American Institute of
Certified Public Accountants and the New York State Society of Certified Public Accountants. He has served as an officer and director of numerous non-profit and civic organizations.




---



##### Table of Contents



69 (6)
    
    Joseph B. Rizzo is a partner and head of the Litigation Department of the law firm of Gallo &
Iacovangelo, LLP and has held this position since December, 1997. He is a published legal
commentator and a lecturer for the New York State Bar Association. He is a member of the New
York State Bar Association and the National Crime Victims Bar Association. He appears in the
Strathmores Whos Who 2005-2006 edition for outstanding leadership and achievement in the
practice of law.(7)
    
    David M. Flaum is a Rochester, New York leading real estate developer. In 1985, he founded
Flaum Management Co.,Inc., a full service regional real estate development and property
management firm. Mr. Flaum is noted for developing retail centers, office buildings,
advanced or high technology facilities, call centers, redevelopment projects and commercial
land in the northeastern United States. Flaum Management Company has developed particular
expertise in redeveloping difficult or troubled properties, often adding hundreds of jobs to
upstate New York communities. Mr. Flaum is a founding board member of US LEC Corp. He serves
on the board of directors of U.S. Telepacific Corp. and is a member of the Board of Trustees
of Syracuse University, serving on its Executive, Facilities and Academic committees. He is
a member of the Facilities committee of the University of Rochesters Medical Center and Eye
Institute.
 (c) Family Relationships
  (d) Section 16(a) Beneficial Ownership Reporting Compliance




---



##### Table of Contents



70 (e) Corporate Governance, Code of Ethics, Director Independence
 Role of the Board of Directors
     Operation of the Board and its Committees




---



##### Table of Contents



71 The Audit Committee




---



##### Table of Contents



72 The Nominating Committee
     Shareholders wishing to directly nominate candidates for election to the board of directors at
an annual meeting must do so by giving notice in writing to the chairman of the Nominating
Committee, Torvec, Inc., Powder Mills Office Park, 1169 Pittsford-Victor Rd., Suite 125,
Pittsford, New York 14534. The notice with respect to any annual meeting must be delivered to
the chairman not less than 120 days prior to the anniversary of the preceding years annual
meeting. The notice shall set forth (a) the name and address of the shareholder who intends to
make the nomination; (b) the name, age, business address and residence address of each nominee;
(c) the principal occupation or employment of each nominee; (d) the class and number of shares
of Torvec securities which are beneficially owned by each nominee and by the nominating
shareholder; (e) any other information concerning the nominee that must be disclosed in nominee
and proxy solicitations pursuant to Regulation 14A of the Securities Exchange Act of 1934; and
(f) the executed consent of each nominee to serve as a director of Torvec if elected.
   Officer
    
    Mailing Address
    
    E-mailJames Y. Gleasman
    
    Torvec, Inc.
    
    jgleasman@torvec.comChief Executive
    
    Powder Mills Office Park,Officer, Interim Chief Financial
    
    1169 Pittsford-Victor Rd., Suite 125Officer
    
    Pittsford, NY 14534Keith E. Gleasman
    
    Torvec, Inc.
    
    kgleasman@torvec.comPresident
    
    Powder Mills Office Park,1169 Pittsford-Victor Rd., Suite 125Pittsford, NY 14534




---



##### Table of Contents



73  Herbert H. Dobbs
    
    dr.hh.dobbs@earthlink.netJoseph Rizzo
    
    josephrizzo@gallolaw.comDaniel R. Bickel
    
    dbickel@frontiernet.netGary A. Siconolfi
    
    gary1015@rochester.rr.comDavid M. Flaum
    
    dmf@flaummgt.comRegular mail may be addressed to:
    
    Torvec Independent Directorsc/o Torvec, Inc.Powder Mills Office Park1169 Pittsford-Victor Rd., Suite 125Pittsford, NY 14534Attention: Gary A. Siconolfi
  In recommending candidates, the Committee shall consider the candidates mix of skills,
experience with businesses and other organizations of comparable size, reputation, background
and time availability (in light of anticipated needs), the interplay of the candidates
experience with the experience of other board members, the extent to which the candidate would
be a desirable addition to the board and any committees of the board and any other factors the
Committee deems appropriate. At a minimum, the Committee shall address the following skill sets
in evaluating director candidates: accounting or finance, business or management experience,
industry knowledge, customer base experience or perspective, international marketing and
business experience, strategic planning and leadership experience.Directors should possess the highest personal and professional ethics, integrity and values,
and be committed to representing the long-term interest of the shareholders. They must also
have an inquisitive and objective perspective, practical wisdom and mature judgment. The board
should represent diverse experience at policy making levels in business, government, education
and technology, and in areas that are relevant to the companys worldwide activities.Directors must be willing to devote sufficient time to carrying out their duties and
responsibilities effectively, and should be committed to serve on the Board for an extended
period of time. Directors should consider offering their resignation in the event that
significant change in their personal circumstances, including their health, family
responsibilities, or a change in their principal job responsibilities, would preclude them from
devoting sufficient time to carrying out their responsibilities effectively.The board does not believe that arbitrary term limits on director service are appropriate, nor
does it believe that directors should expect to be renominated automatically. The contribution
of each member as a member of a committee or the board shall be evaluated each year by the
Committee before his renomination is recommended to the board.




---



##### Table of Contents



74 The Governance and Compensation Committee
     The Executive Committee
      Sarbanes-Oxley Compliance




---



##### Table of Contents



75  (i.) Code of Business Conduct and Ethics
 The companys Code of Business Conduct and Ethics applies to all members of the board, all
senior executive and financial officers, and all employees of the company, its divisions and
its subsidiaries. The Code mandates that all company personnel observe the highest standards of
business and personal conduct in the performance of their duties and responsibilities,
especially in dealing with other company personnel, our shareholders, the general public, the
business community, customers, suppliers, and governmental authorities. It addresses conflicts
of interest, corporate opportunities, confidentiality, fair dealing, protection and proper use
of corporate assets, compliance with laws, rules and regulations and requires the reporting of
any illegal or unethical behavior.We require our employees, our officers and directors to talk to supervisors, managers or other
appropriate personnel to report and discuss any known or suspected unethical, illegal or
criminal activity involving the company and/or its employees. We have established a compliance
network which allows employees, officers and directors to anonymously report any known or
suspected violation of laws, rules, regulations or the Code of Business Conduct and Ethics.Waivers of the Codes provisions are generally not permitted, may be granted only by the Board
of Directors, and if granted, will be disclosed to the companys shareholders. There were no
waivers of the Code during fiscal 2006.A copy of our Code of Conduct is on our website at www.torvec.com.
 (ii.) Financial Integrity and Compliance Program
 The companys Financial Integrity and Compliance Program mandates that the companys results of
operations and financial position must be recorded in accordance with the requirements of law
and generally accepted accounting principles and that all books, records and accounts must be
maintained in reasonable detail so that they accurately and fairly reflect the business
transactions and disposition of assets of the company. The written policy requires all
personnel responsible for the preparation of financial information to ensure that the companys
financial policies and internal control procedures are followed and holds each employee
involved in creating, processing and recording financial information accountable for the
integrity of the financial reporting process. The program establishes a network for the
receipt, retention, and treatment of complaints received by the company regarding accounting,
internal accounting controls or auditing matters and provides for the submission (including the
confidential anonymous submission) by company employees of concerns they may have regarding
questionable accounting or auditing matters.A copy of our Financial Integrity and Compliance Program is on our website at www.torvec.com.
 (iii.) Corporate Governance Principles
 Our Corporate Governance Principles set forth certain principles and policies governing the
role of the board of directors in management, the functions of the board of directors,
qualifications of directors, independence of directors, the size of the board and selection
process, board committees, independence of committee members, meetings of independent
directors, shareholder communications, board and committee agendas, ethics and conflicts of
interest, reporting and access to advisers.Our code of business conduct and ethics, our financial integrity and compliance program, our
statement of corporate governance principles and additional information on our corporate
governance policies is available on our website at: www.torvec.com.A copy of our Corporate Governance Principles is on our website at www.torvec.com.




---



##### Table of Contents



76 
 Item 11. EXECUTIVE COMPENSATION
 (a) Compensation Discussion and Analysis
       the successful
completion of one or more commercializing events. if and only if No shares have been issued under the plan to date and no
shares will be issued under the plan unless and until a commercializing event actually occurs.




---



##### Table of Contents



77  both
 SUMMARY COMPENSATION TABLE FOR YEARS ENDED DECEMBER 31, 2004, 2005 AND 2006
 Name and
    
    Year
    
    
    Salary
    
    
    Bonus
    
    
    Stock
    
    
    Option
    
    
    Non-
    
    
    Change in
    
    
    All
    
    
    Total ($)Principal
    
    
    
    
    
    ($)
    
    
    ($)
    
    
    Awards
    
    
    Awards
    
    
    Equity
    
    
    Pension
    
    
    OtherPosition
    
    
    
    
    
    
    
    
    
    
    
    
    
    ($)
    
    
    ($)
    
    
    Incentive
    
    
    Value and
    
    
    CompensationPlan
    
    
    Nonqualified
    
    
    ($)Compen-
    
    
    Deferredsation
    
    
    Compensation($)
    
    
    Earnings($)(a)
    
    (b)
    
    
    (c)
    
    
    (d)
    
    
    (e)
    
    
    (f)
    
    
    (g)
    
    
    (h)
    
    
    (i)
    
    
    (j)Eric
    
    
    2003
    
    
    $
    0
    
    
    $
    0
    
    
    $
    0
    
    
    $
    0
    
    
    $
    0
    
    
    $
    0
    
    
    $
    0
    
    
    $
    0Steenburgh,
Chief Executive
    
    
    2004
    
    
    $
    0
    
    
    $
    0
    
    
    $
    0
    
    
    $
    0
    
    
    $
    0
    
    
    $
    0
    
    
    $
    0
    
    
    $
    0Officer(1)Richard
    
    
    2004
    
    
    
    (3
    )
    
    
    (3
    )
    
    
    (3
    )
    
    
    (3
    )
    
    
    (3
    )
    
    
    (3
    )
    
    
    (3
    )
    
    
    (3
    )Ottalagana,
Chief Executive
    
    
    2005
    
    
    
    (4
    )
    
    
    (4
    )
    
    
    (4
    )
    
    
    (4
    )
    
    
    (4
    )
    
    
    (4
    )
    
    
    (4
    )
    
    
    (4
    )Officer(2)Philip A.Fain,
    
    
    2004
    
    
    
    (6
    )
    
    
    (6
    )
    
    
    (6
    )
    
    
    (6
    )
    
    
    (6
    )
    
    
    (6
    )
    
    
    (6
    )
    
    
    (6
    )Chief Executive
Officer, Chief
Financial
    
    
    2005
    
    
    
    (7
    )
    
    
    (7
    )
    
    
    (7
    )
    
    
    (7
    )
    
    
    (7
    )
    
    
    (7
    )
    
    
    (7
    )
    
    
    (7
    )Officer(5)Keith E.
    
    
    2003
    
    
    $
    122,500
    
    
    $
    0
    
    
    $
    0
    
    
    $
    49,000
    (9)
    
    $
    0
    
    
    $
    0
    
    
    $
    0
    
    
    $
    171,500Gleasman,
President(8)
    
    
    2004
    
    
    $
    0
    
    
    $
    0
    
    
    $
    0
    
    
    $
    0
    
    
    $
    0
    
    
    $
    0
    
    
    $
    0
    
    
    $
    02005
    
    
    $
    0
    
    
    $
    0
    
    
    $
    0
    
    
    $
    0
    
    
    $
    0
    
    
    $
    0
    
    
    $
    0
    
    
    $
    0James Y.
    
    
    2003
    
    
    $
    92,700
    
    
    $
    0
    
    
    $
    0
    
    
    $
    60,946
    (11)
    
    $
    0
    
    
    $
    0
    
    
    $
    0
    
    
    $
    153,646Gleasman, Chief
Executive
    
    
    2004
    
    
    $
    0
    
    
    $
    0
    
    
    $
    0
    
    
    $
    0
    
    
    $
    0
    
    
    $
    0
    
    
    $
    0
    
    
    $
    0Officer, Interim
Chief Financial
    
    
    2005
    
    
    $
    0
    
    
    $
    0
    
    
    $
    0
    
    
    $
    0
    
    
    $
    0
    
    
    $
    0
    
    
    $
    0
    
    
    $
    0Officer(10)Samuel M.
    
    
    2003
    
    
    $
    0
    
    
    $
    0
    
    
    $
    0
    
    
    $
    0
    
    
    $
    0
    
    
    $
    0
    
    
    $
    0
    
    
    $
    0Bronsky, Chief
Accounting
    
    
    2004
    
    
    $
    25,200
    
    
    $
    0
    
    
    $
    0
    
    
    $
    0
    
    
    $
    0
    
    
    $
    0
    
    
    $
    0
    
    
    $
    25,200Officer(12)
    
    
    2005
    
    
    $
    12,980
    
    
    $
    0
    
    
    $
    0
    
    
    $
    0
    
    
    $
    0
    
    
    $
    0
    
    
    $
    0
    
    
    $
    12,980Richard B.
    
    
    2006
    
    
    $
    129,500
    
    
    $
    0
    
    
    $
    0
    
    
    $
    0
    
    
    $
    0
    
    
    $
    0
    
    
    $
    0
    
    
    $
    129,500Sullivan
General
Counsel(11)




---



##### Table of Contents



78 
 (1)
    
    Eric Steenburgh served as chief executive officer during 2004 until May 31, 2004. He was
not paid any compensation for his services.(2)
    
    Richard Ottalagana served as chief executive officer from June 15, 2004 through March 3,
2005.(3)
    
    Mr. Ottalagana was compensated by the issuance of common shares and common stock purchase
warrants to CXO on the GO, LLC, a management consulting firm of which he was a member. During
fiscal 2004, the firm received 940,000 warrants and 107,499 common shares as compensation and the
company recorded a charge of approximately $5,496,000 for these warrants.(4)
    
    Mr. Ottalagana was compensated by the issuance of common shares and common stock purchase
warrants to CXO on the GO, LLC and CXO on the GO of Delaware, LLC, management consulting firms of
which he was a member. During fiscal 2005, the firms received 140,000 warrants and 90,705 common
shares and the company recorded a charge of approximately $444,000 for these warrants.(5)
    
    Philip A. Fain served as chief financial officer from June 15, 2004 through August 19,
2005 and as chief executive officer from March 3, 2005 to August 19, 2005.(6)
    
    (7) As a member of CXO on the GO, LLC and later, as a member of CXO on the GO of Delaware,
LLC, Mr. Fain was compensated during 2004 and 2005 through the issuance of common shares and
warrants to the management consulting firm in the same manner and amount as stated for Mr.
Ottalagana..(8)
    
    Mr. Keith Gleasman served as president during the years specified. For the years ended
December 31, 2006, 2005 and 2004, Mr. Gleasman was not paid any compensation by the company in
accordance with their mutual agreement of January 1, 2004.(9)
    
    Mr.James Gleasman became chief executive officer and interim chief financial officer on
August 19, 2006. Prior to assuming these positions, Mr. Gleasman served as chief strategist for the
company. For the years ended December 31, 2006 2005 and 2004, Mr. Gleasman was not paid any
compensation by the company in accordance with their mutual agreement of January 1, 2004.(10)
    
    Mr. Bronsky served as the chief accounting officer of the company until June, 2005.(11)
    
    Mr. Sullivan became general counsel to the company on December 16, 2005. In such capacity
he received 25,000 business consultants shares on January 16, 2006, April 20, 2006 and July 26,
2006 valued as of the closing prices of the companys common stock on the trading dates immediately
preceding each of said dates.




---



##### Table of Contents



79 OUTSTANDING EQUITY AWARDS AT DECEMBER 31, 2006
 Option Award
    
    Stock AwardsName
    
    Number
    
    Number of
    
    Equity
    
    Option
    
    Option
    
    Number
    
    Market
    
    Equity
    
    Equityof
    
    Securities
    
    Incentive Plan
    
    Exercise
    
    Expiration
    
    of Shares
    
    Value
    
    Incentive
    
    IncentiveSecurities
    
    Underlying
    
    Awards:
    
    Price
    
    Date
    
    or Units
    
    of
    
    Plan
    
    PlanUnderlying
    
    Unexercised
    
    Number
    
    ($)
    
    
    
    
    
    of Stock
    
    Shares
    
    Awards:
    
    Awards:Unexercised
    
    Options(#)
    
    of Securities
    
    
    
    
    
    
    
    
    
    That Have
    
    or Units
    
    Number
    
    Market orOptions(#)
    
    Unexercisable
    
    Underlying
    
    
    
    
    
    
    
    
    
    Not
    
    of Stock
    
    of
    
    PayoutExercisable
    
    
    
    
    
    Unexercised
    
    
    
    
    
    
    
    
    
    Vested
    
    That
    
    Unearned
    
    Value ofUnearned
    
    
    
    
    
    
    
    
    
    (#)
    
    Have
    
    Shares,
    
    UnearnedOptions
    
    
    
    
    
    
    
    
    
    
    
    
    
    Not
    
    Units or
    
    Shares,(#)
    
    
    
    
    
    
    
    
    
    
    
    
    
    Vested
    
    Other
    
    Units or($)
    
    Rights
    
    OtherThat Have
    
    RightsNot
    
    That haveVested
    
    Not(#)
    
    Vested($)(a)
    
    (b)
    
    (c)
    
    (d)
    
    (e)
    
    (f)
    
    (g)
    
    (h)
    
    (i)
    
    (j)James Y.Gleasman
    
    
    238,739
    
    
    
    0
    
    
    
    0
    
    
    $
    5.00
    
    
    
    2007- 2013(1)
    
    
    
    0
    
    
    $
    0
    
    
    
    0
    
    
    $
    0Keith E. Gleasman
    
    
    237,967
    
    
    
    0
    
    
    
    0
    
    
    $
    5.00
    
    
    
    2007-  2013(2)
    
    
    
    0
    
    
    $
    0
    
    
    
    0
    
    
    $
    0Samuel M. Bronsky
    
    
    100,000
    
    
    
    0
    
    
    
    0
    
    
    $
    5.00
    
    
    
    2011
    
    
    
    0
    
    
    $
    0
    
    
    
    0
    
    
    $
    0Richard
B. Sullivan
    
    
    (3)
    
    
    
    0
    
    
    
    0
    
    
    $
    .01
    
    
    None
    
    
    0
    
    
    $
    0
    
    
    
    0
    
    
    $
    0
 
 (1)
    
    25,000 options expire on December 1, 2007; 174,164 options expire on September 30, 2007
and 39,575 options expire on December 21, 2013.(2)
    
    25,000 options expire on December 1, 2007; 181,149 options expire on September 30, 2007
and 31,818 options expire on December 21, 2013.(3)
    
    Mr. Sullivan was awarded 120,000 warrants in 2005 exercisable at $.01 per common share for
certain business consultant services rendered during that year prior to his becoming general
counsel of the company. He exercised 48,000 of these warrants during
2005 and 72,000 of these
warrants in 2006.




---



##### Table of Contents



80 DIRECTOR COMPENSATION FOR THE YEAR ENDED DECEMBER 31, 2006
 Name
    
    Fees
    
    Stock
    
    Option
    
    Non-
    
    Change in
    
    All Other
    
    TotalEarned
    
    Awards
    
    Awards
    
    Equity
    
    Pension Value
    
    Compensation
    
    ($)or Paid
    
    ($)
    
    ($)
    
    Incentive
    
    and Nonqualified
    
    ($)in Cash
    
    
    
    
    
    
    
    
    
    Plan
    
    Deferred($)
    
    
    
    
    
    
    
    
    
    Compensation
    
    Compensation($)
    
    Earnings(a)
    
    (b)
    
    (c)
    
    (d)
    
    (e)
    
    (f)
    
    (g)
    
    (h)Daniel R. Bickel
    
    $
    0
    
    
    $
    9,300
    
    
    $
    15,215
    (1)
    
    $
    0
    
    
    $
    0
    
    
    $
    0
    
    
    $
    24,515Herbert H. Dobbs
    
    $
    0
    
    
    $
    6,300
    
    
    $
    10,740
    (2)
    
    $
    0
    
    
    $
    0
    
    
    $
    0
    
    
    $
    17,040Joseph B. Rizzo
    
    $
    0
    
    
    $
    11,400
    
    
    $
    10,740
    (2)
    
    $
    0
    
    
    $
    0
    
    
    $
    0
    
    
    $
    22,140Gary A. Siconolfi
    
    $
    0
    
    
    $
    30,900
    
    
    $
    10,740
    (2)
    
    $
    0
    
    
    $
    0
    
    
    $
    0
    
    
    $
    63,780$
    644,480
    (3)
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    644,480David M.
Flaum
    
    $
    0
    
    
    $
    6,300
    
    
    $
    0
    (4)
    
    $
    0
    
    
    $
    0
    
    
    $
    0
    
    
    $
    6,300
 
 (1)
    
    8,500 common stock warrants, exercisable at $.01 per common share, were issued as of March
31, 2006 and June 30, 2006. The closing price for the companys common stock on June 19, 2006, the
date of issuance was $1.80 per common share. All warrants were issued under the Nonmanagement
Directors Plan prior to its amendment on October 13, 2006.(2)
    
    6,000 common stock warrants, exercisable at $.01 per common share, were issued as of March
31, 2006 and June 30, 2006. The closing price for the companys common stock on June 19, 2006, the
date of issuance was $1.80 per common share. All warrants were issued under the Nonmanagement
Directors Plan prior to its amendment on October 13, 2006.(3)
    
    360,000 common stock warrants, exercisable at $.01 per common share, were issued on June
19, 2006 to Mr. Siconolfi for extraordinary services rendered to the company in 2005 and 2006 as
chairman of the companys executive committee. These services included committee oversight,
investigation of a management consulting firms activities with respect to the company, liaison
with special counsel engaged by the company to investigate certain deficiencies with respect to the
firms performance, review of the companys relationships with certain directors introduced to the
company by the consulting firm as well as review of all company policies and procedures regarding
authorization of expenditures, iinsurance coverages, lease arrangments and contract authorizations.(4)
    
    400,000 common stock warrants, exercisable at $3.27 per common share, were issued to a
company of which Mr. Flaum is a member upon his election to the board of directors. The closing
price for the companys common stock as of August 13, 2006, the trading date immediately prior to
the issuance, was $3.27 per common share. The warrants have a ten year term.




---



##### Table of Contents



81 (b) Discussion of Director Compensation
  1) Participation in the Nonmanagement Directors Plan




---



##### Table of Contents



82 2) Participation in 1998 Stock Option Plan
     3) Participation in the Business Consultants Stock Plan




---



##### Table of Contents



83




---



##### Table of Contents



84 
 Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED SHAREHOLDER MATTERS
 Security Ownership  Common Stock
  o
    
    each person who is known by us to beneficially own more than 5% of our common stock;o
    
    each of our directors;o
    
    each of our named executive officers; ando
    
    all of our directors and executive officers as a group.
  Name and Address of
    
    
    
    
    
    Percent of SharesBeneficial Owner
    
    Number of Shares Owned
    
    OwnedMargaret F.
Gleasman
11 Pond
View Drive
Pittsford, NY
14534
    
    
    
    

    3,090,750(1)
    
    
    
    9.8
    %
 
 (1)
    
    Includes 25, 000, 275,734 and 95,455 common shares which may be
purchased through the exercise of ten year options granted on
December 1, 1997, September 30, 2002 and January 5, 2004,
respectively, all exercisable at $5.00 per common share.
 Number of
    
    PercentName and Address of
    
    
    
    Shares
    
    of SharesBeneficial Owner
    
    Position
    
    Owned
    
    OwnedGary A. Siconolfi
325 VanVoorhis Avenue
Rochester, New York 14617
    
    Chairman of the Board
    
    
    529,217
    (1)
    
    
    1.6
    %James Y. Gleasman
11 Pond View Drive
Pittsford, New York 14534
    
    Chief Executive Officer, Interim
Chief Financial Officer, Director
    
    
    6,327,783
    (2)
    
    
    20
    %Keith E. Gleasman 11 Pond View
Drive Pittsford, New York 14534
    
    President Director
    
    
    9,533,028
    (3)
    
    
    30.3
    %Herbert H. Dobbs
448 West Maryknoll Road 
Rochester Hills, Mich. 48309
    
    Secretary
Director
    
    
    461,886
    (4)
    
    
    1.4
    %Daniel R. Bickel
39 Whippletree Road
Fairport, New York 14450
    
    Director
    
    
    79,196
    (5)
    
    less than 1%




---



##### Table of Contents



85 Number of
    
    PercentName and Address of
    
    
    
    Shares
    
    of SharesBeneficial Owner
    
    Position
    
    Owned
    
    OwnedJoseph B. Rizzo
39 State Street, Suite 700
Rochester, New York 14614
    
    Director
    
    
    6,047
    
    
    less than 1%David M. Flaum
39 State Street
Rochester, New York 14614
    
    Director
    
    
    402,086
    (6)
    
    
    1.2
    %All Directors and Executive
Officers as a Group
    
    
    
    
    14,439,243
    (7)
    
    
    45
    %
 
 (1)
    
    Includes 100,000 common shares which may be purchased through the exercise of a ten year option granted
on October 15, 2003, exercisable at $5.00 per share.(2)
    
    Includes 25,000, 270,164 and 39,575 common shares which may be purchased through the exercise of ten
year options granted on December 1, 1997, September 30, 2002 and January 5, 2004, respectively, all
exercisable at $5.00 per share. Includes 1,400,000 common shares held by the Vernon E. Gleasman
Grandchildrens Trust and 1,400,000 common shares held by the Margaret F. Gleasman Grandchildrens Trust
of which Mr. Gleasman is co-trustee.
50,000 of Mr. Gleasmans common shares are subject to a put option given to the holder to pay certain
personal obligations in September, 2004. The option has no exercise price.(3)
    
    Includes 25,000, 181,149 and 31, 818 common shares which may be purchased through the exercise of ten
year options granted on December 1, 1997, September 30, 2002 and December 22, 2003, respectively, all
exercisable at 5.00 per share. Includes 60, 000 common shares owned by Mr. Gleasmans sons. Includes
1,400,000 common shares held by the Vernon E. Gleasman Grandchildrens Trust and 1,400,000 common shares
held by the Margaret F. Gleasman Grandchildrens Trust of which Mr. Gleasman is co-trustee. Includes
1,666,666 shares held by the James Y. Gleasman Childrens Trust of which Mr. Gleasman is co-trustee.(4)
    
    Includes 100,000 common shares which may be purchased through the exercise of a ten year option granted
on January 1, 1998, exercisable at $5.00 per share.(5)
    
    Includes 25,000 common shares which may be purchased through the exercise of a ten year option granted
on October 15, 2003, exercisable at $5.00 per share. Includes 29,750 common shares which may be
purchased at $.01 per common share through the exercise of warrants issued under the Nonmanagement
Directors Plan.(6)
    
    Includes 400,000 common shares which may be purchased through the exercise of ten year warrants
exercisable at $3.27 per common share. Mr. Flaums shares and warrants are owned directly by a company
of which Mr. Flaum is a principal.(7)
    
    Includes an aggregate 797,706 common shares which may be purchased through the exercise of options, all
of which are exercisable at $5.00 per share; 1,400,000 common shares held by the Vernon E. Gleasman
Grandchildrens Trust; 1,400,000 common shares held by the Margaret F. Gleasman Grandchildrens Trust;
and 1,666,666 common shares held by the James Y. Gleasman Childrens Trust. Includes 29,750 common stock
warrants issued under the Nonmanagement Directors Plan exercisable at $.01 per common share. Includes
400,000 common stock warrants exercisable at $3.27 per common share. Includes 60,000 common shares
owned by Keith E. Gleasmans sons.
The 2,800,000 common shares owned by the Vernon and Margaret Gleasman Grandchildrens Trusts are counted
only once for this calculation.
 Security Ownership  Preferred Stock




---



##### Table of Contents



86 
 Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR
INDEPENDENCE
 Certain Transactions




---



##### Table of Contents



87  Director Independence




---



##### Table of Contents



88 
 Item 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
 Principal Accountant Fees and Services
 Audit Fees
  2005
    
    2006$79,733
    
    $116,499
 Audit-Related Fees
  2005
    
    2006None
    
    None
  Tax Fees
  2005
    
    2006None
    
    None
  
    
    tax return compliance for federal and state income/franchise tax purposes; and
    
    advice and/or opinions on tax planning and tax reporting matters, including
research, discussions, preparation of memorandums and attendance at meetings,
as mutually determined to be necessary, including but not limited to the
following areas  international taxes, mergers, acquisitions and
divestitures, employee compensation, benefits and related reporting
requirements, accounting methods, response to inquiries and notices regarding
federal and state taxes.




---



##### Table of Contents



89 All Other Fees
  2005
    
    2006None
    
    None
  Pre-Approval of Policies and Procedures
  Audit -Committee Approval




---



##### Table of Contents



90 
 Item 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
 (a) Exhibits
  (2)
    
    Plan of acquisition, reorganization, arrangement, liquidation, or succession
 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)
    
    Articles of Incorporation, By-laws
 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
    
    Certificate 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 authorized
common shares from
40,000,000 to
400,000,000.
 (4)
    
    Instruments defining the rights of holders including indenturesNone(9)
    
    Voting Trust AgreementNone(10)
    
    Material Contracts
 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;




---



##### Table of Contents



91 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, and 2,500,000 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, and April
20, 2004 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;




---



##### Table of Contents



92 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;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;




---



##### Table of Contents



93 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;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;




---



##### Table of Contents



94 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
Incorporated by reference to annual report (Form 10-KSB) filed for the
year ended December 31, 2005;10.47
    
    Minutes of meeting of Board of Directors dated October 13, 2006 creating
the Commercializing Event Plan, modifying the Nonmanagement Directors
Plan. increasing the number of authorized shares to be issued under
Business Consultants Plan and recommending shareholder approval of
increase in number of authorized common shares from 40,000,000 to
400,000,000;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 Current Report (Form 8-K) filed on June 20,
2006.10.49
    
    Agreement with American Continental Group,LLC dated October 27, 2006
incorporated by reference to Current Report (Form 8-K) filed 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.
 (11)
    
    Statement re computation of per share earnings (loss)
Not applicable(14)
    
    Code of Ethics(16)
    
    Letter on change in certifying accountantNone(18)
    
    Letter re change in accounting principlesNone(20)
    
    Other documents or statements to security holdersNone(21)
    
    Subsidiaries of the registrant
Ice Surface Development, Inc. (New York)
Iso-Torque Corporation (New York)
IVT Diesel Corp. (New York)
Variable Gear, LLC (New York)(22)
    
    Published report regarding matters submitted to vote of security holdersNone




---



##### Table of Contents



95 (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




---



##### Table of Contents



96 
 SIGNATURES
  TORVEC, INC.Date: March 31, 2007
    
    By:
    
    S  James Y. Gleasman
James Y. Gleasman, Chief Executive Officer
  Dated: March 31, 2007
    
    By:
    
    S  James Y. Gleasman
James Y. Gleasman, Chief Executive Officer, Interim Chief
Financial Officer and DirectorDated: March 31, 2007
    
    By:
    
    S  Keith E. Gleasman
Keith E. Gleasman, President and DirectorDated: March 31, 2007
    
    By:
    
    S  Herbert H. Dobbs
Herbert H. Dobbs, Secretary and DirectorDated: March 31, 2007
    
    By:
    
    S  Daniel R. Bickel
Daniel R. Bickel, DirectorDated: March 31, 2007
    
    By:
    
    S  Joseph R.Rizzo 
Joseph R. Rizzo, DirectorDated: March 31, 2007
    
    By:
    
    S  David M. Flaum
David M. Flaum, DirectorDated: March 31, 2007
    
    By:
    
    S  Gary A. Siconolfi
Gary A. Siconolfi, Director




---



##### Table of Contents



97 
 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
    
    
    Certificate 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.
    
    
    103(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




---



##### Table of Contents



98 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;
    
    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 and 2,500,000 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 and April 20, 2004
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/A




---



##### Table of Contents



99 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;
    
    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/A10.24
    
    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/A




---



##### Table of Contents



100 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;
    
    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/A10.36
    
    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/A




---



##### Table of Contents



101 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;
    
    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
incorporated by reference
to annual report (Form
10-KSB) filed for the year
ended December 31, 2005;
    
    N/A10.47
    
    Minutes of meeting of
Board of Directors dated
October 13, 2006 creating
the Commercializing Event
Plan, modifying the
Nonmanagement Directors
Plan. increasing the
number of authorized
shares to be issued under
Business Consultants Plan
and recommending
shareholder approval of
increase in number of
authorized common shares
from 40,000,000 to
400,000,000;
    
    N/A10.48
    
    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 Current Report (Form
8-K) filed on June 20,
2006.
    
    N/A10.49
    
    Agreement with American
Continental Group,LLC
dated October 27, 2006
incorporated by reference
to Current Report (Form
8-K) filed October 30,
2006.
    
    N/A10.50
    
    New York State School Bus
Proposal incorporated by
reference to Form 10-Q
filed for quarter ended
March 31, 2006.
    
    N/A
 (11)
    
    Statement re computation of per share earnings (loss)Not applicable(14)
    
    Code of Ethics(16)
    
    Letter on change in certifying accountantNone(18)
    
    Letter re change in accounting principlesNone




---



##### Table of Contents



102 (20)
    
    Other documents or statements to security holdersNone(21)
    
    Subsidiaries of the registrant
Ice Surface Development, Inc. (New York)
Iso-Torque Corporation (New York)
IVT Diesel Corp. (New York)
Variable Gear, LLC (New York)(22)
    
    Published report regarding matters submitted to vote of security holders
None(23)
    
    Consents of experts and counsel(23.1)
    
    Eisner LLP Consent
    
    
    104(24)
    
    Power of attorney(31.1)
    
    None 

Rule 13(a)-14(a)/15(d)-14(a) Certifications
    
    
    105(32)
    
    Section 1350 Certifications
    
    
    106(99)
    
    Additional exhibits
None