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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, 2007
 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 
incorporation or organization)
    
    I R S Employer Identification No.1999 Mount Read Blvd. 
Building 3
Rochester, New York
    
    14615(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:
 Name of each exchange onTitle of each class
    
    which 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
  Large accelerated filer o
    
    Accelerated filer o
    
    Non-accelerated filer o
    
    Smaller reporting company þ(Do not check if a smaller reporting company)
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TABLE OF CONTENTS
 PAGEPART IItem 1. Description of Business
    
    
    4Item 1A Risk Factors
    
    
    9Item 2. Properties
    
    
    10Item 3. Legal Proceedings
    
    
    11Item 4. Submission of Matters to a Vote of Security Holders
    
    
    12Item 5 Market for Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
    
    
    12Item 6 Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    20Item 6A Quantitative and Qualitative Disclosures About Market RiskPART II  FINANCIAL INFORMATIONItem 7. Consolidated Financial StatementsReport of Independent Registered Public Accounting Firm
    
    
    F-26Torvec, Inc. and Subsidiaries Consolidated Balance Sheet as of December 31, 2007 and 2006
    
    
    F-27Torvec, Inc. and Subsidiaries Consolidated Statements of Operations for each of the years in
the Two-Year Period Ended December 31, 2007 and for the Period from September 25, 1996
(Inception) through December 31, 2007
    
    
    F-28Torvec, Inc. and Subsidiaries Consolidated Statements of Changes in Stockholders Equity
(Capital Deficit) for the Period from September 25, 1996 (Inception) through December 31, 2007
    
    
    F-29Torvec, Inc. and Subsidiaries Consolidated Statements of Cash Flows for each of the years in
The Two Year Period Ended December 31, 2007 and for the Period from September 25, 1996
(Inception) through December 31, 2007
    
    
    F-35Notes to Consolidated Financial Statements
    
    
    F-37Item 8 Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
    
    
    59Item 8A Controls and Procedures
    
    
    59Item 8B Other Information
    
    
    60PART IIIItem 9 Directors, Executive Officers, Promoters and Control Persons; Compliance with Section 16(a) of
the Exchange Act
    
    
    61Item 10 Executive Compensation
    
    
    70Item 11 Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters
    
    
    75Item 12 Certain Relationships and Related Transactions and Director Independence
    
    
    77Item 13 Principal Accountant Fees and Services
    
    
    78Exhibits
    
    
    79SIGNATURES PAGE
    
    
    84EXHIBIT INDEX
    
    
    85EX - 10.55
    
    
    89EX - 23.1
    
    
    97EX - 31.1
    
    
    98EX - 32
    
    
    99EX-10.55EX-23.1EX-31.1EX-32
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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.
    (b) Our Automotive Properties
  (1) Full Terrain Vehicle
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Automotive News
 (2) IsoTorque Differential
   reliable efficient
 (3) Infinitely Variable Transmission  Hydraulic Pump/Motor
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Constant Velocity Joint Mechanism
      (c) Our Ice Technology
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*
    
    With respect to the March 1, 2008 payment only, the $300,000 will be offset by approximately
$91,000 of license-associated expenses paid by Ice Engineering to Dartmouth College on the companys
behalf. At December 31, 2007, the company has accrued $91,000 of these license-associated expenses.
On April 3, 2008, the company received net procceds of approximately $209,000 representing the March 1, 2008 quarterly payment.   (d) Current Status of Product Development
  (e) Competition, Industry and Market Acceptance
  ®
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®
  
 Item 1A. RISK FACTORS
  (1) The company has limited operating history, has not generated significant revenues since
its founding in 1996 and may have to sell shares of its common and if possible convertible Preferred stock to
continue and/or expand business operations.
  (2) The companys ability to generate significant revenue and sustainable profits is dependent
upon its ability to demonstrate the technological superiority of its automotive technologies, their
lower manufacturing costs, generally fewer
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parts and lighter weight, greater affinity for environmentally-sound applications and their
beneficial impact upon the worldwide consumption of increasingly-scarce raw materials to an
automotive industry that is heavily invested in conventional technologies and resistant to new
technology unless developed by the auto companies themselves.
 (3) In the event the company were unable to sell and/or license any of its automotive
technologies to one or more automotive companies, first-tier suppliers, government agencies and/or
the U.S. military, the company may have to embark upon the commercialization of one or more of its
technologies itself, a situation which would require considerably more capital, personnel,
regulatory compliance, time and other resources than is presently available to the company.
 (4) 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.
 (5) 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.
 (6) 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.
 (7) 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.
 (8) 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 that is not owned by the seller 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.
 (9) 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.
 
 Item 2. PROPERTIES.
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Item 3. LEGAL PROCEEDINGS.
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Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
  Subsequent Event
  Election of Directors
 Election of Directors
    
    For
    
    WithheldDaniel R. Bickel
    
    
    31,076,182
    
    
    
    385,660Herbert H. Dobbs
    
    
    31,058,860
    
    
    
    402,982David M. Flaum
    
    
    31,083,756
    
    
    
    378,086James Y. Gleasman
    
    
    31,089,058
    
    
    
    373,784Keith E. Gleasman
    
    
    31,090,058
    
    
    
    372,784Joseph B. Rizzo
    
    
    31,069,941
    
    
    
    391,901Gary A. Siconolfi
    
    
    31,087,041
    
    
    
    374,801
  For
    
    Against
    
    Abstained31,366,125
    
    
    46,646
    
    
    
    49,071
 
 Item 5. MARKET FOR COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUERPURCHASES OF EQUITY
SECURITIES
 (a) Market Information
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2007
    
    High
    
    Low1st Quarter
    
    $
    5.40
    
    
    $
    3.152nd Quarter
    
    $
    4.28
    
    
    $
    3.203rd Quarter
    
    $
    3.84
    
    
    $
    2.504th Quarter
    
    $
    4.56
    
    
    $
    2.84
 2006
    
    High
    
    Low1st Quarter
    
    $
    2.36
    
    
    $
    1.462nd Quarter
    
    $
    2.26
    
    
    $
    1.503rd Quarter
    
    $
    4.23
    
    
    $
    1.624th Quarter
    
    $
    6.40
    
    
    $
    3.02
 (b) Holders of Common Stock
  (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
    
    
    1,021,848
    (1)
    
    $
    4.77
    
    
    
    978,152
    (1)Equity compensation plans not approved by security holders
    
    
    1,495,700
    (2)-(5)
    
    $
    2.85
    
    
    
    
    (2)-(5)Total
    
    
    2,517,548
    (1)-(5)
    
    $
    3.81
    
    
    
    978,152
    (1)-(5)
 
 (1)
    
    Represents number of common stock options outstanding and the number
of options available to be granted under the companys stock option
plan as of December 31, 2007.(2)
    
    The company granted 125,000 common stock warrants to a consultant in
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agreement dated
February 11, 1997. The warrants are only exercisable if and when the
company has an initial public offering of its common stock.(3)
    
    The company granted 1,080,000 common stock warrants to a management
consulting firm as compensation for services such firm was supposed to
provide to the company. 528,800 of these warrants have been exercised
through December 31, 2007. An additional 40,000 warrants were
exercised by the management consulting firm in 2006. These warrants,
and the underlying common shares issued upon their exercise, were
cancelled in accordance with court order dated April 5, 2007. 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. 69,000
warrants have been exercised through December 31, 2007. 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 1,482,083 common stock warrants
to a number of business, engineering, financial, governmental affairs
and technical consultants in connection with its operations. 677,083
warrants have been exercised or have been cancelled or expired by
their terms through December 31, 2006. See footnote H [12] to the
companys financial statements. (e) Class A Preferred Stock
   A.
    
    Number of SharesThe number of Class A Preferred initially authorized is 3,300,000 Class A Preferred. The initial
number authorized shall be increased as required to provide Class A Preferred 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 is outstanding, the holders of the Class A Preferred
will be entitled to receive cumulative preferential dividends in the amount of $.40 per
share of Class A Preferred 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 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 at a rate of 1 share of Class A
Preferred for each $4.00 of dividends. No fractions of Class A Preferred shall issue. The
Company shall pay cash in lieu of paying fractions of Class A Preferred on a pro rata basis.(iii)
    
    Dividends shall be cumulative from the date of issuance of each share of Class A
Preferred, 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 will not bear interest.
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(v)
    
    So long as any Class A Preferred is 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 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 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 will be entitled to
participate in any such dividends, whether payable in cash, stock or otherwise on a pro rata
basis.
 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 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 at a rate of 1 share
of Class A Preferred for each $4.00 of dividends. No fractions of Class A Preferred shall
issue. The Company shall pay cash in lieu of paying fractions of Class A Preferred on a pro
rata basis.(ii)
    
    The Class A Preferred 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
at the Redemption Price.(ii)
    
    For each redemption, the Redemption Price for each share of Class A Preferred shall be
equal to amount paid per share of Class A Preferred 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 share of Class A Preferred (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 shares of Class A Preferred (the Redemption Date).(iii)
    
    In the event of redemption of only a portion of the then outstanding Class A Preferred,
the Company will affect the redemption pro rata according to the number shares held by each
holder of Class A Preferred.(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, written notice (the Redemption Notice) will be mailed,
postage prepaid, to each holder of record of the Class A Preferred at his or her post office
address last shown on the records of the Company. The Redemption Notice will state:
 
    
    Whether all or less than all of the outstanding Class A Preferred is to be
redeemed and the total number of shares of Class A Preferred being redeemed;
    
    the number of shares of Class A Preferred held by the holder that the Company intends to redeem;
    
    the Redemption Date and Redemption Price; and
    
    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 the
number of shares of Class A Preferred to be redeemed.
 (v)
    
    On or before the date fixed for redemption, each holder of Class A Preferred must
surrender the certificate or certificates representing the number of shares of Class A
Preferred to the Company, accompanied by instruments of transfer satisfactory to the Company
and sufficient to transfer the Class A Preferred 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 number of shares of Class A
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Preferred 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 shares of Class A Preferred
represented by any certificate(s) are redeemed, a new certificate will issued by the Company
representing the unredeemed Class A Preferred to the same record owner.(vi)
    
    As promptly as practicable after surrender of the certificate(s) representing the
redeemed Class A Preferred, the Company will pay the Redemption Price to the record holder
of the redeemed Class A Preferred.(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 redeemed shall cease on
the Redemption Date, and the holders of the Class A Preferred redeemed will cease to have
any further rights with respect to such redeemed Class A Preferred on the Redemption Date,
other than to receive the Redemption Price.(viii)
    
    The holders of the Class A Preferred have no right to seek or to compel redemption of the
Class A Preferred.
 E.
    
    Voting Rights The holders of Class A Preferred 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.F.
    
    Conversion Privilege
 (i)
    
    The holders of the Class A Preferred have the right, at each holders option but subject
to board approval in each case, to convert each share of Class A Preferred 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 until 1 year shall have elapsed from the issue date of the Class A
Preferred 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. 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 must give
written notice to the Company that the holder elects to covert the number of shares of Class
A Preferred 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 must surrender the certificate(s) representing the number of
shares of Class A Preferred being converted to the Company, accompanied by instruments of
transfer satisfactory to the Company and sufficient to transfer the Class A Preferred 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 number of shares of Class A Preferred 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 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 number of Class A Preferred in any case in
which fewer than all of the Class A Preferred represented by a certificate(s) are converted
to the same record holder of Class A Preferred converted.(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 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 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 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.
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(vi)
    
    The Conversion Privilege shall terminate with respect to Class A Preferred 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 then outstanding will have the right to convert
the Class A Preferred 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
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 shall have
the right to convert such Class A Preferred upon Board approval.(ix)
    
    Common Shares delivered upon conversion of Class A Preferred will be, upon delivery,
validly issued, fully paid and nonassessable, free of all liens and charges and not subject
to any preemptive rights.(x)
    
    In case the Company
 
    
    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; or
    
    Subdivides its outstanding shares of its $.01 par value common stock into a
greater number of shares of its $.01 par value common stock; or
    
    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 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
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.
    (f) Class B Preferred Stock
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A.
    
    Three hundred thousand (300,000) authorized preferred shares of the par value of $.01
each as fixed by the board of directors, , 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.B.
    
    (1) So long as any Class B Preferred are outstanding, the holders of the Class B
Preferred will be entitled to receive cumulative preferential dividends in the amount of
$.50 per share of Class B Preferred 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 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 at a rate of 1 share of
Class B Preferred for each $5.00 of dividends. No fractions of Class B Preferred shall be
issued. The Corporation shall pay cash in lieu of paying fractions of Class B Preferred
on a pro rata basis.(3) Dividends shall be cumulative from the date of issuance of each share of Class B
Preferred, 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 will not bear interest.(5) So long as any shares of Class B Preferred 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 with respect to the payment of
dividends, including the $.01 par value common stock of the company, 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 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 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 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
shares of Class B Preferred at a rate of 1 share of Class B Preferred for each $5.00 of
dividends. No fractions of Class B Preferred shall be issued. The Corporation shall pay cash
in lieu of paying fractions of Class B Preferred on a pro rata basis. (2) The Class B
Preferred 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 at the Redemption Price.(2) For each redemption, the Redemption Price for each share of Class B Preferred shall
be equal to the sum of $5.00 per share of Class B Preferred, 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 share of Class B Preferred (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 shares of Class B Preferred (the
Redemption Date).
 18




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##### Table of Contents



(3) In the event of a redemption of only a portion of the then outstanding Class B
Preferred, the Corporation will affect the redemption pro rata according to the number
shares held by each holder of Class B Preferred.(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 redeemed shall
cease on the Redemption Date, and the holders of the Class B Preferred redeemed will
cease to have any further rights with respect to such redeemed Class B Preferred on the
Redemption Date, other than to receive the Redemption Price.(5) The holders of the Class B Preferred have no right to seek or to compel redemption
of the Class B Preferred.F.
    
    The holders of Class B Preferred are not 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 have the right, at each holders option but
subject to board approval in each case, to (i) convert each share of Class B Preferred 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 share of Class B Preferred 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:
 (a) the effectiveness of a registration statement as filed with the Securities and Exchange
Commission pursuant to and under the Securities Act of 1933 with respect to an initial
public offering of Iso-Torque Common; or(b) the effectiveness of a registration statement as filed with the Securities and Exchange
Commission pursuant to and under the Securities Exchange Act of 1934 with respect to an
initial trading of Iso-Torque Common on a national exchange, the NASDAQ or the OTCBB; or(c) notwithstanding the 1 year holding period set forth in Section G(2) the execution of a
definitive agreement for the sale, transfer and/or exchange of all of the issued and
outstanding Iso-Torque Common to a third party purchaser of such stock or by any of a
business combination of Iso-Torque Corporation with an unrelated entity, other than a merger
or consolidation in which Iso-Torque Corporation is the surviving corporation.
 (2) The Conversion Privilege set forth in this Section G may not be exercised by the
holder of Class B Preferred until 1 year shall have elapsed from the issue date of the
Class B Preferred 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 B
Preferred. Such approval shall not be unreasonably withheld. Upon receipt of the Notice
of Conversion and the boards approval of such conversion, the Corporation 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.(3) 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 B Preferred in any case in
which fewer than all of the Class B Preferred represented by a certificate(s) are
converted to the same record holder of Class B Preferred converted.(4) Each conversion will be deemed to have been effective immediately prior to the
close of business on the date on which the Class B Preferred will have been so
surrendered (the Conversion Date) and the person(s) in whose name(s) any certificate(s)
for Torvec Common or Iso-Torque Common will be issuable upon the conversion will be
deemed to have become the holder(s) of record of the Torvec Common or Iso-Torque Common
on the Conversion Date. Effective as of the Conversion Date, the Corporation will have no
obligation to pay dividends on the Class B Preferred converted provided that effective as
of the Conversion Date, the Corporation shall pay all accumulated and unpaid dividends
(including the prorated dividend from the last Dividend Accrual Date) on the Class B
Preferred converted, payable in the discretion of the board, in cash out of any funds
legally available for payment of such dividends or in shares of Class B Preferred.(5) The Conversion Privilege shall terminate with respect to Class B Preferred called
for redemption by the mailing of a Redemption Notice on the close of business on the date
immediately preceding the Redemption Date.(6) Notwithstanding the requirement for board approval and the 1 year limit set forth
in Section G(2), in case of any consolidation or merger to which the Corporation is a
party other than a merger or consolidation in which the Corporation is the surviving
corporation or in case of any sale or conveyance to another corporation of all or
substantially all of the assets of
 19




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##### Table of Contents



the Corporation or in the case of any statutory exchange of securities representing an excess
of 50% of the total outstanding securities of the Corporation with another corporation
(including any exchange effected in connection with a merger of a third corporation into the
Corporation), the holders of Class B Preferred then outstanding will have the right to convert
the Class B Preferred 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 B Preferred been converted
immediately prior to the effective date of the consolidation, merger, statutory exchange, sale
or conveyance as the case may be.(7) Notwithstanding the 1 year holding period set forth in Section G(2), in the event
the highest bid price for the Corporation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 B
Preferred shall have the right to convert such Class B Preferred upon board approval for
such conversion period.(8) Torvec Common or Iso-Torque Common delivered upon conversion of Class B Preferred
will be, upon delivery, validly issued, fully paid and nonassessable, free of all liens
and charges and not subject to any preemptive rights.(9) In case the Corporation
 (a) 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; or(b) subdivides its outstanding shares of its $.01 par value common stock into a greater
number of shares of its $.01 par value common stock; or(c) 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 Torvec Common issuable upon the conversion of the Class B Preferred 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, each holder of Class B Preferred will be entitled to receive the same percentage of
ownership of the Corporations $.01 par value common stock as such holder would have been
entitled to receive immediately prior to such record or effective date.
  (g) Reports to Shareholders
  (h) Transfer Agent and Registrar
  
 Item 6. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
 (a) Overall Business Strategy
  20




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##### Table of Contents



(b) Current Status of Business Plan and Ongoing Projects
             21




---



##### Table of Contents



*
    
    With respect to the March 1, 2008 quarterly payment only, the $300,000 will be offset by
approximately $91,000 of license-associated expenses paid by Ice Engineering on the companys
behalf. At December 31, 2007, the company has accrued $91,000 of these license-associated expenses. On April 3, 2008, the company received net proceeds
of approximately $209,000 representing the March 1, 2008 quarterly
payment.    (c) Company Expenses
     (d) Liquidity and Capital Resources
   22




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##### Table of Contents



(e) Critical Accounting Policies
     23




---



##### Table of Contents



(f) Impact of Inflation
  (g) Quarterly Fluctuations
  24




---



##### Table of Contents



TORVEC, INC. AND SUBSIDIARIES
 Contents
 PageFinancial StatementsReport of Independent Registered Public Accounting Firm
    
    F-26Consolidated balance sheets as of December 31, 2007 and 2006
    
    F-27Consolidated statements of operations for each of the years in
the two-year period ended December 31, 2007 and for the period
from September 25, 1996 (inception) through December 31, 2007
    
    F-28Consolidated statements of changes in stockholders equity
(capital deficit) for the period from September 25, 1996
(inception) through December 31, 2007
    
    F29  F-35Consolidated statements of cash flows for each of the years in
the two-year period ended December 31, 2007 and for the period
from September 25, 1996 (inception) through December 31, 2007
    
    F-36Notes to consolidated financial statementsF-37
 F-25




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##### Table of Contents



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
     
 F-26




---



##### Table of Contents



2007
    
    
    2006ASSETSCurrent assets:Cash and
cash equivalents
    
    $
    192,000
    
    
    $
    720,000Prepaid expenses and other receivable
    
    
    43,000
    
    
    
    73,000Total current assets
    
    
    235,000
    
    
    
    793,000Property and Equipment:Office equipment
    
    
    67,000
    
    
    
    44,000Shop equipment
    
    
    129,000
    
    
    
    126,000Leasehold improvements
    
    
    149,000
    
    
    
    3,000Transportation equipment
    
    
    106,000
    
    
    
    106,000451,000
    
    
    
    279,000Less accumulated depreciation and amortization
    
    
    170,000
    
    
    
    123,000Net property and equipment
    
    
    281,000
    
    
    
    156,000Other Assets:Deposits
    
    
    
    
    
    
    252,000Total Other Assets
    
    
    
    
    
    
    252,000$
    516,000
    
    
    $
    1,201,000LIABILITIESCurrent liabilities:Notes payable  current
    
    $
    15,000
    
    
    $
    14,000Accounts payable
    
    
    261,000
    
    
    
    145,000Accrued liabilities
    
    
    1,704,000
    
    
    
    1,541,000Advance from stockholder
    
    
    
    
    
    
    250,000Total current liabilities
    
    
    1,980,000
    
    
    
    1,950,000Deferred revenue
    
    
    500,000
    
    
    
    150,000Notes payable  long term
    
    
    43,000
    
    
    
    59,000Total liabilities
    
    
    2,523,000
    
    
    
    2,159,000Commitments,
Contingencies
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 2007 and 2006:732,493 shares issued and outstanding
(liquidation preference 2007: $3,701,162 and
2006: $3,408,634) 300,000 designated as Class
B, non-voting, cumulative dividend $.50 per
share, per annum, convertible 2007 and 2006: 97,500 shares issued and outstanding
(liquidation preference 2007: $311,787 and
2006: $263,235)
    
    
    9,000
    
    
    
    9,000Common stock, $.01 par value, 400,000,000
shares authorized, 31,640,045 and 31,307,792
issued and outstanding
    
    
    316,000
    
    
    
    313,000Additional paid-in capital
    
    
    45,926,000
    
    
    
    43,767,000Deficit accumulated during the development stage
    
    
    (48,258,000
    )
    
    
    (45,047,000
    )(2,007,000
    )
    
    
    (958,000
    )$
    516,000
    
    
    $
    1,201,000
 See notes to consolidated financial statements
 F-27




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##### Table of Contents



September 25,1996(Inception)Year Ended
    
    
    ThroughDecember 31,
    
    
    December 31,2007
    
    
    2006
    
    
    2007RevenueSales
    
    $
    126,000
    
    
    $
    
    
    
    $
    126,000Cost of Goods Sold
    
    
    120,000
    
    
    
    
    
    
    
    120,000Gross Profit
    
    
    6,000
    
    
    
    
    
    
    
    6,000Costs and expenses:Research and development
    
    
    710,000
    
    
    
    1,313,000
    
    
    
    14,800,000General and administrative
    
    
    2,653,000
    
    
    
    5,351,000
    
    
    
    33,811,000Asset Impairment
    
    
    
    
    
    
    1,071,000
    
    
    
    1,071,000Loss before minority interest
    
    
    (3,357,000
    )
    
    
    (7,735,000
    )
    
    
    (49,676,000
    )Other Income
    
    
    146,000
    
    
    
    
    
    
    
    146,000Minority interest in loss of consolidated subsidiary
    
    
    
    
    
    
    8,000
    
    
    
    1,272,000Net loss
    
    
    (3,211,000
    )
    
    
    (7,727,000
    )
    
    
    (48,258,000
    )Preferred stock beneficial conversion feature
    
    
    
    
    
    
    48,000
    
    
    
    763,000Preferred stock dividend
    
    
    341,000
    
    
    
    253,000
    
    
    
    869,000Net loss attributable to common stockholders
    
    $
    (3,552,000
    )
    
    $
    (8,028,000
    )
    
    $
    (49,890,000
    )Basic and diluted net loss attributable to common
stockholders per share
    
    $
    (0.11
    )
    
    $
    (0.26
    )Weighted average number of shares of common stock 
basic and diluted
    
    
    31,261,000
    
    
    
    30,566,000
 See notes to consolidated financial statements
 F-28




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##### Table of Contents



DeficitUnearned
    
    
    AccumulatedClass A
    
    
    Class B
    
    
    
    
    
    
    
    
    
    
    Additional
    
    
    Due
    
    
    Compensatory
    
    
    During the
    
    
    TotalPreferred Stock
    
    
    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
 F-29




---



##### Table of Contents



DeficitUnearned
    
    
    AccumulatedClass A
    
    
    Class B
    
    
    
    
    
    
    
    
    
    
    Additional
    
    
    Due
    
    
    Compensatory
    
    
    During the
    
    
    TotalPreferred Stock
    
    
    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  Demceber 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
 F-30




---



##### Table of Contents



DeficitUnearned
    
    
    AccumulatedClass A
    
    
    Class B
    
    
    
    
    
    
    
    
    
    
    Additional
    
    
    Due
    
    
    Compensatory
    
    
    During the
    
    
    TotalPreferred Stock
    
    
    Preferred Stock
    
    
    Common Stock
    
    
    Paid-in
    
    
    From
    
    
    Stock and
    
    
    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
 F-31




---



##### 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
    
    
    EquitySale 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
 F-32




---



##### 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 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
 F-33




---



##### 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 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
 F-34




---



##### Table of Contents



DeficitUnearned
    
    
    Accumulated
    
    
    TotalAdditional
    
    
    Due
    
    
    Compensatory
    
    
    During the
    
    
    StockholdersClass A Preferred Stock
    
    
    Class B Preferred Stock
    
    
    Common Stock
    
    
    Paid-in
    
    
    From
    
    
    Stock and
    
    
    Development
    
    
    EquityShares
    
    
    Amount
    
    
    Shares
    
    
    Amount
    
    
    Shares
    
    
    Amount
    
    
    Capital
    
    
    Stockholders
    
    
    Options
    
    
    Stage
    
    

(Capital Deficit)Contribution of services
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    300,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    300,000Exercise of Warrants
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    25,250
    
    
    
    1,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,000Shares Issued for Services
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    302,003
    
    
    
    2,000
    
    
    
    1,190,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,192,000Warrants Issued for Services
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    650,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    650,000Stock Issued for Purchase of
Variable Gear, LLC
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,000
    
    
    
    
    
    
    
    19,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    19,000Net Loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3,211,000
    )
    
    
    (3,211,000
    )Balance at December 31, 2007
    
    
    732,493
    
    
    $
    8,000
    
    
    
    97,500
    
    
    $
    1,000
    
    
    
    31,640,045
    
    
    $
    316,000
    
    
    $
    45,926,000
    
    
    $
    0
    
    
    $
    0
    
    
    $
    (48,258,000
    )
    
    $
    (2,007,000
    )
 See notes to consolidated financial statements
 F-35




---



##### Table of Contents



C F
 September 25,1996(Inception)Year Ended
    
    
    ThroughDecember 31,
    
    
    December 31,2007
    
    
    2006
    
    
    2007Cash flows from operating activities:Net loss
    
    $
    (3,211,000
    )
    
    $
    (7,727,000
    )
    
    $
    (48,258,000
    )Adjustments to reconcile net loss to net cash used in operating
activities:Depreciation and amortization
    
    
    47,000
    
    
    
    682,000
    
    
    
    2,383,000Loss on impairment of license
    
    
    
    
    
    
    1,071,000
    
    
    
    1,071,000Impairment of goodwill
    
    
    19,000
    
    
    
    
    
    
    
    19,000Gain on sale of fixed assets
    
    
    
    
    
    
    
    
    
    
    (10,000
    )Minority interest in loss of consolidated subsidiary
    
    
    
    
    
    
    (8,000
    )
    
    
    (1,272,000
    )Compensation expense attributable to common stock in
Subsidiary
    
    
    
    
    
    
    
    
    
    
    619,000Common stock issued for services
    
    
    1,090,000
    
    
    
    1,225,000
    
    
    
    11,696,000Stockholder contribution of services
    
    
    300,000
    
    
    
    300,000
    
    
    
    2,409,000Compensatory common stock, options and warrants
    
    
    650,000
    
    
    
    3,614,000
    
    
    
    17,252,000Shares issued for future consulting services
    
    
    
    
    
    
    103,000
    
    
    
    103,000Changes in:Prepaid expenses
    
    
    30,000
    
    
    
    (6,000
    )
    
    
    118,000Deferred revenue
    
    
    350,000
    
    
    
    
    
    
    
    500,000Accounts payable and accrued expenses
    
    
    279,000
    
    
    
    (3,000
    )
    
    
    3,873,000Other Assets  deposits
    
    
    2,000
    
    
    
    
    
    
    
    0Net cash used in operating activities
    
    
    (444,000
    )
    
    
    (749,000
    )
    
    
    (9,497,000
    )Cash flows from investing activities:Purchase of equipment
    
    
    (70,000
    )
    
    
    (9,000
    )
    
    
    (349,000
    )Cost of acquisition
    
    
    
    
    
    
    
    
    
    
    (16,000
    )Proceeds from sale of fixed asset
    
    
    
    
    
    
    
    
    
    
    10,000Net cash used in investing activities
    
    
    (70,000
    )
    
    
    (9,000
    )
    
    
    (355,000
    )Cash flows from financing activities:Net proceeds from sales of common stock and upon exercise of
options and warrants
    
    
    1,000
    
    
    
    10,000
    
    
    
    6,501,000Net proceeds from sales of preferred stock
    
    
    
    
    
    
    1,368,000
    
    
    
    3,537,000Net proceeds from sale of subsidiary stock
    
    
    
    
    
    
    
    
    
    
    234,000Proceeds from loan
    
    
    
    
    
    
    56,000
    
    
    
    85,000Repayments of loan
    
    
    (15,000
    )
    
    
    (7,000
    )
    
    
    (51,000
    )Proceeds
for stockholders loan and advances
    
    
    250,000
    
    
    
    
    
    
    
    250,000Repayment of  stockholders loans and advances
    
    
    (250,000
    )
    
    
    
    
    
    
    (147,000
    )Distributions
    
    
    
    
    
    
    
    
    
    
    (365,000
    )Net cash provided by (used in) financing activities
    
    
    (14,000
    )
    
    
    1,427,000
    
    
    
    10,044,000Net
(decrease) increase in cash and cash equivalents
    
    
    (528,000
    )
    
    
    669,000
    
    
    
    192,000Cash and
cash equivalents at beginning of period
    
    
    720,000
    
    
    
    51,000Cash and
cash equivalents at end of period
    
    $
    192,000
    
    
    $
    720,000
    
    
    $
    192,000Supplemental disclosure of noncash investing and financing
activities:Issuance of common stock, in settlement of notes payablePreferred dividends paid in preferred stockReclass due from stockholder to other receivableShares issued for future consulting servicesIssuance of common stock for a finders fee
    
    
    
    
    
    $
    225,000Advance from stockholder
    
    
    
    
    
    $
    250,000Issuance of common stock, leasehold improvements
    
    $
    102,000Shares issued for acquistion of Variable Gear, LLC
    
    $
    19,000Interest paid
    
    $
    11,000
 See notes to consolidated financial statements
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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, 2007 and 2006), and its wholly-owned subsidiaries Iso-Torque
Corporation, IVT Diesel Corp. and Variable Gear LLC. All material intercompany transactions and
account balances have been eliminated in consolidation.
 [2]
    
    Cash and Cash EquivalentsCash and cash equivalents include time deposits, certificates of deposit, and all highly liquid
debt instruments with original maturities of three months or less. The company maintains cash
and cash equivalents at financial institutions which periodically may exceed federally insured
amounts.
 [3]
    
    Property and Equipment:Equipment, including a prototype vehicle, is stated at cost less accumulated depreciation.
Depreciation is provided using the straight-line method over the estimated useful lives of the
assets which range from three to seven years. Leasehold improvements
are being amortized over shorter of lease term or useful life.
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##### Table of Contents



[4]
    
    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, 2007, 2006, and 2005 was $47,000, $40,000, and $31,000 respectively.Patent costs for the year ended December 31, 2007 and 2006 are $43,000 and $40,000, respectively.[5]
    
    License:Through December 31, 2004, the license for the companys Ice technology was being amortized over
its estimated remaining useful life which correlated to the underlying patent. Effective January
1, 2005, the company changed its estimate of economic useful life to 3 years. In December 2006,
the company concluded that recovery of the carrying value of the Ice Technology was impaired.
Charges for amortization in the years ended December 31, 2006, and 2005 were $642,000, and
$856,000 respectively. Such amortization expense is included in research and development expense
for each of these years.The company follows SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived
Assets. Whenever events or circumstances indicate, the companys 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.In accordance with SFAS No. 144, management determined that events and circumstances indicated
that the carrying amount of the license for the companys Ice technology exceeded the estimated
undiscounted cash flows to be generated by the license. Based upon such determination, management
compared the carrying amount of the license as of December 31, 2006 to the estimated discounted
cash flows to be generated by the license and recorded such excess as an impairment. Management
has concluded that the carrying amount of its Dartmouth College license as of December 31, 2006
($1,071,000) was impaired  in accordance with SFAS No. 144. (See
Note C.)Effective June 15, 2007, the company assigned the license to Ice Engineering,
LLC in exchange for Ice Engineerings agreement to pay the shareholders of the companys
majority-owned subsidiary, Ice Surface Development, Inc., an annual royalty equal to 5% of the
annual gross revenues generated by the license and its agreement to assume all of the obligations
to Dartmouth College under the license.[6]
    
    Use of Estimates:The preparation of financial statements in conformity with U.S. generally accepted accounting
principles requires management to make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenue and expenses during the reporting
period. Such estimates are used in valuing the useful lives of its intangible assets and the
future realizable value of such assets. These estimates are subject to a high degree of judgment
and potential change. Actual results could differ from those estimates.[7]
    
    Loss per Common Share:Statement of Financial Accounting Standards (SFAS) No. 128, Earnings Per Share, requires the
presentation of basic earnings per share, which is based on common stock outstanding, and
dilutive earnings per share, which gives effect to options, warrants and convertible securities
in periods when they are dilutive. At December 31, 2007, and 2006, the company excluded 3,540,739
and 4,905,536 potential common shares, respectively, relating to convertible preferred stock
outstanding, options and warrants from its diluted net loss per common share calculation because
they are anti-dilative.[8]
    
    Fair Value of Financial Instruments:The carrying amount of cash, prepaid expenses, accounts payable,  and accrued
expenses approximates their fair value due to the short maturity of those instruments.
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[9]
    
    Stock-based Compensation:In December 1997, the Board of Directors of the company approved a Stock Option Plan (the Plan)
which provides for the granting of up to 2,000,000 shares of common stock, pursuant to which
officers, directors, key employees and key consultants/advisors are eligible to receive
incentive, nonstatutory or reload stock options. Options granted under the Plan are exercisable
for a period of up to 10 years from date of grant at an exercise price which is not less than the
fair value on date of grant, except that the exercise period of options granted to a stockholder
owning more than 10% of the outstanding capital stock may not exceed five years and their
exercise price may not be less than 110% of the fair value of the common stock at date of grant.
Options may vest over five years.Effective January 1, 2006, we adopted Statement of Financial Accounting Standards (SFAS) No.
123(R), 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 123(R),
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 123(R) 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 123(R). 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 123(R).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 123(R)-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 123(R).[10]
    
    Revenue Recognition:The companys terms provided that customers are obligated
to pay for products sold to them within a specified number of days
from the date that title  to the products is transferred to the
customers. The companys standard terms are typically net 30
days. The company recognizes revenue when transfer of title occurs
and risk of ownership passes to a customer at the time of shipment
or delivery depending on the terms of the agreement with a particular
customer. The sale price of the companys products is
substantially fixed and determinable at the date of the sale based
upon purchase orders generated by a customer and accepted by the
company. To the extent that collectibility of the receivable is not
assured, the company follows the cost recovery approach. Accordingly,
amounts collected will be accounted for as a reduction of costs.[11]
    
    Recent Accounting Pronouncements:In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements, to define fair value,
establish a framework for measuring fair value in accordance with generally accepted accounting
principles, and expand disclosures about fair value measurements. SFAS No. 157 will be effective
for fiscal years beginning with Companys 2008 fiscal year. FASB Staff Position 157-2 has
deferred the effective date of SFAS 157 to fiscal year beginning after November 15, 2008, the
beginning of the Companys 2009 fiscal year.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. SFAS No. 159 is not expected to have a material effect
on the results of operations and financial position.In December 2007, the Financial Accounting Standards Board issued Statement of Financial
Accounting Standard (SFAS) No. 160, Noncontrolling interest in a subsidiary and for the
deconsolidation of a subsidiary. SFAS 160 is effective for fiscal years, and interim periods
within those fiscal years, beginning on or after December 15, 2008. As such, the Company is
required to adopt these provisions at the beginning of the fiscal year ended December 2009. The
Company is currently evaluating the impact of SFAS 160 on its consolidated financial statements
but does not expect it to have a material effect.
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NOTE C  LICENSE FROM THE TRUSTEES OF DARTMOUTH COLLEGE
       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]). These options expired on November 30, 2007. 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 was not renewed.
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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, 2007, 2006 and 2005, 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, 2007, 2006 and 2005, respectively, for the estimated
value of these services based upon the compensation payable under the previous consulting
agreements. The company recorded $125,000, $200,000, and $200,000 to research and development and
$175,000, $100,000, and $100,000 to general and administrative for the years ended December 31,
2007, 2006, and 2005, respectively.[2]
    
    During the years ended December 31, 2007 and 2006, the company paid $88,820 and $42,990,
respectively, to a member of the Gleasman family for administrative, technological and
engineering consulting services. Management believes this compensation is reasonable.[3]
    
    During the year ended December 31, 2007, the company
paid $31,160 to a family member of its general
counsel  for engineering services rendered to the company. Management believes this
compensation is reasonable.[4]
    
    On September 14, 2007, the company moved its executive offices from Pittsford, New York to
Rochester, New York, which includes both a manufacturing and executive office facility. The
Rochester facility is owned by a partnership, in which David M. Flaum, a company director, is
a partner. The company is still engaged in discussions concerning the final terms and
conditions of the lease agreement with respect to the Rochester facility and anticipates that
such discussions will be concluded within the first quarter of 2008. The company anticipates
its monthly rent payment will be approximately $5,700 for the first five years and payments
are to commence on June 1, 2008. Under the proposed lease, monthly rent and certain other
payments due to the landlord is to be paid in common shares of the company, based upon the
closing price per shares of the 15th day of the calendar month immediately prior to
the date any installment of monthly rent or other sum is due landlord.[5]
    
    On June 29, 2000, the company granted an exclusive world-wide license of all its automotive
technologies to Variable Gear, LLC for the aeronautical and marine
markets for $150,000 cash. The company recorded the receipt of the
$150,000 as deferred revenue to be recognized when all conditions for
earning such fees are complete. At the time of its
formation and through June 6, 2007 when his interest was purchased, Robert C. Horton, a
company shareholder, owned 51% of Variable Gear, LLC. On June 6, 2007, the company purchased
Mr. Hortons entire interest in Variable Gear for 5,000
shares of common stock for $19,250. The company recognized the
deferred revenue of $150,000 as other income and recorded an
impairment of the goodwill of $19,250, since there were no operations
of the entity since inception.[6]
    
    During the year ended December 2005, the company issued 90,000 common shares as rent for the
companys use of a facility owned by the stockholder valued at approximately $259,000 based
upon the fair market value of the common stock on the date of issuance. This arrangement
terminated effective February 28, 2006 when the company moved to a new facility.[7]
    
    During the year ended December 31, 2005, the company incurred approximately $298,000 for
non-legal consulting services provided to the company by one of its outside counsel. This
arrangement terminated on December 16, 2005.[8]
    
    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.[9]
    
    On June 19, 2006, the company awarded an aggregate 360,000 nonqualified common stock warrants
valued at approximately $629,000 to a director for additional services rendered by such
director as chairman of the boards executive committee during 2006.[10]
    
    On August 17, 2005, the company repaid $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.
 NOTE E  INCOME TAXES
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Year EndedDecember 31,2007
    
    
    2006Computed federal income tax benefit at 34% rate
    
    $
    (1,092,000
    )
    
    $
    (2,627,000
    )State tax benefit, net of federal tax benefit
    
    
    (170,000
    )
    
    
    (408,000
    )Nondeductible expenses
    
    
    3,000
    
    
    
    675,000Valuation allowance
    
    
    1,259,000
    
    
    
    2,360,000$
    0
    
    
    $
    0
    NOTE FACCOUNTS PAYABLE AND ACCRUED LIABILITY EXPENSES
  2007
    
    
    2006Professional fees
    
    $
    470,000
    
    
    $
    191,000Salaries to officer/stockholders of Ice (Note I[3])
    
    
    1,495,000
    
    
    
    1,495,000$
    1,965,000
    
    
    $
    1,686,000
 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.
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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 31,2008
    
    $
    20,0002009
    
    
    20,0002010
    
    
    20,0002011
    
    
    10,0002012
    
    
    0Total Minimum payments
    
    
    70,000Less-amount representing interest
    
    
    12,00058,000Less-Current Maturities
    
    
    15,000Long Term Portion
    
    $
    43,000
 [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.On March 16, 2007, the Appellate Division of the New York State Supreme Court reversed the lower
courts May 8, 2006 order in its entirety. Pursuant to such reversal, on April 5, 2007, the lower
court ordered the return of the $250,000 deposit (less administrative costs of $4,032) to the
company. The company repaid the entire $250,000 to the stockholder in April, 2007. Interest
expense associated with the loan for the years ended December 31, 2007 and 2006 was $3,336 and
$5,821, respectively.
 Note H  Stockholders Equity (Capital Deficit)
 [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
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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.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.During 2003, the company sold 15,687 Class A Preferred to accredited investors for proceeds of
$63,000. In December 2003, the company received $9,216 for 2,305 Class A Preferred Shares.During 2004, the company sold 235,770 Class A Preferred to accredited investors for proceeds of
$943,000.During 2004, Class A Preferred holders converted 38,500 Class A Preferred into 38,500 common
shares and received dividends of 8,031 Class A Preferred upon conversion. In June, 2004, 2,550 of
the Class A Preferred shares issued as dividends were converted into 2,550 common shares.During 2005, the company sold 200,000 Class A Preferred to accredited investors for proceeds of
$800,000 and issued 62,500 common stock warrants immediately exercisable for $.01 per common
share over a ten year term.During 2006, the company sold 273,250 Class A Preferred to accredited investors for proceeds of
$1,093,000 and issued 137,932 common stock warrants immediately exercisable for $.01 per common
share over a ten year term. During 2006, an accredited investor also purchased 20,500 common
stock warrants for a purchase price of $2,000. The warrants are immediately exercisable for $.01
per common share over a ten year term. The fair value of the warrants when considered with the
exercise price of the warrants resulted in a beneficial conversion feature of $48,000 and was
recorded as a preferred stock beneficial conversion feature in determining net loss attributable
to common stockholders.No Class A Preferred was sold for the year ended December 31, 2007.At December 31, 2007 and 2006, dividends in arrears amounted to approximately $771,000 and
$479,000, respectively.[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
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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 company, whether voluntary
or involuntary, the holders of Class B 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(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 company 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 company.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.No Class B Preferred was sold for the year ended December 31, 2007.At December 31, 2007 and 2006, dividends in arrears amounted to approximately $98,000 and
$49,000, respectively.[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, 2007, 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.[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 adopted and on May 28, 1998, the companys shareholders
ratified the creation of 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
 F-45




---



##### Table of Contents



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 were 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. The options expired on
November 30, 2007 and were not replaced.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 expired 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.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 expired on September 30, 2007 and were not replaced.In 2003, in connection with the same consulting agreements, the company granted 166,848 options
under the Option Plan, all exercisable immediately at $5.00 per common share. The options were
granted in payment of an aggregate $265,000 owed under the consulting agreements. These options
expire on December 22, 2013.In 2003, the company granted an aggregate 225,000 options under the Option Plan to three
directors, all immediately exercisable at $5.00 per common share. These options expire on October
15, 2013.In 2003, the company granted 50,000 options to a consultant under the Option Plan, immediately
exercisable at $2.26 per common share. In connection with this grant, the company recorded a
stock compensation charge of $46,000. These options expire on May 20, 2013.In 2005, the company granted 100,000 options to a consultant under the Option Plan, immediately
exercisable at $5.00 per common share. In connection with this grant, the company recorded a
stock compensation charge of $247,000 allocated to research and development. These options expire
on June 30, 2015.No options were granted under the Option Plan during the year ended December 31, 2007.A summary of options granted under the Option Plan is set forth in the following table:
 Year Ended December 31,2007
    
    
    2006Weighted
    
    
    
    
    
    
    
    
    
    
    WeightedAverage
    
    
    Aggregate
    
    
    
    
    
    
    AverageExercise
    
    
    Intrinsic
    
    
    
    
    
    
    ExerciseShares
    
    
    Price
    
    
    Value
    
    
    Shares
    
    
    PriceOutstanding at beginning of year
    
    
    1,823,895
    
    
    $
    4.92
    
    
    
    
    
    
    
    1,823,895
    
    
    $
    4.92Granted
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Expired
    
    
    (802,047
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Outstanding at end of year
    
    
    1,021,848
    
    
    
    4.77
    
    
    $
    42,000
    
    
    
    1,823,895
    
    
    
    4.92Options exercisable at year end
    
    
    1,021,848
    
    
    
    4.77
    
    
    $
    42,000
    
    
    
    1,823,895
    
    
    
    4.92Options Vested and Expected to Vest
    
    
    1,021,848
    
    
    
    4.77
    
    
    $
    42,000
    
    
    
    1,823,895
    
    
    
    4.92
 At December 31, 2007, 978,152 options are available for future grants under the Plan.
 F-46




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The following table represents information relating to stock options outstanding at December 31,
2007:
 Options Outstanding
    
    
    
    Options ExercisableWeighted
    
    Weighted
    
    
    
    
    
    
    
    WeightedAverage
    
    Average
    
    
    
    
    
    
    
    AverageExercise
    
    Remaining Life
    
    
    
    
    
    
    
    ExerciseShares
    
    Price
    
    in Years
    
    
    
    Shares
    
    Price1,021,848
    
    
    
    4.77
    
    
    
    4.36
    
    
    
    
    
    1,021,848
    
    
    
    4.77
 As of December 31, 2007, the company did not have any unrecognized stock compensation related to
unvested awards.[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.
 Common Shares Issued to BusinessFor the year ended
    
    Consultants and Other Third Parties
    
    Amount Charged toDecember 31,
    
    in Exchange for Services
    
    Operations
    
    Note2007
    
    
    359,432
    
    
    $
    1,245,3492006
    
    
    983,230
    
    
    $
    1,861,000
    
    
    
    A2005
    
    
    836,309
    
    
    $
    1,874,0002004
    
    
    469,883
    
    
    $
    2,352,0002003
    
    
    738,184
    
    
    $
    832,0002002
    
    
    1,057,455
    
    
    $
    1,036,000
    
    
    
    B2001
    
    
    361,100
    
    
    $
    1,011,0002000
    
    
    196,259
    
    
    $
    840,0001999
    
    
    45,351
    
    
    $
    327,000
 
 A-
    
    Includes 448,000 business consulting shares issued upon exercise of warrants at a value of approximately $629,000.B-
    
    Includes 190,965 issued in settlement of amounts owed at a approximate value of $269,000 (see Note H[10]) At December 31, 2007, 4,653,626 business consultant common shares were available for future
issuance under the Stock Plan.[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
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##### Table of Contents



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).
 F-48




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.
  [9] Shares Issued for Services and Rent:
  [10] Business, Financial and Engineering Consultants:
     F-49




---



##### Table of Contents



Year Ended December 31,2007
    
    2006Dividend yield
    
    
    0
    %
    
    
    0
    %Expected volatility
    
    
    1.12
    %
    
    
    1.64
    %Risk free interest rate
    
    
    4.31
    %
    
    
    3.76
    %Expected Life
    
    10 years
    
    10 years
 [11] Equity Funding Commitment:
      F-50




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##### Table of Contents



[12] Warrants:
  Number ofExercise
    
    
    
    
    
    SharesPrice
    
    Expiration
    
    
    
    Exercisable(a)
    
    (a)
    
    
    
    
    125,000
    
    
    (a)$.75
    
    None
    
    
    
    
    500,000
    
    
    (b)$.01
    
    None
    
    
    
    
    511,200
    
    
    (c)$.01
    
    None
    
    
    
    
    54,500
    
    
    (d)(e)
    
    (e)
    
    
    
    
    (e
    )
    
    (e)$.01
    
    None
    
    
    
    
    39,000
    
    
    (f)$5.00
    
    10 years
    
    
    
    
    60,000
    
    
    (g)$.01
    
    None
    
    
    
    
    6,000
    
    
    (h)$.01
    
    None
    
    
    
    
    18,750
    
    
    (i)$1.00
    
    None
    
    
    
    
    20,500
    
    
    (j)(k)
    
    (k)
    
    
    
    
    (k
    )
    
    (k)(l)
    
    (l)
    
    
    
    
    (l
    )
    
    (l)$3.27
    
    10 years
    
    
    
    
    400,000
    
    
    (m)$3.75
    
    10 years
    
    
    
    
    200,000
    
    
    (n)$5.00
    
    10 years
    
    
    
    
    50,000
    
    
    (o)$5.00
    
    10 years
    
    
    
    
    100,000
    
    
    (p)
 
 (a)
    
    Exercisable only if the company has an IPO at the IPO price and exercisable five years from
IPO. Through December 31, 2007, 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 him chief
executive officer. During the year ended December 31, 2002, 250,000 warrants were exercised
for $.30 per share, resulting in proceeds of $75,000. During the year ended December 31, 2003,
250,000 warrants were exercised for $.50 per share, resulting in proceeds of $125,000. The
remaining 500,000 warrants are exercisable upon the execution of the company of a binding
agreement for the sale, transfer, license or assignment for value of any and/or all of its
companys automotive technology at $.75 per share. The company will record a charge
representing the fair value of the warrants when the warrants become exercisable.(c)
    
    The company has issued 1,080,000 warrants, exercisable at $.01 per common share, to a
management consulting firm. 528,800 of these warrants have been exercised for aggregate
proceeds of $5,484. The company is in litigation with this management consulting firm. In
accordance with the court of original jurisdictions order rendered on May 8, 2006, the
company was required to honor immediately the exercise of 40,000 of the 551,200 warrant
balance, to issue an additional 245,000 warrants, exercisable at $.01 per common share and to
honor, if and when presented for exercise, the remaining 511,200 previously issued warrants.
The company appealed the lower courts order to the Appellate Division of the New York Supreme
Court. On March 16, 2007, the Appellate Division unanimously reversed the lower courts order
in its entirety. During the pendency of its appeal, the company had been required to deposit
with the clerk of the court 40,000 common shares, 245,000 common stock warrants and $250,000.
As the result of the Appellate Courts decision, the lower court ordered of the 40,000 common
shares, 245,000 common stock warrants and $250,000 to the company. Upon such return, the
company cancelled both the 40,000 common shares and the 245,000 common stock warrants. Thus,
the 511,200 warrants do not include either the 40,000 warrants which were exercised or the
245,000 warrants, both of which were cancelled on the companys books. See Notes J and K.(d)
    
    The company has 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 and 2005, the company
issued 26,500 and 44,000 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 years ended December 31, 2007, 2006
and 2005, 6,000, 42,000 and 21,000 of these warrants were exercised for proceeds of $60, $420
and $210, respectively.(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. The engineering consultants holding
445,000 of these warrants agreed to cancel them in the fourth quarter of 2007 in exchange for
their participation in the companys Commercializing Event Plan.(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, 2007. F-51




---



##### Table of Contents



(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 135,849
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, 110,849 of these warrants were exercised for proceeds of approximately $1,108.
During the year ended December 31, 2007, 18,750 of these previously issued warrants were
exercised for proceeds of approximately $188. No additional warrants were issued during the
year ended December 31, 2007.(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, 2007.(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. During the year ended December 31, 2007, the remaining 500
warrants were exercised for proceeds of $5.00.(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. None of these warrants have
been exercised through December 31, 2007.(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. None of these
warrants have been exercised through December 31, 2007.(o)
    
    During 2007, the company issued 50,000 warrants exercisable for ten years at $5.00 per common
share upon the happening of a commercializing event. The warrants were issued to a consultant
who assisted the company in the development of its school bus program. The company recorded a
charge of $249,000 to general and administrative expenses. None of these warrants have been
exercised through December 31, 2007.(p)
    
    During 2007, the company issued 100,000 warrants immediately exercisable for ten years at an
exercise price of $5.00 per common share to two engineering consultants in connection with the
companys engagement to furnish constant velocity joints to a military contractor. The company
recorded a charge of $401,000 to general and administrative expenses. None of these warrants
have been exercised through December 31, 2007.  WeightedWeighted
    
    
    AverageAverage
    
    
    Remaining
    
    
    AggregateExercise
    
    
    Contractual
    
    
    IntrinsicShares
    
    
    Price
    
    
    Term
    
    
    ValueOutstanding at January 1, 2007
    
    
    2,652,700
    
    
    $
    1.90
    
    
    5.18 years
    
    $
    3,291,000Granted
    
    
    150,000
    
    
    
    5.00
    
    
    8.33 yearsExercised
    
    
    (25,250
    )
    
    
    0.01
    
    
    5.65 yearsCanceled or expired
    
    
    (692,500
    )
    
    
    3.26
    
    
    10.52 yearsOutstanding at December 31, 2007
    
    
    2,084,950
    
    
    $
    2.59
    
    
    5.60 years
    
    $
    3,109,611Exercisable at December 31, 2007
    
    
    1,164,950
    
    
    $
    2.51
    
    
    2.41 years
    
    $
    1,934,611
 [13] Issuance of Stock and Warrants by Subsidiary:
   F-52




---



##### Table of Contents



Year Ended December 312007
    
    2006Outstanding at the beginning of the year
    
    
    103,948
    
    
    
    103,948Granted
    
    
    
    
    
    
    Cancelled
    
    
    (103,948
    )
    
    
    Outstanding at the end of the year
    
    
    
    
    
    
    103,948
 [14] Shares Issued for Consulting Services:
     [15] Commercializing Event Plan:
     F-53




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##### Table of Contents



Note I  Commitments and Other Matters
 [1] Consulting Agreements:
      [2] Variable Gear, LLC:
   [3] Employment Agreements:
 F-54




---



##### Table of Contents



[4] Leases:
     Note J Management Agreement
  F-55




---



##### Table of Contents



Note K Litigation
  F-56




---



##### Table of Contents



F-57




---



##### Table of Contents



Note L
 Royalty Agreement
  Note M  Subsequent Events
          F-58




---



##### Table of Contents



Item 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE .
  
 Item 8 (a) CONTROLS and PROCEDURES
  59




---



##### Table of Contents



REPORT ON MANAGEMENTS ASSESSMENT OF INTERNAL CONTROL OVER  FINANCIAL REPORTING
       
 Item 8B. OTHER INFORMATION
  60




---



##### Table of Contents



PART III
 
 Item 9. 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
325 Van Voorhis Avenue
Rochester, New York 14617
    
    Chairman of the Board
    
    
    56
    
    
    10/31/02
    
    **(2)
    
    James Y. Gleasman
11 Pond View Drive
Pittsford, New York 14534
    
    Chief Executive OfficerInterim Chief Financial
Officer, Director
President, Director
    
    
    67
    
    
    02/20/98
    
    **(3)
    
    Keith E. Gleasman
11 Pond View Drive
Pittsford, NY 14534
    
    
    
    
    60
    
    
    09/26/96
    
    **(4)
    
    Herbert H. Dobbs
448 West Maryknoll Road
Rochester Hills, Mich. 48309
    
    Secretary, Director
    
    
    76
    
    
    02/20/98
    
    **(5)
    
    Daniel R. Bickel
39 Whippletree Road
Fairport, New York 14450
    
    Director
    
    
    60
    
    
    10/31/02
    
    **(6)
    
    Joseph B. Rizzo
39 State Street, Suite 700
Rochester, New York 14614
    
    Director
    
    
    43
    
    
    9/9/2005
    
    **(7)
    
    David M. Flaum
39 State Street, Suite 300
Rochester, New York 14614
    
    Real Estate Developer
Director
    
    
    58
    
    
    8/21/06
    
    **
 
 **
    
    Changes in Control  (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.
 61




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##### Table of Contents



(2)
    
    James Y. Gleasman has been a consultant of the company since its inception. His business
background includes the following:
 
    
    life-long entrepreneur;
    
    skilled in management, finance, strategic planning, organizing and marketing;
    
    principal inventor of the infinitely variable transmissions; co-inventor of several other patented inventions;
    
    established manufacturing of the Torsen® differential in Argentina, Brazil, etc;
    
    former principal with two companies formerly owned by the Gleasman family;
    
    set business strategies for small companies dealings with large companies;
    
    joint venture partner with Clayton Brokerage Co. of St. Louis, Mo.;
    
    owned financial-consulting business;
    
    negotiated with numerous Asian corporations (including Mitsubishi and Mitsui);
    
    educated in Asian philosophy, business practices and culture.
 (3)
    
    Keith E. Gleasman is a co-inventor on all of 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
companys products to persons within all levels of the automotive industry, race crew members,
educators and students. His experience includes:
 
    
    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;
    
    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;
    
    he has extensive after-market experience including pricing, distribution, sales
catalogs, promotions, trade show booths designs and vehicle sponsorships;
    
    he was responsible for the publication of over 300 articles in trade magazines
highlighting the Torsen differential (e.g., Popular Science, Auto Week, Motor Trend,
Off-Road, and Four Wheeler);
    
    he designed the FTV vehicle from concept to a production-ready model;
    
    he assisted in developing engineering and manufacturing procedures for the Torsen
differential and for all of the Torvec prototypes, preproduction and design-specific
models;
    
    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) and
has worked with Nissan-sponsored race teams on the use of the IsoTorque differential;
    
    he has been trained for up-to-date manufacturing techniques such as NWH,
statistical process control and MRP II.
  (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. During his
career he has:
 62




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
    
    worked as a manufacturing engineer;
    
    worked as a design engineer in the aircraft and missile industry;
    
    managed Army laboratories as a captain, lieutenant colonel and colonel;
    
    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;
    
    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);
    
    managed advanced development of the laser guided 155mm-artillery shell now known as
the Copperhead;
    
    served in Taiwan as a member of the U.S. Military Assistance Advisory Group (MAAG)
working with the Republic of China Army General Staff;
    
    served as liaison officer between the Army and Air Force for development of the
laser seeker for the Hellfire missile;
    
    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;
    
    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.  (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 more than 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.(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.
 63




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(c) Family Relationships
  (d) Section 16(a) Beneficial Ownership Reporting Compliance
   (e) Corporate Governance, Code of Ethics, Director Independence
 Role of the Board of Directors
     Operation of the Board and its Committees
    64




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Director Independence
    Code of Ethics/Committee Charters
        65




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Policy/Procedure for Review/Approval of Related  Party Transactions
   Executive Sessions of Independent Directors
  Committees of the Board
 The Audit Committee
   
    
    
    the appointment, compensation, retention and oversight of the work of the registered
public accounting firm engaged (including the resolution of disagreements between management
and the auditor regarding financial reporting) for the purpose of preparing or issuing an
audit report or related work or performing other audit, review or attest services;
    
    the pre-approval of all auditing and legally permissible non-auditing services to be
performed by the companys registered public accounting firm;
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
    
    the disclosure by the company of all pre-approved non-audit services in periodic
reports filed by the company with the Securities and Exchange Commission;
    
    the disclosure by the company of the number and name(s) of each Audit Committee member
who is an audit committee financial expert as defined by the Charter in accordance with
rules promulgated by the Securities and Exchange Commission;
    
    the establishment of internal procedures for complaints concerning the companys
accounting, internal accounting controls or auditing matters; and
    
    the engagement of independent counsel and advisors as it determines necessary to carry
out its duties and the funding therefore.
  The Nominating Committee
   
       67




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Officer
    
    Mailing Address
    
    E-mailJames Y. Gleasman
Chief Executive
Officer, Interim Chief Financial
Officer
    
    Torvec, Inc.
1999 Mount Read Blvd. Building 3
Rochester, New York 14615
    
    jgleasman@torvec.comKeith E. Gleasman
President
    
    Torvec, Inc.
1999 Mount Read Blvd. Building 3
Rochester, New York 14615
    
    kgleasman@torvec.comAny shareholder wishing to communicate directly with any of our independent directors should e-mail
him as follows: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 Directors
c/o Torvec, Inc.1999 Mount Read Blvd. Building 3
Rochester, New York 14615
Attention: Gary A. Siconolfi
      
 68




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The Governance and Compensation Committee
   
    The Executive Committee
   
     (i)
    
    submit to shareholders any action requiring shareholder approval under the Business Corporation
Law;(ii)
    
    fill vacancies in the board or in any committee;(iii)
    
    fix compensation of directors;(iv)
    
    amend or repeal the companys bylaws or adopt new bylaws;(v)
    
    amend or repeal any resolution of the board where the resolution states it is not repealable or
amendable.
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##### Table of Contents



Sarbanes-Oxley Compliance
    
 Item 10. EXECUTIVE COMPENSATION
 (a) Compensation Discussion and Analysis
  
    
    compensation payable for services rendered, including engineering, business consulting, legal
and patent services, as well as for services rendered by management and the companys directors, is
to be paid to the extent feasible pursuant to the companys business consultants stock plan. The
company has registered common shares issuable under the plan so that nonaffiliates are able to sell
such shares immediately and affiliates are able to sell such shares without regard to the
restricted stock provisions of Rule 144 promulgated by the Securities and Exchange Commission;
    
    the number of common shares and/or common stock warrants to be issued in satisfaction of
consultants invoices and/or to be issued in accordance with the terms of compensatory plans duly
adopted by the board, such as the nonmanagement directors plan, is to be calculated based upon the
closing price of the companys $.01 par value common stock as of the trading date of the invoice or
the date of payment under the plan (e.g. the last day of each calendar quarter);
    
    no current compensation is to be paid to Keith E. Gleasman in any capacity, including his
position as president and no current compensation is to be paid to James Y. Gleasman in any
capacity, including his position as chief executive officer and interim chief financial officer.
This policy has been in effect since January 1, 2004 and, as of December 31, 2007, this policy
remained in effect.
    
    current compensation to be paid to administrative, technological, engineering consultants,
business consultants and the companys general counsel is to be paid to the extent feasible in
business consultants stock. The annual rate of current compensation payable to each of the
individuals performing such services was negotiated an arms-length basis and is commensurate with
the level of current compensation payable for such services in the greater metropolitan Rochester,
New York region.
  70




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71




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SUMMARY
COMPENSATION TABLE FOR YEARS ENDED DECEMBER 31, 2006 and 2007
 Change inNon-
    
    PensionEquity
    
    Value andIncentive
    
    NonqualifiedPlan
    
    Deferred
    
    AllStock
    
    Option
    
    Compen-
    
    Compensation
    
    OtherSalary
    
    Bonus
    
    Awards
    
    Awards
    
    sation
    
    Earnings
    
    CompensationName and Principal Position
    
    Year
    
    ($)
    
    ($)
    
    ($)
    
    ($)
    
    ($)
    
    ($)
    
    ($)
    
    Total ($)(a)
    
    (b)
    
    (c)
    
    (d)
    
    (e)
    
    (f)
    
    (g)
    
    (h)
    
    (i)
    
    (j)Keith E.
    
    
    2006
    
    
    $
    0
    
    
    $
    0
    
    
    $
    0
    
    
    $
    0
    
    
    $
    0
    
    
    $
    0
    
    
    $
    0
    
    
    $
    0Gleasman, President(1)



    
    
    2007
    
    
    $
    0
    
    
    $
    0
    
    
    $
    0
    
    
    $
    0
    
    
    $
    0
    
    
    $
    0
    
    
    $
    0
    
    
    $
    0James Y. Gleasman,
    
    
    2006
    
    
    $
    0
    
    
    $
    0
    
    
    $
    0
    
    
    $
    0
    
    
    $
    0
    
    
    $
    0
    
    
    $
    0
    
    
    $
    0Chief Executive Officer,(2)
    
    
    2007
    
    
    $
    0
    
    
    $
    0
    
    
    $
    0
    
    
    $
    0
    
    
    $
    0
    
    
    $
    0
    
    
    $
    0
    
    
    $
    0Richard B. Sullivan
    
    
    2006
    
    
    $
    0
    
    
    $
    0
    
    
    $
    0
    
    
    $
    0
    
    
    $
    0
    
    
    $
    0
    
    
    $
    129,500
    
    
    $
    129,500General Counsel (3)
    
    
    2007
    
    
    $
    0
    
    
    $
    0
    
    
    $
    0
    
    
    $
    0
    
    
    $
    0
    
    
    $
    0
    
    
    $
    144,000
    
    
    $
    144,000
 
 (1)
    
    Mr. Keith E. Gleasman served as president during the years specified. For the years ended
December 31, 2007 and 2006, Mr. Gleasman was not paid any compensation by the company
in accordance with their mutual agreement of January 1, 2004.(2)
    
    Mr. James Y. 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, 2007 and 2006, Mr. Gleasman was not
paid any compensation by the company in accordance with their mutual agreement of January 1,
2004.(3)
    
    Mr. Sullivan became general counsel to the company on December 16, 2005. 72




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OUTSTANDING EQUITY AWARDS AT DECEMBER 31, 2007
 EquityIncentiveEquity
    
    PlanIncentive
    
    Awards:Option Award
    
    
    
    
    
    
    
    
    
    
    
    
    
    Stock Awards
    
    Plan
    
    Market orEquity
    
    
    
    
    
    
    
    
    
    
    
    
    
    Market
    
    Awards:
    
    PayoutIncentive Plan
    
    
    
    
    
    
    
    
    
    
    
    
    
    Value
    
    Number
    
    Value ofAwards:
    
    
    
    
    
    
    
    
    
    
    
    
    
    of
    
    of
    
    UnearnedNumber
    
    
    
    
    
    
    
    
    
    Number
    
    Shares
    
    Unearned
    
    Shares,Number
    
    
    
    
    
    of Securities
    
    
    
    
    
    
    
    
    
    of Shares
    
    or Units
    
    Shares,
    
    Units orof
    
    Number of
    
    Underlying
    
    
    
    
    
    
    
    
    
    or Units
    
    of Stock
    
    Units or
    
    OtherSecurities
    
    Securities
    
    Unexercised
    
    
    
    
    
    
    
    
    
    of Stock
    
    That
    
    Other
    
    RightsUnderlying
    
    Underlying
    
    Unearned
    
    Option
    
    
    
    
    
    That Have
    
    Have
    
    Rights
    
    That haveUnexercised
    
    Unexercised
    
    Options
    
    Exercise
    
    Option
    
    Not
    
    Not
    
    That Have
    
    NotOptions(#)
    
    Options(#)
    
    (#)
    
    Price
    
    Expiration
    
    Vested
    
    Vested
    
    Not
    
    VestedExercisable
    
    Unexercisable
    
    Vested
    
    ($)
    
    Date
    
    (#)
    
    ($)
    
    (#)
    
    ($)Name (a)
    
    (b)
    
    (c)
    
    (d)
    
    (e)
    
    (f)
    
    (g)
    
    (h)
    
    (i)
    
    (j)James Y. Gleasman
    
    
    39,575
    
    
    
    0
    
    
    
    0
    
    
    $
    5.00
    
    
    
    12/22/13
    
    
    
    0
    
    
    $
    0
    
    
    
    0
    
    
    $
    0Keith E. Gleasman
    
    
    31,818
    
    
    
    0
    
    
    
    0
    
    
    $
    5.00
    
    
    
    12/22/13
    
    
    
    0
    
    
    $
    0
    
    
    
    0
    
    
    $
    0
 DIRECTOR COMPENSATION FOR THE YEAR ENDED DECEMBER 31, 2007
 Non-
    
    Change inFees
    
    
    
    
    
    
    
    
    
    Equity
    
    Pension ValueEarned
    
    
    
    
    
    
    
    
    
    Incentive
    
    and Nonqualifiedor Paid
    
    Stock
    
    Option
    
    Plan
    
    Deferred
    
    All Otherin Cash
    
    Awards
    
    Awards
    
    Compensation
    
    Compensation
    
    Compensation
    
    Total($)
    
    ($)
    
    ($)
    
    ($)
    
    Earnings
    
    ($)
    
    ($)Name (a)
    
    (b)
    
    (c)
    
    (d)
    
    (e)
    
    (f)
    
    (g)
    
    (h)Daniel R. Bickel
    
    $
    0
    
    
    $
    37,665
    
    
    $
    0
    
    
    $
    0
    
    
    $
    0
    
    
    $
    0
    
    
    $
    37,655Herbert H. Dobbs
    
    $
    0
    
    
    $
    25,514
    
    
    $
    0
    
    
    $
    0
    
    
    $
    0
    
    
    $
    0
    
    
    $
    25,514Joseph B. Rizzo
    
    $
    0
    
    
    $
    30,679
    
    
    $
    0
    
    
    $
    0
    
    
    $
    0
    
    
    $
    0
    
    
    $
    30,679Gary A. Siconolfi
    
    $
    0
    
    
    $
    64,850
    
    
    $
    0
    
    
    $
    0
    
    
    $
    0
    
    
    $
    0
    
    
    $
    64,850David M. Flaum
    
    $
    0
    
    
    $
    25,514
    
    
    $
    0
    
    
    $
    0
    
    
    $
    0
    
    
    $
    0
    
    
    $
    25,514
 (b) Discussion of Director Compensation
  1) Participation in the Nonmanagement Directors Plan
  73




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2) Participation in 1998 Stock Option Plan
   74




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##### Table of Contents



Item 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
SHAREHOLDER MATTERS
 Security Ownership  Common Stock
  
    
    each person who is known by us to beneficially own more than 5% of our common stock;
    
    each of our directors;
    
    each of our named executive officers; and
    
    all of our directors and executive officers as a group.
  Name and Address ofBeneficial Owner
    
    Number of Shares Owned
    
    Percent of Shares OwnedMargaret F. Gleasman
    
    
    2,790,016
    (1)
    
    
    9
    %11 Pond View
Drive 
Pittsford, NY 14534
 
 (1)
    
    Includes 95,455 common shares which may be purchased through the exercise of a ten year
option granted on January 5, 2004 all exercisable at $5.00 per common share. Number of
    
    PercentName and Address of
    
    
    
    Shares
    
    of SharesBeneficial Owner
    
    Position
    
    Owned
    
    OwnedGary A. Siconolfi
    
    Chairman of the Board
    
    
    438,549
    (1)
    
    
    1
    %325 VanVoorhis Avenue
Rochester, New York 14617James Y. Gleasman
    
    Chief Executive Officer, Interim
    
    
    6,032,619
    (2)
    
    
    19
    %11 Pond View Drive
    
    Chief Financial Officer, DirectorPittsford, New York 14534Keith E. Gleasman
    
    President
    
    
    9,326,879
    (3)
    
    
    29
    %11 Pond View Drive
    
    DirectorPittsford, New York 14534
 75




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##### Table of Contents



Number of
    
    PercentName and Address of
    
    
    
    Shares
    
    of SharesBeneficial Owner
    
    Position
    
    Owned
    
    OwnedHerbert H. Dobbs
    
    Secretary
    
    
    468,628
    (4)
    
    
    1
    %448 West Maryknoll Road
    
    DirectorRochester Hills, Mich. 48309Daniel R. Bickel
    
    Director
    
    
    84,148
    (5)
    
    less than 1%39 Whippletree Road 
Fairport, New York 14450Joseph B. Rizzo
    
    Director
    
    
    7,875
    
    
    less than 1%39 State Street, Suite 700
Rochester, New York 14614David M. Flaum
    
    Director
    
    
    408,826
    (6)
    
    
    1
    %39 State Street
Rochester, New York 14614All Directors and Executive Officers as a Group
    
    
    
    
    16,767,526
    (7)
    
    
    52
    %
 
 (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 39,575 common shares which may be purchased through the
exercise of a ten year option granted on January 5, 2004, 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 31, 818 common shares which may be purchased through the
exercise of a ten year option granted on December 22, 2003 exercisable
at 5.00 per share. Includes 30, 000 common shares owned by Mr.
Gleasmans son. 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 271,393 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 30,000 common shares
owned by Keith E. Gleasmans son. 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
   76




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Item 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE
 Certain Transactions
             77




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##### Table of Contents



Director Independence
  
 Item 13. PRINCIPAL ACCOUNTANT FEES AND SERVICES
 Principal Accountant Fees and Services
 Audit Fees
  2007
    
    2006$170,500
    
    $116,499
 Audit-Related Fees
  2007
    
    2006None
    
    None
 Tax Fees
  All Other Fees
  2007
    
    2006None
    
    None
 Total Fees
  Pre-Approval of Policies and Procedures
  78




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##### Table of Contents



Audit -Committee Approval
  
 Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
 (a) Exhibits
   2.1
    
    Agreement and Plan of Merger, dated November 29, 2000 by and among Torvec Subsidiary
Corporation, Torvec, Inc., UTEK Corporation and ICE Surface Development, Inc. incorporated
by reference to Form 8-K filed November 30, 2000 and Form 8K/A filed February 12, 2001.
  3.1
    
    Certificate of Incorporation, incorporated by reference to Form 10-SB/A , Registration
Statement, registering Companys $.01 par value common stock under section 12(g) of the
Securities Exchange Act of 1934;3.2
    
    Certificate of Amendment to the Certificate of Incorporation dated August 30, 2000,
incorporated by reference to Form SB-2 filed October 19, 2000;3.3
    
    Certificate of Correction dated March 22, 2002, incorporated by reference to Form 10-KSB
filed for fiscal year ended December 31, 2002;3.4
    
    By-laws, as amended by shareholders on January 24, 2002, incorporated by reference to
Form 10-KSB filed for fiscal year ended December 31, 2002;3.5
    
    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.
      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
 79




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##### Table of Contents



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;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;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;
 80




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##### Table of Contents



10.18
    
    Stock Option Agreement with Samuel Bronsky, Chief Financial and Accounting Officer,
dated August 28, 2001, incorporated by reference to Form 10-QSB filed for fiscal quarter
ended September 30, 2001;10.19
    
    Pittsford Capital Group, LLC Agreement dated January 30, 2002, incorporated by reference
to Form 10-KSB filed for fiscal year ended December 31, 2001;10.20
    
    Gleasman-Steenburgh Indemnification Agreement dated April 9, 2002, incorporated by
reference to Form 10-KSB filed for fiscal year ended December 31, 2001;10.21
    
    Series B Warrant dated April 10, 2002, incorporated by reference to Form 10-KSB filed
for fiscal year ended December 31, 2001;10.22
    
    Billow Butler & Company, LLC investment banking engagement letter dated October 1, 2003,
incorporated by reference to Form 10-QSB filed for fiscal quarter ended September 30, 2003;10.23
    
    Letter of Acknowledgement and Agreement with U.S. Environmental Protection Agency dated
February 4, 2004, incorporated by reference to Form 10-KSB filed for fiscal year ended
December 31, 2003;10.24
    
    Letter Agreement with CXO on the GO, L.L.C. dated February 20, 2004, incorporated by
reference to Form 10-KSB filed for fiscal year ended December 31, 2003;10.25
    
    Letter Amendment with CXO on the GO, L.L.C. dated February 23, 2004, incorporated by
reference to Form 10-KSB filed for fiscal year ended December 31, 2003;10.26
    
    Lease Agreement for premises at Powder Mills Office Park, 1169 Pittsford-Victor Road,
Suite 125, Pittsford, New York 14534, dated July 16, 2004; incorporated by reference to Form
10-QSB filed for fiscal quarter ended June 30, 2004;10.27
    
    Lease Agreement for testing facility and Mustang dynamometer, dated July 21, 2004;
incorporated by reference to Form 10-QSB filed for fiscal quarter ended June 30, 2004;10.28
    
    Advisory Agreement with PNB Consulting, LLC, 970 Peachtree Industrial Blvd., Suite 303,
Suwanee, Georgia 30024; incorporated by reference to Form 10-QSB filed for fiscal quarter
ended June 30, 2004;10.29
    
    Agreement between Torvec and ZT Technologies, Inc. dated July 21, 2004, incorporated by
reference to Form 10-QSB filed for fiscal quarter ended September 30, 2004;10.30
    
    Assignment and Assumption of Lease between William J. Green and Ronald J. Green and
Torvec, Inc. effective as of December 31, 2004, incorporated by reference to Form 10-KSB
filed for fiscal year ended December 31,2004;10.31
    
    Bill of Sale between Dynamx, Inc. and Torvec, Inc. for equipment and machinery,
incorporated by reference to Form 10-KSB filed for fiscal year ended December 31, 2004;10.32
    
    Lease and Services Agreement between Robert C. Horton as Landlord and Torvec, Inc. as
Tenant dated March 18, 2005, incorporated by reference to Form 10-KSB filed for fiscal year
ended December 31, 2004;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;
 81




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##### Table of Contents



10.37
    
    Option Agreement between Matthew R. Wrona and Torvec, Inc. dated June 30, 2005,
incorporated by reference to Form 10-QSB filed for fiscal quarter ended June 30, 2005;10.38
    
    Trust Agreement between Matthew R. Wrona, Donald Gabel, Lawrence Clark, Steven Urbanik,
Floyd G. Cady,Jr., and Michael Pomponi as Grantors and Richard B. Sullivan as Trustee, dated
September 22, 2005, incorporated by reference to Form 10-QSB filed for fiscal quarter ended
September 30, 2005;10.39
    
    Consultant Agreement with Floyd G. Cady, Jr., dated October 1, 2005, incorporated by
reference to Form 10-QSB filed for fiscal quarter ended September 30, 2005;10.40
    
    Consultant Agreement with Lawrence W. Clark, dated October 1, 2005, incorporated by
reference to Form 10-QSB filed for fiscal quarter ended September 30, 2005;10.41
    
    Consultant Agreement with Donald W. Gabel, dated October 1, 2005, incorporated by
reference to Form 10-QSB filed for fiscal quarter ended September 30, 2005;10.42
    
    Consultant Agreement with Michael A. Pomponi, dated October 1, 2005, incorporated by
reference to Form 10-QSB filed for fiscal quarter ended September 30, 2005;10.43
    
    Consultant Agreement with Steven Urbanik, dated October 1, 2005, incorporated by
reference to Form 10-QSB filed for fiscal quarter ended September 30, 2005;10.44
    
    Consultant Agreement with Kiwee Johnson, dated September 30, 2005, incorporated by
reference to Form 10-QSB filed for fiscal quarter ended September 30, 2005;10.45
    
    Confidentiality Agreement with Joseph B. Rizzo, dated October 24, 2005, incorporated by
reference to Form 10-QSB filed for fiscal quarter ended September 30, 2005.10.46
    
    Minutes of meeting Board of Directors Torvec, Inc., held October 19, 2004 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, 2006.10.51
    
    Order of Supreme Court of the State of New York directing the Monroe County, New York
Clerk to release back to the company 40,000 common shares and 245,000 common stock warrants
issued to a management consulting firm with which the company is in litigation and held in
escrow by such Clerk by virtue of a previous court order and which order directed the return
to the company of a $250,000 (less administrative fee) undertaking deposited with the Monroe
County, New York Treasurer in connection with the same litigation, incorporated by reference
to quarterly report (Form 10-Q) filed for the quarter ended March 31, 2007;10.52
    
    License Assignment and Transfer Agreement by and between Ice Engineering, LLC and
Torvec, LLC made effective June 15, 2007 assigning license granted by Dartmouth College with
respect to ice technology from Torvec to Ice Engineering, incorporated by reference to
current report (Form 8-K) filed July 18, 2007.10.53
    
    License Agreement by and between High Density Powertrain and Torvec, Inc. dated December
12, 2007, incorporated by reference to current report (Form 8-K) filed December 14, 2007;
 82




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##### Table of Contents



10.54
    
    Consulting Agreement by and between Clifford Carlson and Torvec, Inc. dated December 12,
2007, incorporated by reference to current report (Form 8-K) filed December 14, 2007.10.55
    
    Minutes of meeting of Governance and Compensation Committee dated February 19, 2008
establishing compensation for the companys president and chief executive officer and
amending the companys commercializing event plan.
                        83




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##### Table of Contents



SIGNATURES
  TORVEC, INC.Date: April 11, 2008
    
    By:
    
    S  James Y. GleasmanJames Y. Gleasman, Chief Executive Officer
  Dated: April 11, 2008
    
    By:
    
    S  James Y. GleasmanJames Y. Gleasman, Chief Executive Officer, Interim ChiefFinancial Officer and DirectorDated: April 11, 2008
    
    By:
    
    S  Keith E. GleasmanKeith E. Gleasman, President and DirectorDated: April 11, 2008
    
    By:
    
    S  Herbert H. DobbsHerbert H. Dobbs, Secretary and DirectorDated: April 11, 2008
    
    By:
    
    S  Daniel R. BickelDaniel R. Bickel, DirectorDated: April 11, 2008
    
    By:
    
    S  Joseph R.RizzoJoseph R. Rizzo, DirectorDated: April 11, 2008
    
    By:
    
    S  David M. FlaumDavid M. Flaum, DirectorDated: April 11, 2008
    
    By:
    
    S  Gary A. SiconolfiGary A. Siconolfi, Director
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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/A10.2
    
    
    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/A
 85




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##### Table of Contents



EXHIBIT
    
    
    
    
    
    
    
    PAGE10.9
    
    
    Extension of and Amendment to Consulting Agreement with Keith E.
Gleasman, incorporated by reference to Form 10-KSB filed for the fiscal year
ended December 31, 2000;
    
    
    N/A10.10
    
    
    Extension of and Amendment to Consulting Agreement with Vernon E.
Gleasman, incorporated by reference to Form 10-KSB filed for the fiscal year
ended December 31, 2000;
    
    
    N/A10.11
    
    
    Option and Consulting Agreement with Marquis Capital, LLC dated
February 10, 1999, incorporated by reference to Form 10-QSB filed for
quarter ended March 31, 2001;
    
    
    N/A10.12
    
    
    Option and Consulting Agreement with PMC Direct Corp., dated February
10, 1999, incorporated by reference to Form 10-QSB filed for quarter ended
March 31, 2001;
    
    
    N/A10.13
    
    
    Investment Banking Services Agreement with Swartz Institutional
Finance (Dunwoody Brokerage Services, Inc.) dated December 8, 2000,
incorporated by reference to Form 10-QSB filed for quarter ended March 31,
2001;
    
    
    N/A10.14
    
    
    Employment Agreement with Michael Martindale, Chief Executive Officer,
dated August 1, 2001, incorporated by reference to Form 10-QSB filed for
fiscal quarter ended September 30, 2001;
    
    
    N/A10.15
    
    
    Employment Agreement with Jacob H. Brooks, Chief Operating Officer,
dated August 1, 2001, incorporated by reference to Form 10-QSB filed for
fiscal quarter ended September 30, 2001;
    
    
    N/A10.16
    
    
    Employment Agreement with David K. Marshall, Vice-President of
Manufacturing, dated September 1, 2001, incorporated by reference to Form
10-QSB filed for fiscal quarter ended September 30, 2001;
    
    
    N/A10.17
    
    
    Investment Banking Services Agreement with Swartz Institutional
Finance (Dunwoody Brokerage Services, Inc.), as amended, dated October 23,
2001, incorporated by reference to Form 10-QSB filed for fiscal quarter
ended September 30, 2001;
    
    
    N/A10.18
    
    
    Stock Option Agreement with Samuel Bronsky, Chief Financial and
Accounting Officer, dated August 28, 2001, incorporated by reference to Form
10-QSB filed for fiscal quarter ended September 30, 2001;
    
    
    N/A10.19
    
    
    Pittsford Capital Group, LLC Agreement dated January 30, 2002,
incorporated by reference to Form 10-KSB filed for fiscal year ended
December 31, 2001;
    
    
    N/A10.20
    
    
    Gleasman-Steenburgh Indemnification Agreement dated April 9, 2002,
incorporated by reference to Form 10-KSB filed for fiscal year ended
December 31, 2001;
    
    
    N/A10.21
    
    
    Series B Warrant dated April 10, 2002, incorporated by reference to
Form 10-KSB filed for fiscal year ended December 31, 2001;
    
    
    N/A10.22
    
    
    Billow Butler & Company, LLC investment banking engagement letter
dated October 1, 2003, incorporated by reference to Form 10-QSB filed for
fiscal quarter ended September 30, 2003;
    
    
    N/A10.23
    
    
    Letter of Acknowledgement and Agreement with U.S. Environmental
Protection Agency dated February 4, 2004, incorporated by reference to Form
10-KSB filed for fiscal year ended December 31, 2003;
    
    
    N/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/A10.28
    
    
    Advisory Agreement with PNB Consulting, LLC, 970 Peachtree Industrial
Blvd., Suite 303, Suwanee, Georgia 30024; incorporated by reference to Form
10-QSB filed for fiscal quarter ended June 30, 2004;
    
    
    N/A10.29
    
    
    Agreement between Torvec and ZT Technologies, Inc. dated July 21,
2004, incorporated by reference to Form 10-QSB filed for fiscal quarter
ended September 30, 2004;
    
    
    N/A10.30
    
    
    Assignment and Assumption of Lease between William J. Green and Ronald
J. Green and Torvec, Inc. effective as of December 31, 2004, incorporated by
reference to Form 10-KSB filed for fiscal year ended December 31, 2004;
    
    
    N/A10.31
    
    
    Bill of Sale between Dynamx, Inc. and Torvec, Inc. for equipment and
machinery, incorporated by reference to Form 10-KSB filed for fiscal year
ended December 31, 2004;
    
    
    N/A
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##### Table of Contents



EXHIBIT
    
    
    
    
    
    
    
    PAGE10.32
    
    
    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/A10.41
    
    
    Consultant Agreement with Donald W. Gabel, dated October 1, 2005,
incorporated by reference to Form 10-QSB filed for fiscal quarter ended
September 30, 2005;
    
    
    N/A10.42
    
    
    Consultant Agreement with Michael A. Pomponi, dated October 1, 2005,
incorporated b y reference to Form 10-QSB filed for fiscal quarter ended
September 30, 2005;
    
    
    N/A10.43
    
    
    Consultant Agreement with Steven Urbanik, dated October 1, 2005,
incorporated by reference to Form 10-QSB filed for fiscal quarter ended
September 30, 2005;
    
    
    N/A10.44
    
    
    Consultant Agreement with Kiwee Johnson, dated September 30, 2005,
incorporated by reference to Form 10-QSB filed for fiscal quarter ended
September 30, 2005;
    
    
    N/A10.45
    
    
    Confidentiality Agreement with Joseph B. Rizzo, dated October 24,
2005, incorporated by reference to Form 10-QSB filed for fiscal quarter
ended September 30, 2005
    
    
    N/A10.46
    
    
    Minutes of meeting Board of Directors Torvec, Inc., held October 19,
2004 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
Quarterly Report (Form10-Q) filed March 31, 2006
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##### Table of Contents



EXHIBIT
    
    
    
    
    
    
    
    PAGE10.51
    
    
    Order of Supreme Court of the State of New York directing the Monroe
County, New York Clerk to release back to the company 40,000 common
shares and 245,000 common stock warrants issued to a management consulting
firm with which the company is in litigation and held in escrow by such
Clerk by virtue of a previous court order and which order directed the
return to the company of a $250,000 (less administrative fee) undertaking
deposited with the Monroe County, New York Treasurer in connection with the
same litigation, incorporated by reference to quarterly report (Form 10-Q)
filed for the quarter ended March 31, 2007;
    
    
    N/A10.52
    
    
    License Assignment and Transfer Agreement by and between Ice
Engineering, LLC and Torvec, LLC made effective June 15, 2007 assigning
license granted by Dartmouth College with respect to ice technology from
Torvec to Ice Engineering, incorporated by reference to current report (Form
8-K) filed July 18, 2007.
    
    
    N/A10.53
    
    
    License Agreement by and between High Density Powertrain and Torvec,
Inc. dated December 12, 2007, incorporated by reference to current report
(Form 8-K) filed December 14, 2007;
    
    
    N/A10.54
    
    
    Consulting Agreement by and between Clifford Carlson and Torvec, Inc.
dated December 12, 2007, incorporated by reference to current report (Form
8-K) filed December 14, 2007.
    
    
    N/A10.55
    
    
    Minutes of meeting of Governance and Compensation Committee dated
February 19, 2008 establishing compensation for the companys president and
chief executive officer and amending the companys commercializing event
plan.
    
    
    92Not 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 registrantIce 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 attorneyNone(31.1)
    
    Rule 13(a)-14(a)/15(d)-14(a) Certifications
    105(32)
    
    Section 1350 Certifications
    106(99)
    
    Additional exhibitsNone
 88