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U.S. SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-KSB
 þ
    
    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR
ENDED DECEMBER 31, 2005
 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.
 1169 Pittsford-Victor RoadBuilding 3, Suite 125
    
    14534Pittsford, New York
    
    (Zip Code)(Address of principal executive offices)
 Issuers Telephone Number, including Area Code: (585) 248-0740
 Securities registered pursuant to Section 12(b) of the Exchange Act:
 Title of each class
    
    Name of each exchange on
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
 o
 o þ
 $0.00
   o o
     o þ




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2




TABLE OF CONTENTS  PART IItem 1.DESCRIPTION OF BUSINESS.Item 2.DESCRIPTION OF PROPERTY.Item 3.LEGAL PROCEEDINGS.Item 4.SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.PART IIItem 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERSItem 6.     MANAGEMENTS DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.Item 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSUREItem 8 (a) CONTROLS AND PROCEDURESPART IIIItem 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACTItem 10. EXECUTIVE COMPENSATIONItem 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENTItem 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONSItem 13. EXHIBITS AND REPORTS ON FORM 8-K.Item 14. PRINCIPAL ACCOUNTANT FEES AND SERVICESSIGNATURESEXHIBIT INDEXEX-10.46: MINUTES OF MEETING BOARD OF DIRECTORS TORVEC, INC.EX-23.1: EISNER LLP CONSENTEX-31: CERTIFICATIONEX-32: CERTIFICATION    Table of Contents  
 PART I
 THE COMPANY
 
 Item 1. DESCRIPTION OF BUSINESS.
 History and Development of Our Inventions
  (i)
    
    Iso-torque differential (next generation of Torsen ® differential  see
Torsen on Google websearcher);(ii)
    
    three 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)
    
    spherical gearing constant velocity mechanism;




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3  Our Automotive Properties
  Torvecs FTVä
    Automotive News
 Torvecs ISO-Torqueä Differential




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4 Torvecs Infinitely Variable Transmission  Hydraulic Pump/Motor




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5 
     Spherical Gearing Constant Velocity Mechanism




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




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7    
 Item 2. DESCRIPTION OF PROPERTY.




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8 
 Item 3. LEGAL PROCEEDINGS.




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9 
 Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
  Subsequent Event
  Election of Directors
 Election of Directors
    
    
    For
    
    
    WithheldDaniel R. Bickel
    
    
    27,084,789
    
    
    
    235,578Herbert H. Dobbs
    
    
    26,991,321
    
    
    
    329,046Keith E. Gleasman
    
    
    27,000,688
    
    
    
    319,679James Y. Gleasman
    
    
    26,974,767
    
    
    
    345,600Joseph B. Rizzo
    
    
    27,059,818
    
    
    
    260,549Gary A. Siconolfi
    
    
    27,066,118
    
    
    
    254,249
  For
    
    
    Against
    
    
    Abstained27,200,582
    
    
    108,020
    
    
    
    11,765




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10 
 PART II
 
 Item 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS .
 (a) Market Information
   2004
    
    High
    
    
    Low1st Quarter
    
    $
    8.99
    
    
    $
    1.752nd Quarter
    
    $
    9.98
    
    
    $
    5.153rd Quarter
    
    $
    6.95
    
    
    $
    3.604th Quarter
    
    $
    7.05
    
    
    $
    3.15
 2005
    
    High
    
    
    Low1st Quarter
    
    $
    6.05
    
    
    $
    3.602nd Quarter
    
    $
    4.07
    
    
    $
    2.353rd Quarter
    
    $
    3.27
    
    
    $
    1.814th Quarter
    
    $
    2.90
    
    
    $
    1.15
 (b) Holders of Common Stock
  (c) Dividend Policy on Common Stock




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11 (d) Securities Authorized for Issuance Under Equity Compensation Plans
 Number of securitiesto be issued upon
    
    
    Weighted averageexercise of
    
    
    exercise price of
    
    
    Number of securitiesoutstanding options,
    
    
    outstanding options,
    
    
    remaining availablewarrants and rights
    
    
    warrants and rights
    
    
    for future issuancePlan Category
    
    (a)
    
    
    (b)
    
    
    (c)Equity compensation
plans approved by
security holders
    
    
    1,823,895
    
    
    $
    5.00
    
    
    
    176,105
    (1)Equity
compensation plans
not approved by
security holders
(2) (3) (4)
    
    
    177,750
    
    
    $
    0.09
    
    
    
    (1) (2)-
    (4)Total
    
    
    2,001,645
    
    
    $
    3.42
    
    
    
    176,105 (1) (2)-
    (4)
 
 (1)
    
    As of December 31, 2005.(2)
    
    The company granted 125,000 warrants to a consultant in
connection with a non-exclusive financial consulting
agreement dated February 11, 1997. The warrants are only
exercisable if and when the company has an initial public
offering of its common stock.The company granted 7,500 warrants to its placement agent in
connection with its 2002 private placement of its Class A
Preferred Shares. 2,500 warrants have been exercised leaving
a balance of 5,000.(3)
    
    The company has granted 1,080,000 warrants to a
management consulting firm of which 528,400 have been
exercised. The company is litigating that such firm is not
legally entitled to exercise the unexercised warrants
outstanding as well as the issuance of an indeterminate
number of additional warrants issuable under a purported
agreement with such firm dated April 12, 2005. See footnote J
to the companys financial statements on page 43.(4)
    
    The company is obligated to issue up to 12,000 warrants
per annum to each nonmanagement director under its
Nonmanagement Directors Plan and up to an additional 5,000
warrants per annum to the chairman of the companys audit
committee. 97,000 warrants have been issued of which 21,000
have been exercised. See Note H [8]. (e) Class A Preferred Stock




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12    (i)
    
    So long as any Class A Preferred Shares are
outstanding, the holders of the Class A Preferred
Shares will be entitled to receive cumulative
preferential dividends in the amount of $.40 per Class
A Preferred Share and no more for each annual dividend
period. The annual dividend period shall commence on
the first day of each March and shall end on the last
day of the immediately succeeding February, which
February date is referred to as the Dividend Accrual
Date.(ii)
    
    When and as declared by the Board, dividends payable
on the Class A Preferred Shares will be paid in cash
out of any funds legally available for the payment of
dividends or, in the discretion of the Board, will be
paid in Class A Preferred Shares at a rate of 1 Class
A Preferred Share for each $4.00 of dividends. No
fractions of Class A Preferred Shares shall issue.
The Company shall pay cash in lieu of paying fractions
of Class A Preferred Shares on a pro rata basis.(iii)
    
    Dividends shall be cumulative from the date of
issuance of Class
A Preferred Shares, whether or not declared and
whether or not, in any annual dividend period(s),
there are net profits or net
assets of the Company legally available for the
payment of dividends.(iv)
    
    Accumulated and unpaid dividends on the Class A
Preferred Shares will not bear interest.(v)
    
    So long as any Class A Preferred Shares are
outstanding, the Company may not declare or pay any
dividend, make any distribution, or fund, set aside or
make monies available for a sinking fund for the
purchase or redemption of, any shares or stock of the
Company ranking junior to the Class A Preferred Shares
with respect to the payment of dividends, including
the $.01 par value common stock of the Company
(Junior Stock), unless all dividends in respect of
the Class A Preferred Shares for all past annual
dividend periods have been paid and such dividends for
the current annual dividend period have been paid or
declared and duly provided for. Subject to the
foregoing, and not otherwise, the dividends (payable
in cash, stock or otherwise) as may be determined by
the Board, may be declared and paid on any Junior
Stock from time to time out of any funds legally
available therefor, and the Class A Preferred Shares
will be entitled to participate in any such dividends,
whether payable in cash, stock or otherwise on a pro
rata basis.




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13 
  (i)
    
    In the event of any liquidation, dissolution or winding up of the Company,
whether voluntary or involuntary, the holders of Class A Preferred Shares then
outstanding are entitled to be paid out of the assets of the Company available
for distribution to its shareholders, whether such assets are capital, surplus
or earnings, before any payment or declaration and setting apart for payment of
any amount in respect of any shares of any Junior Stock with respect to the
payment of dividends or distribution of assets on liquidation, dissolution or
winding up of the Company, all accumulated and unpaid dividends (including a
prorated dividend from the last Dividend Accrual Date) in respect of any
liquidation, dissolution or winding up consummated except that, notwithstanding
the provisions of Section B(ii), all of such accumulated and unpaid dividends
will be paid in Class A Preferred Shares at a rate of 1 Class A Preferred Share
for each $4.00 of dividends. No fractions of Class A Preferred Shares shall
issue. The Company shall pay cash in lieu of paying fractions of Class A
Preferred Shares on a pro rata basis.(ii)
    
    The Class A Preferred Shares will be entitled to participate on a pro rata
basis in any distribution of assets as may be made or paid on Junior Stock upon
the liquidation, dissolution or winding up of the Company.(iii)
    
    A consolidation or merger of the Company with or into any
other corporation or corporations or any other legal entity will not be deemed
to constitute a liquidation, dissolution or winding up of the Company as those
terms are used in this Section C.
  (i)
    
    The Company may, in the absolute discretion of its Board, redeem at any time
and from time to time from any source of funds legally available any and all of
the Class A Preferred Shares at the Redemption Price.(ii)
    
    For each redemption, the Redemption Price for each Class A Preferred Share
shall be equal to amount paid per Class A Preferred Share payable in cash, plus
an amount payable (not withstanding the provisions of Section B (ii)) in cash
equal to the sum of all accumulated unpaid dividends per Class A Preferred
Share (including a prorated annual dividend from the last Dividend Accrual
Date) to the respective date for each redemption on which the Company shall
redeem any Class A Preferred Shares (the Redemption Date).(iii)
    
    In the event of redemption of only a portion of the then outstanding Class A
Preferred Shares, the Company will affect the redemption pro rata according to
the number shares held by each holder of Class A Preferred Shares.(iv)
    
    At least 20 days and not more than 60 days prior to the date fixed by the Board
for any redemption of Class A Preferred Shares, written notice (the Redemption
Notice) will be mailed, postage prepaid, to each holder of record of the Class
A Preferred Shares at his or her post office address last shown on the records
of the Company. The Redemption Notice will state:




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14 
 o
    
    Whether all or less than all of the
outstanding Class A Preferred Shares are to
be redeemed and the total number of Class A
Preferred Shares being redeemed;o
    
    the number of Class A Preferred Shares held
by the holder that the Company intends to
redeem;o
    
    the Redemption Date and Redemption Price; ando
    
    that the holder is to surrender to the
Company, in the manner and at the place
designated in Section D(v), his or her
certificate or certificates representing
Class A Preferred Shares to be redeemed.
 (v)
    
    On or before the date fixed for redemption, each holder of Class A Preferred Shares must
surrender the certificate or certificates representing Class A Preferred Shares to the
Company, accompanied by instruments of transfer satisfactory to the Company and sufficient
to transfer the Class A Preferred Shares being redeemed to the Company free and clear of any
adverse interest, at the place designated in the Redemption Notice. The Redemption Price
for the Class A Preferred Shares redeemed will be payable in cash on the Redemption Date to
the person whose name appears on the certificate(s) as the owner of such certificate(s) as
of the date of the Redemption Notice. In the event that less than all of the Class A
Preferred Shares represented by any certificate(s) are redeemed, a new certificate will
issued by the Company representing the unredeemed Class A Preferred Shares to the same
record owner.(vi)
    
    As promptly as practicable after surrender of the certificate(s) representing the redeemed
Class A Preferred Shares, the Company will pay the Redemption Price to the record holder of
the redeemed Class A Preferred Shares.(vii)
    
    Unless the Company defaults in the payment in full of the Redemption Price, the obligation
of the Company to pay dividends on the Class A Preferred Shares redeemed shall cease on the
Redemption Date, and the holders of the Class A Preferred Shares redeemed will cease to have
any further rights with respect to such redeemed Class A Preferred Shares on the Redemption
Date, other than to receive the Redemption Price.(viii)
    
    The holders of the Class A Preferred Shares have no right to seek or to compel redemption of
the Class A Preferred Shares.




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




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




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17 (x)
    
    In case the Company
 o
    
    Declares a dividend, or makes
a distribution, on shares of its $.01 par value common
stock in shares of its $.01 par value common stock; oro
    
    Subdivides its outstanding shares of its $.01 par value
common stock into a greater number of shares of its $.01
par value common stock; oro
    
    Combines its outstanding shares of its $.01 par value
common stock into a smaller number of shares of $.01 par
value common stock,
       (f) Class B Preferred Stock




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18 A.
    
    Three hundred thousand (300,000) authorized preferred shares of the
par value of $.01 each as fixed by the Board of Directors, none of
which has been issued, shall be issued in and as a series to be
designated Class B Non-Voting Cumulative Convertible Preferred Shares,
$.01 par value. Said series is hereinafter called Class B Preferred
Shares. The term preferred shares as used herein shall include all
100,000,000 of the preferred shares, $.01 par value authorized by the
Certificate of Incorporation of the Corporation of which Class B
Preferred Shares is the second series.B.
    
    (1) So long as any Class B Preferred Shares are outstanding, the
holders of the Class B Preferred Shares will be entitled to receive
cumulative preferential dividends in the amount of $.50 per Class B
Preferred Share and no more for each annual dividend period. The
annual dividend period shall commence on the first clay of each
September and shall end on the last day of the immediately succeeding
August, which August date is referred to as the Dividend Accrual
Date.(2) When and as declared by the Board, dividends payable on the
Class B Preferred Shares will be paid in cash out of any funds legally
available for the payment of dividends or, in the discretion of the
Board, will be paid in Class B Preferred Shares at a rate of 1 Class B
Preferred Shares for each $5.00 of dividends. No fractions of Class B
Preferred Shares shall be issued. The Corporation shall pay cash in
lieu of paying fractions of Class B Preferred Shares on a pro rata
basis.(3) Dividends shall be cumulative from the date of issuance of
Class B Preferred Shares, whether or not declared and whether or not,
in any annual dividend period(s), there are net profits or net assets
of the Corporation legally available for the payment of dividends.(4) Accumulated and unpaid dividends on the Class B Preferred
Shares will not bear interest.(5) So long as any Class B Preferred Shares are outstanding, the
Corporation may not declare or pay any dividend, make any
distribution, or fund, set aside or make monies available for a
sinking fund for the purchase or redemption of any shares or stock of
the Corporation ranking junior to the Class B Preferred Shares with
respect to the payment of dividends, including the $.01 par value
common stock of the Class B Preferred Shares for all past annual
dividend periods have been paid and such dividends for the current
annual dividend period have been paid or declared and duly provided
for. Subject to the foregoing, and not otherwise, the dividends
(payable in cash, stock or otherwise) as may be determined by the
Board, may be declared and paid on any Junior Stock from time to time
out of any funds legally available therefore, and the Class B
Preferred Shares will be entitled to participate in any such
dividends, whether payable in cash, stock or otherwise, on a pro rata
basis.C.
    
    The Class B Preferred Shares shall rank junior and be classified as
Junior Stock with respect to the Corporations Class A Preferred
Shares in all respects.D.
    
    (1) In the event of any liquidation, dissolution or winding up
of the Corporation, whether voluntary or involuntary, the holders of
Class B Preferred Shares then outstanding are entitled to be paid out
of the assets of the Corporation available for distribution to its
shareholders, whether such assets are capital, surplus or earnings,
before any payment or declaration and setting apart for payment of any
amount in respect of any shares of any Junior stock with respect to
the payment of dividends or distribution of




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




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(g)
    
    Reports to Shareholders
  (h)
    
    Transfer Agent and Registrar
  
 Item 6.     MANAGEMENTS DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
 (a)
    
    Overall Business Strategy
  o
    
    to license or sell any one or
all of its technologies (i.e.
the infinitely variable
transmissions, the hydraulic
pump/motor system, the
Iso-Torque differential, the
spherical gearing constant
velocity joint mechanism, the
ice technology) in order to
provide the capital management
believes is necessary to
successfully implement its
stated goal to manufacture and
market its FTV worldwide,
especially in the Asian,
African, South and Central
American, and Eastern European
markets.
  o
    
    to continue the ongoing real
world testing of our modular,
hydromechanical infinitely
variable transmission in both
our GM Tahoe and a
diesel-powered vehicle and to
showcase the performance of
such transmission to the
worldwide automotive industry,
local, regional and national
governments and to private
sector vehicle end-users, such
as the U.S. military,
companies with large truck
fleets and school bus
companies;o
    
    to continue demonstrating the
Iso-Torque differential both
in the Nissan 350-Z as well in
as other,
strategically-targeted
vehicles to the worldwide auto
industry, local, regional and
national governments and to
private sector end-users, such
as the U.S. military,
companies with large truck
fleets and school bus
companies;o
    
    to continue demonstrating the
Full Terrain Vehicle (FTV) to
the worldwide auto industry,
local, regional and national
governments and to private
sector end users, such as the
U.S. military;o
    
    to continue ongoing
discussions with such
governments and private sector
end-users as well as with
automotive manufacturers and
1st-Tier suppliers
worldwide in order to
consummate one or more joint
venture or other business
combinations that would lead
to the commercialization of
the companys products;o
    
    to continue ongoing
discussions with glass
manufacturers regarding the
joint development and
commercialization of the ice
technology with a view to the
license or sale of such
technology;o
    
    to continue to improve the
companys inventions and,
where appropriate, to obtain
patent protection on such new
improvements.




---



##### Table of Contents



www.torvec.com
   (b)
    
    Current Status of Product Development
  o
    
    the FTVä, including the steering drive and suspension for tracked vehicles;o
    
    the Iso-Torque differential;o
    
    our infinitely variable transmissions;o
    
    the hydraulic pump and motor;o
    
    spherical gearing constant velocity mechanism;o
    
    the ice technology.
  o
    
    The Iso-Torque differential  patent protection for this invention was
issued July 8, 2004. Through our wholly-owned subsidiary, Iso-Torque Corporation, we have
built prototype Iso-Torque differential and have been demonstrating these differentials to
government and private sector visitors at our development facility and under real-world
driving conditions. The successful testing and showcasing of the Iso-Torque differential has
lead management to focus upon the strategy the company is employing to market and
commercialize the Iso-Torque differential. A significant aspect of this strategy is highway
safety.All differentials manufactured by the companys competitors are plagued by a fundamental
flaw in the physics governing differentials - a flaw which creates an imbalance of
traction when one drive wheel is on dry pavement and the other is on loose gravel, grass,
snow, ice or other slippery surface. Similarly, an imbalance of traction occurs when a
vehicle is going around a sharp corner with less traction on the outside wheels.
Management believes that the Iso-Torque differential dramatically solves the imbalance of
traction problem characteristic of all other differentials. The Iso-Torque differential
maintains proportionately balanced torque going to the drive wheels, at all times and under
any and all conditions. The company has retained the services of Mr. Gary Eldlin to educate
the auto insurance industry, the American Automobile Association, the National Safety
Council and similar organizations with respect to the extraordinary safety implications of
the Iso-Torque differential.The full terrain vehicle (FTV) requires two Iso-Torque differentials and the company plans
to incorporate the sale of Iso-Torque differentials in any strategic alliance or other
business relationship involving the sale or other transaction involving our FTV technology.




---



##### Table of Contents



o
    
    The infinitely variable transmission   the company has developed three infinitely variable
transmissions for diesel and gasoline engines, namely, the hydromechanical configured for
the Dodge Ram diesel (2003), the all hydraulic for gasoline engines (2004) and the modular,
hydromechanical for both gasoline as well as diesel engines.Essentially, we believe we have created transmissions for very different market applications.The all-hydraulic transmission has approximately 170 total parts, of which 25 are separately
manufactured parts (excluding nuts, bolts, screws and the like). This contrasts with an
average of over 700 parts for an automatic transmission, the majority of which have to be
separately manufactured. We believe our all-hydraulic transmission has solved the major
problems of weight, size, noise, heat and lack of start-up ability at low revolutions per
minute (rpm), all of which have heretofore prevented the development of a hydraulic
transmission for automotive use.We believe that our all-hydraulic transmission, functioning as a stand alone transmission,
is ideal for use in subcompact, compact and mid-sized cares where, according to the May 9,
2005 issue of Business Week, Why GMs Plan Wont Work, the auto companies profit margin
is most narrow. We believe the market for the all-hydraulic transmission may very well be
the rapidly emerging, but highly competitive Third World markets like China where cost
reduction is essential, roads are difficult to traverse, city driving is generally congested
and vehicle speeds are reduced.While the companys unique pumps and motors can function as a stand alone transmission, they
also form the core of the companys infinitely variable, hydromechanical transmission. Our
hydromechanical transmission operates both on our unique pumps and motors and on gears. The
addition of a gear pack to the hydraulic transmission enables our transmission to operate
under the greater torque (power) requirements demanded by SUVs, Hummers, trucks and buses,
and is the ideal transmission for these types of vehicles.The combination of our hydraulic and hydromechanical transmissions constitutes the companys
modular, hydromechanical transmission for which the company has recently filed for patent
protection.The company believes that all its transmissions - all hydraulic, hydromechanical and
modular - perform better than an automatic transmission for a number of reasons, including:
 
    
    No vehicle creep  we have all experienced sitting at a red light and our foot comes
off the brake. The vehicle creeps forward or rolls backward which, if unanticipated, can be
extremely dangerous. We are confident that our transmissions eliminate vehicle creep,
whether forward or backward;
    
    Increased vehicle control  our transmissions enable a driver to dramatically
control vehicle speed, reducing speeds to less than one-half mph ( i.e. approximately 16 ft.
per minute ), thus providing greater safety in inclement weather, less fuel usage in traffic
jams, greater control and flexibility to maneuver through parking lots and narrow streets
(e.g. those in Eastern Europe and Asia), as well as greater maneuverability on rough terrain
and poor road conditions;
    
    Greater mpg during rapid acceleration  a considerable portion of typical city and
suburban driving involves rapid acceleration, that is, acceleration from zero to 30 mph at
a rate exceeding 6 mph per second. In side-by-side testing of the hydraulic transmission
against a Tahoes automatic transmission in the zero to 30 mph acceleration range, our test
results indicated that the automatic transmission used 100% more fuel than our transmission;




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##### Table of Contents




    
    Increased fuel economy  in response to inquiries made by several auto companies, we
have compared our transmission in side-by-side tests under simulated city driving scenarios
as well as side-by-side comparisons utilizing the EPA-sanctioned New York City cycle test.
Over the course of all of these tests, our transmission consistently achieved an average of
4.33% improvement in fuel efficiency over the Tahoe automatic.
    
    Greater operating efficiencies/durability  durability and efficiency are directly
related (i.e. the more efficient a device is, the more durable it will also be under test
conditions). Heat generated is an extremely accurate measure of efficiency. Our all
hydraulic transmission operates in a temperature range of 90 to 160 degrees ( the higher
temperature reflects high loads and more difficult driving conditions), with a general
operating temperature of approximately 140 degrees. There is no oil cooler (radiator)
required, and the entire system utilizes only 6 quarts of oil. In its operating range, our
pump is 92% efficient and the motor is 92% efficient, reflecting an overall operating
efficiency of 85% (92%x92%). These efficiencies are validated by our operating temperatures.
A further confirmation of our transmissions efficiency is greater fuel mileage during
acceleration as previously described.
 During the third quarter of 2005, we installed our modular, hydromechanical, infinitely
variable transmission in the Tahoe. Preliminary findings from tests designed to measure the
engines revolutions per minute (rpm) conducted under a full load (full vehicle weight,
5575 lbs., load resistance on our dynamometer) with the transmission accelerating through
15, 30, 45 and 60 miles per hour (mph) demonstrate that our modular, hydromechanical
transmission reduces engine rpm dramatically in comparison to the stock, automatic
transmission originally installed in the SUV.At 15 mph, the engine rpm with the IVT was 600; at 30mph, the rpm was 700; at 45, the rpm
was 1100 and at 60 mph, the rpm was 1400. In addition, the engine rpm increases in a steady
progression as opposed to the rapid rise and fall characteristic of the automatic as it
shifts gears. At steady state operation, the engine rpm with the IVT averaged 728 at 30
mph as against 1160 rpm with the automatic and at steady state operation at 50mph, the
engine rpm with our transmission averaged 1216 as against 1500 rpm with the automatic.
We also believe our modular hydromechanical transmission will generate impressive fuel
savings. To this point, preliminary data gathered from repeatable tests are very positive.
At steady state operation at 30mph, the engine only used an average of 87 ccms (cubic
centimeters) of fuel per minute with our transmission as against an average of 109 ccms per
minute used by the engine with the stock automatic transmission. This represents a 20% gain
in fuel efficiency.At steady state operation at 50mph, the engine only used an average of 167 ccms of fuel
per minute with our transmission as against an average of 181 ccms per minute used by the
engine with the stock automatic transmission. This respresents over a 7% gain in fuel
efficiency.While these findings are preliminary, they were generated by repeatable tests and management
is confident that these results will be confirmed through more exhaustive testing. To this
end, we are upgrading our computer software program to maximize the performance of our
modular hydromechanical so that we can successfully complete both the old and new EPA
sanctioned city and highway tests as well as successfully perform real world driving
scenarios.When we have completed our testing with our hydromechanical transmission in the SUV, we will
install it in a diesel fueled vehicle and conduct similar tests with this vehicle.o
    
    The Full Terrain Vehicle - the company has completed structural reinforcements and minor
alterations to the FTV suspension and continues to showcase the FTV to governmental and
private sector visitors.




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##### Table of Contents



o
    
    The constant velocity joint - the company has filed for new patents on this invention due
to recent improvements which we believe strengthen the CV joint, increase its efficiency and
makes it less costly to manufacture.
  (c)
    
    Status of Certain, Publicly Announced Negotiations
     (d)
    
    Company Expenses
    (e)
    
    Liquidity And Capital Resources




---



##### Table of Contents



th
    (f)
    
    Subsequent Event
  (g)
    
    Critical Accounting Policies




---



##### Table of Contents



(h)
    
    Impact of Inflation
  (i)
    
    Quarterly Fluctuations




---



##### Table of Contents



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




---



##### Table of Contents



TORVEC, INC. AND SUBSIDIARIES
 Contents
 PageFinancial StatementsReport of Independent Registered Public Accounting Firm
    
    
    F-2Consolidated balance sheet as of December 31, 2005
    
    
    F-3Consolidated statements of operations for each of the years in the two-year period ended
December 31, 2005 and for the period from September 25, 1996 (inception) through
December 31, 2005
    
    
    F-4Consolidated statements of changes in stockholders equity (capital deficit) for the periods
from September 25, 1996 (inception) through December 31, 2005
    
    
    F-5Consolidated statements of cash flows for each of the years in the two-year period ended
December 31, 2005 and for the period from September 25, 1996 (inception) through
December 31, 2005
    
    
    F-10Notes to consolidated financial statements
    
    
    F-11
 F-1




---



##### Table of Contents



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
     
 F-2




---



##### Table of Contents



ASSETSCurrent assets:Cash
    
    $
    51,000Prepaid
expenses and other receivable
    
    
    67,000Total current assets
    
    
    118,000Property and Equipment:Office equipment
    
    
    42,000Shop equipment
    
    
    126,000Leasehold improvements
    
    
    3,000Transportation equipment
    
    
    99,000270,000Less accumulated depreciation and amortization
    
    
    82,000Net property and equipment
    
    
    188,000Other Assets:License, less accumulated amortization of $1,548,000
    
    
    1,712,000Deposits
    
    
    2,000Total Other Assets
    
    
    1,714,000$
    2,020,000LIABILITIESCurrent liabilities:Notes payable
    
    $
    5,000Accounts payable
    
    
    148,000Accrued liabilities
    
    
    1,541,000Total current liabilities
    
    
    1,694,000Deferred revenue
    
    
    150,000Notes payable
    
    
    19,000Total liabilities
    
    
    1,863,000Minority interest
    
    
    8,000Commitments and other mattersSTOCKHOLDERS EQUITYPreferred 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 preferred,
459,243 shares issued and outstanding (liquidation preference $2,085,179)
    
    
    5,000300,000 designated as Class B, Non-voting, cumulative dividend $.50 per share, per annum,
convertible preferred, 42,500 shares issued and outstanding (liquidation preference $240,292)Common stock, $.01 par value, 40,000,000 shares authorized, 30,052,630 issued and
outstanding
    
    
    300,000Additional paid-in capital
    
    
    37,267,000Shares issued for future consulting services
    
    
    (103,000
    )Deficit accumulated during the development stage
    
    
    (37,320,000
    )149,000$
    2,020,000
 See notes to consolidated financial statements
 F-3




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##### Table of Contents



September 25,1996(Inception)Year Ended
    
    
    ThroughDecember 31,
    
    
    December 31,2005
    
    
    2004
    
    
    2005Revenue
    
    $
    
    
    
    $
    
    
    
    $
    Cost and expenses:Research and development
    
    
    2,719,000
    
    
    
    2,165,000
    
    
    
    12,777,000General and administrative
    
    
    2,999,000
    
    
    
    7,932,000
    
    
    
    25,807,000Loss before minority interest
    
    
    (5,718,000
    )
    
    
    (10,097,000
    )
    
    
    (38,584,000
    )Minority interest in loss of consolidated subsidiary
    
    
    273,000
    
    
    
    292,000
    
    
    
    1,264,000Net loss
    
    
    (5,445,000
    )
    
    
    (9,805,000
    )
    
    
    (37,320,000
    )Preferred stock beneficial conversion feature
    
    
    159,000
    
    
    
    556,000
    
    
    
    715,000Preferred stock dividend
    
    
    156,000
    
    
    
    91,000
    
    
    
    275,000Net loss attributable to common stockholders
    
    $
    (5,760,000
    )
    
    $
    (10,452,000
    )
    
    $
    (38,310,000
    )Basic and diluted net loss attributable to common
stockholders per share
    
    $
    (0.19
    )
    
    $
    (0.37
    )Weighted average number of shares of common
stock  basic and diluted
    
    
    29,560,000
    
    
    
    28,515,000
 See notes to consolidated financial statements
 F-4




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##### Table of Contents



Consolidated Statements of Changes in Stockholders Equity (Capital Deficit)
For the Period from September 25, 1996 (Inception) through December 31, 2005
 DeficitUnearned
    
    
    AccumulatedAdditional
    
    
    Due
    
    
    Compensatory
    
    
    During the
    
    
    TotalClass A Preferred Stock
    
    
    Class B Preferred Stock
    
    
    Common Stock
    
    
    Paid-in
    
    
    From
    
    
    Stock and
    
    
    Development
    
    
    StockholdersShares
    
    
    Amount
    
    
    Shares
    
    
    Amount
    
    
    Shares
    
    
    Amount
    
    
    Capital
    
    
    Stockholders
    
    
    Options
    
    
    Stage
    
    
    EquityIssuance of shares to founders
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    16,464,400
    
    
    $
    165,000
    
    
    $
    (165,000
    )
    
    $
    
    
    
    
    
    
    
    
    
    
    
    $
    0Issuance of stock for services
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,535,600
    
    
    
    25,000
    
    
    
    381,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    406,000Sale of common stock  November ($1.50 per share)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    64,600
    
    
    
    1,000
    
    
    
    96,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    97,000Sale of common stock  December ($1.50 per share)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    156,201
    
    
    
    1,000
    
    
    
    233,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    234,000Distribution to founders
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (27,000
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (27,000
    )Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    (489,000
    )
    
    
    (489,000
    )Balance  December 31, 1996
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    19,220,801
    
    
    
    192,000
    
    
    
    518,000
    
    
    
    
    
    
    
    
    
    
    
    (489,000
    )
    
    
    221,000Issuance of compensatory stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,000,000
    
    
    
    10,000
    
    
    
    1,490,000
    
    
    
    
    
    
    $
    (1,500,000
    )
    
    
    
    
    
    
    0Issuance of stock for services
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    12,000
    
    
    
    
    
    
    
    18,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    18,000Sale of common stock  January ($1.50 per share)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    58,266
    
    
    
    1,000
    
    
    
    86,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    87,000Sale of common stock  February ($1.50 per share)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    75,361
    
    
    
    1,000
    
    
    
    112,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    113,000Sale of common stock  May ($1.50 per share)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    30,000
    
    
    
    
    
    
    
    45,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    45,000Issuance of stock for services
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,000
    
    
    
    
    
    
    
    6,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6,000Sale of common stock  June ($3.00 per share)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    73,166
    
    
    
    1,000
    
    
    
    219,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    220,000Sale of common stock  July ($3.00 per share)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    13,335
    
    
    
    
    
    
    
    40,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    40,000Sale of common stock  August ($3.00 per share)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    60,567
    
    
    
    1,000
    
    
    
    181,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    182,000Sale of common stock  September ($3.00 per share)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    10,000
    
    
    
    
    
    
    
    30,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    30,000Sale of common stock  October ($3.00 per share)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    7,000
    
    
    
    
    
    
    
    21,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    21,000Sale of common stock  November ($3.00 per share)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    10,000
    
    
    
    
    
    
    
    30,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    30,000Sale of common stock  December ($3.00 per share)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    100,000
    
    
    
    1,000
    
    
    
    299,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    300,000Issuance of compensatory options to consultants
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    234,000
    
    
    
    
    
    
    
    (234,000
    )
    
    
    
    
    
    
    0Compensatory stock and options earned
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    451,000
    
    
    
    
    
    
    
    451,000Distributions to founders
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (338,000
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (338,000
    )Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (922,000
    )
    
    
    (922,000
    )Balance  December 31, 1997
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    20,672,496
    
    
    
    207,000
    
    
    
    2,991,000
    
    
    
    
    
    
    
    (1,283,000
    )
    
    
    (1,411,000
    )
    
    
    504,000Issuance of stock for services
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,000
    
    
    
    
    
    
    
    3,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,000Sale of common stock  May 11 to September 20 ($5.00 per share)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    112,620
    
    
    
    1,000
    
    
    
    562,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    563,000Sale of common stock  September 21 to December 31 ($10.00 per share)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    25,500
    
    
    
    
    
    
    
    255,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    255,000Costs of offering
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (60,000
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (60,000
    )Compensatory stock and options earned
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    578,000
    
    
    
    
    
    
    
    578,000Contribution of services
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    15,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    15,000Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,122,000
    )
    
    
    (2,122,000
    )Balance  December 31, 1998
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    20,811,616
    
    
    
    208,000
    
    
    
    3,766,000
    
    
    
    
    
    
    
    (705,000
    )
    
    
    (3,533,000
    )
    
    
    (264,000
    )Issuance of stock for services
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    45,351
    
    
    
    
    
    
    
    327,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    327,000Sale of common stock  January 1 to August 9 ($10.00 per share)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    80,670
    
    
    
    1,000
    
    
    
    806,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    807,000Sale of common stock  August 10 to November 30 ($5.00 per share)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    84,500
    
    
    
    1,000
    
    
    
    422,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    423,000Issuance of compensatory options to consultants
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,780,000
    
    
    
    
    
    
    
    (2,780,000
    )
    
    
    
    
    
    
    0Common stock
issued  exercise of options
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    21,000
    
    
    
    
    
    
    
    105,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    105,000Compensatory stock and options earned
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,050,000
    
    
    
    
    
    
    
    3,050,000Contribution of services
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    15,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    15,000Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (4,788,000
    )
    
    
    (4,788,000
    )Balance  December 31, 1999
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    21,043,137
    
    
    
    210,000
    
    
    
    8,221,000
    
    
    
    
    
    
    $
    (435,000
    )
    
    
    (8,321,000
    )
    
    
    (325,000
    )
 See notes to consolidated financial statements.
 F-5




---



##### Table of Contents



TORVEC, INC. AND SUBSIDIARIES
 Consolidated Statements of Changes in Stockholders Equity (Capital Deficit)
For the Period from September 25, 1996 (Inception) through December 31, 2005
(continued)
 DeficitUnearned
    
    
    AccumulatedAdditional
    
    
    Due
    
    
    Compensatory
    
    
    During the
    
    
    TotalClass A Preferred Stock
    
    
    Class B Preferred Stock
    
    
    Common Stock
    
    
    Paid-in
    
    
    from
    
    
    Stock and
    
    
    Development
    
    
    StockholdersShares
    
    
    Amount
    
    
    Shares
    
    
    Amount
    
    
    Shares
    
    
    Amount
    
    
    Capital
    
    
    Stockholders
    
    
    Options
    
    
    Stage
    
    
    EquityIssuance of stock for services
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    196,259
    
    
    $
    2,000
    
    
    $
    838,000
    
    
    $
    
    
    
    
    
    
    
    
    
    
    
    $
    840,000Sale of common stock  March 29 ($4.51 per share)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    44,321
    
    
    
    
    
    
    
    200,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    200,000Sale of common stock  June 23 ($3.50 per share)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    100,000
    
    
    
    1,000
    
    
    
    349,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    350,000Acquisition of Ice Surface Development
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,068,354
    
    
    
    11,000
    
    
    
    3,394,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,405,000Proceeds from exercise of put option
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    36,735
    
    
    
    1,000
    
    
    
    108,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    109,000Compensatory stock and options earned
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    435,000
    
    
    
    
    
    
    
    435,000Contribution of services
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    15,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    15,000Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    (2,374,000
    )
    
    
    (2,374,000
    )Balance  December 31, 2000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    22,488,806
    
    
    
    225,000
    
    
    
    13,125,000
    
    
    
    
    
    
    
    0
    
    
    
    (10,695,000
    )
    
    
    2,655,000Issuance of stock for liabilities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    126,667
    
    
    
    1,000
    
    
    
    664,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    665,000Issuance of stock for services
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    361,100
    
    
    
    4,000
    
    
    
    1,007,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,011,000Issuance of option to consultant for services
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    398,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    398,000Proceeds from exercise of put option
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    101,910
    
    
    
    1,000
    
    
    
    323,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    324,000Contribution of services
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    15,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    15,000Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3,871,000
    )
    
    
    (3,871,000
    )Balance  December 31, 2001
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    23,078,483
    
    
    
    231,000
    
    
    
    15,532,000
    
    
    
    
    
    
    
    0
    
    
    
    (14,566,000
    )
    
    
    1,197,000Exercise of warrants
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    124,448
    
    
    
    1,000
    
    
    
    126,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    127,000Exercise of warrants
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    250,000
    
    
    
    3,000
    
    
    
    72,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    75,000Loss on sale of minority interest
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (232,000
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (232,000
    )Sale of preferred stock and warrant
    
    
    38,500
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    142,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    142,000Issuance of stock for services
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,001,454
    
    
    
    10,000
    
    
    
    1,224,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,234,000Issuance of options in settlement of liabilities and consulting fees
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    653,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    653,000Issuance of warrants to chairman
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    690,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    690,000Proceeds from exercise of put option ($.90 per share)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    440,000
    
    
    
    5,000
    
    
    
    391,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    396,000Common stock issued in exchange for loan
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    35,461
    
    
    
    
    
    
    
    50,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    50,000Sale of common stock  July ($1.45 per share)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    46,897
    
    
    
    
    
    
    
    68,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    68,000Sale of common stock  August ($1.42 per share)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    211,265
    
    
    
    2,000
    
    
    
    298,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    300,000Sale of common stock  September ($1.42 per share)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    140,845
    
    
    
    1,000
    
    
    
    199,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    200,000Sale of common stock  December ($.91 per share)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    109,890
    
    
    
    1,000
    
    
    
    99,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    100,000Contribution of services
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    15,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    15,000Issuance of warrant for financial services
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    8,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    8,000Warrant issued in lieu of compensation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    633,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    633,000Issuance of shares in settlement of liabilities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    190,965
    
    
    
    2,000
    
    
    
    267,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    269,000Compensatory stock options
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    32,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    32,000Employees/Stockholders Contribution of services in subsidiary
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    519,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    519,000Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (4,577,000
    )
    
    
    (4,577,000
    )Balance  December 31, 2002
    
    
    38,500
    
    
    
    0
    
    
    
    
    
    
    
    
    
    
    
    25,629,708
    
    
    $
    256,000
    
    
    $
    20,786,000
    
    
    $
    
    
    
    $
    0
    
    
    $
    (19,143,000
    )
    
    $
    1,899,000
  F-6




---



##### Table of Contents



TORVEC, INC. AND SUBSIDIARIES
(a development stage company)
 Consolidated Statements of Changes in Stockholders Equity (Capital Deficit)
For the Period from September 25, 1996 (Inception) through December 31, 2005
(continued)
 DeficitUnearned
    
    
    AccumulatedAdditional
    
    
    Due
    
    
    Compensatory
    
    
    During the
    
    
    TotalClass A Preferred Stock
    
    
    Class B Preferred Stock
    
    
    Common Stock
    
    
    Paid-in
    
    
    from
    
    
    Stockholders
    
    
    Development
    
    
    StockholdersShares
    
    
    Amount
    
    
    Shares
    
    
    Amount
    
    
    Shares
    
    
    Amount
    
    
    Capital
    
    
    Stockholders
    
    
    Options
    
    
    Stage
    
    
    EquitySale of Common Stock  March ($0.90 per share)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    111,112
    
    
    
    1,000
    
    
    $
    99,000
    
    
    $
    
    
    
    $
    
    
    
    
    
    
    
    $
    100,000Sale of Common Stock  June (0.80 per share)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    250,000
    
    
    
    3,000
    
    
    
    197,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    200,000Sale of Common Stock  September ($2.50 per share)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    8,000
    
    
    
    
    
    
    
    20,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    20,000Advance settled with Common Stock  October
($2.50 per share)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    10,000
    
    
    
    
    
    
    
    25,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    25,000Exercise of warrant for common stock  (December
$0.50 per share)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    250,000
    
    
    
    2,000
    
    
    
    123,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    125,000Issuance of stock for services
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    753,824
    
    
    
    8,000
    
    
    
    842,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    850,000Exercise of Warrants for $.01 per share
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    130,000
    
    
    
    1,000
    
    
    
    (1,000
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Exercise of Warrants for $.01 per share
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    50,000
    
    
    
    1,000
    
    
    
    (1,000
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Exercise of Warrants for $.01 per share
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    8,680
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Exercise of Warrants for $.01 per share
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,500Cashless exercise of put option
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    654,432
    
    
    
    7,000
    
    
    
    (7,000
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Sale of Class A Preferred Stock  September
($4.00 per share)
    
    
    5,575
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    22,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    22,000Sale of Class A Preferred Stock  December ($4.00
per share)
    
    
    10,112
    
    
    $
    1,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    40,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    41,000Issuance of option for services
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    46,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    46,000Issuance of options in settlement of liabilities
and consulting fees
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    265,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    265,000Contribution of services in subsidiary
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    173,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    173,000Adjustment for equity issuances of subsidiary
common stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    79,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    79,000Class A Preferred stock issued
    
    
    2,305
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    9,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    9,000NET LOSS
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,927,000
    )
    
    
    (2,927,000
    )BALANCE AT December 31, 2003
    
    
    56,492
    
    
    $
    1,000
    
    
    
    
    
    
    
    
    
    
    
    27,858,256
    
    
    $
    279,000
    
    
    $
    22,717,000
    
    
    $
    
    
    
    $
    
    
    
    $
    (22,070,000
    )
    
    $
    927,000
  F-7




---



##### Table of Contents



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




---



##### Table of Contents



SharesIssued forFuture
    
    
    Deficit Accumulated
    
    
    TotalAdditional Paid-
    
    
    Due from
    
    
    Consulting
    
    
    During the
    
    
    StockholdersClass A Preferred Stock
    
    
    Class B Preferred Stock
    
    
    Common Stock
    
    
    In Capital
    
    
    Stockholders
    
    
    Services
    
    
    Development Stage
    
    
    EquityShares
    
    
    Amount
    
    
    Shares
    
    
    Amount
    
    
    Shares
    
    
    AmountIssuance of common stock for services
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    786,309
    
    
    $
    8,000
    
    
    $
    1,771,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    1,779,000Sale of Class A Preferred Stock ($4.00
per share)  March
    
    
    47,500
    
    
    $
    1,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    189,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    190,000Sale of Class A Preferred Stock ($4.00
per share)  April/May
    
    
    30,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    120,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    120,000Sale of Class A Preferred Stock ($4.00
per share)
    
    
    92,500
    
    
    $
    1,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    369,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    370,000Sale of Class A Preferred Stock ($4.00
per share)  October/November
    
    
    30,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    120,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    120,000Contribution of services
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    300,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    300,000Issuance of options for consulting
services
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    247,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    247,000Exercise of consultants warrants
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    161,000
    
    
    
    2,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,000Issuance of warrants for consulting
services
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,261,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,261,000Issuance of shares for debt repayment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    11,667
    
    
    
    
    
    
    
    28,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    28,000Shares issued for future consulting services
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    50,000
    
    
    
    
    
    
    
    103,000
    
    
    
    
    
    
    
    (103,000
    )Receipt for common stock par 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
    
    
    $
    0
    
    
    $
    (103,000
    )
    
    $
    (37,320,000
    )
    
    $
    149,000
  F-9




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##### Table of Contents



Consolidated Statements of Cash Flows
 September 25,1996(Inception)Year Ended
    
    
    ThroughDecember 31,
    
    
    December 31,2005
    
    
    2004
    
    
    2005Cash flows from operating activities:Net loss
    
    $
    (5,445,000
    )
    
    $
    (9,805,000
    )
    
    $
    (37,320,000
    )Adjustments to reconcile net loss to net cash used in
operating activities:Depreciation and amortization
    
    
    885,000
    
    
    
    182,000
    
    
    
    1,654,000Gain on sale of fixed assets
    
    
    (10,000
    )
    
    
    
    
    
    
    (10,000
    )Minority interest in loss of consolidated subsidiary
    
    
    (273,000
    )
    
    
    (292,000
    )
    
    
    (1,264,000
    )Compensation expense attributable to common stock in
Subsidiary
    
    
    
    
    
    
    
    
    
    
    619,000Common stock issued for services
    
    
    1,779,000
    
    
    
    2,352,000
    
    
    
    9,381,000Contribution of services
    
    
    300,000
    
    
    
    450,000
    
    
    
    1,809,000Compensatory common stock, options and warrants
    
    
    1,508,000
    
    
    
    5,794,000
    
    
    
    12,988,000Changes in:Prepaid expenses
    
    
    83,000
    
    
    
    (141,000
    )
    
    
    94,000Deferred revenue
    
    
    
    
    
    
    
    
    
    
    150,000Accounts payable and accrued expenses
    
    
    (96,000
    )
    
    
    657,000
    
    
    
    3,597,000Other Assets  Deposits
    
    
    
    
    
    
    (2,000
    )
    
    
    (2,000
    )Net cash used in operating activities
    
    
    (1,269,000
    )
    
    
    (805,000
    )
    
    
    (8,304,000
    )Cash flows from investing activities:Purchase of equipment
    
    
    (66,000
    )
    
    
    (135,000
    )
    
    
    (270,000
    )Cost of acquisition
    
    
    
    
    
    
    
    
    
    
    (16,000
    )Proceeds from sale of fixed asset
    
    
    10,000
    
    
    
    
    
    
    
    10,000Net cash used in investing activities
    
    
    (56,000
    )
    
    
    (135,000
    )
    
    
    (276,000
    )Cash flows from financing activities:Net proceeds from sales of common stock and upon exercise of
options and warrants
    
    
    2,000
    
    
    
    271,000
    
    
    
    6,490,000Net proceeds from sales of preferred stock
    
    
    800,000
    
    
    
    1,187,000
    
    
    
    2,169,000Net proceeds from sale of subsidiary stock
    
    
    
    
    
    
    
    
    
    
    234,000Proceeds from loan
    
    
    
    
    
    
    
    
    
    
    29,000Repayments of loan
    
    
    
    
    
    
    
    
    
    
    (29,000
    )Proceeds from (repayment of) stockholders loans and advances
    
    
    
    
    
    
    
    
    
    
    103,000Distributions
    
    
    
    
    
    
    
    
    
    
    (365,000
    )Net cash provided by financing activities
    
    
    802,000
    
    
    
    1,458,000
    
    
    
    8,631,000Net (decrease) increase in cash
    
    
    (523,000
    )
    
    
    518,000
    
    
    
    51,000Cash at beginning of period
    
    
    574,000
    
    
    
    56,000Cash at end of period
    
    $
    51,000
    
    
    $
    574,000
    
    
    $
    51,000Supplemental disclosure of noncash investing and
financing activities:Issuance of common stock, in
settlement of notes payable
    
    $
    28,000Preferred Dividends paid in Preferred Stock
    
    
    
    
    
    $
    32,000Reclass due
from stockholder to other receivable
    
    $
    1,000Shares issued for future consulting services
    
    $
    103,000
  F-10




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##### Table of Contents



Notes to Consolidated Financial Statements
December 31, 2005
 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, 2005), and its wholly owned subsidiary Iso-Torque
Corporation. All material intercompany transactions and account balances have been eliminated
in consolidation.
 [2]
    
    Property and Equipment:
 Equipment, including a prototype vehicle, is stated at cost less accumulated depreciation.
Depreciation is provided using the straight-line method over the estimated useful lives of the
assets which range from three to seven years. Leasehold improvements are being amortized over
shorter of lease term or useful life. During 2005, the Company sold a
fully depreciated asset and recognized a gain on sale of $10,000,
which is included in general and administrative expense.
 [3]
    
    Research and development and patents:
 Research and development costs and patent expenses are charged to operations as incurred.




---



##### Table of Contents



Notes to Consolidated Financial Statements  December 31, 2005
 Note B  Summary of Significant Accounting Policies (continued)
 [4]
    
    License:
 Through December 31, 2004, the license was being amortized over its estimated useful life of
approximately 19 years which correlates to an underlying patent with a remaining life at
December 31, 2004 of 3 years. Effective January 1, 2005, the Company has changed its estimate
of economic useful life to 3 years. Charges for amortization in each of the years ended
December 31, 2005, and 2004 was $856,000 and $169,000, respectively. Such amortization
expense is included in research and development expense.
 Total future amortization of the license are as follows:
 Year EndingDecember 31,
    
    Amount2006
    
    $
    856,0002007
    
    
    856,000$
    1,712,000
 [5]
    
    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.
 [6]
    
    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, 2005 and 2004 the Company excluded
3,454,340 (excluding 500,000 warrant subject to exercise conditions) and 2,832,435 potential
common shares, respectively, relating to convertible preferred stock outstanding options and
warrants from its diluted net loss per common share calculation because they are anti-dilutive.
 [7]
    
    Fair value of financial instruments:
 The carrying amount of cash, accounts payable, notes payable and accrued expenses approximates
their fair value due to the short maturity of those instruments.
 F-12




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##### Table of Contents



Notes to Consolidated Financial Statements  December 31, 2005
 Note B  Summary of Significant Accounting Policies (continued)
 [8]
    
    Stock-based compensation:
   Year EndedDecember 31,2005
    
    
    2004Net loss attributable to common stockholders
    
    $
    (5,760,000
    )
    
    $
    (10,452,000
    )Add stock-based compensation expense under APB No. 25
included in net loss
    
    
    113,000
    
    
    
    297,000Less stock-based compensation expense under SFAS No. 123
    
    
    (113,000
    )
    
    
    (297,000
    )Pro forma net loss attributable to common stockholders
    
    $
    5,760,000
    
    
    $
    (10,452,000
    )Basic and diluted net loss attributable to common
stockholders per share
    
    $
    (0.19
    )
    
    $
    (0.37
    )Pro forma basic and diluted net loss
attributable to common stockholders per share
    
    $
    (0.19
    )
    
    $
    (0.37
    )
  [9]
    
    Revenue recognition:
 Revenue in connection with the granting of a license to Variable Gear LLC (Note I[2]) is to be
recognized when all conditions for earning such fee is complete. Revenue will be recognized
when the related products are shipped, title has passed, collections are reasonably assured
and the Company has no further obligation. An allowance for discounts and returns will be
taken as a reduction of sales within the same period the revenue is recognized. Such
allowances will be based on facts and circumstances.




---



##### Table of Contents



Notes to Consolidated Financial Statements  December 31, 2005
 Note B  Summary of Significant Accounting Policies (continued)
 [10]
    
    Impairment of long-lived assets:
 The Company follows SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived
Assets. Accordingly, whenever events or circumstances indicate that the carrying amount of an
asset may not be recoverable, management assesses the recoverability of the assets. Management
is also required to evaluate the useful lives each reporting period. When events or
circumstances indicate, our long-lived assets, including intangible assets with finite useful
lives, are tested for impairment by using the estimated future cash flows directly associated
with, and that are expected to arise as a direct result of, the use of the assets. If the
carrying amount exceeds the estimated undiscounted cash flows, an impairment may be indicated.
The carrying amount is then compared to the estimated discounted cash flows, and if there is an
excess, such amount is recorded as an impairment.
 Management conducted its impairment test with respect to the carrying amount of its
majority-owned subsidiarys license with the Trustees of Dartmouth College (Note C) based upon
the expectation that such amount is recoverable through sublicense agreements with one or more
domestic or international glass companies with whom the subsidiarys management is in
discussions. The subsidiary has entered into a Memorandum of Understanding with respect to the
future development and commercialization of its ice technology with a major international glass
company and both companies are currently engaged in finalizing a definitive agreement to
jointly commercialize the ice technology.
 [11]
    
    Recent accounting standards:
 In December 2004, the FASB issued FASB Statement No. 123 (Revised 2004) Share-Based Payment:
an Amendment of FASB Statement No. 123 (FAS 123R). FAS 123R is effective for public
entities that file as small business issuers as of the first interim or annual reporting period
that begins after December 31, 2005. Therefore, we will adopt it during fiscal 2006. FAS 123R
sets accounting requirements for share-based compensation to employees, requires companies to
recognize in the income statement the grant-date fair value of stock options and other
equity-based compensation issued to employees and disallows the use of the intrinsic value
method of accounting for stock compensation. We are currently evaluating the impact that this
statement will have on our results of operations.
 In May 2005, the FASB issued SFAS No. 154, Accounting Changes and Error Corrections  a
replacement of APB Opinion No. 20, Accounting Changes, and FASB Statement No. 3, Reporting
Accounting Changes in Interim Financial Statements, and changes the requirements for the
accounting for and reporting of a change in accounting principle. SFAS 154 requires
retrospective application to prior periods financial statements of a voluntary change in
accounting principle unless it is impractical to determine period specific changes. This
statement is effective for fiscal periods beginning after December 15, 2005 and is not expected
to have a significant impact on the Companys financial statements.
 Note C  License From the Trustees of Dartmouth College




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##### Table of Contents



Notes to Consolidated Financial Statements  December 31, 2005
 Note D  Related Party Transactions
 [1]
    
    On December 1, 1997, the Company entered into three-year consulting agreements with three
members of the Gleasman family (major stockholders and directors) whereby each will provide
technical services to the Company in exchange for compensation of $12,500 each per month. In
addition, the Company granted them options to purchase a total of 75,000 shares of common
stock at an exercise price of $5.00 per share (Note H[5]). 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. Effective December 1, 2000, the agreement
was extended for three years and amended to provide for the payment of prior and future
compensation at the discretion of the Board of Directors in either cash or shares of common
stock or combination of both. Amounts charged to operations for the year ended December 31,
1997 and for the period ended December 31, 1996 were approximately $55,000 and $18,000,
respectively. During 2001, the Company issued 126,667 shares of common stock in settlement of
$665,000 of expenses accrued for consulting service. On September 30, 2002 fees due under the
consulting agreement of approximately $653,000 were settled for 727,047 common stock options
exercisable immediately at $5.00 per share (see Note H[6]). The options are exercisable for
five years.
 On December 23, 2003 fees due under the consulting agreement of approximately $265,000 were
settled for 166,848 common stock options exercisable immediately at $5.00 per share (see Note
H[6]). The options were valued using Black Scholes and            are exercisable for ten years.
 Torvecs consulting agreements with each of Vernon E. Gleasman, Keith E. Gleasman and James Y.
Gleasman expired on December 1, 2003.
 The Gleasmans have agreed to provide consulting services and assign new patents, existing
patent improvements and all know-how in connection with all their inventions to the company.
In addition, Keith E. Gleasman will continue to serve as President and as a director and James
Y. Gleasman will serve as Chief Executor Officer, Interim Chief Financial Officer, Investor
Relations and as a director. During fiscal 2005, the company did not pay the Gleasmans any
consulting fees for their services. The company recorded approximately $300,000 for the
estimated value of these services as a contribution to capital based upon approved time and
hours spent and recorded $225,000 to research and development and $75,000 to general and
administrative.
 [2]
    
    During 2005 and 2004, the Company paid approximately $23,000 and $17,000, respectively, to
a member of the Gleasman family for investor and engineering services rendered. The
individual is paid for services on a hourly basis. Management believes the rate of
compensation is reasonable.
 [3]
    
    During the years ended December 31, 2005 and 2004, the Company issued to a stockholder
90,000 and 35,000 common shares as rent for the companys use of a facility valued at
approximately $259,000 and $194,000 respectively based upon the fair market value of the
common stock on the date of issuance..
 [4]
    
    On August 17, 2005, the company repaid a $28,000 indebtedness to a stockholder in exchange
for 11,667 shares of 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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##### Table of Contents



Notes to Consolidated Financial Statements  December 31, 2005
 Note E  Income Taxes  (continued)
    Year EndedDecember 31,2005
    
    
    2004Computed federal income tax benefit at 34% rate
    
    $
    (1,851,000
    )
    
    $
    (3,334,000
    )State tax benefit, net of federal tax benefit
    
    
    (288,000
    )
    
    
    (517,000
    )Nondeductible expenses
    
    
    340,000
    
    
    
    68,000Valuation allowance
    
    
    1,799,000
    
    
    
    3,783,000$
    0
    
    
    $
    0
 Note F  Accounts Payable and Accrued Liabilities
  Professional fees
    
    $
    194,000Salaries to officer/stockholders of Ice (Note I[1])
    
    
    1,495,000$
    1,689,000




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##### Table of Contents



Notes to Consolidated Financial Statements  December 31, 2005
 Note G  Note Payable  Stockholders,
Officer and Other Notes Payable
 [1]
    
    Notes Payable  Financial Institution
 During 2005, the Company financed a vehicle as a prototype in which the vehicle is collateral
for a loan. The loan in the amount of $24,000 is paid in monthly installments of principal and
interest (at 6.59% per annum) of $479 through December 2010.
  Year EndingDecember 312006
    
    $
    5,7002007
    
    
    5,7002008
    
    
    5,7002009
    
    
    5,7002010
    
    
    5,700Total Minimum payments
    
    
    28,500Less-amount representing interest
    
    
    4,50024,000Less-Current Maturities
    
    
    5,000Long Term Portion
    
    $
    19,000
 [2]
    
    Notes Payable  Stockholders and Officers
 During 2001, an existing shareholder loaned the company $50,000 bearing interest at 7.5% with no
specified repayment terms. Included in amounts payable at December 31, 2003 is approximately
$2,000 of accrued interest. During April 2002 the principal of this loan was satisfied with the
issuance of 35,461 shares of common stock at the then fair market value at the date of exchange.During 2001, certain officers and stockholders loaned the Company $109,000. The loans were
noninterest bearing with no specified repayment terms. During 2002, $81,000 of such loans were
repaid. The remaining $28,000 was repaid with the issuance of 11,667 shares of common stock, in
August 2005.In August 2003, this existing stockholder advanced $25,000 to the Company. In October 2003, this
advance was settled for 10,000 shares of common stock at market value.
 Note H  Stockholders Equity
 [1]
    
    Private placement:
 The Company received net proceeds from private placements of its common stock 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 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 approximately $668,000.
 In 2003, this existing stockholder purchased 361,112 common shares for $300,000 and was paid
70,000 common shares valued at $158,000 for consulting and as rent for the Companys use of a
facility.




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##### Table of Contents



Notes to Consolidated Financial Statements  December 31, 2005
 Note
H  Stockholders
Equity (continued)
 [1]
    
    Private placement:
 On September 10, 2003, the Company sold 8,000 common shares for $20,000.
 In 2004, this 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 and
for use by the Company of a facility and technicians.
 [2]
    
    Class A Preferred stock:
 In January 2002, the Company has authorized the sale of up to 2,000,000 shares of its Class A
Non-Voting Cumulative Convertible Preferred Stock (Class A Preferred). During 2002, the
Company sold 38,500 shares at $4.00 per share of its Class A Preferred in a private placement
offering 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. At December 31, 2005, dividends in arrears amounted to approximately $248,176.
 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. 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. 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. On
July 8, August 14 and September 11, 2003, the company issued 2,500, 7,480 and 1,200 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
shareholders, whether such assets are capital, surplus
or earnings, before any payment or declaration and
setting apart for payment of any amount in respect of
any shares of any Junior Stock with respect to the
payment of dividends or distribution of assets on
liquidation, dissolution or winding up of the Company,
all accumulated and unpaid dividends (including a
prorated dividend from the last Dividend Accrual Date)
in respect of any liquidation, dissolution or winding
up consummated except that, notwithstanding the
provisions of Section B(ii), all of such accumulated
and unpaid dividends will be paid in Class A Preferred
Shares at a rate of 1 Class A Preferred Share for each
$4.00 of dividends. No fractions of Class A Preferred
Shares shall issue. The Company shall pay cash in lieu
of paying fractions of Class A Preferred Shares on a
pro rata basis.(ii)
    
    The Class A Preferred Shares will be entitled to
participate on a pro rata basis in any distribution of
assets as may be made or paid on Junior Stock upon the
liquidation, dissolution or winding up of the Company.(iii)
    
    A consolidation or merger of the Company with or into
any other corporation or corporations or any other
legal entity will not be deemed to constitute a
liquidation, dissolution or winding up of the Company
as those terms are used in this Section C.
 F-18




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##### Table of Contents



Notes to Consolidated Financial Statements  December 31, 2005
 Note H  Stockholders Equity (continued)
      [3]
    
    Class B Preferred stock:
 On October 21, 2004, the Company authorized the sale of up to 300,000 shares of its Class B
Non-Voting Cumulative Convertible Preferred Stock (Class B Preferred). During 2004, the
company sold 42,500 shares at $5.00 per share of its Class B Preferred for $212,500. Each
share of Class B Preferred is cumulative convertible into either one share of voting common
stock of the Company or one share of common stock of Iso-Torque Corporation under certain
circumstances and entitles the holder to dividends, at $.50 per share per annum. The holder
has the right to convert after one year subject to Board approval. At December 31, 2005,
dividends in arrears amounted to approximately $27,267.
 The Company determined the estimated aggregate fair value of these warrants on the date of
grant to be approximately $20,000 based on the Black-Scholes valuation model using the
following assumptions: expected volatility of 116%, dividend yield of 0%, risk free interest
of 4.31% and an expected life of 5 years. The value of the
warrant was accounted for as a beneficial conversion feature and
expensed immediately.
 Liquidation
Rights
 (1) In the event of any liquidation, dissolution or winding up of the
Corporation, whether voluntary or involuntary, the holders of Class B Preferred
Shares then outstanding are entitled to be paid out of the assets of the
Corporation available for distribution to its shareholders, whether such assets
are capital, surplus or earnings, before any payment or declaration and setting
apart for payment of any amount in respect of any shares of any Junior stock
with respect to the payment of dividends or distribution of assets on
liquidation, dissolution or winding up of the Corporation, all accumulated and
unpaid dividends (including a prorated dividend from the last Dividend Accrual
Date) in respect of any liquidation, dissolution or winding up consummated
except that, notwithstanding the provisions of Section B(2), all of such
accumulated and unpaid dividends will be paid in Class B Preferred Shares at a
rate of 1 Class B Preferred Share for each $5.00 of dividends. No fractions of
Class B Preferred Shares shall be issued. The Corporation shall pay cash in
lieu of paying fractions of Class B Preferred Shares on a pro rata basis.
 (2) The Class B Preferred Shares will be entitled to participate on a
pro rata basis in any distribution of assets as may be made or paid on Junior
Stock upon the liquidation, dissolution or winding up of the Corporation.




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##### Table of Contents



Notes to Consolidated Financial Statements  December 31, 2005
 Note
H  Stockholders Equity (continued)
 [4]
    
    Consultant:
 In February 1997, the Company entered into a three-year agreement with an IPO consultant (the
IPO Consultant) whereby the IPO Consultant to provide financial consulting services and
assistance in obtaining financing as well as other services. In consideration thereof,
employees of the IPO Consultant received an aggregate of 1,000,000 shares of common stock for
$50. The Company valued the shares of common stock at $1.50 per share.
 In April 1997, the Company granted an aggregate of 500,000 warrants to five employees of the
IPO Consultant. The warrants are exercisable into common stock at the initial public offering
(the IPO) price and are exercisable for five years from the date the Companys IPO is
declared effective (the warrant term). However, if fifty percent or more of either the
Companys assets or its common stock is acquired by another entity or group during the warrant
term, the exercise price shall be $1.50. The Company will record a charge to operations
representing the fair value of the warrants when the IPO is declared effective.
 On February 10, 1999, the company entered into a one-year agreement with two employees of the
IPO Consultant to provide financial and public relation services. In connection therewith,
375,000 of the 500,000 warrants previously granted as described in the previous paragraph were
cancelled and the company granted 375,000 options at an exercise price of $5.00 exercisable
immediately through February 10, 2004. 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 0%, volatility 40%
and expected life for options granted of 5 years. These options were charged to operations
over the term of the consulting agreement. In February 1999, 21,000 of such options were
exercised. The term of these options expired on February 10, 2004.




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##### Table of Contents



Notes to Consolidated Financial Statements  December 31, 2005
 Note H  Stockholders Equity (continued)
 [5]
    
    Common stock subject to resale guarantee:
 During 2002, the Company issued 190,965 shares to former officers and certain minority
stockholders 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 shall be issued and if
the amount is greater than $269,000 such excess shall be returned to the Company. During
2002, such shares realized proceeds of approximately $269,000.
 [6]
    
    Stock option plan:
 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.
 In connection with certain consulting agreements (see Note D[1]), the Company granted an
aggregate of 75,000 nonqualified options to purchase common stock under the Plan at an
exercise price of $5.00 per share. The options vest 20% per annum and are exercisable through
November 30, 2007. The Company valued these options using the Black-Scholes option-pricing
model. The fair value of these options were expensed over the term of the consulting
agreements.
 On September 30, 2002, in connection with the same agreements (see Note D[1]), the
company granted an aggregate 727,047 common stock options under the Plan, exercisable at $5.00
per share. The options were issued in payment of an aggregate $653,000 owed under the
consulting agreements. These options expire on September 30, 2007.
 On December 22, 2003 the company granted 166,848 common stock options under the Plan at
an exercise price of $5.00 per share. These options were issued in payment of an aggregate
$265,000 owed through December 31, 2003 under the consulting agreements. (see Note D[1])
 In August 2001, the Company granted 100,000 options to an officer in his capacity as
consultant at $5.00 per share exercisable immediately. In connection therewith, the Company
recorded a stock compensation charge of $398,000. The term of the option granted shall be for
a period of 10 years.
 On May 20, 2003, the company granted a common stock option to a consultant under the plan for
50,000 shares, exercisable at $2.26 per common share. In connection therewith, the Company
recorded a stock compensation charge of $46,000. These options expire on May 20, 2013.
 The company granted an aggregate 225,000 common stock options under the Plan on October 15,
2003 exercisable at $5.00 per share to three directors of the company. These options expire
on October 15, 2013.
 No options were granted under the Plan during fiscal 2004.
 On June 30, 2005, the Company granted 100,000 non-qualified stock options to a consultant at
5.00 per share exercisable immediately. In connection therewith, the Company recorded a stock
compensation charge of $247,000 to research and development. These options expire on June 30,
2015.




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##### Table of Contents



Notes to Consolidated Financial Statements  December 31, 2005
 Note H  Stockholders Equity (continued)
  Year Ended December 31,2005
    
    2004Weighted
    
    
    
    
    
    WeightedAverage
    
    
    
    
    
    AverageExercise
    
    
    
    
    
    ExerciseShares
    
    Price
    
    Shares
    
    PriceOutstanding at beginning of year
    
    
    1,723,895
    
    
    $
    4.92
    
    
    
    1,723,895
    
    
    $
    4.92Granted
    
    
    100,000
    
    
    
    5.00
    
    
    
    Outstanding at end of year
    
    
    1,823,895
    
    
    
    4.92
    
    
    
    1,723,895
    
    
    
    4.92Options exercisable at year end
    
    
    1,823,895
    
    
    
    4.92
    
    
    
    1,723,895
    
    
    
    4.92
    Options Outstanding
    
    Options ExercisableWeighted
    
    
    Weighted
    
    
    
    
    
    WeightedAverage
    
    
    Average
    
    
    
    
    
    AverageExercise
    
    
    Remaining Life
    
    
    
    
    
    ExerciseShares
    
    Price
    
    
    in Years
    
    Shares
    
    
    Price1,773,895
    
    $
    5.00
    
    
    4.52
    
    
    1,773,895
    
    
    $
    5.0050,000
    
    
    2.26
    
    
    7.42
    
    
    50,000
    
    
    
    2.261,823,895
    
    
    4.92
    
    
    
    
    
    1,823,895
    
    
    
    4.92




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##### Table of Contents



Notes to Consolidated Financial Statements  December 31, 2005
 Note H  Stockholders Equity (continued)
  2005Risk-free interest rates
    
    
    3.76
    %Expected options life in years
    
    
    10Expected stock price volatility
    
    
    1.64
    %Expected dividend yield
    
    
    0
    %
 [7]
    
    Business consultant stock plan:
 In June 1999, the Company adopted the Business Consultant Stock Plan (the Stock Plan). The
plan as amended provides for up to 5,100,000 shares of common stock to be issued from time to
time to consultants in exchange for services. For the years ended December 31, 2005, 2004,
2003, 2002, 2001, 2000 and 1999, 836,309, 469,883, 738,184, 1,057,455 (including 190,965
issued in settlement of amounts owed (see Note H[5])), 361,100, 196,259 and 45,351 shares were
issued, respectively, to consultants and third parties in exchange for services and amounts
owed to them. During the years ended December 31, 2005, 2004, 2003, 2002, 2001, 2000 and 1999
the Company charged $1,874,000, $2,352,000, $832,000, $1,036,000 (excluding $269,000 (see Note
H[5])), $1,011,000, $840,000 and $327,000, respectively, to operations in connection with the
share issuances. At December 31, 2005, 1,049,859 shares are available for future grants under
the 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, 97,000 warrants were issued and vested immediately. The Company issued
44,000 warrants and recorded a charge of $113,000 to general and administrative expenses
representing the difference in the excess of the fair market value and $.01 per share of such warrants in 2005.
During 2005, one director exercised 21,000 warrants granted to him as a director.
 [9]
    
    Noncash transaction:
 During 1998, the Company granted 1,000 shares of common stock, valued at $3.00 per share, for
services provided. During 1997, the Company granted 12,000 and 2,000 shares of common stock
for services provided. The Company valued the shares at their fair value of $1.50 and $3.00
per share, respectively. During 2003 and 2002, 15,640 and 134,964 restricted shares were
issued for services aggregating approximately $18,000 and $198,000 respectively. During 2005
and 2004, 100,000 and 35,000 restricted shares were issued for services and rent aggregating
approximately $259,500 and $194,000.
 [10]
    
    Equity funding commitment:
 On September 5, 2000, the Company entered into an agreement with Swartz Private Equity, LLC
(Swartz) pursuant to which Swartz granted to the Company a $50,000,000 equity funding
commitment which continues for a period of thirty-six months. The agreement provides that
from time to time, at the Companys




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##### Table of Contents



Notes to Consolidated Financial Statements  December 31, 2005
 Note H  Stockholders Equity (continued)
     [11]
    
    Warrants:
 At December 31, 2005, outstanding warrants to acquire shares of the Companys common stock are
as follows:
 Exercise
    
    
    
    Number ofPrice
    
    Expiration
    
    Shares Reserved$
    1.52
    
    September 18, 2007
    
    
    5,000
    
    
    (Note H [2])(a)
    
    (a)
    
    
    125,000
    
    
    (Note H[4])$
    .75
    
    None
    
    
    500,000
    
    
    (b)$
    .01
    
    None
    
    
    551,200
    
    
    (c)$
    .01
    
    None
    
    
    73,000
    
    
    (d)$
    .01
    
    None
    
    
    72,000
    
    
    (e)$
    .01
    
    None
    
    
    9,000
    
    
    (f)$
    5.00
    
    Ten Years
    
    
    210,000
    
    
    (g)$
    .01
    
    None
    
    
    6,000
    
    
    (h)$
    .01
    
    None
    
    
    12,500
    
    
    (j)
 (a)
    
    Exercisable at IPO price and exercisable five years from IPO.(b)
    
    On April 15, 2002, the Company issued 1,000,000 warrants to purchase common stock
at prices ranging from $.30 to $.75 to its then chairman of the board of directors and
chief executive officer. Of the total warrants, 250,000 were exercisable at $.30, and
250,000 were exercisable at $.50 on the date the then board elected the executive to the
board and named the chief executive officer. During the year ended December 31, 2002,
250,000 warrants were exercised for $.30 per share, resulting in proceeds of $75,000.
During the year ended December 31, 2003, 250,000 warrants were exercised for $.50 per
share, resulting in proceeds of $125,000. The remaining 500,000 warrants are exercisable
upon the execution of the Company of a binding agreement for the sale, transfer, license
or assignment for value of any and/or all of its Companys technology at $.75 per share.
The Company will record a charge representing the fair value of the warrants when the
warrants become exercisable.




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##### Table of Contents



Notes to Consolidated Financial Statements  December 31, 2005
 Note H  Stockholders Equity (continued)
 (c)
    
    The Company issued 1,080,000 warrants, exercisable at $.01 per share, 528,800
warrants were exercised for proceeds of aggregate $5,484 in accordance with a purported
June 30, 2004 agreement with a management consulting firm. (see
Note J) On April 19, 2006 the remaining exercise price on the $.01
warrants was received.(d)
    
    For the year ended December 31, 2005, the Company is authorized to issue 12,000
warrants to each of four nonemployee directors under the Nonemployee Directors Stock Plan
and 5,000 warrants to its audit committee chairman for services rendered to the Board and
to the committee. The exercise price is $.01 per share with no expiration date. (see
Note H[8])(e)
    
    The Company issued 120,000 warrants to a consultant, exercisable at .01 per share,
48,000 warrants were exercised in 2005.(f)
    
    In June 2005, the Company issued 12,000 warrants to a consultant, exercisable at
..01 per share, 3,000 warrants were exercised in 2005.(g)
    
    During 2005, the Company issued 210,000 warrants to consultants, exercisable at
$5.00 per share. The warrants carry a ten year term. None were exercised in 2005.(h)
    
    During 2005, the Company issued 6,000 warrants to a consultant, exercisable at .01
per share. None were exercised in 2005.(i)
    
    The Company issued 25,000 warrants exercisable to each of two investors along with
the purchase of 50,000 shares of preferred class A stock, at .01 per share. All 50,000
warrants were exercised in 2005.(j)
    
    The Company issued 12,500 warrants exercisable to one investor along with the
purchase of 12,500 shares of preferred class A stock at .01 per share. None were
exercised in 2005.
 [12]
    
    Issuance of Stock and Warrants by Subsidiary:
 During the quarters ended June 30, and September 30, 2003, the Companys subsidiary Ice,
issued 308,041 shares of its common stock at $.76 per share realizing aggregate proceeds of
$234,000 in a private placement. These issuances reduced the Companys interest in the
subsidiary from 72% to approximately 69.26%. Based on the Companys accounting policy, the
change in the Companys proportionate share of Ices equity resulting from the additional
equity raised by the subsidiary is accounted for as a capital transaction and has been
reflected as an increase in stockholders equity. Pursuant to Ices private placement the
Company, has reserved the right but not the obligation, for a period not to exceed 30 months
from June 9, 2003 or any subsequent offering of Ice stock, to purchase all of the capital
stock of Ice (including shares to be issued upon exercise of outstanding warrants of Ice) at a
purchase price equal to the greater of $3.00 per share or the appraised value of Ice with such
appraised value capped at $6.00 per share.
 In connection with the private placement, Ice issued 53,948 warrants to the placement agent
exercisable at $.76 per share through June 9, 2008. In addition, 50,000 warrants were issued
by Ice to a consultant exercisable at $.76 per common share through June 9, 2008. In
connection therewith a fair value compensation charge of $36,000 was recognized.
 [13]
    
    Shares Issued for Future Consulting Services
 On September 17, 2005, certain consultants created a trust to enable them to sell business
consultants shares issued to them by the Company under their consultant agreements. The
Company issued 50,000 business consultant shares valued at $103,000 to such consultants on
September 27, 2005, contingent on their performance of future services under such consultant
agreements. No shares were sold by the trust in fiscal 2005. 46,500
shares were sold by the trust and the proceeds distributed by the
trust to the consultants through April 14, 2006. Under the trust's
terms, the Company has no further legal obligation with respect to
the payment of the consultants' fees upon depositing the shares in
the trust, regardless of any price fluctuations after the date of the
deposit.




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##### Table of Contents



Notes to Consolidated Financial Statements  December 31, 2005
 Note I  Commitments and Other Matters
 [1]
    
    Employment agreements:
 The Company has entered into three employment agreements with stockholders for a period of
three years, commencing on the first day of the month in which the Company receives the
proceeds from an IPO. Two agreements each provide for salaries of $150,000 per year. The
third agreement provides for a salary of $240,000 in the first year, $252,000 in the second
year and $264,000 in the third year and provides for a minimum bonus of $15,000 per quarter
for the duration of the agreement. Effective August 1, 2001, such employment agreements were
terminated. However, options previously granted pursuant to those agreements remain in
effect. No compensation charge has been reflected related to their change in status since the
individuals were also members of the board of directors. As of December 31, 2002, the options
were fully vested.
 Effective January 1, 2002, one of the directors resigned. Consequently, the Company recorded
a charge of $32,000 relating to the estimated fair value of the remaining vesting of such
directors options during 2002.
 On August 1, 2001, the Company entered into three-year employment agreements with its Chief
Executive Officer and Chief Operating Officer. The employment agreements provide for annual
base salary of $240,000 pro rated for calendar year 2001 and increasing thereafter by $20,000
per annum. In addition, the agreements provide for an annual bonus of $60,000 for calendar
year 2001 and increasing thereafter by $60,000 per annum. On September 1, 2001 the Company
entered into a three-year employment agreement with its Vice President  Manufacturing. The
employment agreement provides for annual base salary of $144,000 pro rated for calendar year
2001 and increasing by $16,000 for calendar year 2002, and increasing thereafter by $30,000
per annum. In addition, the agreement provides for annual bonuses of $25,000, $40,000 and
$50,000 for calendar years 2001, 2002 and 2003, respectively. At March 31, 2002 amounts owing
under these employment agreements aggregating approximately $633,000 were settled through the
issuance of 448,865 warrants to purchase common stock at an exercise price of $.01. On March
20, 2003, 130,000 of these warrants were exercised and on September 26, 2003, another 50,000
of these warrants were exercised. On April 1, 2004, the balance of 268,865 warrants were
exercised.
 The Company may pay all compensation under these agreements either in cash or common stock as
determined by the Board of Directors. In connection with these agreements, the Company
granted 450,000 options at $5.00 per share. The term of the options granted shall be for a
period of 10 years and vest immediately. These options were exchanged for a 28% interest in
Ice in March 2002. (see Note A)
 Effective March 31, 2002 the agreements were terminated and the officers resigned from the
Company. Simultaneously, Ice executed employment agreements with the individuals in the name
of Ice with the same terms as previously executed and the individuals became officers of Ice.
In 2003 and 2002, these individuals contributed $240,000 and $720,000 respectively of accrued
compensation to Ices capital and agreed to forgo payment of all future monies under their
employment agreement until certain board-discretionary performance criteria have been
realized.
 On March 31, 2003, the Company issued 148,387 shares of common stock at fair market value to
the officers of Ice in exchange for approximately $122,000 owed to them for services performed
for Ice. These shares were issued under the Business Consultants Stock Plan.
 During the quarter ended June 30, 2003, the Company issued 52,911 shares at fair market value
to the officers of Ice in exchange for approximately $40,000 owed to them for services
performed for Ice. These shares were issued under the Business Consultants Stock Plan.




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##### Table of Contents



Notes to Consolidated Financial Statements  December 31, 2005
 Note I  Commitments and Other Matters (continued)
 [1]
    
    Employment agreements
 On June 30, 2005, the Company entered into a non-exclusive two year consulting agreement
for engineering design services. Under the terms of the consulting agreement, the Company
will issue annually 12,000 fully and immediately vested $.01 warrants exercisable into common
stock of the Company, payable on a quarterly basis. In addition, the Company granted 100,000
stock options under its 1998 Stock Option Plan to acquire shares of its common stock to its
engineering design consultant during the three months ended June 30, 2005. The option vests
immediately and has a term of ten years. The exercise price for the option is $5.00 per
share. The Company valued the options at $247,000 using the Black-Scholes option/pricing
model and charged operations. This agreement was terminated in the third quarter of 2005.
 During 2005, the Company entered into non-exclusive two year consulting agreements with
various consultants. Under the terms of the consulting agreements, the Company will issue
payment to be made in cash, business consultants stock or a combination hereof, in the
Companys sole discretion. The consultants were issued $5.00 warrants exercisable into .01
par value common stock of the Company. Such warrants are fully vested, exercisable
immediately and have a ten year term. The Company issued 210,000 warrants in 2005 and valued
the warrants at $377,000 using the Black-Scholes option/pricing model and charged
operations.[See Note H 11[G]]
 [2]
    
    Variable Gear, LLC
 In June 2000, the Company sold 100,000 shares of common stock to a stockholder for $5.00 per
share and granted an exclusive world-wide license of all its technology to Variable Gear, LLC
(Variable Gear) (an entity owned 51% by the stockholder) for the aeronautical and marine
markets. Variable Gear is to pay the Company a royalty of 4% of the gross selling price of
products incorporating the technology and 49% of compensation received with respect to
sublicense income through January 1, 2008. The Company owns the remaining 49% of Variable
Gear. The Company does not share in any profit or losses in this entity. On January 1, 2008,
the Company is required to purchase the membership interest of the stockholder at the then
fair market value as defined. At December 31, 2005 such fair value cannot yet be reasonably
determined.
 The market price of the Companys stock at the date of the transaction was $3.50.
Accordingly, $1.50 per share has been allocated to the license agreement. The license revenue
of $150,000 is classified as deferred revenue.
 [3]
    
    Leases:
 The company has leased premises for use as its executive offices. The lease is for a period
of 3 years, commencing July 1, 2004 expiring on June 30, 2007 with monthly rental payments of
approximately $2,200. The company is also responsible for its share of real estate taxes,
certain maintenance and repair costs, and increases in utility costs associated with the premises.
 On August 1, 2004, the company sublet, as a tenant, a portion of a facility for a term of six
months at a rental rate of $600 per month. On December 31, 2004, the company purchased from
the previous owner certain assets for approximately $68,000 and assumed the lease of the
underlying tenant for the entire premises. The lease term expires on February 28, 2007 with a
monthly rental payments of $2,100. Rent expense for the year ended December 31, 2005 was
approximately $311,000.




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##### Table of Contents



Notes to Consolidated Financial Statements  December 31, 2005
 Note I  Commitments and Other
Matters (continued)
 [3]
    
    Leases: (continued)
 On March 1, 2005 the company entered into a one year lease with a shareholder pursuant to
which the company rents an office, conference room, shop and manufacturing facility. The
company is also furnished with the services of three engineers and two machine operators at
the facility. The company is obligated to pay 10,000 shares of its common stock on a monthly
basis for the facility and services. This lease was not renewed.
 Minimum future obligations under the leases are as follows:
 Year ending December 312006
    
    $
    51,0002007
    
    
    17,000$
    68,000
 Note J  Management Agreement




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##### Table of Contents



Note J  Management Agreement (continued)
     Note K  Subsequent Event




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##### Table of Contents



30 
 Item 8. CHANGES IN AND DISAGREEMENTS
WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE .
  
 Item 8 (a) CONTROLS AND PROCEDURES
   
 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
    
    Chairman of the Board Director
    
    
    54
    
    
    10/31/02
    
    **325 Van Voorhis AvenueRochester, New York 14617(2)
    
    James Y. Gleasman 11 Pond View Drive Pittsford, New York 14534
    
    Chief Executive Officer, Interim Chief Financial Officer Director
    
    
    65
    
    
    02/20/98
    
    **(3)
    
    Keith E. Gleasman
    
    President Director
    
    
    58
    
    
    09/26/96
    
    **11 Pond View DrivePittsford, NY 14534(4)
    
    Herbert H. Dobbs
    
    Secretary Director
    
    
    74
    
    
    02/20/98
    
    **448 West Maryknoll RoadRochester Hills, Mich. 48309(5)
    
    Daniel R. Bickel
    
    Director
    
    
    57
    
    
    10/31/02
    
    **39 Whippletree RoadFairport, New York 14450(6)
    
    Joseph B. Rizzo
    
    Director
    
    
    41
    
    
    9/9/2005
    
    **39 State Street, Suite 700Rochester, New York 14614




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##### Table of Contents



31  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.
(2) James Y. Gleasman has been a consultant of the company since its inception. His business background includes the following:
 o
    
    life-long entrepreneur;o
    
    skilled in management, finance, strategic planning, organizing and marketing;o
    
    principal inventor of the infinitely variable transmissions; co-inventor of
several other patented inventions;o
    
    established manufacturing of the Torsen® Differential in Argentina, Brazil, etc.;o
    
    former principal with two companies formerly owned by the Gleasman family;o
    
    set business strategies for small companies dealings with large companies;o
    
    joint venture partner with Clayton Brokerage Co. of St. Louis, MO.;o
    
    owned financial-consulting business;o
    
    negotiated with numerous Asian Corporations (including Mitsubishi and Mitsui);o
    
    Educated in Asian philosophy, business practices and culture.
 (3)
    
    Keith E. Gleasman is a co-inventor on Torvec patents. His strengths include his extensive marketing and sales executive
experience, in addition to his design and development knowledge. His particular expertise has been in the area of defining and
demonstrating the products to persons within all levels of the automotive industry, race crew members, educators and students.
His experience includes:
 o
    
    as former Vice President of Sales for the unrelated Gleason Corporation (Power Systems Division), he designed and conducted seminars on vehicle
driveline systems for engineers at the U.S. army tank automotive command;o
    
    he designed a complete nationwide after-market program for the Torsen differential, which included trade show participation for the largest after-market
shows in the U.S., SCORE and SEMA;o
    
    he has extensive after-market experience including pricing, distribution, sales catalogs, promotions, trade show booths designs and vehicle sponsorships;




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##### Table of Contents



32 
 o
    
    he was responsible for over 300 articles in trade magazines highlighting the Torsen Differential (e.g., Popular Science, Auto Week, Motor Trend,
Off-Road, and Four Wheeler);o
    
    he designed the FTV vehicle from concept to preproduction prototype;o
    
    He assisted in developing engineering and manufacturing procedures for the Torsen differential and for all of the Torvec prototypes;o
    
    he has instructed race teams on use of the Torsen differential (Indy cars, Formula 1, SCCA Trans-Am, IMSA, GTO, GTU, GT-1, NASCAR, truck pullers and
off-road racers);o
    
    he has been trained for up-to-date manufacturing techniques such as NWH, statistical process control and MRP II.
 Mr. Gleasman has extensive technical and practical experience, covering all aspect of the companys products such as, promotion,
engineering and manufacturing.(4)
    
    Dr. Dobbs, Ph.D., P.E., has worked at every level from design engineer to technical director of an Army Major Commodity Command
at the two-star level. He has worked as a hands-on engineer and scientist in industry and government, commanded field units,
managed Army R & D programs and laboratories and currently has his own practice as a consultant engineer. He has the broad
background needed to guide the companys growth and development.During his career he has:
 o
    
    worked as a manufacturing engineer;o
    
    worked as a design engineer in the aircraft and missile industry;o
    
    managed Army laboratories as a captain, lieutenant colonel and colonel;o
    
    organized, implemented and operated the theater-wide Red Ball Express quick response supply system in Vietnam to get disabled weapons and other
critical equipment repaired and back into combat as rapidly as possible;o
    
    Conducted basic research on multi-phase turbulent fluid dynamics supporting development of the gas turbine primary power system now used in the M1
Abrams Main Battle Tank (MBT);o
    
    managed advanced development of the laser guided 155mm-artillery shell now known as the Copperhead;o
    
    served in Taiwan as a member of the U.S. Military Assistance Advisory Group (MAAG) working with the Republic of China Army General Staff;o
    
    served as liaison officer between the Army and Air Force for development of the laser seeker for the Hellfire missile;o
    
    guided development of a new family of tactical vehicles for the Army, including the High Mobility Multipurpose Wheeled Vehicle (HMMWV) now known as the
Hummer, which uses the Torsen differential.o
    
    served as Technical Director of U.S. Army Tank-Automotive Command* (TACOM), which then employed some 6,400 people and is responsible for all support of
U.S. military ground vehicles (a fleet of 440,000) from development to ultimate disposal with a budget of nearly $10 billion a year. He was also
responsible for negotiation and management of military automotive R&D agreements with the French and German Ministries of Defense.
 
 *
    
    Now the U.S. Army Tank-automotive and Armaments Command.




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##### Table of Contents



33 At the end of 1985, Herbert H. Dobbs left government service and started his own consulting
practice and began working with the Gleasmans to develop and market the Gleasman familys
inventions. Herbert H. Dobbs holds a Ph.D. in Mechanical Engineering from the University of
Michigan and is a registered professional engineer in Michigan. He holds several patents of
his own and, among many affiliations, is a member of SAE, ASME, NSPE, AAAS, Sigma XI, AUSA,
NDIA and the U.S. Army Science Board. The last named organization is a small group of
senior technical and managerial people chosen from industry and academia to provide direct
advice to the Secretary of the Army, the Chief of Staff, and the Department of the Army
concerning issues of policy, budgets, doctrine, organization, training and technology.(5)
    
    Daniel R. Bickel is a partner in the accounting firm of Bickel & Dewar, C.P.A.s, an
accounting firm providing a variety of accounting services to small to medium sized
business. The services provided include audits, reviews, compilations, business and
personal consulting, business acquisition and sale assistance and income tax preparation.
Mr. Bickel is a graduate of the Rochester Institute of Technology. He has been licensed in
New York State as a certified public accountant for almost 30 years and is a member of the
American Institute of Certified Public Accountants and the New York State Society of
Certified Public Accountants. He has served as an officer and director of numerous
non-profit and civic organizations.(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.
 (c) Family Relationships
  (d) Section 16(a) Beneficial Ownership Reporting Compliance




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##### Table of Contents



34 
 Item 10. EXECUTIVE COMPENSATION
 Summary Compensation Table
  Annual
    
    Long TermCompensation
    
    Compensation AwardsStockName and Position
    
    Salary
    
    Consultants Fee
    
    Options Granted
    
    AwardsRichard E. Ottalagana (1)Chief Executive Officer
    
    $
    (1
    )
    
    $
    (1
    )
    
    
    (1
    )
    
    
    (1
    )Keith E. GleasmanPresident
    
    $
    (2
    )
    
    $
    (2
    )
    
    
    (2
    )
    
    
    (2
    )Philip A. Fain (3)Chief Executive Officer, ChiefFinancial Officer
    
    $
    (3
    )
    
    $
    (3
    )
    
    
    (3
    )
    
    
    (3
    )SecretaryJames Y. Gleasman(4)Chief Executive Officer, Interim
    
    $
    (4
    )
    
    $
    (4
    )
    
    
    (4
    )
    
    
    (4
    )Chief Financial OfficerSamuel M. Bronsky(5)Chief Accounting Officer
    
    $
    (5
    )
    
    $
    (5
    )
    
    
    (5
    )
    
    
    (5
    )
 
 (1)
    
    Richard E. Ottalagana became chief executive officer, effective June 15, 2004. He was
replaced on March 1, 2005. He was compensated indirectly by the company in fiscal
2005 through the companys working relationship with CXO on the GO, LLC. See
footnote J to the companys financial statements on page 42. (F-24)(2)
    
    Mr. Gleasman provided services to the company during fiscal 2005 without compensation
from the company. He sold 7,500 of his own shares during fiscal 2005 for proceeds of
$25,645 in lieu of receiving a consulting fee.(3)
    
    Philip A. Fain became chief financial officer, effective June 15, 2004 and secretary
effective November 9, 2004. He became chief executive officer on March 1, 2005 and
was removed from his officer positions on August 19, 2005. He was compensated
indirectly by the company in fiscal 2005 through the companys working relationship
with CXO on the GO, LLC. See footnote J to the companys financial statements on
page 42. (F-24)(4)
    
    Mr. Gleasman provided services to the company during fiscal 2005 without compensation
from the company. He sold 11,000 of his own shares during fiscal 2005 for proceeds
of $36,472 in lieu of receiving a consulting fee.(5)
    
    Mr. Bronsky was paid $12,980 for services rendered during fiscal 2005. He resigned as
chief accounting officer in June, 2005.




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##### Table of Contents



35 Option/SAR Grants in Last Fiscal Year
  Shares
    
    % of OptionsUnderlyingName
    
    Options Granted
    
    Granted
    
    Exercise Price
    
    Expiration DateRichard E. Ottalagana
    
    
    (1
    )
    
    
    (1
    )
    
    $
    (1
    )
    
    
    (1
    )Keith E. Gleasman
    
    
    0
    
    
    
    0
    
    
    $
    
    
    
    
    Philip A. Fain
    
    
    (1
    )
    
    
    (1
    )
    
    $
    (1
    )
    
    
    (1
    )James Y. Gleasman
    
    
    0
    
    
    
    0
    
    
    $
    
    
    
    
    Samuel M. Bronsky
    
    
    0
    
    
    
    0
    
    
    $
    
    
    
    
    
 
 (1)
    
    See footnote J to the companys consolidated financial statements on page 42. (F-24)   Number of Unexercised
    
    Value of UnexercisedOptions at
    
    In-the-Money OptionsShares
    
    
    
    
    
    December 31, 2005
    
    at December 31, 2005(1)Acquired
    
    ValueName
    
    on Exercise
    
    Realized
    
    Exercisable
    
    Unexercisable
    
    Exercisable
    
    UnexercisableRichard E. Ottalagana
    
    
    (2
    )
    
    
    (2
    )
    
    
    (2
    )
    
    
    (2
    )
    
    $
    (2
    )
    
    $
    (2
    )Keith E. Gleasman
    
    
    0
    
    
    
    0
    
    
    
    237,967
    
    
    
    0
    
    
    $
    0
    
    
    $
    0Philip A. Fain
    
    
    (2
    )
    
    
    (2
    )
    
    
    (2
    )
    
    
    (2
    )
    
    $
    (2
    )
    
    $
    (2
    )James Y. Gleasman
    
    
    0
    
    
    
    0
    
    
    
    334,575
    
    
    
    0
    
    
    $
    0
    
    
    $
    0Samuel M. Bronsky
    
    
    0
    
    
    
    0
    
    
    
    100,000
    
    
    
    0
    
    
    $
    0
    
    
    $
    0
 
 (1)
    
    The closing price of the companys common stock on December 30, 2005, the last trading date
for such fiscal year was $1.44 per share. Since the per share exercise price is $5.00 under the
option agreements, none of the options were in-the-money as of that date.(2)
    
    See footnote J to the companys consolidated financial statements on page 42.




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##### Table of Contents



36 Year 2005 Options
  1998 Stock Option Plan
     Business Consultants Stock Plan




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##### Table of Contents



37     Nonmanagement Directors Plan
    
 Item 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
 Security Ownership  Common Stock
  o
    
    each person who is known by us to beneficially own more than 5% of our common stock;o
    
    each of our directors;o
    
    each of our named executive officers; ando
    
    all of our directors and executive officers as a group.




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##### Table of Contents



38 Number of
    
    PercentName and Address of
    
    Shares
    
    of SharesBeneficial Owner
    
    Owned
    
    OwnedMargaret F. Gleasman
    
    
    3,090,750
    (1)
    
    
    10.2
    %11 Pond View DrivePittsford, NY 14534
 
 (1)
    
    Includes 396,189 shares which may be purchased through the
exercise of ten year options, all exercisable at $5.00 per share. Number of
    
    PercentName and Address of
    
    
    
    
    
    Shares
    
    of SharesBeneficial Owner
    
    Position
    
    Owned
    
    OwnedGary A. Siconolfi
    
    Chairman of the Board
    
    
    178,783
    (1)
    
    less than 1%325 VanVoorhis AvenueRochester, New York 14617James Y. Gleasman
    
    Chief Executive Officer, Interim
    
    
    6,390,901
    (2)
    
    
    21
    %11 Pond View Drive
    
    Chief Financial Officer, DirectorPittsford, New York 14534Keith E. Gleasman
    
    President
    
    
    9,566,233
    (3)
    
    
    31.6
    %11 Pond View Drive
    
    DirectorPittsford, New York 14534Herbert H. Dobbs
    
    Secretary
    
    
    459,550
    (4)
    
    
    1.53
    %448 West Maryknoll Road
    
    DirectorRochester Hills, Mich. 48309Daniel R. Bickel
    
    Director
    
    
    68,850
    (5)
    
    less than 1%39 Whippletree RoadFairport, New York 14450Joseph B. Rizzo
    
    Director
    
    
    
    
    
    
    39 State Street, Suite 700Rochester, New York 14614All Directors and Officers
    
    
    
    
    
    
    13,864,317
    
    
    
    44.87
    %As a Group




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##### Table of Contents



39 
 (1)
    
    Includes 100,000 common shares which may be purchased through the
exercise of a ten year option granted on October 15, 2003, exercisable
at $5.00 per share.(2)
    
    Includes 25,000, 270,164 and 39,575 common shares which may be
purchased through the exercise of ten year options granted on December
1, 1997, September 30, 2002 and January 5, 2004, respectively, all
exercisable at $5.00 per share. Includes 1,400,000 shares held by the
Vernon E. Gleasman Grandchildrens Trust and 1,400,000 shares held by
the Margaret F. Gleasman Grandchildrens Trust of which Mr. Gleasman
is co-trustee.(3)
    
    Includes 25,000, 181,149 and 31, 818 shares which may be purchased
through the exercise of ten year options granted on December 1, 1997,
September 30, 2002 and December 22, 2003, respectively, all
exercisable at 5.00 per share. Includes 60, 000 common shares owned by
Mr. Gleasmans sons. Includes 1,400,000 shares held by the Vernon E.
Gleasman Grandchildrens Trust and 1,400,000 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 shares which may be purchased through the exercise of
a ten year option granted on January 1, 1998, exercisable at $5.00 per
share. Includes 21,000 common stock warrants issued under the
Nonmanagement Directors Plan.(5)
    
    Includes 25,000 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 stock warrants issued under the
Nonmanagement Directors Plan.(6)
    
    Includes an aggregate 797,706 common shares which may be purchased
through the exercise of options, all of which are exercisable at $5.00
per share; 1,400,000 shares held by the Vernon E. Gleasman
Grandchildrens Trust; 1,400,000 shares held by the Margaret F.
Gleasman Grandchildrens Trust; and 1,666,666 shares held by the James
Y. Gleasman Childrens Trust. Includes 50,750 common stock warrants
issued under the Nonmanagement Directors Plan. Includes 60,000 shares
owned by Keith E. Gleasmans sons. The 2,800,000 shares owned by the
Vernon and Margaret Gleasman Grandchildrens Trusts are counted only
once for this calculation.




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##### Table of Contents



40 Security Ownership  Preferred Stock
  
 Item 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
 Certain Transactions




---



##### Table of Contents



41




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##### Table of Contents



42 
 Item 13. EXHIBITS AND REPORTS ON FORM 8-K.
 (a) Exhibits
  (2)
    
    Plan of acquisition, reorganization, arrangement, liquidation, or succession
 2.1
    
    Agreement and Plan of
Merger, dated November
29, 2000 by and among
Torvec Subsidiary
Corporation, Torvec,
Inc., UTEK Corporation
and ICE Surface
Development, Inc.
incorporated by reference
to Form 8-K filed
November 30, 2000 and
Form 8K/A filed February
12, 2001.
 (3)
    
    Articles of Incorporation, By-laws
 3.1
    
    Certificate of
Incorporation,
incorporated by reference
to Form 10-SB/A ,
Registration Statement,
registering Companys
$.01 par value common
stock under section 12(g)
of the Securities
Exchange Act of 1934;3.2
    
    Certificate of Amendment
to the Certificate of
Incorporation dated
August 30, 2000,
incorporated by reference
to Form SB-2 filed
October 19, 2000;3.3
    
    Certificate of Correction
dated March 22, 2002,
incorporated by reference
to Form 10-KSB filed for
fiscal year ended
December 31, 2002;3.4
    
    By-laws, as amended by
shareholders on January
24, 2002, incorporated by
reference to Form 10-KSB
filed for fiscal year
ended December 31, 2002;3.5
    
    Certification of
Amendment to the
Certificate of
Incorporation dated
October 21, 2004 setting
forth terms and
conditions of Class B
Preferred, incorporated
by reference to Form
10-QSB filed for fiscal
quarter ended September
30, 2004.
 (4)
    
    Instruments defining the rights of holders including indenturesNone(9)
    
    Voting Trust AgreementNone(10)
    
    Material Contracts
 10.1
    
    Certain Employment Agreements, Consulting Agreements,
certain assignments of patents, patent properties,
technology and know-how to the Company, Neri Service and
Space Agreement and Ford Motor Company Agreement and
Extension of Term, all incorporated by reference to Form
10-SB/A, Registration Statement, registering Companys
$.01 par value common stock under section 12(g) of the
Securities Exchange Act of 1934;10.2
    
    The Companys 1998 Stock Option Plan and related Stock
Options Agreements, incorporated by reference to Form
S-8, Registration Statement, registering 2,000,000 shares
of the Companys $.01 par value common stock reserved for
issuance thereunder, effective December 17, 1998;




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##### Table of Contents



43 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;




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##### Table of Contents



44 10.17
    
    Investment Banking Services Agreement with Swartz
Institutional Finance (Dunwoody Brokerage Services, Inc.),
as amended, dated October 23, 2001, incorporated by reference to
Form 10-QSB filed for fiscal quarter ended September 30, 2001;10.18
    
    Stock Option Agreement with Samuel Bronsky, Chief Financial and
Accounting Officer, dated August 28, 2001, incorporated by reference to
Form 10-QSB filed for fiscal quarter ended September 30, 2001;10.19
    
    Pittsford Capital Group, LLC Agreement dated January 30, 2002,
incorporated by reference to Form 10-KSB filed for fiscal year ended
December 31, 2001;10.20
    
    Gleasman-Steenburgh Indemnification Agreement dated April 9, 2002,
incorporated by reference to Form 10-KSB filed for fiscal year ended
December 31, 2001;10.21
    
    Series B Warrant dated April 10, 2002, incorporated by reference to
Form 10-KSB filed for fiscal year ended December 31, 2001;10.22
    
    Billow Butler & Company, LLC investment banking engagement letter
dated October 1, 2003, incorporated by reference to Form 10-QSB filed
for fiscal quarter ended September 30, 2003;10.23
    
    Letter of Acknowledgement and Agreement with U.S. Environmental
Protection Agency dated February 4, 2004, incorporated by reference to
Form 10-KSB filed for fiscal year ended December 31, 2003;10.24
    
    Letter Agreement with CXO on the GO, L.L.C. dated February 20, 2004,
incorporated by reference to Form 10-KSB filed for fiscal year ended
December 31, 2003;10.25
    
    Letter Amendment with CXO on the GO, L.L.C. dated February 23, 2004,
incorporated by reference to Form 10-KSB filed for fiscal year ended
December 31, 2003;10.26
    
    Lease Agreement for premises at Powder Mills Office Park, 1169
Pittsford-Victor Road, Suite 125, Pittsford, New York 14534, dated
July 16, 2004; incorporated by reference to Form 10-QSB filed for
fiscal quarter ended June 30, 2004;10.27
    
    Lease Agreement for testing facility and Mustang dynamometer, dated
July 21, 2004; incorporated by reference to Form 10-QSB filed for
fiscal quarter ended June 30, 2004;10.28
    
    Advisory Agreement with PNB Consulting, LLC, 970 Peachtree Industrial
Blvd., Suite 303, Suwanee, Georgia 30024; incorporated by reference to
Form 10-QSB filed for fiscal quarter ended June 30, 2004;10.29
    
    Agreement between Torvec and ZT Technologies, Inc. dated July 21,
2004, incorporated by reference to Form 10-QSB filed for fiscal
quarter ended September 30, 2004;10.30
    
    Assignment and Assumption of Lease between William J. Green and Ronald
J. Green and Torvec, Inc. effective as of December 31, 2004,
incorporated by reference to Form 10-KSB filed for fiscal year ended
December 31,2004;10.31
    
    Bill of Sale between Dynamx, Inc. and Torvec, Inc. for equipment and
machinery, incorporated by reference to Form 10-KSB filed for fiscal
year ended December 31, 2004;




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##### Table of Contents



45 10.32
    
    Lease and Services Agreement between Robert C. Horton as Landlord and
Torvec, Inc. as Tenant dated March 18, 2005, incorporated by reference
to Form 10-KSB filed for fiscal year ended December 31, 2004;10.33
    
    Settlement Agreement and Mutual Release between Torvec, Inc. and ZT
Technologies, Inc. dated March 29, 2005, incorporated by reference to
Form 10-QSB filed for fiscal quarter ended March 31, 2005;10.34
    
    Advisory Agreement between Robert C. Horton and Torvec, Inc. dated
February 15, 2005, incorporated by reference to Form 10-QSB filed for
fiscal quarter ended March 31, 2005;10.35
    
    Lease and Services Agreement between Dennis J. Trask as Landlord and
Torvec, Inc. as Tenant dated April 18, 2005, incorporated by reference
to Form 10-QSB filed for fiscal quarter ended March 31, 2005;10.36
    
    Consulting Agreement with Matthew R. Wrona, dated June 30, 2005,
incorporated by reference to Form 10-QSB filed for fiscal quarter
ended June 30, 2005;10.37
    
    Option Agreement between Matthew R. Wrona and Torvec, Inc. dated June
30, 2005, incorporated by reference to Form 10-QSB filed for fiscal
quarter ended June 30, 2005;10.38
    
    Trust Agreement between Matthew R. Wrona, Donald Gabel, Lawrence
Clark, Steven Urbanik, Floyd G. Cady,Jr., and Michael Pomponi as
Grantors and Richard B. Sullivan as Trustee, dated September 22, 2005,
incorporated by reference to Form 10-QSB filed for fiscal quarter
ended September 30, 2005;10.39
    
    Consultant Agreement with Floyd G. Cady, Jr., dated October 1, 2005,
incorporated by reference to Form 10-QSB filed for fiscal quarter
ended September 30, 2005;10.40
    
    Consultant Agreement with Lawrence W. Clark, dated October 1, 2005,
incorporated by reference to Form 10-QSB filed for fiscal quarter
ended September 30, 2005;10.41
    
    Consultant Agreement with Donald W. Gabel, dated
October 1, 2005, incorporated by reference to Form 10-QSB filed for
fiscal quarter ended September 30, 2005;10.42
    
    Consultant Agreement with Michael A. Pomponi, dated October 1, 2005,
incorporated by reference to Form 10-QSB filed for fiscal quarter
ended September 30, 2005;10.43
    
    Consultant Agreement with Steven Urbanik, dated October 1, 2005,
incorporated by reference to Form 10-QSB filed for fiscal quarter
ended September 30, 2005;10.44
    
    Consultant Agreement with Kiwee Johnson, dated September 30, 2005,
incorporated by reference to Form 10-QSB filed for fiscal quarter
ended September 30, 2005;10.45
    
    Confidentiality Agreement with Joseph B. Rizzo, dated October 24,2005,
incorporated by reference to Form 10-QSB filed for fiscal quarter
ended September 30, 2005.10.46
    
    Minutes of meeting Board of Directors Torvec, Inc., held October 19,
2004, creating the non-management directors plan.




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##### Table of Contents



46 
 (11)
    
    Statement re computation of per share earnings (loss)Not applicable(14)
    
    Code of Ethics(16)
    
    Letter on change in certifying accountantNone(18)
    
    Letter re change in accounting principlesNone(20)
    
    Other documents or statements to security holdersNone(21)
    
    Subsidiaries of the 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 holdersNone(23.1)
    
    Consents of experts and counselEisner LLP Consent(24)
    
    Power of attorneyNone(31)
    
    Rule 13(a)-14(a)/15(d)-14(a) Certifications(32)
    
    Section 1350 Certifications(99)
    
    Additional exhibitsNone
 (b) Reports Filed on Form 8-K




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##### Table of Contents



47 
 Item 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
 Audit Fees
  Fiscal 2004
    
    Fiscal 2005$78,500
    
    $77,233
 Audit Related Fees
  Fiscal 2004
    
    Fiscal 2005$3,000
    
    $
  Tax Fees
  Fiscal 2003
    
    Fiscal 2004
    
    Fiscal 2005$
    
    $
    
    $
    All Other Fees
  Fiscal 2003
    
    Fiscal 2004$
    
    $




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##### Table of Contents



48 Pre-Approval of Policies and Procedures
  Audit -Committee Approval




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##### Table of Contents



49 FORWARD-LOOKING STATEMENTS
   a.
    
    the companys ability to raise significant capital to fund its
business during fiscal year 2006 and beyond;b.
    
    the companys ability to enter into collaborative joint working
arrangements, formal joint venture arrangements and/or licensing
arrangements with domestic and/or foreign governments, automotive
industry manufacturers and suppliers to manufacture and promote the
companys inventions;c.
    
    industry and consumer acceptance of the companys inventions;d.
    
    the level of competition and resistance in the automotive and related
industries;e.
    
    general economic and competitive conditions in the markets and
countries in which the company will operate, and the risks inherent in
any future international operations;f.
    
    the strength of the U.S. dollar against currencies of other countries
where the company may operate, as well as cross-currencies between the
companys future operations outside of the U.S. and other countries
with whom it transacts business.




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##### Table of Contents



50 
 SIGNATURES
  TORVEC, INC.Date: April 17, 2006
    
    By:
    
    S  James Y. GleasmanJames Y. Gleasman, Chief Executive Officer
  Dated: April 17,2006
    
    By:
    
    S  James Y. GleasmanJames Y. Gleasman, Chief Executive Officer, Interim ChiefFinancial Officer and DirectorDated: April 17,2006
    
    By:
    
    S  Keith E. GleasmanKeith E. Gleasman, President and DirectorDated: April 17,2006
    
    By:
    
    S  Herbert H. DobbsHerbert H. Dobbs, Secretary and DirectorDated: April 17,2006
    
    By:
    
    S  Daniel R. BickelDaniel R. Bickel, DirectorDated: April 17,2006
    
    By:
    
    S  Joseph B. RizzoJoseph B. Rizzo, DirectorDated: April 17,2006
    
    By:
    
    S  Gary A. SiconolfiGary A. Siconolfi, Director




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##### Table of Contents



51 
 EXHIBIT INDEX
 EXHIBIT
    
    
    
    
    
    PAGE(2)
    
    Plan of acquisition, reorganization, arrangement, liquidation, or succession
    
    
    
    

2.1
    
    Agreement and Plan of Merger, dated November 29, 2000 by
and among Torvec Subsidiary Corporation, Torvec, Inc., UTEK
Corporation and ICE Surface Development, Inc. incorporated
by reference to Form 8-K filed November 30, 2000 and
Form 8K/A filed February 12, 2001.
    
    
    N/A(3)
    
    Articles of Incorporation, By-laws3.1
    
    Certificate of Incorporation, incorporated by reference to
Form 10-SB/A , Registration Statement, registering
Companys $.01 par value common stock under section 12(g)
of the Securities Exchange Act of 1934;
    
    
    N/A3.2
    
    Certificate of Amendment to the Certificate of Incorporation dated
August 30, 2000, incorporated by reference to Form SB-2 filed
October 19, 2000;
    
    
    N/A3.3
    
    Certificate of Correction dated March 22, 2002, incorporated by
reference to Form 10-KSB filed for fiscal year ended
December 31, 2002;
    
    
    N/A3.4
    
    By-laws, as amended by shareholders on January 24, 2002,
incorporated by reference to Form 10-KSB filed for fiscal year
ended December 31, 2002;
    
    
    N/A3.5
    
    Certification of Amendment to the Certificate of Incorporation
dated October 21, 2004 setting forth terms and conditions
of Class B Preferred, incorporated by reference to Form 10-QSB
filed for fiscal quarter ended September 30, 2004.
    
    
    N/A(4)
    
    Instruments defining the rights of holders including indenturesNone
    
    
    N/A(9)
    
    Voting Trust AgreementNone
    
    
    N/A(10)
    
    Material Contracts10.1
    
    Certain Employment Agreements,
Consulting Agreements, certain
assignments of patents, patent
properties, technology and know-how
to the Company, Neri Service and
Space Agreement and Ford Motor
Company Agreement and Extension of
Term, all incorporated by
reference to Form 10-SB/A,
Registration Statement, registering
Companys $.01 par value common stock
under section 12(g) of the
Securities Exchange Act of 1934;
    
    
    N/A




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##### Table of Contents



52 EXHIBIT
    
    
    
    
    
    PAGE10.2
    
    The Companys 1998 Stock Option Plan and related Stock Options
Agreements, incorporated by reference to Form S-8, Registration
Statement, registering 2,000,000 shares of the Companys $.01 par
value common stock reserved for issuance thereunder, effective
December 17, 1998;
    
    
    N/A10.3
    
    The Companys Business Consultants Stock Plan, incorporated by
reference to Form S-8, Registration Statement, registering 200,000
shares of the Companys $.01 par value common stock reserved for
issuance thereunder, effective: June 11, 1999 as amended by reference
to Form S-8 Registration Statement registering an additional
200,000, 200,000, 100,000, 800,000, 250,000, 250,000, 350,000,
250,000 and 2,500,000 shares of the Companys $.01 par value common
stock reserved for issuance thereunder, effective October 5, 2000,
November 7, 2001, December 21, 2001, February 1, 2002, November 12,
2002, January 22, 2003, May 23, 2003, November 26, 2003 and April
20, 2004 respectively;
    
    
    N/A10.4
    
    Termination of Neri Service and Space Agreement dated August 31,
1999, incorporated by reference to Form 10-QSB filed for the quarter
ended September 30, 1999;
    
    
    N/A10.5
    
    Operating Agreement of Variable Gear, LLC dated June 28, 2000,
incorporated by reference to Form 10-QSB filed for the quarter ended
June 30, 2000;
    
    
    N/A10.6
    
    License Agreement between Torvec, Inc. and Variable Gear, LLC
dated June 28, 2000, incorporated by reference to Form SB-2 filed
October 19, 2000;
    
    
    N/A10.7
    
    Investment Agreement with Swartz Private Equity, LLC dated
September 5, 2000, together with attachments thereto, incorporated
by reference to Form 8-K filed October 2, 2000;
    
    
    N/A10.8
    
    Extension of and Amendment to Consulting Agreement with James A.
Gleasman, incorporated by reference to Form 10-KSB filed for the
fiscal year ended December 31, 2000;
    
    
    N/A10.9
    
    Extension of and Amendment to Consulting Agreement with Keith E.
Gleasman, incorporated by reference to Form 10-KSB filed for the
fiscal year ended December 31, 2000;
    
    
    N/A10.10
    
    Extension of and Amendment to Consulting Agreement with Vernon E.
Gleasman, incorporated by reference to Form 10-KSB filed for the
fiscal year ended December 31, 2000;
    
    
    N/A10.11
    
    Option and Consulting Agreement with Marquis Capital, LLC dated
February 10, 1999, incorporated by reference to Form 10-QSB filed
for quarter ended March 31, 2001;
    
    
    N/A10.12
    
    Option and Consulting Agreement with PMC Direct Corp., dated
February 10, 1999, incorporated by reference to Form 10-QSB filed
for quarter ended March 31, 2001;
    
    
    N/A10.13
    
    Investment Banking Services Agreement with Swartz Institutional
Finance (Dunwoody Brokerage Services, Inc.) dated December 8, 2000,
incorporated by reference to Form 10-QSB filed for quarter ended
March 31, 2001;
    
    
    N/A




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##### Table of Contents



53 EXHIBIT
    
    
    
    
    
    PAGE10.14
    
    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/A




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##### Table of Contents



54 EXHIBIT
    
    
    
    
    
    PAGE10.29
    
    Agreement between Torvec and ZT Technologies,
Inc. dated July 21, 2004,
incorporated by reference to Form 10-QSB filed
for fiscal quarter ended September
30, 2004;
    
    
    N/A10.30
    
    Assignment and Assumption of Lease between
William J. Green and Ronald J. Green and
Torvec, Inc. effective as of December 31,
2004, incorporated by reference to Form
10-KSB filed for fiscal year ended December 31, 2004;
    
    
    N/A10.31
    
    Bill of Sale between Dynamx, Inc. and Torvec,
Inc. for equipment and machinery,
incorporated by reference to Form 10-KSB filed
for fiscal year ended December 31,
2004;
    
    
    N/A10.32
    
    Lease and Services Agreement between Robert C.
Horton as Landlord and Torvec, Inc.
as Tenant dated March 18, 2005, incorporated
by reference to Form 10-KSB filed for
fiscal year ended December 31, 2004;
    
    
    N/A10.33
    
    Settlement Agreement and Mutual Release between Torvec, Inc. and ZT
Technologies,
Inc. dated March 29, 2005, incorporated by reference to
Form 10-QSB filed for
fiscal quarter ended March 31, 2005;
    
    
    N/A10.34
    
    Advisory Agreement between Robert C. Horton and Torvec, Inc.
dated February 15,
2005, incorporated by reference to Form 10-QSB filed for fiscal
quarter ended March
31, 2005;
    
    
    N/A10.35
    
    Lease and Services Agreement between Dennis J. Trask as
Landlord and Torvec, Inc.
as Tenant dated April 18, 2005, incorporated by reference
to Form 10-QSB filed for
fiscal quarter ended March 31, 2005;
    
    
    N/A10.36
    
    Consulting Agreement with Matthew R. Wrona, dated June 30, 2005,
incorporated by
reference to Form 10-QSB filed for fiscal quarter ended June 30, 2005;
    
    
    N/A10.37
    
    Option Agreement between Matthew R. Wrona and Torvec, Inc.
dated June 30, 2005,
incorporated by reference to Form 10-QSB filed for
fiscal quarter ended June 30,
2005;
    
    
    N/A10.38
    
    Trust Agreement between Matthew R. Wrona, Donald Gabel,
Lawrence Clark, Steve
Urbanik, Floyd G. Cady, Jr. and Michael Pomponi as Grantors
and Richard B. Sullivan
as Trustee, dated September 22, 2005, incorporated
by reference to Form 10-QSB
filed for fiscal quarter ended September 30, 2005;
    
    
    N/A10.39
    
    Consultant Agreement with Floyd G. Cady, Jr., dated October 1, 2005,
incorporated
by reference to Form 10-QSB filed for fiscal quarter
ended September 30, 2005;
    
    
    N/A10.40
    
    Consultant Agreement with Lawrence W. Clark, dated October 1, 2005,
incorporated by
reference to Form 10-QSB filed for fiscal quarter ended September 30,
2005;
    
    
    N/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 by reference to Form 10-QSB filed for fiscal quarter
ended September 30, 2005;
    
    
    N/A




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##### Table of Contents



55 EXHIBIT
    
    
    
    
    
    PAGE10.43
    
    Consultant Agreement with Steven Urbanik, dated October 1, 2005,
incorporated by
reference to Form 10-QSB filed for fiscal quarter ended September 30,
2005;
    
    
    N/A10.44
    
    Consultant Agreement with Kiwee Johnson, dated September 30, 2005,
incorporated by
reference to Form 10-QSB filed for fiscal quarter ended September 30,
2005;
    
    
    N/A10.45
    
    Confidentiality Agreement with Joseph B. Rizzo, dated October 24, 2005,
incorporated by reference to Form 10-QSB filed for fiscal quarter ended
September
30, 2005
    
    
    N/A10.46
    
    Minutes of meeting Board of Directors Torvec, Inc.,
held October 19, 2004,
creating
the non-management directors plan.
    
    
    71(11)
    
    Statement re computation of per share earnings (loss)Not applicable(14)
    
    Code of Ethics(16)
    
    Letter on change in certifying accountantNone(18)
    
    Letter re change in accounting principlesNone(20)
    
    Other documents or statements to security holdersNone(21)
    
    Subsidiaries of the registrant
Ice Surface Development, Inc. (New York)
Iso-Torque Corporation (New York)
IVT Diesel Corp. (New York)
Variable Gear, LLC (New York)(22)
    
    Published report regarding matters submitted to vote of security holdersNone(23)
    
    Consents of experts and counsel(23.1)
    
    Eisner LLP Consent
    
    
    75(24)
    
    Power of attorneyNone(31)
    
    Rule 13(a)-14(a)/15(d)-14(a) Certifications
    
    
    76(32)
    
    Section 1350 Certifications
    
    
    77(99)
    
    Additional exhibitsNone