U.S. Securities and Exchange Commission

                             Washington, D.C. 20549

                                   FORM 10-KSB
(Mark One)

[X]                  ANNUAL REPORT UNDER SECTION 13 OR 15(d)
                     OF THE SECURITIES EXCHANGE ACT OF 1934

                   For the fiscal year ended December 31, 2001

[ ]                TRANSITION REPORT UNDER SECTION 13 OR 15(d)
                     OF THE SECURITIES EXCHANGE ACT OF 1934

                         Commission file number: 0-21811

                         TORQUE ENGINEERING CORPORATION
                 (Name of small business issuer in its charter)

                Delaware                                   83-0317306
    (State or other jurisdiction of                     (I.R.S. Employer
     incorporation or organization)                    Identification No.)

                    2932 Thorne Drive, Elkhart, Indiana 46514
          (Address of principal executive offices, including ZIP Code)

  Issuer's telephone number:                              (219) 264-2628

           Securities registered pursuant to Section 12(g) of the Act:

                   Common Stock, par value $0.00001 per share
                   ------------------------------------------
                                (Title of Class)

      Check  whether  the issuer (1) filed all  reports  required to be filed by
Section 13 or 15(d) of the  Exchange  Act during the past 12 months (or for such
shorter period that the  registrant was required to file such reports),  and (2)
has been subject to such filing  requirements for the past 90 days. Yes [ X ] No
[ ]

      Check if there is no disclosure  of delinquent  filers in response to Item
405 of  Regulation  S-B  contained  in  this  form,  and no  disclosure  will be
contained,  to the  best of  registrant's  knowledge,  in  definitive  proxy  or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [ ]

      The issuer's  revenues for its most recent fiscal year ended  December 31,
2001 were $295,715.

      The  aggregate  market  value  of the  8,290,795  shares  of the  issuer's
outstanding  common stock held by  non-affiliates  of the issuer as of April 15,
2002,  was  $248,723.85  based on the  closing  bid  price of $0.03 per share as
reported on the OTC Bulletin Board on that date.

      The  issuer  had  12,748,965   shares  of  its  common  stock  issued  and
outstanding as of April 15, 2002.

<PAGE>

                         TORQUE ENGINEERING CORPORATION

                      INDEX TO ANNUAL REPORT ON FORM 10-KSB


FORWARD-LOOKING STATEMENTS....................................................3
PART I........................................................................3
         Item 1.   Description of Business....................................3
         Item 2.   Description of Property...................................11
         Item 3.   Legal Proceedings.........................................11
         Item 4.   Submission of Matters to a Vote of Security Holders.......11
PART II......................................................................12
         Item 5.   Market for Common Equity and Related Stockholder
                   Matters...................................................12
         Item 6.   Management's Discussion and Analysis......................14
         Item 7.   Financial Statements......................................17
         Item 8.   Changes In and Disagreements With Accountants on
                   Accounting and Financial Disclosure.......................17
PART III.....................................................................18
         Item 9.   Directors, Executive Officers, Promoters and Control
                   Persons; Compliance with Section 16(a) of the Exchange
                   Act.......................................................18
         Item 10.  Executive Compensation....................................19
         Item 11.  Security Ownership of Certain Beneficial Owners and
                   Management................................................20
         Item 12.  Certain Relationships and Related Transactions............21
         Item 13.  Exhibits and Reports on Form 8-K..........................22
SIGNATURES...................................................................25

                                       2
<PAGE>

FORWARD-LOOKING STATEMENTS

      Information  included  or  incorporated  by  reference  in this filing may
contain  forward-looking  statements  within the  meaning of Section  27A of the
Securities Act and Section 21E of the Exchange Act. This information may involve
known and unknown  risks,  uncertainties  and other  factors which may cause our
actual results,  performance or achievements to be materially different from the
future  results,  performance  or  achievements  expressed  or  implied  by  any
forward-looking   statements.    Forward-looking   statements,   which   involve
assumptions  and describe our future plans,  strategies  and  expectations,  are
generally  identifiable by use of the words "may," "will,"  "should,"  "expect,"
"anticipate,"  "estimate,"  "believe,"  "intend" or "project" or the negative of
these words or other variations on these words or comparable terminology.

      This filing  contains  forward-looking  statements,  including  statements
regarding,  among other things, (a) our projected sales and  profitability,  (b)
our company's  growth  strategies,  (c) our company's future financing plans and
(d) our company's anticipated needs for working capital. These statements may be
found under  "Management's  Discussion  and Analysis of Financial  Condition and
Results of Operations" and "Business," as well as in this prospectus  generally.
Actual  events  or  results  may  differ  materially  from  those  discussed  in
forward-looking  statements as a result of various factors,  including,  without
limitation,  the risks outlined  under "Risk  Factors" and matters  described in
this filing generally.  In light of these risks and uncertainties,  there can be
no assurance that the forward-looking  statements  contained in this filing will
in fact occur.


                                     PART I


ITEM 1.  DESCRIPTION OF BUSINESS

      Torque  Engineering  Corporation  was formerly known as  Quintessence  Oil
Company.  Quintessence  Oil was formed  under  Wyoming  law on June 26,  1996 to
purchase,  develop  and  operate  oil and  gas  leases.  On  December  3,  1996,
Quintessence Oil voluntarily filed a registration  statement on Form 10 with the
SEC to become a publicly reporting company. Prior to May 28, 1999,  Quintessence
Oil  was  essentially  inactive  and  had no  operations.  Quintessence  Oil had
previously  acquired one  undeveloped  oil and gas lease,  but had not initiated
drilling or other production operations.

      In May 1999,  Quintessence Oil's new management began the first phase of a
transition   from  an  inactive  oil  and  gas  company  to  a  manufacturer  of
high-performance production engines for the boating and transportation industry.
On May 28, 1999, Quintessence Oil issued 1,500,000 shares of its common stock to
acquire  IPSL,  Inc.  Prior to that,  on May 1, 1999,  IPSL acquired from Glaval
Corporation  the  proprietary  rights to continue  to  research  and develop the
Torque  V-12,  an  aluminum,  gasoline-powered  engine for the luxury  off-shore
marine industry.  By acquiring IPSL and other assets,  Quintessence Oil obtained
those  same  proprietary   rights.  On  November  17,  1999,   Quintessence  Oil
re-incorporated  under  Delaware law and changed its name to Torque  Engineering
Corporation.

      Torque  Engineering's  current management has experience in the design and
production of high-performance,  marine race and pleasure engines.  Beginning in
1986, under the name Lightning Performance Products,  Inc., Torque Engineering's
current  president,  Raymond B.  Wedel,  Jr.,  developed  and sold  after-market
performance-enhanced parts and equipment for marine racing and pleasure engines.

      The   high-performance   marine  race  and  pleasure   engines   Lightning
Performance  originally  produced were custom-made.  As a result, the market for
these  products was extremely  limited.  In early 1992, Mr. Wedel sold Lightning
Performance to Richard  Streffling  where Lightning  Performance,  as an Indiana
corporation under the name Torque Engineering,  continued operations.  Mr. Wedel
joined  that  business  after  the sale  and  began  to  transition  it from the
production  of race engines to the  development  of a  light-weight,  high-power
marine  engine  which could be built on a  production-line  basis for the luxury
performance pleasure craft industry.

      In 1997,  Mr.  Wedel left the prior  Torque  Engineering  to pursue  other
opportunities in the marine industry.  However, that company,  utilizing many of
the same  employees  who worked for Mr.  Wedel,  continued to develop the Torque
V-12. In 1999 IPSL  purchased the assets and  proprietary  rights to continue to
research and develop the Torque V-12 from the prior Torque Engineering entity.

      On May  21,  1999,  Quintessence  Oil and  IPSL  entered  into a Plan  and
Agreement of Reorganization  under which  Quintessence Oil agreed to acquire all
of the issued and  outstanding  shares of common stock of IPSL.  Under the plan,

                                       3
<PAGE>

IPSL's sole shareholder, Michel Attias, irrevocably granted Quintessence Oil the
right  to  exchange  1,500,000  shares  of  its  common  stock  for  all  of the
outstanding  shares of common  stock of IPSL at any time prior to June 15, 1999.
On May 28, 1999  Quintessence  Oil exercised its right to close the  transaction
and to acquire  IPSL and the  assets  and  proprietary  rights to  research  and
develop  the  Torque  V-12.   As   described   above,   Quintessence   Oil  then
reincorporated and changed its name to Torque Engineering Corporation.

      Since  acquiring IPSL and the rights to develop and manufacture the Torque
V-12,   Torque   Engineering  has  formulated  a  plan  of  operation  based  on
management's  belief  that  even  as boat  manufacturers  increase  the  size of
pleasure  craft,  marine  industry  consumers are unwilling to settle for lesser
performance than what is available in smaller craft. Management believes that in
order to provide the same level of  performance,  the standard  automotive-based
gasoline  V-8 engine is being  asked to perform  beyond its  engineered  limits.
Owners of luxury  offshore  pleasure  craft  are  therefore  forced to resort to
installing three or four high performance V-8 engines or installing  heavier and
noisier diesel engines. As a result, Torque Engineering has developed and is now
manufacturing  and marketing the Torque V-12, a  high-powered,  12-cylinder,  14
liter/860 cubic inch V-12 aluminum marine engine.  Torque Engineering  presently
offers the Torque V-12 in the following three models:

     o  The TORQ 1000 - 900 horsepower engine with 1050 ft.-lbs. of torque,

     o  The TORQ 1100 - 1,050 horsepower engine with 1100 ft.-lbs. of torque,
        and

     o  The TORQ 1200 - 1,150 horsepower engine with 1150 ft.-lbs. of torque.


PRODUCTS

      The Torque V-12 is an all-aluminum,  electronically  fuel-injected  engine
designed to run on premium  gasoline.  The engine has a broad torque band, which
allows the Torque V-12 to generate  significant power at low throttle  settings,
thus providing for greater fuel economy. As of March 15, 2001 Torque Engineering
is  unaware  of  any  other  marine   engine   manufacturer   that  produces  an
all-aluminum,  naturally aspirated,  gasoline-powered  V-12 engine that provides
the same performance characteristics of the Torque V-12 engines.

      In September  1999, the Torque V-12 became an available power plant in the
Carlson  Model 2000, 33 foot sport cruiser boat line.  Torque  Engineering  will
display  this boat at various  marine  industry  trade  shows  throughout  2002.
Currently,  Cigarette,  Fountain,  Hustler, Magnum Marine, NorTech, and Predator
boats also list the Torque  V-12 as a power  plant  selection  for some of their
current models.

      The Torque V-12 is designed for  installation  in luxury  marine  pleasure
craft.  In the event  significant  production of the Torque V-12 begins,  Torque
Engineering  anticipates  that it will  analyze  whether  the Torque V-12 may be
commercially  adapted to other uses,  including potential military,  industrial,
agricultural  or mining  uses.  Torque  Engineering  has  engaged in the past in
discussions  with various third parties about  adapting the Torque V-12 to other
marine uses outside of the luxury  pleasure craft  industry.  These  discussions
continued during the year ended December 31, 2001.  However,  these  discussions
continue  to be of an  extremely  broad  and  preliminary  nature.  There  is no
assurance  that  Torque  Engineering  will adapt its Torque  V-12 to  additional
marine or other uses, or that the Torque V-12 will be appropriate for uses other
than in the luxury marine pleasure craft market.

      Retail  prices for the Torque V-12 range from  $69,539 to $81,227  without
options.  Torque  Engineering  offers a one-year  limited  warranty on all three
Torque V-12 models.

PRODUCT MARKET

      Torque  Engineering's  products are designed for the marine pleasure craft
industry.  That industry is divided  primarily  into the stern drive segment and
the  outboard  segment.  The Torque  V-12 is  targeted  toward  the stern  drive
segment.

      More specifically,  Torque Engineering's Torque V-12 engines are currently
targeted   toward  a  limited  niche  market  for   purchasers   and  owners  of
high-powered,  luxury  performance  pleasure  craft  sold  in  the  U.S.  Torque
Engineering  believes  this niche  market is generally  characterized  as having
consumers who are concerned primarily with:

                                       4
<PAGE>

     o  the performance of the high-powered engines they purchase,

     o  the dependability of those engines, and

     o  the overall useful life of those high-powered engines.

      Prices for the marine craft for which the Torque V-12 engines are designed
generally range from $250,000 to $1,000,000.

INDUSTRY OVERVIEW

      According  to  the  National  Marine   Manufacturers'   Association,   the
recreational  boating industry generated  approximately  $21.7, $25.0, and $25.6
billion in overall sales in 1999, 2000, and 2001 respectively.

      There were 96,000 new sales of inboard  and stern drive boats in 2001.  Of
these,  approximately  20,000 were 25' or more in length.  Approximately  90% of
these  boats would have two or more  engines.  Torque  Engineering's  management
hopes to capture  2-1/2% to 4% of this market over the next three to five years.
However, there can be no assurance Torque Engineering will be able to do so.

      Management  believes  recreational  marine  industry sales are impacted by
factors such as:

     o  the general state of the economy,

     o  interest rates,

     o  consumer spending,

     o  technology,

     o  dealer effectiveness,

     o  demographics,

     o  weather conditions,

     o  fuel availability and price, and

     o  government regulations.

      During the period  from 1983 to 1992,  the  recreational  marine  industry
experienced  both its largest growth (from 1983 to 1988) and its largest decline
(from  1988 to 1992) in over 30 years.  The growth  was  stimulated  not only by
increasing real disposable  income,  but also by readily obtainable marine loans
that  required no down  payment  and could be  financed  over a term of over ten
years.  The  contraction  in sales  from  1988 to 1992 was due to the  recession
during the early  1990s and to the  increased  level of sales in the late 1980s.
Many boat owners had loan balances in the early 1990s that exceeded the value of
their boats, which made trade-up sales more difficult to obtain. In addition, in
1990 the U.S.  government imposed a luxury tax on boats sold at prices in excess
of $100,000. However, the luxury tax was repealed in 1993 and boats over 24 feet
continue to be one of the largest growth sectors in the market.

      Torque Engineering also believes there are three primary factors affecting
the recreational marine industry today.

      o There are an  increasing  number of consumers  over the age of 50. These
        older consumers  typically have larger  discretionary  income per capita
        and  increased  leisure  time.  Torque  Engineering  believes that these
        consumers are purchasing larger and more luxurious boats.

      o Torque  Engineering  believes there is increasing  interest in upgrading
        existing  boats through  equipment-based  accessories  and  repowerment.
        Torque  Engineering's  research  indicates that  approximately 1% of the
        existing boat engines in use are replaced on an annual basis.

                                       5
<PAGE>

      o Women  are  increasingly  influencing  or making  purchasing  decisions.
        Torque Engineering  estimates there are currently  approximately 500,000
        women  powerboat  owners in the U.S.  and that the number is expected to
        grow.

MANUFACTURING

      Torque  V-12   engines   were   developed   and  are  produced  in  Torque
Engineering's Elkhart, Indiana manufacturing facility using  computer-controlled
machining centers.

      In November 1999, Torque Engineering completed  installation of additional
computer-controlled  machining centers it uses to manufacture Torque V-12 engine
components.  Haas Automation  manufactured these additional  computer-controlled
machining centers and Torque  Engineering  leased the machining centers from CNC
Associates, Inc.

      The Torque  V-12  engine is  machined  and also  hand-assembled  by Torque
Engineering's employees at the Elkhart, Indiana production facility. Each engine
is tested on a dynamometer  and research is conducted using a 41 foot test boat.
Management  believes that this  manufacturing  arrangement will be sufficient as
production begins to meet consumer demand for the Torque V-12.

RAW MATERIALS

      Torque  Engineering  plans to produce  internally as many of the necessary
components for the Torque V-12 as possible.  Torque Engineering expects that the
computer-controlled  manufacturing  machines  acquired  in  November  1999  will
facilitate  the internal  component  production  process.  Additionally,  Torque
Engineering  utilizes components acquired in May 1999 as part of the acquisition
of IPSL, Inc. However, subcontractors and supplies will still be needed for some
components,  such as crankshafts,  electronic  controls,  and raw aluminum block
castings.  Torque Engineering  solicits  competitive quotes for these components
whenever  possible.  Whenever  the  price of a  component  can be  substantially
reduced by volume buying Torque  Engineering plans to do so. Torque  Engineering
believes  that adequate  sources of supply exist and will continue to exist,  at
competitive prices, for all of Torque Engineering's raw material requirements.

MAJOR CUSTOMERS

      For the year  ended  December  31,  2001,  approximately  98.0% of  Torque
Engineering's  revenues were generated  from sales to two  customers,  Cigarette
Racing Team,  Inc and Douglas Marine Corp. For the year ended December 31, 2000,
approximately 97.5% of Torque  Engineering's  revenues were generated from sales
to one customer, Cigarette Racing Team, Inc. We cannot assure you that Cigarette
Racing Team or Douglas Marine Corp, Inc. will continue to be major customers.

MARKETING

      Torque  Engineering  currently markets its Torque V-12 engines on a direct
sale basis  through  leads  derived  from trade  shows,  magazine  articles  and
personal  contacts  of our  employees  in the  power  boating  industry.  Torque
Engineering  markets its  products not only to boat  manufacturers,  but also to
pleasure boat users in an effort to increase demand through consumer requests to
boat  manufacturers  for the Torque V-12 as an  available  power plant in luxury
pleasure craft.

DISTRIBUTION

      Torque  Engineering does not currently have a distribution  network set up
for the Torque  V-12.  If Torque  Engineering's  sales  increase  substantially,
Torque  Engineering  may in the  future  establish  Service  Representatives  in
various areas to service its products.  Torque Engineering believes that it will
be able to  adequately  ship the Torque V-12 to  manufacturers  who purchase the
Torque V-12 through normal shipping avenues.

COMPETITION

      Torque  Engineering  anticipates that it will face intense  competition in
the market in which  Torque  Engineering  will  produce and sell its Torque V-12
engines.  The marine  engine  production  market  generally has high barriers to
entry due to the capital  investment  and  technological  expertise  required in
manufacturing  marine  engines.  As  a  result,  the  marine  engine  market  is
concentrated  among large U.S.,  Japanese and European  manufacturers.  Industry
estimates are that U.S.-based Brunswick Corporation  maintains  approximately 70
to 80 percent of the stern drive  market  segment  with Volvo Penta  Corporation

                                       6
<PAGE>

enjoying a large portion of the remaining  market share.  In the outboard engine
market,  management  believes  Brunswick and Outboard Motor Corporation  control
roughly 80 percent of the market.

      In the niche  market  for  high-powered  marine  engines  in which  Torque
Engineering will participate, there are several manufacturers who build gasoline
engines  with 700 or more  horsepower,  including  Volvo  Penta  and  Brunswick.
Management's experience is that generally these engines are either modified V-8s
with enhanced aspiration such as turbo-chargers,  or diesel fueled engines. As a
result,  Torque  Engineering  does not believe that these  engines are competing
with the Torque V-12 on an identical product line basis.

      Nonetheless,  Torque  Engineering's  competitors,  including Brunswick and
Volvo  Penta are  large,  vertically  integrated  companies  that  have  greater
resources, including financial resources, than Torque Engineering.  Economies of
scale give these  companies  distinct  advantages  in the market.  For  example,
Brunswick and its subsidiaries have established dealer networks that offer sales
as well as service and  warranty  repair and  production  schedules  afford them
larger margins than other competitors in the market. The vertical integration of
Torque  Engineering's  competitors  allow  them  to  offer  consumers  different
combinations of boat, engine and stern drive packages at various pricing levels.

      There is no assurance that Torque Engineering will be able to successfully
compete  against these companies in the stern drive segment of the marine engine
market.

INTELLECTUAL PROPERTY

      In developing its business strategy for the Torque V-12 Torque Engineering
expects to rely on  patented  and other  proprietary  technology.  In  addition,
Torque  Engineering  expects  to rely on  confidentiality  agreements  and other
contractual  covenants  to  establish  and  protect  its  technology  and  other
intellectual  property  rights.  Wherever  legally  permissible and appropriate,
Torque  Engineering  plans  to file  patent  applications  and to  register  its
trademarks.

      Torque  Engineering has registered the trademark "Torque" for its products
and also holds a U.S.  patent for its Torque V-12  engines'  lubrication  system
which patented system has a substantial  impact on the useful life of the Torque
V-12.  This patent was granted on August 18, 1998 to Torque  Engineering  as the
assignee of Raymond B. Wedel and Richard Moser. Torque Engineering cannot assure
you that any future patent  applications it submits will result in patents being
issued or that,  if issued,  such  patents or  pre-existing  patents will afford
adequate protection against  competitors with similar  technology.  In addition,
Torque Engineering's competitors may independently develop superior technology.

      Torque  Engineering  also cannot assure you that any patents  issued to or
licensed by Torque  Engineering will not be infringed upon or designed around by
others, that others will not obtain patents that Torque Engineering will need to
license  or  design  around  or that  Torque  Engineering's  products  will  not
inadvertently  infringe  upon the valid patents of others.  In addition,  Torque
Engineering  cannot  assure you that the Torque  Engineering  patent will not be
invalidated or that Torque  Engineering  will have adequate funds to finance the
high cost of defending or prosecuting patent validity or infringement issues.

RESEARCH AND DEVELOPMENT

      Torque Engineering maintains an ongoing research & development program. In
September  1999,  Torque  Engineering  completed a private  placement of 461,540
shares  of  common  stock to raise a total of  $1,500,000  for  working  capital
purposes,  including continued  development of the Torque V-12 engine. A portion
of the  proceeds of this private  offering  were used as a down payment to lease
the  computer-controlled  manufacturing equipment Torque Engineering uses in the
production of its Torque V-12 engines.  In 2000,  Torque  Engineering  completed
private  placements  of  578,359  shares  of  common  stock  to raise a total of
$913,000 of which a portion  supported  ongoing  research & development with the
balance used for overhead and the  purchase of raw  materials.  In 2001,  Torque
Engineering  continued  advancing and refining the Torque V-12 engine design and
plan to offer a 1,450 horsepower version of the V-12.

      Management  believes that Glaval  Corporation  spent  significant funds on
research  and  development  prior  to  IPSL's  acquisition  of  the  assets  and
proprietary   rights  to  develop  and  manufacture   the  Torque  V-12.   These
expenditures  were  included  as part of the  acquisition  price and will not be
passed on to customers.  The portion of funds spent after May 1, 1999 to convert
to a  production  line is  considered  overhead  that will be prorated  over the
manufacturing  cost of the V-12 engines in accordance  with  generally  accepted
accounting principles.

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<PAGE>

ENVIRONMENTAL AND REGULATORY MATTERS

      Torque  Engineering is subject to regulation under various federal,  state
and local laws relating to the  environment  and to employee  safety and health.
These laws include those relating to the  generation,  storage,  transportation,
disposal and emission into the environment of various substances, those relating
to  drinking  water  quality  initiatives,  and  those  which  allow  regulatory
authorities  to compel  or seek  reimbursement  for  clean-up  of  environmental
contamination  at its owned or operated sites and at facilities  where its waste
is  or  has  been  disposed.  Permits  are  required  for  operation  of  Torque
Engineering's  business, and these permits are subject to renewal,  modification
and, in certain circumstances,  revocation.  Torque Engineering believes that it
is in substantial compliance with environmental laws and permit requirements.

      The EPA has adopted  regulations  governing emissions from marine engines.
The regulations relating to outboard engines phase in over nine years, beginning
in model year 1998 and  concluding in model year 2006.  For personal  watercraft
the  regulations  phase in over eight  years,  beginning  in model year 1999 and
concluding  in model year 2006.  Marine  engine  manufacturers  are  required to
reduce hydrocarbon emissions from outboard engines, on average, by 8.3% per year
beginning with the 1998 model year,  and emissions  from personal  watercraft by
9.4%  per  year  beginning  in  model  year  1999.  These  regulations  apply to
two-stroke  engines  and to  personal  watercraft,  such as jet skis.  Since the
Torque V-12 is a four-stroke  engine,  Torque  Engineering does not believe that
compliance with these standards will have a material  adverse effect on the cost
of its engine products or its future sales.

      Certain states, including California, have adopted environmental laws that
require  marine  engines  to  comply  with  future  federal  annual  hydrocarbon
emissions  standards  more  quickly  than  federal law  requires.  While  Torque
Engineering  has not been able to fully  assess the impact that these  standards
will have on its  business,  Torque  Engineering  does not  believe  these  more
stringent state  requirements will have a material adverse effect on the cost of
its engine products or its future sales.

      Torque  Engineering  cannot  predict  the  environmental   legislation  or
regulations  that may be enacted in the future or how existing or future laws or
regulations will be administered or interpreted.  Compliance with more stringent
laws  or  regulations,  as well as more  vigorous  enforcement  policies  of the
regulatory  agencies or stricter  interpretation  of existing  laws, may require
expenditures by Torque Engineering.

EMPLOYEES

      As of April 15, 2002, Torque Engineering employed a total of 8 people, all
of which are employed full time.

CERTAIN BUSINESS RISKS

      Torque  Engineering is subject to various risks which may materially  harm
its  business,  financial  condition  and  results  of  operations.  You  should
carefully  consider the risks and  uncertainties  described  below and the other
information  in this filing  before  deciding to purchase  Torque  Engineering's
common stock.  These are not the only risks and  uncertainties  that the Company
faces.  If  any  of  these  risks  or  uncertainties   actually  occur,   Torque
Engineering's  business,  financial  condition  or  operating  results  could be
materially  harmed.  In that case,  the  trading  price of Torque  Engineering's
common stock could decline and you could lose all or part of your investment.

      WE HAVE HISTORICALLY LOST MONEY AND LOSSES MAY CONTINUE IN THE FUTURE

      We have  historically  lost money. In the year ended December 31, 2001 and
year ended  December  31,  2000,  we sustained  losses from  operations  of $8.5
million  and $2.8  million,  respectively.  Future  losses  are likely to occur.
Accordingly,  we may experience  significant liquidity and cash flow problems if
we are not able to raise additional  capital as needed and on acceptable  terms.
No assurances can be given that we will be successful in reaching or maintaining
profitable operations.

      WE WILL NEED TO RAISE ADDITIONAL CAPITAL TO FINANCE OPERATIONS

      Our operations have relied almost  entirely on external  financing to fund
our  operations.  Such  financing has  historically  come from a combination  of
borrowings  from and sale of common stock to third parties and funds provided by
certain officers and directors. We will need to raise additional capital to fund
our anticipated  operating  expenses and future  expansion.  Among other things,
external  financing  will be required to cover our  operating  costs.  We cannot
assure you that financing  whether from external sources or related parties will
be available if needed or on  favorable  terms.  The sale of our common stock to

                                       8
<PAGE>

raise capital may cause dilution to our existing shareholders.  Our inability to
obtain  adequate   financing  will  result  in  the  need  to  curtail  business
operations.  Any of these events would be materially harmful to our business and
may result in a lower stock price.

      THERE IS  SUBSTANTIAL  DOUBT  ABOUT OUR  ABILITY  TO  CONTINUE  AS A GOING
      CONCERN DUE TO RECURRING LOSSES AND WORKING CAPITAL SHORTAGES, WHICH MEANS
      THAT WE MAY NOT BE ABLE TO CONTINUE OPERATIONS UNLESS WE OBTAIN ADDITIONAL
      FUNDING

      The report of our  independent  accountants  on our  December 31, 2001 and
December  31,  2000  financial  statements  included  an  explanatory  paragraph
indicating  that there is  substantial  doubt about our ability to continue as a
going concern due to recurring losses and working capital shortages. Our ability
to  continue  as a going  concern  will be  determined  by our ability to obtain
additional funding. Our financial statements do not include any adjustments that
might result from the outcome of this uncertainty.

      WE HAVE A LIMITED OPERATING HISTORY

      Torque  Engineering  is  a  manufacturing  business  that  has  a  limited
operating  history.  Limited  production  commenced  in late 2000 with the first
Torque V-12 engines  being shipped in the fourth  quarter.  Prior to May 1999 we
were an inactive public company originally formed for the purpose of purchasing,
developing  and  operating  oil and gas  leases.  Our  business  strategy  is to
continue to transition Torque Engineering away from the oil and gas business and
to  manufacture  an  aluminum,  gasoline-powered  V-12  engine  for  use  in the
performance  pleasure boat marine industry.  We expect to incur operating losses
and negative  operating  cash flows as we begin to increase our  operations.  We
cannot  assure you that we will succeed in our  transition  or that we will have
sufficient funds to continue operations until we reach profitability.

      WE  CANNOT  ASSURE  YOU  THAT  THE  MARKET  FOR THE  TORQUE  V-12  WILL BE
      SUFFICIENT TO COVER OUR OPERATING EXPENSES

      Sales  of  the  Torque  V-12  are  currently  targeted  toward  owners  of
performance  pleasure craft.  This market is a limited niche market in which the
price of the boats for which the  Torque  V-12 is  designed  range in price from
$250,000 to greater than $1,000,000.  We cannot assure you that sales of engines
in this  market  will be  sufficient  to allow us to  become  profitable  in the
future.

      WE CANNOT  ASSURE YOU THAT WE WILL BE ABLE TO ADAPT THE TORQUE V-12 TO ANY
      OTHER USE OUTSIDE OF THE MARINE ENGINE MARKET

      Our current business strategy is to market and sell the Torque V-12 in the
high-performance marine engine industry. Because this is a limited niche market,
we also anticipate we will attempt to adapt the Torque V-12 to other  industries
and uses in order for us to increase our future profitability.  We cannot assure
you  that we will be able to adapt  the  Torque  V-12 to other  uses or to other
industries.

      WE HAVE NOT YET MANUFACTURED THE TORQUE V-12 ON A FULL PRODUCTION BASIS

      Our  current  business  strategy  is to  manufacture  the Torque V-12 on a
production  basis,  as opposed to customizing the Torque V-12 per our customers'
requests. In 1999 and 2000 we continued the tooling, fixturing,  programming and
installation of equipment in preparation for production.  The initial production
engines  we  completed  and  shipped in the later part of 2000 and early part of
2001.  Due to  financing  shortages  throughout  2001,  we have not yet begun to
implement  quantity  production of the Torque V-12 and cannot assure you that we
will not experience initial or recurring quality control or cost problems.

      WE HAVE NOT YET  ESTABLISHED  A FULL  DISTRIBUTION  CHANNEL FOR THE TORQUE
      V-12

      We  currently  market the Torque V-12 through OEM boat  manufacturers,  an
Internet  website,  trade  show  appearances,  magazine  articles  and  personal
contacts of the members of our company in the pleasure craft marine industry. We
cannot assure you that these marketing efforts will prove sufficient to allow us
to be profitable.

                                       9
<PAGE>

      WE COULD FAIL TO ATTRACT OR RETAIN KEY PERSONNEL

      Our  success   largely  depends  on  the  efforts  and  abilities  of  key
executives, including Richard D. Wedel, our Chief Executive Officer and Chairman
of the Board;  Raymond B. Wedel, Jr., our President and a Director;  and I. Paul
Arcuri, our Chief Financial Officer and a Director.  The loss of the services of
Messrs.  Wedel,  Arcuri and/or Wedel,  Jr., could  materially  harm our business
because of the cost and time necessary to replace and train a replacement.  Such
a loss would also divert management  attention away from operational  issues. We
do not have employment agreements with Messrs. Wedel, Arcuri or Wedel, Jr. We do
not  presently   maintain  a  key-man  life  insurance   policy  covering  these
individuals.

      WE EXPECT INTENSE COMPETITION

      Although  we are not aware of any  other  gasoline-powered  aluminum  V-12
engine with performance  characteristics  similar to the Torque V-12. We believe
that if the Torque V-12 becomes popular with consumers, other manufacturers will
design and market their own aluminum  V-12  engines that will  directly  compete
with the Torque V-12. Many of our competitors  have  significantly  greater name
recognition  and financial and other  resources than we do. We cannot assure you
that we will  succeed  in the  face of  strong  competition  from  other  engine
manufacturers.

      NO ASSURANCE OF TECHNOLOGICAL SUCCESS

      Our ability to commercialize  our products is dependent on the advancement
of our existing technology. In order to obtain and maintain a significant market
share we will  continually  be required to make advances in  technology.  Due to
cash shortages, we did not expend any money in research and development in 2001.
We cannot  assure you that our research and  development  efforts will result in
the  development of such technology on a timely basis or at all. Any failures in
such  research and  development  efforts could result in  significant  delays in
product  development and have a material  adverse effect on us. We cannot assure
you that we will  not  encounter  unanticipated  technological  obstacles  which
either delay or prevent us from completing the development of our products. Such
obstacles could have a material adverse effect on us.

      WE DO NOT MAINTAIN ANY PRODUCT LIABILITY INSURANCE, WHICH MAY EXPOSE US TO
      THE EXPENSE OF DEFENDING ANY LIABILITY CLAIMS

      The  manufacture  and sale of our  products  entails  the risk of  product
liability  claims.  In addition,  certain  companies  with which we do or may do
business may require financial assurances of product reliability. At the present
time we do not maintain product liability insurance.


      EXISTING  SHAREHOLDERS WILL EXPERIENCE  SIGNIFICANT DILUTION FROM OUR SALE
      OF SHARES UNDER THE EQUITY LINE OF CREDIT AND THE CONVERSION OF DEBENTURES

      On November 9, 2001,  we entered  into an equity line of credit  agreement
pursuant  to which we may sell shares of our common  stock to an investor  for a
purchase  price of up to  $5,000,000.  For each share of common stock  purchased
under the equity line of credit, the investor will pay 91% of the average of the
2 lowest  closing  bid prices on which our common  stock is traded  during the 5
days immediately  following a notice date. In addition, on November 14, 2001, we
sold $300,000 of convertible  debentures that are convertible into shares of our
common stock.  The sale of shares  pursuant to our equity line of credit and the
conversion  of  debentures  into shares of our common stock will have a dilutive
impact on our stockholders. As a result, our net income per share could decrease
in future  periods,  and the market price of our common stock could decline.  In
addition,  the lower our stock price is the more shares of common  stock we will
have to issue  under the equity  line of credit to draw down the full amount and
the more  shares of common  stock we will have to issue upon  conversion  of the
debentures.  If our stock price is lower, then our existing  stockholders  would
experience greater dilution.

      THE   INVESTOR   UNDER  THE  LINE  OF  CREDIT   WILL  PAY  LESS  THAN  THE
      THEN-PREVAILING MARKET PRICE OF OUR COMMON STOCK

      The  common  stock to be issued  under the equity  line of credit  will be
issued at a 9% discount  to the average of the two lowest  closing bid prices on
the  Over-the-Counter  Bulletin  Board or other  principal  market  on which our
common stock is traded for the five days immediately  following the notice date.
These discounted sales could cause the price of our common stock to decline.

                                       10
<PAGE>

      THE SELLING STOCKHOLDERS PURSUANT TO AN EFFECTIVE  REGISTRATION  STATEMENT
      INTEND TO SELL THEIR SHARES OF COMMON STOCK IN THE MARKET, WHICH SALES MAY
      CAUSE OUR STOCK PRICE TO DECLINE

      On December 27, 2001, the Securities and Exchange  Commission declared our
Registration Statement on Form SB-2 effective. The selling stockholders included
in that registration statement intend to sell in the public market the shares of
common  stock  registered  in that  offering.  That means that up to  19,025,000
shares of common stock, the number of shares registered in that offering, may be
sold. Such sales may cause our stock price to decline.

ITEM 2.  DESCRIPTION OF PROPERTY

      Torque Engineering's business office and manufacturing facility is located
at 2932 Thorne Drive, Elkhart, Indiana 46514. Torque Engineering leases a 33,000
square foot  industrial  type metal building on  approximately 4 1/2 acres in an
industrial park area in Elkhart, Indiana. The initial term of lease is for three
years.  The lease provides Torque  Engineering the option to renew the lease for
two  successive  three  year  terms.  Torque  Engineering  also has an option to
acquire the property  during the initial term of the lease.  Torque  Engineering
believes that the property is sufficient for its current operating plans.

ITEM 3.  LEGAL PROCEEDINGS

      On November 26, 2001,  Torque  Engineering  was named in  litigation  with
Patrick  Patel and Peter  Hledin in the  Superior  Court of New  Jersey,  Hudson
County.  Messrs. Patel and Hledin sued Torque Engineering for breach of warranty
and  under  New  Jersey  Fraud   regarding   alleged   deficiencies   in  Torque
Engineering's engines and transmissions sold to the plaintiffs.  On February 22,
2002,  Torque  Engineering  filed a third party  claim  against  Douglas  Marine
Corporation,  the vendor to whom the engines  were sold,  alleging,  among other
things,  that any damage  resulting  to the engines was caused by  defective  or
negligent  "rigging." Due to the  preliminary  status of the lawsuit,  it is not
possible to evaluate the  likelihood of an  unfavorable  outcome or estimate the
extent of potential loss.

      On March 2, 2002,  Torque  Engineering  was named in litigation with Crown
Financial in the Texas court system.  Crown  Financial  sued Torque  Engineering
regarding alleged  non-payment under a security agreement against Douglas Marine
Corporation  and  Torque  Engineering.  Due to  the  preliminary  status  of the
lawsuit, it is not possible to evaluate the likelihood of an unfavorable outcome
or estimate the extent of potential loss.

ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

         None.

                                       11
<PAGE>

                                     PART II


ITEM 5.  MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

      PRINCIPAL MARKET OR MARKETS.  Torque Engineering common stock is traded in
the  over-the-counter  market,  and is presently quoted on the  Over-the-Counter
Bulletin Board under the symbol "TORQ."  Trading on the OTC Bulletin Board began
on May 14, 1998 and prior to October 22, 1999 the trading symbol was "QTSN". The
following  table sets  forth the high and low bid prices of the common  stock on
the OTC Bulletin Board during each quarter from January 1, 2000 through December
31, 2001. These prices reflect interdealer  quotations,  without retail mark-up,
mark-down  or  commissions,  and  may  not  represent  prices  at  which  actual
transactions occurred.

                                                    BID
                                        ----------------------------
                QUARTER ENDED               HIGH            LOW
                ---------------------   -------------   ------------

                March 31, 2000              6.000          1.125
                June 30, 2000               4.000          1.000
                September 30, 2000          4.125          1.437
                December 31, 2000           4.125          0.656

                March 31, 2001              1.250          1.250
                June 30, 2001               1.010          0.800
                September 30, 2001          0.060          0.400
                December 31, 2001           0.360          0.330

      APPROXIMATE  NUMBER OF HOLDERS OF COMMON  STOCK.  The number of holders of
record of Torque  Engineering  common stock at April 15, 2002 was  approximately
44, which does not include all beneficial shareholders.  This includes 4,681,351
shares held by brokers.

      DIVIDENDS.  Holders of Torque  Engineering  common  stock are  entitled to
receive  dividends  if declared by the board of  directors.  No dividends on the
common stock have been paid by Torque  Engineering  since  inception  and Torque
Engineering does not anticipate paying dividends in the foreseeable future.

      RECENT  SALES OF  UNREGISTERED  SECURITIES.  During the past three  years,
Torque  Engineering  has sold  securities in the  transactions  described  below
without  registering  the securities  under the  Securities Act of 1933.  Unless
otherwise  indicated,  no underwriter,  sales or placement agent was involved in
the transactions.

      In March 1999, a total of 4,870,000  shares of common stock were issued to
fifteen individuals,  including Torque Engineering's current president,  Raymond
B. Wedel, Jr., current chief executive officer,  Richard D. Wedel,  current vice
president and chief financial  officer,  I. Paul Arcuri,  and current secretary,
Donald  Christensen.  Those shares were issued in reliance on the exemption from
registration provided by Section 4(2) of the Securities Act of 1933.

      In May  1999,  1,500,000  shares  of common  stock  were  issued to Michel
Attias,  the sole  shareholder of IPSL,  Inc., in exchange for all of the issued
and  outstanding  shares of IPSL  capital  stock.  These  shares  were issued in
reliance on the  exemption  from  registration  provided by Section  4(2) of the
Securities Act of 1933.

      In September  1999, a total of 461,540  shares of common stock were issued
to Clement M. Lange, Glen A. Lange, Joey Lange and Sheila Wendholt at a price of
$3.25 per share or a total  amount of  $1,500,005.  These  shares were issued in
reliance on the  exemption  from  registration  provided by Section  4(2) of the
Securities Act of 1933.

      In November 1999, Torque Engineering issued options to purchase a total of
80,000 shares of common stock to various Torque Engineering  employees under the
Torque Engineering 1999 stock option plan. These stock options vest at a rate of
20% per year beginning one year after the grant of the options.  On November 12,
1999,  the board of  directors  approved the  immediate  vesting of 20% of those
stock options issued to all but one of the Torque Engineering employees who were
granted an option.  That employee's option vests 20% on the one year anniversary
of the option grant.  The exercise  price of these stock options is $1.80625 per
share.

                                       12
<PAGE>

      In November 1999,  Torque  Engineering  issued options to purchase  10,000
shares of  common  stock to the  following  members  of the board of  directors:
Richard D. Wedel,  Raymond B. Wedel, Jr., and Donald Christensen.  These options
are  immediately  exercisable at a price of $3.25 per share for a period of five
years from the date of the option grant. Torque Engineering also granted I. Paul
Arcuri,  its chief financial  officer,  an option to purchase  100,000 shares of
common stock at an exercise price of $3.25 per share. Mr. Arcuri's option vested
one-third at the time of the option  grant,  and the remainder  vests  one-third
twelve  months  from the date of the option  grant,  and  one-third  twenty-four
months from the date of the option grant. Torque Engineering also granted Donald
Christensen,  an officer and a director,  an option to purchase 30,000 shares of
common  stock at an  exercise  price of $3.25  per share  with the same  vesting
provisions as for Mr. Arcuri's option.

      In  December  1999,  a total of 1,400  shares were issued to Mark Sorg and
Eugene Sobczak in exchange for marketing services provided to Torque Engineering
in the amount of $2,688.  These shares were issued in reliance on the  exemption
from registration provided by Section 4(2) of the Securities Act of 1933.

      In February 2000, Torque  Engineering  issued an option to purchase 10,000
shares of common stock to an employee  under the Torque  Engineering  1999 stock
option plan. This stock option was immediately 20% vested and vests at a rate of
20% per year thereafter.  The exercise price of the stock option is $1.80625 per
share.

      In June 2000,  a total of 266,667  shares of common  stock were  issued to
Clement  M. Lange at a price of $1.50 per share or a total  amount of  $400,000.
These shares were issued in reliance on the exemption from registration provided
by Section 4(2) of the Securities Act of 1933.

      In October  2000,  a total of 4,000  shares of common stock were issued to
Glen S. Graber at a price of $3.25 per share or a total amount of $13,000. These
shares were issued in reliance on the exemption  from  registration  provided by
Section 4(2) of the Securities Act of 1933.

      In November 2000,  Torque  Engineering  issued options to purchase  10,000
shares of  common  stock to the  following  members  of the board of  directors:
Richard D. Wedel, Raymond B. Wedel, Jr., Donald Christensen,  I. Paul Arcuri and
Clement M. Lange. These options are immediately  exercisable at a price of $3.25
per share for a period of five years from the date of the option grant.

      In November 2000, a total of 307,692 shares of common stock were issued to
Clement M. Lange at a price of $1.625 per share or a total  amount of  $500,000.
These shares were issued in reliance on the exemption from registration provided
by Section 4(2) of the Securities Act of 1933.

      In February 2001, a total of 125,000 shares of common stock were issued to
Messrs.  Richard D. Wedel, Raymond B. Wedel, Jr. and Michel Attias at a price of
$2.00 per share or a total  amount of  $250,000.  These  shares  were  issued in
reliance on the  exemption  from  registration  provided by Section  4(2) of the
Securities Act of 1933.

      In May 2001,  a total of 35,543  shares of  common  stock  were  issued to
Michael  Bennett  at a price of $1.16 per share or a total  amount of $41,230 in
exchange  for  services  rendered.  These  shares were issued in reliance on the
exemption  from  registration  provided by Section 4(2) of the Securities Act of
1933.

      In May 2001,  a total of 180,000  shares of common  stock  were  issued to
NuMark  Capital  Corporation  at a price of $1.07 per share or a total amount of
$192,600.   These  shares  were  issued  in  reliance  on  the  exemption   from
registration provided by Section 4(2) of the Securities Act of 1933.

      In November 2001, a total of 200,000 shares of common stock were issued to
Kenneth Hersh at a price of $0.25 per share or a total amount of $50,000.  These
shares were issued in reliance on the exemption  from  registration  provided by
Section 4(2) of the Securities Act of 1933.

      In November  2001, a total of 20,000 shares of common stock were issued to
Kenneth  Hersh at a price of $0.25  per  share or a total  amount  of  $5,000 in
exchange  for  services  rendered.  These  shares were issued in reliance on the
exemption  from  registration  provided by Section 4(2) of the Securities Act of
1933.

      In November 2001, a total of 625,000 shares of common stock were issued to
Yorkville  Advisors  Management  LLC at a price  of $0.42  per  share or a total
amount of $262,500 in exchange for services  rendered.  These shares were issued
in reliance on the exemption from  registration  provided by Section 4(2) of the
Securities Act of 1933.

                                       13
<PAGE>

      In November 2001, Torque Engineering issued Convertible  Debentures in the
original  principal  amount  of  $300,000.   These  Convertible  Debentures  are
convertible  into shares of common stock at a price equal to 120% of the closing
bid price of the common  stock as of the date of  purchase or 80% of the average
of the 4 lowest  closing bid prices of the common  stock for the 5 trading  days
immediately  preceding the conversion date. These Convertible  Debentures accrue
interest  at 6% per year  and are  convertible  at the  holder's  option.  These
Convertible  Debentures have a term of 5 years. At Torque Engineering's  option,
these  Convertible  Debentures  may be paid in cash or converted  into shares of
common stock on the fifth anniversary unless earlier converted by the holder.

      In January 2002, a total of 250,000  shares of common stock were issued to
V.T.  Lincoln  Financial  Corporation  at a price of $0.51  per share or a total
amount of $127,500 in exchange for services  rendered.  These shares were issued
in reliance on the exemption from  registration  provided by Section 4(2) of the
Securities Act of 1933.

      In January  2002,  a total of 5,000  shares of common stock were issued to
William R. A.  Kleysteuber,  III at a price of $0.30 per share or a total amount
of $1,500 in  exchange  for  services  rendered.  These  shares  were  issued in
reliance on the  exemption  from  registration  provided by Section  4(2) of the
Securities Act of 1933.

      In March,  2002, a total of 900,000  shares of common stock were issued to
Peter  Cardillo  at a price of $0.09 per share or a total  amount of  $81,000 in
exchange  for  services  rendered.  These  shares were issued in reliance on the
exemption  from  registration  provided by Section 4(2) of the Securities Act of
1933.

      In March,  2002, a total of 105,000  shares of common stock were issued to
Kenneth  Hersh at a price of $0.08  per  share or a total  amount  of  $8,400 in
exchange  for  services  rendered.  These  shares were issued in reliance on the
exemption  from  registration  provided by Section 4(2) of the Securities Act of
1933.

      The  stock  options  described  above  were  granted  in  reliance  on the
exemption  from  registration  provided by Section 4(2) of the Securities Act of
1933.

      The facts relied on to make the exemption  from  registration  provided by
Section 4(2) of the  Securities Act of 1933 available for the sale of securities
discussed in paragraphs 1 through 10 above were:

      o the limited number of purchasers,

      o the sophistication or accreditation of the purchasers,

      o their access to material information about Torque Engineering,

      o the information provided to Torque Engineering by them,

      o the absence of any general solicitation or advertising, and

      o restrictions  on transfer of the securities  issued to them as indicated
        by a legend on the certificates representing such securities.

ITEM 6.  MANAGEMENT'S DISCUSSION AND ANALYSIS

      The  following   information  should  be  read  in  conjunction  with  our
consolidated  financial  statements and the notes thereto appearing elsewhere in
this filing.

      Certain  statements  within this Item and throughout this Annual Report on
Form  10-KSB  and  the  documents   incorporated  herein  are   "forward-looking
statements"  as  described  in  the  "safe  harbor"  provision  of  the  Private
Securities  Litigation Reform Act of 1995. These statements  involve a number of
risks and  uncertainties  and actual results could differ  materially from those
projected.

                                       14
<PAGE>

OVERVIEW

      Torque  Engineering  is a company  that  continues  to devote its  efforts
toward  establishing  itself as a manufacturer  of a  lightweight,  high-powered
marine  engine  built on a  production  line  basis for the  luxury  performance
pleasure craft  industry.  Torque  Engineering  was a development  stage company
through  September  30,  2000,  which has  devoted  most of its  efforts  toward
establishing its planned transition from an inoperative oil and gas company to a
manufacturer of a lightweight,  high-powered marine engine built on a production
line basis for the luxury  performance  pleasure boat industry.  During the year
ended  December 31, 2000,  we became an  operating  company.  For the year ended
December 31, 2001 Torque Engineering had a net loss $8,534,825.  We had negative
cash flows used in operating activities of $1,126,718 and an accumulated deficit
of $12,623,761  for the year ended  December 31, 2001.  These  conditions  raise
substantial  doubt  about our ability to  continue  as a going  concern.  Torque
Engineering's  financial  statements do not include any  adjustments  that might
result from the outcome of this uncertainty.

      Torque  Engineering's  ability to continue as a going concern is dependent
upon  management's  ability to increase  sales of the Torque V-12 engines and to
obtain adequate  levels of additional  financing.  Management  believes that its
current  efforts  will  provide  for Torque  Engineering  to continue as a going
concern. We cannot assure you, however, that we will be successful.

RESULTS OF OPERATIONS

      SALES

      We had  sales,  net of  $295,715  for the year  ended  December  31,  2001
compared to sales,  net of $718,801  for the year ended  December  31,  2000,  a
decrease of 58.9%. This decrease is substantially  attributable to our sale of 3
Torque V-12 engines for the year ended  December  31,  2001,  as compared to our
sale of six Torque V-12 engines in the same period in 2000.

      COST OF SALES

      We had cost of sales of $1,482,593  for the year ended  December 31, 2001,
as compared to  $1,607,494  for the year ended  December 31, 2000, a decrease of
7.8%. This decrease is primarily  attributable to reduced  operating  levels, as
well as a reduction in materials, labor and overhead.

      OPERATING EXPENSES

      We had operating  expenses of $7,076,205  for the year ended  December 31,
2001,  as  compared to  $1,863,434  for the year ended  December  31,  2000,  an
increase of 279.7%.  This increase in our operating  expenses for the year ended
December 31, 2001 is primarily  attributable  to a loss on  impairment  of fixed
assets  in  the  amount  of  $4,764,258   and  an  increase  in  consulting  and
professional fees.

      NET LOSS

      We had a net  loss  from  operations  and  before  extraordinary  items of
$8,534,825  for the year ended  December 31, 2001, as compared to $2,752,608 for
the year ended  December  31,  2000,  an increase of 210.1%.  This is  primarily
attributable to a loss on impairment of fixed assets in the amount of $4,764,259
taken in the year ended  December  31,  2001,  decreased  sales,  an increase in
consulting and professional  fees,  physical inventory loss, and financing costs
associated with our accounts receivable factoring arrangement.

      We had depreciation  expense of $1,124,641 for the year ended December 31,
2001,  as  compared  to  $1,118,079  for the year  ended  December  31,  2000 in
connection with property acquired as part of Torque Engineering's acquisition of
IPSL and used in connection  with the Company's  production-line  manufacture of
the Torque V-12 engines.

                                       15
<PAGE>

      MARKETABLE SECURITIES

      We had net unrealized gain on marketable securities of $2,426 for the year
ended  December  31,  2001,  as compared  to an  unrealized  loss on  marketable
securities of $30,932 for the year ended December 31, 2000.

      LIQUIDITY AND CAPITAL RESOURCES

      Management  anticipates  that the capital  requirements  to conduct Torque
Engineering's business plan will be significant and we cannot assure you that we
will be able to obtain  those  funds or obtain  the  required  capital  on terms
favorable  to us. We  anticipate  that we will  require  additional  capital  to
implement our business plan. We plan to obtain such capital  through the sale of
additional  securities,  financing from third parties,  and funds generated from
the sale of the Torque V-12  engine.  Management  further  anticipates  that any
funds obtained will be used for working capital,  administrative  expenses,  and
research and  development of the Torque V-12 engine for other  potential uses in
the  marine  industry,  as well as other  industries.  If we are  unable to sell
additional securities, obtain financing from third parties, or if our funds from
ongoing  operations are insufficient,  it is unlikely that we will continue as a
going concern.

      As discussed in Note 3 to our 2001 financial  statements,  on May 2, 2001,
we entered into an accounts  receivable  financing  agreement.  Amounts received
were utilized for inventory and working capital.

      As discussed in Note 9 to our 2001 financial  statements,  on November 14,
2001, we sold $300,000 of 6% Convertible Subordinated  Debentures,  due November
13,  2006  to  Cornell  Capital  Partners,  L.P.  After  expenses,  we  received
approximately  $220,000 from such offering. We intend to use the proceeds of the
offering  for  working  capital  purposes  and  to  pay  certain  administrative
expenses.

      As discussed in Note 10 to our 2001 financial  statements,  on November 9,
2001,  we entered into an equity line of credit  agreement  pursuant to which we
may sell shares of our common stock to an investor for a purchase price of up to
$5,000,000.  For each share of common stock  purchased  under the equity line of
credit,  the  investor  will pay 91% of the average of the 2 lowest  closing bid
prices  on which  our  common  stock is  traded  during  the 5 days  immediately
following the notice date.  Unless  waived by the  investor,  the amount of each
advance is subject to a monthly maximum amount of  $208,333.33.  As of April 15,
2002, we have received  $50,000 in gross proceeds  ($42,000 in net proceeds) and
issued 806,452  shares of common stock pursuant to the agreement.  We used these
funds for working capital and we anticipate  using any additional  funds that we
receive pursuant to the equity line of credit to be used for working capital and
to implement our business plan. If the equity line of credit  agreement does not
provide  sufficient  capital  resources,  or  if  our  funds  from  our  ongoing
operations do not increase, it is unlikely we will continue as a going concern.

      CASH FLOWS

      A total of $1,126,718 and $1,468,442 was used for operating activities for
the year ended  December 31, 2001 and 2000,  respectively.  The decrease in cash
used in operating  activities  was  primarily  attributable  to stock issued for
services  and a  decrease  in  operating  assets.  The  cash  used in  operating
activities  was  primarily  expended  on  costs  and  expenses  related  to  the
production-line  manufacturing  of  the  Torque  V-12  engines,   administrative
expenses,  and  research  and  development  of the Torque  V-12 engine for other
potential uses in the marine industry, as well as other industries. For the year
ended  December  31,2001,  Torque  Engineering  raised net cash of $300,000 from
private placements of its common stock,  $220,000 from a convertible  debenture,
$219,586  from  factoring  receivables,  and $115,000  from a note  payable.  In
addition,  2  stockholders,  both of whom are officers and  directors,  provided
operating  funds in the amount of $76,500.  The proceeds  from these  activities
were  used for  working  capital,  administrative  expenses,  and  research  and
development  of the Torque V-12 engine for other  potential  uses.  For the year
ended  December 31, 2000,  Torque  Engineering  raised net cash of $913,000 from
private  placements  of our common  stock.  Of the net cash raised from  private
placements  during the year ended December 31, 2000,  $900,000 was raised from a
director and significant shareholder.  In addition, 2 stockholders,  one of whom
is also an  officer  and  director,  provided  operating  funds in the amount of
$60,000.  The proceeds from these private placements and from these stockholders
were used for working capital.

      Torque  Engineering  believes it does not have sufficient cash to continue
operations  and to  manufacture  the Torque V-12 on a  production-line  basis to
generate  revenues  for the next  twelve  months.  However,  Torque  Engineering
intends to seek other sources of capital to continue  operations and to increase
sales and revenues. Management is continuing to evaluate the company's projected
capital needs for the future development and manufacture of Torque V-12 engines.

                                       16
<PAGE>

      NEW ACCOUNTING PRONOUNCEMENT

      The  Financial   Accounting   Standards  Board  has  recently  issued  new
accounting  pronouncement,  Statement of Financial Accounting Standards ("SFAS")
No.  133,  as  amended  by SFAS No.  137 and  138,  "Accounting  for  Derivative
Instruments and Hedging  Activities" that  establishes  accounting and reporting
standards  for  derivative   instruments  and  related   contracts  and  hedging
activities. This statement is effective for all fiscal quarters and fiscal years
beginning after June 15, 2000.

      Torque Engineering believes that the future adoption of this pronouncement
will not have a material effect on Torque  Engineering's  financial  position or
results of operations.

ITEM 7.  FINANCIAL STATEMENTS

      The independent  auditors' report and the financial  statements  listed on
the  accompanying  index at page F-1 of this  report  are  filed as part of this
report and incorporated herein by reference.

ITEM 8.  CHANGES  IN  AND  DISAGREEMENTS  WITH  ACCOUNTANTS  ON  ACCOUNTING  AND
         FINANCIAL DISCLOSURE

         None.

                                       17
<PAGE>

                                    PART III

ITEM 9.  DIRECTORS,   EXECUTIVE   OFFICERS,   PROMOTERS  AND  CONTROL   PERSONS;
         COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT

         (a)  Directors  and  Executive  Officers.  The  names  and  ages of the
directors and executive  officers of Torque  Engineering,  as of April 15, 2001,
are as follows:

Name                     Age        Position
---------------------   ----        --------------------------------------------
Raymond B. Wedel, Jr.    60         President and Director

Richard D. Wedel         54         Chairman, Chief Executive Officer and
                                    Director

I. Paul Arcuri           47         Vice President, Chief Financial Officer and
                                    Director

      Each  director  serves until the next annual  meeting of  shareholders  or
until his successor is elected and qualified.

      The following sets forth information  concerning the principal occupations
and  business  experience  of the  current  officers  and  directors  of  Torque
Engineering:


Raymond B. Wedel, Jr.
---------------------

      Raymond B. Wedel, Jr. has been the President,  and Chief Operating Officer
of Torque  Engineering  since  1999.  From 1992 until  1997,  Mr.  Wedel was the
President of Torque Engineering, a business of Glaval Corporation,  which is the
predecessor  to the  current  Torque  Engineering.  At the time of  acquisition,
Quintessence  obtained the right to continue  business under the old name.  From
1986 until 1992, Mr. Wedel was Vice-President of Lightning Performance Products,
also a predecessor to Torque Engineering.  Mr. Wedel has an extensive background
in the marine  industry going back to the 1970's.  During  1997-1998,  Mr. Wedel
served  as the  Chief  Operational  Officer  of Sonic Jet  Performance,  Inc.  a
manufacturer of personal water-craft,  recreational, and fire-rescue boats, with
factories in California,  Florida and China. Mr. Wedel has a Bachelor of Science
Degree in Business Administration from the University of Evansville in Indiana.


Richard D. Wedel
----------------

      Mr. Richard D. Wedel has been the Chief Executive  Officer and Chairman of
the  Board of  Directors  of  Torque  Engineering  since  1999.  Mr.  Wedel is a
financial consultant and since 1998, has been President of Wedel Consultants,  a
firm involved in mergers and  acquisitions.  Since 1999,  Mr. Wedel has been the
Chairman of the Board of  Integrated  Homes,  Inc.,  (INHI),  a publicly  traded
company.  Integrated Homes is a provider of bundled voice and data communication
systems and  services  for planned  development  communities.  From 1997 through
1998,  Mr.  Wedel was Chief  Operating  Officer  and a  Director  of  Horizontal
Ventures, Inc. From 1982 through 1997, Mr. Wedel was President and a Director of
Petro Union Inc., an energy resource  exploration and production company,  which
merged  with  Horizontal  Ventures,  Inc.  Mr.  Wedel is a past  Chairman of the
American Petroleum Institute Eastern U.S. Advisory Board. Mr. Wedel has a degree
in Business Administration from the University of Evansville.


I. Paul Arcuri
--------------

      Mr. I. Paul Arcuri was elected to Torque  Engineering's Board of Directors
in December 1999. Mr. Arcuri has served as President and Financial  Principal of
the Carney Group,  Inc., an investment  banking firm,  member of N.A.S.D.  since
1985.  Mr. Arcuri has been a registered  broker since 1978 and was an investment
advisor  registered  with the  Securities  Exchange  Commission.  Mr. Arcuri has
extensive  background  in financial  management  involving  cash flow,  cost and
budgeting analysis with an emphasis on operations  management.  Mr. Arcuri was a
Director  and  Chairman  of  Gibraltar  Savings and Loan  Association  from 1987
through 1992.  Mr.  Arcuri has a Bachelor of Arts in Accounting  from St. Thomas
University/Biscayne College in Miami, Florida.

                                       18
<PAGE>

Family Relationship:
--------------------

      Raymond B. Wedel, Jr. and Richard D. Wedel are brothers.


Section 16(a) Beneficial Reporting Compliance
---------------------------------------------

      Under U.S.  securities  laws,  directors,  executive  officers and persons
holding  more than 10% of Torque  Engineering's  common  stock must report their
initial  ownership  of the common  stock and any  changes in that  ownership  on
reports  that must be filed  with the SEC and  Torque  Engineering.  The SEC has
designated  specific  deadlines  for these reports and Torque  Engineering  must
identify in this Form 10-KSB those  persons who did not file these  reports when
due.

      Based upon  information  provided to Torque  Engineering by its directors,
executive  officers and persons  holding  more than 10% of Torque  Engineering's
common  stock,  Torque  Engineering  is not aware of any failures to comply with
reporting requirements of Section 16(a) of the Securities Act of 1934.


ITEM 10.  EXECUTIVE COMPENSATION

      The following table summarizes the total  compensation  Torque Engineering
awarded or paid to Torque  Engineering's  Chief  Executive  Officer for the year
ended December 31, 2001. The current Chief Executive Officer was not employed by
Torque Engineering prior to March 1999. In addition,  no other executive officer
of Torque  Engineering had a total annual salary and bonus in excess of $100,000
for 2001.

<TABLE>
                           SUMMARY COMPENSATION TABLE
<CAPTION>
                                                                   Long Term
                                  Annual Compensation            Compensation
           Name and          ---------------------------         -------------      All Other
      Principal Position     Year   Salary ($)  Bonus($)           Options (#)    Compensation ($)
--------------------------   ----   ---------   --------           -----------    ----------------
<S>                          <C>     <C>            <C>            <C>                  <C>
Richard D. Wedel,            2001    50,000        -0-             10,000(1)           -0-
Chief Executive Officer      2000    50,000        -0-             10,000(1)           -0-
                             1999    50,000        -0-             10,000(1)           -0-

_____________________

(1)  In 1999,  2000 and 2001,  Mr.  Wedel  received  options to purchase  10,000
     shares of Torque Engineering common stock in connection with his service as
     a member of the Board of Directors.  All of these options were  immediately
     vested when granted and are exercisable for a period of five years from the
     grant date.
</TABLE>

                             2001 OPTION/SAR GRANTS
<TABLE>
<CAPTION>
                               Number of
                              Securities          Percent of Total
                              Underlying           Options/SAR's
                              Options/SAR's         Granted to             Exercise or
                               Granted              Employees               Base Price           Expiration
            Name                 (#)              in Fiscal Year          ($ Per Share)             Date
-----------------------      --------------       ----------------        -------------          -----------
<S>                            <C>                    <C>                     <C>                       <C> <C>
Richard D. Wedel               10,000                 33.33%                  $3.25            November 12, 2011
Raymond B. Wedel, Jr.          10,000                 33.33%                  $3.25            November 12, 2011
I. Paul Arcuri                 10,000                 33.33%                  $3.25            November 12, 2011
</TABLE>

                                       19
<PAGE>
<TABLE>
                               AGGREGATED OPTION/SAR EXERCISES
                IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTIONS/SAR VALUES(1)
<CAPTION>
                                                                                           Value of
                                                                                         Unexercised
                                                                                         In-The-Money
                           Shares                       Number of Unexercised           Options/SAR's
                          Acquired       Value              Options/SAR's               at FY-End ($)
                         on Exercise   Realized             at FY-End (#)                Exercisable/
         Name                (#)          ($)         Exercisable/Unexercisable         Unexercisable
-----------------------  -----------   --------       --------------------------        -------------
<S>                         <C>           <C>         <C>                 <C>               <C>
Richard D. Wedel             --           --          Exercisable:        30,000            -0-(2)
                                                      Unexercisable:           0            -0-
Raymond B. Wedel, Jr.        --           --          Exercisable:        30,000            -0-(2)
                                                      Unexercisable:           0            -0-
I. Paul Arcuri               --           --          Exercisable:        86,666            -0-(2)
                                                      Unexercisable:      33,334            -0-(2)
</TABLE>

(1)  These grants represent options to purchase common stock. No SAR's have been
     granted.

(2)  The exercise  price for the options  exceeded the closing bid quotation for
     Torque  Engineering  common stock on the OTC Bulletin  Board as of December
     31, 2000.

      Other than the options to  purchase  10,000  shares of Torque  Engineering
common  stock  at an  exercise  price of  $3.25  per  share  granted  to  Torque
Engineering's five directors in 2001, directors did not receive compensation for
their services in 2001.


ITEM 11.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

      The following table sets forth information  regarding beneficial ownership
as of April 15, 2002 of Torque Engineering common stock by any person who Torque
Engineering knows to be the beneficial owner of more than five percent of Torque
Engineering's  voting securities,  and by each Torque  Engineering  director and
executive  officer  and  by the  directors  and  executive  officers  of  Torque
Engineering  as a group.  As of April 15, 2002 there were  12,748,965  shares of
common stock issued and outstanding.

      All beneficial  owners listed below have sole voting and investment  power
with respect to the shares shown, unless otherwise indicated.

                                       20
<PAGE>
<TABLE>
                                BENEFICIAL OWNERS
--------------------------------------------------------------------------------------------------
                                              TITLE OF
                                              CLASS            SHARES           PERCENT OF CLASS
------------------------------------          ------------     ------------     ------------------
Officers and Directors
------------------------------------
<S>                                           <C>              <C>                   <C>
Raymond B. Wedel, Jr.                         Common Stock     1,621,702(1)          12.7%
1415 Meadow Lane
Elkhart, IN   46514

Richard D. Wedel                              Common Stock     1,493,334(2)          11.7%
3900 Woodcastle
Evansville, IN 47711

I. Paul Arcuri                                Common Stock     186,666(3)             1.5%
c/o Torque Engineering Corporation
2432 Thorne Drive
Elkhart, IN 46674

All officers and directors as a group         Common Stock     3,301,702(4)          25.5%
(3 persons)

------------------------------------
Other Beneficial Owners
------------------------------------

Michel Attias                                 Common Stock     1,303,134             10.2%
4 Riviera Avenue
Costa De Caza, CA   92679

Clement Lange                                 Common Stock     1,234,629              9.7%
4481 W. Holland Road, East
Huntingburg, IN 47532
</TABLE>

----------------

(1)  Excludes  740,000  shares owned by Mr. Wedel's  brother,  Richard D. Wedel.
     Includes  316,668  shares owned by Raymond B. Wedel,  Jr.'s wife. Mr. Wedel
     disclaims  beneficial  ownership of such  shares.  Excludes an aggregate of
     633,332  shares owned by Mr.  Wedel's  adult  children who do not live with
     him. Also includes 30,000 shares Mr. Wedel is entitled to acquire within 60
     days of April 15, 2002  pursuant  to options  granted to him as a member of
     the board of  directors.  Excludes  10,000  shares owned by Wanda Pride and
     10,000  shares  owned by Blanche  Wedel.  Ms.  Pride and Ms.  Wedel are Mr.
     Wedel's sisters. Mr. Wedel disclaims beneficial ownership of such shares.


(2)  Includes  400,000  shares  owned by  Richard D.  Wedel's  wife.  Mr.  Wedel
     disclaims  beneficial  ownership of such shares.  Includes  400,000  shares
     owned by Mr.  Wedel's minor son who lives with him.  Also  includes  30,000
     shares Mr.  Wedel is entitled  to acquire  within 60 days of April 15, 2002
     pursuant to options  granted to him as a member of the board of  directors.
     Excludes  10,000  shares  owned by Wanda Pride and 10,000  shares  owned by
     Blanche Wedel. Ms. Pride and Ms. Wedel are Mr. Wedel's  sisters.  Mr. Wedel
     disclaims beneficial ownership of such shares.


(3)  Includes  66,666 shares vested under an option to purchase  100,000  shares
     granted to Mr. Arcuri as Vice-President and Chief Financial  Officer.  Also
     includes  20,000 shares Mr. Arcuri is entitled to acquire within 60 days of
     April 15,  2002  pursuant  to an option  granted  to him as a member of the
     board of directors


(4)  Includes  options  to  acquire  180,000  shares of  Torque's  common  stock
     exercisable within 60 days of April 15, 2002.


ITEM 12.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

      Effective May 28, 1999, Torque Engineering acquired the outstanding common
stock of IPSL, a Nevada  corporation,  in exchange for the issuance of 1,500,000
shares of  Torque  Engineering  common  stock to  Michel  Attias,  then the sole
shareholder of IPSL and now a significant shareholder of Torque Engineering. The
principal  reason for Torque  Engineering's  acquisition  of IPSL was to acquire
certain  property and equipment to be used to manufacture the Torque V-12, which
property and equipment IPSL acquired from an Indiana  corporation under the name
of Torque Engineering in April 1999.

                                       21
<PAGE>

      During the year ended December 31, 1999, Torque  Engineering  through IPSL
made  repayments  on prior loans to IPSL by  affiliates  of Michel Attias in the
total amount of $280,031.

      In June 2000,  Torque  Engineering  sold 266,667 shares of common stock to
Clement  Lange,  a former member of the board of directors,  at a price of $1.50
per share for a total  purchase  price of $400,000.  In November  2000,  Clement
Lange  purchased  an  additional  307,692  shares of common stock at a per share
price of $1.625, for a total price of $500,000.

      During September, October and December 2000, Torque Engineering received a
total of $60,000 in  operating  funds from two of its  stockholders,  Richard D.
Wedel  and  Michel  Attias.  Mr.  Wedel is an  officer  and  director  of Torque
Engineering.  In addition, $11,656 of reimbursable expenses were owed to Richard
D. Wedel as of December 31,  2000.  Those loans were  converted to  non-interest
bearing  promissory notes due June 30, 2001. Torque  Engineering is currently in
default on these promissory notes.

      During  February  2001,  Clement  Lange,  a former  member of the board of
directors,  acquired  250,000  shares of common  stock from  Richard  D.  Wedel,
Raymond Wedel and Michel Attias in exchange for  $250,000.  In addition,  Torque
Engineering  issued to Richard  D.  Wedel,  Raymond  D. Wedel and Michel  Attias
125,000  shares  of  common  stock  at a price of $2.00  per  share  for a total
purchase  price of $250,000.  Richard  Wedel and Raymond  Wedel are officers and
directors of Torque Engineering.

      During  March  2001,  Torque  Engineering  received  a total of $46,500 in
operating funds from one of its stockholders,  Richard D. Wedel. Mr. Wedel is an
officer  and  director of Torque  Engineering.  Those  loans were  converted  to
non-interest  bearing  promissory notes due June 30, 2001. Torque Engineering is
currently in default on these promissory notes.

      During  May 2001,  Torque  Engineering  received  a total of  $115,000  in
operating funds from Patriot  Manufacturing  Corp.  Michael Attias, a beneficial
owner of more than 5% of Torque  Engineering's  common  stock is an  officer  of
Patriot  Manufacturing Corp. Those loans were converted to non-interest  bearing
promissory notes due August 31, 2001.

      During December 2001,  Torque  Engineering  received a total of $30,000 in
operating  funds from two of its  stockholders,  Richard D. Wedel and Raymond B.
Wedel Jr.  Richard D. Wedel and Raymond B. Wedel Jr. are officers and  directors
of Torque  Engineering.  Those  loans were  converted  to  non-interest  bearing
promissory notes due March 30, 2002.


ITEM 13.  EXHIBITS AND REPORTS ON FORM 8-K

      (a) The following exhibits are furnished as part of this report:
<TABLE>
Exhibit No.       Description                                Location
------------      -----------------------------------------  --------------------------------------
<S>               <C>                                        <C>
2.1               Form of Agreement and Plan of Merger by    Incorporated by reference to Exhibit A
                  and among Quintessence Oil Company and     to the Registrant's Definitive Proxy
                  Torque                                     Statement file don September 24, 1999

2.2               Plan and Agreement of Reorganization       Incorporated by reference to Exhibit
                  dated May 21, 1999 between IPSL, Inc.      2.2 to the Registrant's Annual Report
                  and Quintessence Oil Company               on Form 10-KSB filed on May 25, 2000

2.3               Bill of Sale between IPSL, Inc. and        Incorporated by reference to Exhibit
                  Torque                                     2.3 to the Registrant's Annual Report
                                                             on Form 10-KSB filed on May 25, 2000

3.1               Articles of Incorporation of               Incorporated by reference to Exhibit
                  Quintessence Oil Company                   3.1 to the Registrant's Form 10 filed
                                                             on December 3, 1996

3.2               Certificate of Incorporation of Torque     Incorporated by reference to Exhibit B
                                                             to the Registrant's Definitive Proxy
                                                             Statement filed on September 24, 1999

3.3               Bylaws of Quintessence Oil Company         Incorporated by reference to Exhibit
                                                             3.2 of the Registrant's Registration
                                                             Statement on Form 10 filed on December
                                                             3, 1996
                                       22
<PAGE>

Exhibit No.       Description                                Location
------------      -----------------------------------------  --------------------------------------

3.4               Bylaws of Torque                           Incorporated by reference to Exhibit C
                                                             of the Registrant's Definitive Proxy
                                                             Statement filed on September 24, 1999

10.1              Lease Rental Agreement dated October 6,    Incorporated by reference to Exhibit
                  1999 between Quintessence Oil Company      10.1 of the Registrant's Amended Annual
                  and CNC Associates (Lease No. 99870001)    Report on Form 10-KSB/A filed on August
                                                             10, 2000

10.2              Lease Rental Agreement dated October 6,    Incorporated by reference to Exhibit
                  1999 between Quintessence Oil Company      10.2 of the Registrant's Amended Annual
                  and CNC Associates (Lease No. 9987002)     Report on Form 10-KSB/A filed on August
                                                             10, 2000

10.3              Lease Rental Agreement dated October 6,    Incorporated by reference to Exhibit
                  1999 between Quintessence Oil Company      10.3 of the Registrant's Amended Annual
                  and CNC Associates (Lease NO. 99870003)    Report on Form 10-KSB/A filed on August
                                                             10, 2000

10.4              Lease Rental Agreement dated October 6,    Incorporated by reference to Exhibit
                  1999 between Quintessence Oil Company      10.4 of the Registrant's Amended Annual
                  and CNC Associates (Lease No. 99870003)    Report on Form 10-KSB/A filed on August
                                                             10, 2000

10.5              Real Estate Lease dated April 29, 1999     Incorporated by reference to Exhibit
                  by and between Richard W. Strefling        10.5 of the Registrant's Annual Report
                  Industries, Inc. and Quintessence Oil      on Form 10-KSB filed on May 25, 2000
                  Company

10.6              Torque 1999 Stock Option Plan              Incorporated by reference to Exhibit E
                                                             to the Registrant's Definitive Proxy
                                                             Statement filed on September 24, 1999

10.7              Corporate Note dated September 28, 2000    Incorporated by reference to Exhibit
                  to Richard D. Wedel                        10.7 of the Registrant's Annual Report
                                                             on Form 10-KSB filed on March 29, 2001

10.8              Corporate Note dated October 4, 2000 to    Incorporated by reference to Exhibit
                  Richard D. Wedel                           10.8 of the Registrant's Annual Report
                                                             on Form 10-KSB filed on March 29, 2001

10.9              Corporate Note dated October 12, 2000 to   Incorporated by reference to Exhibit
                  Michael Attias                             10.9 of the Registrant's Annual Report
                                                             on Form 10-KSB filed on March 29, 2001

10.10             Corporate Note dated December 31, 2000     Incorporated by reference to Exhibit
                  to Richard D. Wedel                        10.11 of the Registrant's Annual Report
                                                             on Form 10-KSB filed on March 29, 2001

10.12             Account Purchase Agreement dated May 2,    Incorporated by reference to Exhibit
                  2001 between Torque and Crown Financial,   10.1 to the Registrant's Quarterly
                  L.L.C.                                     Report on Form 10-QSB filed on August
                                                             17, 2001

10.13             Securities Purchase Agreement dated as     Incorporated by reference to Exhibit
                  of October 28, 2001 between Torque and     10.13 to the Registrant's Registration
                  Cornell Capital Partners, LP               Statement on Form 10-SB-2 filed on
                                                             December 17, 2001

10.14             Investor Registration Rights Agreement     Incorporated by reference to Exhibit
                  dated as of October 28, 2001 between       10.14 to the Registrant's Registration
                  Torque and Cornell Capital Partners, LP    Statement on Form 10-SB-2 filed on
                                                             December 17, 2001

10.15             Escrow Agreement dated as of October 28,   Incorporated by reference to Exhibit
                  2001 among Torque, Yorkville Advisors      10.15 to the Registrant's Registration
                  Management, LLC and First Union National   Statement on Form 10-SB-2 filed on
                  Bank                                       December 17, 2001

                                       23
<PAGE>

Exhibit No.       Description                                Location
------------      -----------------------------------------  --------------------------------------

10.16             Transfer Agent Instructions dated as of    Incorporated by reference to Exhibit
                  October 28, 2001 among Torque, Cornell     10.16 to the Registrant's Registration
                  Capital Partners, LP and Computer Share    Statement on Form 10-SB-2 filed on
                  Trust Company, Inc.                        December 17, 2001

10.17             Equity Line of Credit Agreement dated      Incorporated by reference to Exhibit
                  November 14, 2001 between Torque and       10.17 to the Registrant's Registration
                  Cornell Capital Partners, LP               Statement on Form 10-SB-2 filed on
                                                             December 17, 2001

10.18             Registration Rights Agreement dated        Incorporated by reference to Exhibit
                  November 14, 2001 between Torque and       10.18 to the Registrant's Registration
                  Cornell Capital Partners, LP               Statement on Form 10-SB-2 filed on
                                                             December 17, 2001

10.19             Escrow Agreement dated November 14, 2001   Incorporated by reference to Exhibit
                  among Torque, Cornell Partners, LP and     10.19 to the Registrant's Registration
                  First Union National Bank                  Statement on Form 10-SB-2 filed on
                                                             December 17, 2001

10.20             Placement Agent Agreement dated November   Incorporated by reference to Exhibit
                  14, 2001 between Torque and Westport       10.20 to the Registrant's Registration
                  Partners, Ltd.                             Statement on Form 10-SB-2 filed on
                                                             December 17, 2001

99.1              IPSL, Inc. Financial Statements as of      Incorporated by reference to Exhibit
                  May 28, 1999                               99.1 to the Registrant's Annual Report
                                                             on Form 10-KSB filed on May 25, 2000
</TABLE>

      (b)      Reports on Form 8-K.

               None.

                                       24
<PAGE>

                                   SIGNATURES

      In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.

Date:    April 25, 2002                   TORQUE ENGINEERING CORPORATION

                                          By:/s/ Raymond B. Wedel, Jr.
                                             -----------------------------------
                                             Raymond B. Wedel, Jr., President


      In accordance  with the Exchange Act, this report has been signed below by
the following  persons on behalf of the  registrant and in the capacities and on
the dates indicated.


/s/ Raymond B. Wedel, Jr.
---------------------------------------------        Date: April 25, 2002
Raymond B. Wedel, Jr.
President and Director

/s/ Richard D. Wedel
---------------------------------------------        Date: April 25, 2002
Richard D. Wedel
Chairman, Chief Executive Officer
and Director

/s/ Paul Arcuri
---------------------------------------------        Date: April 25, 2002
I. Paul Arcuri
Vice President, Chief Financial Officer and
Director

<PAGE>








                         TORQUE ENGINEERING CORPORATION
                                 AND SUBSIDIARY
                        CONSOLIDATED FINANCIAL STATEMENTS
                        AS OF DECEMBER 31, 2001 AND 2000










<PAGE>






                  TORQUE ENGINEERING CORPORATION AND SUBSIDIARY

                                    CONTENTS

PAGE   F-2     INDEPENDENT AUDITORS' REPORT

PAGE   F-3     CONSOLIDATED BALANCE SHEETS AS OF DECEMBER 31, 2001 AND 2000

PAGE   F-4     CONSOLIDATED  STATEMENTS OF OPERATIONS AND  COMPREHENSIVE  LOSS
               FOR THE YEARS ENDED DECEMBER 31, 2001 AND 2000

PAGES  F-5     CONSOLIDATED  STATEMENTS OF  STOCKHOLDERS'  EQUITY FOR THE YEARS
               ENDED DECEMBER 31, 2001 AND 2000

PAGES  F-6     CONSOLIDATED  STATEMENTS  OF CASH FLOWS FOR THE YEARS ENDED
               DECEMBER  31, 2001 AND 2000

PAGES  F-8     NOTES TO CONSOLIDATED FINANCIAL STATEMENTS





                                      F-1
<PAGE>






                          INDEPENDENT AUDITORS' REPORT

To the Board of Directors of:
  Torque Engineering Corporation

We  have  audited  the  accompanying   consolidated  balance  sheets  of  Torque
Engineering  Corporation and Subsidiary as of December 31, 2001 and 2000 and the
related   consolidated   statements  of  operations  and   comprehensive   loss,
stockholders' equity and cash flows for the years then ended. These consolidated
financial  statements are the  responsibility of the Company's  management.  Our
responsibility  is  to  express  an  opinion  on  these  consolidated  financial
statements based on our audits.

We conducted our audits in accordance with auditing standards generally accepted
in the  United  States of  America.  Those  standards  require  that we plan and
perform the audits to obtain reasonable assurance about whether the consolidated
financial  statements  are free of  material  misstatement.  An  audit  includes
examining,  on a test basis,  evidence supporting the amounts and disclosures in
the  financial  statements.  An audit also  includes  assessing  the  accounting
principles  used  and  significant  estimates  made  by  management,  as well as
evaluating the overall  financial  statement  presentation.  We believe that our
audits provide a reasonable basis for our opinion.

In our opinion, the consolidated  financial statements referred to above present
fairly in all material  respects,  the financial  position of Torque Engineering
Corporation  and  Subsidiary as of December 31, 2001 and 2000 and the results of
their  operations  and their cash flows for the years then ended,  in conformity
with accounting principles generally accepted in the United States of America.

The  accompanying  financial  statements  have been  prepared  assuming that the
Company will continue as a going  concern.  As discussed in Note 18, the Company
has a loss from current  operations  of  $8,534,825,  a negative  cash flow from
operating activities of $1,126,718 and a working capital deficiency of $725,507.
These conditions raise substantial doubt about the Company's ability to continue
as a going  concern.  Management's  plans in  regard to these  matters  are also
described in Note 18. The financial  statements  do not include any  adjustments
that might result from the outcome of this uncertainty.



WEINBERG & COMPANY, P.A.


Boca Raton, Florida
April 9, 2002



                                      F-2

<PAGE>

<TABLE>
                  TORQUE ENGINEERING CORPORATION AND SUBSIDIARY
                           CONSOLIDATED BALANCE SHEETS
                        AS OF DECEMBER 31, 2001 AND 2000


<CAPTION>
                                                   ASSETS
                                                                         2001                   2000
                                                                   ------------------     ------------------
<S>                                                             <C>                    <C>
CURRENT ASSETS
 Cash                                                           $            12,757    $           160,113
 Marketable securities                                                        3,639                  1,213
 Accounts receivable, net                                                   156,104                311,159
 Inventories                                                                348,752                789,135
 Prepaid expenses                                                            22,448                 50,008
 Advances to suppliers                                                       73,094                109,180
                                                                   ------------------     ------------------
       Total Current Assets                                                 616,794              1,420,808

PROPERTY & EQUIPMENT - NET                                                3,573,112              9,451,698
                                                                   ------------------     ------------------

TOTAL ASSETS                                                    $         4,189,906    $        10,872,506
                                                                   ==================     ==================

                                    LIABILITIES AND STOCKHOLDERS' EQUITY

CURRENT LIABILITIES
 Accounts payable and accrued liabilities                       $           642,180    $           341,069
 Due to factor                                                              219,586                   -
 Obligations under capital leases - current portion                         217,379                127,278
 Notes payable - officers                                                   148,156                 71,656
 Note payable                                                               115,000                   -
                                                                   ------------------     ------------------
       Total Current Liabilities                                          1,342,301                540,003
                                                                   ------------------     ------------------

LONG-TERM LIABILITIES
 Obligations under capital leases                                           342,851                454,363
 Convertible debentures                                                     280,000                   -
                                                                   ------------------     ------------------
     Total Long-Term Liabilities                                            622,851                   -
                                                                   ------------------     ------------------

TOTAL LIABILITIES                                                         1,965,152                994,366
                                                                   ------------------     ------------------

STOCKHOLDERS' EQUITY
 Common stock, $.00001 par value, 50,000,000 shares
  authorized, 9,597,112 and 8,411,299 shares issued,
  respectively                                                                   96                     84
 Common stock to be issued, 121,942 shares                                        1                   -
 Additional paid in capital                                              15,202,320             14,243,709
 Accumulated deficit                                                    (12,623,761)            (4,088,936)
 Accumulated other comprehensive loss                                      (208,637)              (211,063)
                                                                   ------------------     ------------------
                                                                          2,370,019              9,943,794
 Less Treasury Stock at cost (6,750 Shares)                                 (56,970)               (56,970)
 Less Deferred compensation expense                                         (88,295)                (8,684)
                                                                   ------------------     ------------------
       Total Stockholders' Equity                                         2,224,754              9,878,140
                                                                   ------------------     ------------------

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY                      $         4,189,906    $        10,872,506
                                                                   ==================     ==================

                        See accompanying notes to consolidated financial statements.
</TABLE>





                                                     F-3
<PAGE>

<TABLE>
                              TORQUE ENGINEERING CORPORATION AND SUBSIDIARY
                      CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
                             FOR THE YEARS ENDED DECEMBER 31, 2001 AND 2000

<CAPTION>
                                                                       2001                  2000
                                                                 -----------------     -----------------
<S>                                                           <C>                   <C>
SALES, NET                                                    $          295,715    $          718,801

COST OF SALES                                                          1,482,593             1,607,494
                                                                 -----------------     -----------------

GROSS LOSS                                                            (1,186,878)             (888,693)
                                                                 -----------------     -----------------

OPERATING EXPENSES
 Loss on impairment of property and equipment                          4,764,259                  -
 Depreciation                                                          1,124,641             1,118,079
 Consulting                                                              442,637                  -
 Professional fees                                                       209,884               116,498
 Officer compensation                                                    141,230               155,655
 Other selling, general and administrative                               154,109               112,664
 Rent                                                                    120,000               120,000
 Payroll and other compensation                                          119,445               240,538
                                                                 -----------------     -----------------
      Total Operating Expenses                                         7,076,205             1,863,434
                                                                 -----------------     -----------------

LOSS FROM OPERATIONS                                                  (8,263,083)           (2,752,127)
                                                                 -----------------     -----------------

OTHER INCOME (EXPENSE)
 Interest expense                                                       (157,032)              (40,130)
 Factoring expenses                                                     (116,813)                 -
 Other expense - net                                                      (2,452)                 -
 Other income                                                              4,176                   427
 Interest income                                                             379                10,514
                                                                 -----------------     -----------------
      Total Other Income (Expense)                                      (271,742)              (29,189)
                                                                 -----------------     -----------------

NET LOSS BEFORE EXTRAORDINARY ITEM                                    (8,534,825)           (2,781,316)

EXTRAORDINARY ITEM
    Gain on extinguishment of debt                                          -                   28,708
                                                                 -----------------     -----------------

NET LOSS                                                              (8,534,825)           (2,752,608)

OTHER COMPREHENSIVE INCOME (LOSS)
    Unrealized gain (loss) on marketable
      securities - net                                                     2,426               (30,932)
                                                                 -----------------     -----------------

COMPREHENSIVE LOSS                                            $       (8,532,399)   $       (2,783,540)
                                                                 =================     =================

Loss per share before extraordinary gain                      $             (.97)   $            (.347)
extraordinary gain                                                          -                     .004
                                                                 -----------------     -----------------

Net loss per share - basic and diluted                        $             (.97)   $            (.343)
                                                                 =================     =================

Weighted average number of shares outstanding
   during the period -basic and diluted                                 8,764,579             8,012,677
                                                                 =================     =================


                      See accompanying notes to consolidated financial statements.
</TABLE>



                                                   F-4
<PAGE>

<TABLE>
                                            TORQUE ENGINEERING CORPORATION AND SUBSIDIARY
                                           CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
                                            FOR THE YEAR ENDED DECEMBER 31, 2001 AND 2000


<CAPTION>
                                          Common Stock To                             Accumulated
                         Common Stock        Be Issued      Additional                   Other                   Deferred
                        ---------------   ---------------    Paid-in    Accumulated   Comprehensive  Treasury  Compensation
                        Shares   Amount   Shares   Amount    Capital      Deficit         Loss         Stock     Expense      Totals
                        ------   ------   ------   ------    -------      -------         ----         -----     -------      ------
<S>                     <C>         <C>     <C>     <C>   <C>           <C>            <C>         <C>        <C>        <C>
Balance December 31,
 1999                   7,832,940   $ 78      -     $  -  $13,330,715   $(1,336,328)  $(180,131)  $(56,970)  $(20,220)  $11,737,144

Stock issued for cash     578,359      6      -        -      912,994         -             -          -          -         913,000

Deferred compensation
 expensed                   -         -       -        -         -            -             -          -       11,536        11,536

Unrealized loss on
 available-for-sale
 securities                 -         -       -        -         -            -         (30,932)       -          -         (30,932)

Net Loss, 2000              -         -       -        -         -       (2,752,608)        -          -          -      (2,752,608)
                        ---------- ------ ------- ------- ------------ ------------- ------------ ---------- ---------- -----------

Balance, December 31,
 2000                   8,411,299     84      -        -   14,243,709    (4,088,936)   (211,063)   (56,970)    (8,684)    9,878,140

Stock issued for cash     325,000      3      -        -      299,997         -             -          -          -         300,000

Stock issued for
 services                 860,813      9      -        -      493,150         -             -          -       (8,572)      484,587

Stock to be issued for
 services                   -         -     50,000     -       25,500         -             -          -      (23,375)        2,125

Grant of stock options
 for services               -         -       -        -       51,997         -             -          -      (47,664)        4,333

Stock to be issued for
 debt conversion            -         -     71,942     1       19,999         -             -          -          -          20,000

Unrealized gain on
 available-for-sale
 securities                 -         -       -        -         -            -           2,426        -          -           2,426

Beneficial conversion
  feature of convertible
  debentures                -         -       -        -       67,968         -             -          -          -          67,968

Net Loss, 2001              -         -                          -       (8,534,825)        -          -          -      (8,534,825)
                        ---------- ------ ------- ------- ------------ ------------- ------------ ---------- ---------- -----------
 BALANCE,
 DECEMBER 31, 2001      9,597,112  $  96   121,942  $  1   15,202,320  $(12,623,761)  $(208,637)  $(56,970)  $(88,295)   $2,224,754
                        ========== ====== ======= ======= ============ ============= ============ ========== ========== ===========

                                    See accompanying notes to consolidated financial statements.
</TABLE>




                                                                 F-5
<PAGE>

<TABLE>
                                 TORQUE ENGINEERING CORPORATION AND SUBSIDIARY
                                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                                FOR THE YEARS ENDED DECEMBER 31, 2001 AND 2000

<CAPTION>
                                                                              2001                  2000
                                                                      -------------------   -------------------
<S>                                                                    <C>                   <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
 Net loss                                                              $   (8,534,825)       $     (2,752,608)
 Adjustments to reconcile net loss to net
    cash used in operating activities:
  Depreciation                                                              1,124,641               1,118,079
  Loss on impairment of property and equipment                              4,764,259                    -
  Beneficial conversion feature of convertible debentures                      67,968                    -
  Compensation expense incurred in exchange for stock options                   4,333                  11,536
  Provision for bad debts                                                       6,571                    -
  Stock issued for services                                                   486,711                    -
  Gain on extinguishment of debt                                                 -                    (28,708)
 Changes in operating assets and liabilities:
  (Increase) decrease in:
    Accounts receivable                                                       148,484                (308,870)
    Prepaid expenses                                                           27,560                 (45,240)
    Advances to suppliers                                                      36,086                (109,180)
    Inventories                                                               440,383                 375,875
    Accounts payable and accrued liabilities                                  301,111                 270,674
                                                                         --------------     -------------------
        Net Cash Used In Operating Activities                              (1,126,718)             (1,468,442)
                                                                         --------------     -------------------

CASH FLOWS FROM INVESTING ACTIVITIES:
 Purchase of property and equipment                                           (10,315)               (103,607)
                                                                         --------------     -------------------
        Net Cash Used In Investing Activities                                 (10,315)               (103,607)
                                                                         --------------     -------------------

CASH FLOWS FROM FINANCING ACTIVITIES:
 Proceeds from issuance of common stock                                       300,000                 913,000
 Principal repayments on capital lease obligations                            (21,409)                (38,857)
 Due to factor                                                                219,586                    -
 Proceeds from notes payable - officers                                        76,500                  60,000
 Proceeds from note payable                                                   115,000                    -
 Proceeds from convertible debenture                                          300,000                    -
                                                                         --------------     -------------------
        Net Cash Provided By Financing Activities                             989,677                 934,143
                                                                         --------------     -------------------

NET DECREASE IN CASH                                                         (147,356)               (637,906)

CASH AT BEGINNING OF YEAR                                                     160,113                 798,019
                                                                         --------------     -------------------

CASH AT END OF YEAR                                                    $       12,757    $            160,113
                                                                         ==============     ===================

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION

Cash paid for interest                                                 $      122,787    $              4,278
                                                                         ==============     ===================

                         See accompanying notes to consolidated financial statements.
</TABLE>






                                                        F-6
<PAGE>

                  TORQUE ENGINEERING CORPORATION AND SUBSIDIARY
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                 FOR THE YEARS ENDED DECEMBER 31, 2001 AND 2000


SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:

During 2001,  the Company  recorded  71,942  shares of common stock to be issued
under the terms of the  convertible  debenture  agreement to convert  $20,000 of
principal (See Notes 9 and 19(B)).

During 2000, the Company acquired equipment totaling $12,125 under capital lease
obligations.

During 2000,  the Company  converted  accounts  payable with a shareholder  to a
related party note payable in the amount of $11,656.





















          See accompanying notes to consolidated financial statements.



                                       F-7
<PAGE>

                  TORQUE ENGINEERING CORPORATION AND SUBSIDIARY
                        NOTES TO CONSOLIDATED STATEMENTS
                        AS OF DECEMBER 31, 2001 AND 2000


NOTE 1     SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND ORGANIZATION


         (A) ORGANIZATION

         The Company designs and manufactures  high performance  offshore marine
         engines.

         The Company was in the development stage through December 31, 1999. The
         year ended  December  31, 2000 was the first year  during  which it was
         considered an operating company.


         (B) PRINCIPLES OF CONSOLIDATION

         The  consolidated  financial  statements  include  the  accounts of the
         Company and its wholly owned subsidiary.  All intercompany balances and
         transactions have been eliminated in consolidation.


         (C) USE OF ESTIMATES

         In preparing financial statements in conformity with generally accepted
         accounting  principles,  management  is required to make  estimates and
         assumptions  that affect the reported amounts of assets and liabilities
         and the disclosure of contingent  assets and liabilities at the date of
         the financial  statements and revenues and expenses during the reported
         period. Actual results could differ from those estimates.


         (D) CASH AND CASH EQUIVALENTS

         For purposes of the cash flow  statements,  the Company  considers  all
         highly liquid  investments with original  maturities of three months or
         less at the time of purchase to be cash equivalents.

         The  Company  maintains  its cash in bank  accounts,  which,  at times,
         exceed  federally  insured limits.  The Company has not experienced any
         losses in such accounts as of December 31, 2001.


         (E) MARKETABLE SECURITIES

         The  Company  invests in various  marketable  equity  instruments.  The
         Company  accounts for such  investments in accordance with Statement of
         Financial   Accounting   Standards  No.  115  "Accounting  for  Certain
         Investments in Debt and Equity Securities" ("SFAS 115") (See Notes 1(M)
         and 2)).

         Management determines the appropriate classification of its investments
         at the time of acquisition and reevaluates  such  determination at each
         balance sheet date.  Available-for-sale  securities are carried at fair
         value,  with  unrealized  gains and losses,  net of tax,  reported as a
         separate component of stockholders' equity.  Investments  classified as
         held-to-maturity are carried at amortized cost. In determining realized
         gains  and  losses,  the  cost of the  securities  sold is based on the
         specific identification method.


         (F) INVENTORY

         Inventories  are stated at the lower of cost  (first-in,  first-out) or
         net   realizable    value,    and   consists   of   purchased    parts,
         engines-in-process and completed engines (See Note 6).



                                       F-8
<PAGE>

                  TORQUE ENGINEERING CORPORATION AND SUBSIDIARY
                        NOTES TO CONSOLIDATED STATEMENTS
                        AS OF DECEMBER 31, 2001 AND 2000


         (G) PROPERTY AND EQUIPMENT

         Property and  equipment  are stated at cost and  depreciated  using the
         straight-line method over the estimated economic useful lives of 3 to 8
         years.  Expenditures for maintenance and repairs are charged to expense
         as incurred. Major improvements are capitalized (See Note 7).


         (H) STOCK OPTIONS

         In accordance with Statement of Financial Accounting Standards No. 123,
         ("SFAS  123") the  Company  has  elected to account  for Stock  Options
         issued to employees under  Accounting  Principles  Board Opinion No. 25
         ("APB  Opinion  No.  25")  and  related  interpretations.  The  Company
         accounts for stock options issued to non-employees under the fair value
         method of SFAS 123 (See Note 12(C)).


         (I) REVENUE RECOGNITION

         The Company recognizes revenue upon shipment of products.


         (J) ADVERTISING COSTS

         Advertising  is charged to operations as incurred.  For the years ended
         December 31, 2001 and 2000,  the Company  charged  $95,376 and $74,461,
         respectively.


         (K) INCOME TAXES

         The Company  accounts for income taxes under the  Financial  Accounting
         Standards  Board  Statement of Financial  Accounting  Standards No. 109
         "Accounting for Income Taxes"  ("Statement  109"). Under Statement 109,
         deferred tax assets and  liabilities  are recognized for the future tax
         consequences   attributable   to  differences   between  the  financial
         statement carrying amounts of existing assets and liabilities and their
         respective tax bases.  Deferred tax assets and liabilities are measured
         using  enacted  tax rates  expected  to apply to taxable  income in the
         years in which those temporary differences are expected to be recovered
         or settled.  Under Statement 109, the effect on deferred tax assets and
         liabilities  of a change  in tax rates is  recognized  in income in the
         period that includes the enactment date.


         (L) COMPREHENSIVE INCOME (LOSS)

         The  Company  accounts  for  Comprehensive   Income  (Loss)  under  the
         Statement  of  Financial   Accounting  Standards  No.  130,  "Reporting
         Comprehensive   Income"  ("Statement  No.  130").   Statement  No.  130
         establishes standards for reporting and display of comprehensive income
         and its  components,  and is effective for fiscal years beginning after
         December 15, 1997.

         The  unrealized  gains  and  losses,  net of tax,  resulting  from  the
         valuation of  available-for-sale  securities at their fair market value
         at year end (see Note 1 (F)) are reported as Other Comprehensive Income
         (Loss)  in  the  Statement  of  Operations  and  as  Accumulated  Other
         Comprehensive   Income  (Loss)  in  Stockholders'  Equity  and  in  the
         Statement of Stockholders' Equity.


         (M) NEW ACCOUNTING PRONOUNCEMENTS

         The Financial  Accounting  Standards  Board has recently issued several
         new Statements of Financial Accounting Standards.


                                       F-9
<PAGE>

                  TORQUE ENGINEERING CORPORATION AND SUBSIDIARY
                        NOTES TO CONSOLIDATED STATEMENTS
                        AS OF DECEMBER 31, 2001 AND 2000


         Statement No. 141,  "Business  Combinations"  supersedes APB Opinion 16
         and various  related  pronouncements.  Pursuant to the new  guidance in
         Statement  No. 141, all  business  combinations  must be accounted  for
         under the  purchase  method  of  accounting;  the  pooling-of-interests
         method  is no longer  permitted.  SFAS 141 also  establishes  new rules
         concerning  the  recognition  of goodwill and other  intangible  assets
         arising in a purchase business  combination and requires  disclosure of
         more  information  concerning a business  combination  in the period in
         which it is  completed.  This  statement  is  generally  effective  for
         business combinations initiated on or after July 1, 2001.

         Statement No. 142,  "Goodwill and Other Intangible  Assets"  supercedes
         APB  Opinion  17  and  related   interpretations.   Statement  No.  142
         establishes  new rules on accounting for the  acquisition of intangible
         assets not acquired in a business  combination  and the manner in which
         goodwill and all other  intangibles  should be accounted for subsequent
         to their initial  recognition in a business  combination  accounted for
         under SFAS No. 141.  Under SFAS No. 142,  intangible  assets  should be
         recorded at fair value.  Intangible  assets  with finite  useful  lives
         should be amortized  over such period and those with  indefinite  lives
         should not be amortized.  All intangible assets being amortized as well
         as those  that are  not,  are both  subject  to  review  for  potential
         impairment  under  SFAS No.  121,  "Accounting  for the  Impairment  of
         Long-Lived  Assets and for  Long-Lived  Assets to be Disposed of". SFAS
         No. 142 also requires that goodwill  arising in a business  combination
         should not be  amortized  but is subject to  impairment  testing at the
         reporting  unit level to which the goodwill was assigned to at the date
         of the business combination.

         SFAS No. 142 is effective for fiscal years beginning after December 15,
         2001  and  must be  applied  as of the  beginning  of such  year to all
         goodwill and other intangible assets that have already been recorded in
         the  balance  sheet  as of the  first  day in  which  SFAS  No.  142 is
         initially  applied,  regardless  of when  such  assets  were  acquired.
         Goodwill  acquired in a business  combination whose acquisition date is
         on or after  July 1,  2001,  should  not be  amortized,  but  should be
         reviewed for impairment  pursuant to SFAS No. 121, even though SFAS No.
         142 has not yet been adopted.  However,  previously  acquired  goodwill
         should continue to be amortized until SFAS No. 142 is first adopted.

         Statement  No.  143  "Accounting  for  Asset  Retirement   Obligations"
         establishes  standards  for  the  initial  measurement  and  subsequent
         accounting for obligations  associated with the sale,  abandonment,  or
         other type of disposal of long-lived  tangible  assets arising from the
         acquisition,  construction,  or development  and/or normal operation of
         such assets. SFAS No. 143 is effective for fiscal years beginning after
         June 15, 2002, with earlier application encouraged.

         The adoption of these pronouncements is not expected to have a material
         effect on the Company's financial position or results of operations.


         (N) LOSS PER SHARE

         Basic  and  diluted  net loss per  common  share  for the  years  ended
         December 31, 2001 and 2000 is computed based upon the weighted  average
         common  shares  outstanding.  Common  stock  equivalents  have not been
         included in the  computation of diluted loss per share since the effect
         would be anti-dilutive.


         (O) BUSINESS SEGMENTS

         The Company operates in one segment and therefore  segment  information
         is not presented.


         (P) FAIR VALUE OF FINANCIAL INSTRUMENTS

         Statement of Financial Accounting Standards No. 107, "Disclosures about
         Fair  Value  of  Financial   Instruments",   requires   disclosures  of
         information about the fair value of certain  financial  instruments for
         which it is  practicable  to estimate that value.  For purposes of this
         disclosure,  the fair value of a financial  instrument is the amount at

                                        F-10
<PAGE>

         which  the  instrument  could be  exchanged  in a  current  transaction
         between  willing  parties,  other than in a forced sale or liquidation.
         The carrying amounts of the Company's accounts receivable,  advances to
         suppliers,   marketable   securities,   accounts  payable  and  accrued
         liabilities,  notes payable - officer, notes payable, and due to factor
         approximates  fair value due to the relatively short period to maturity
         for these instruments.


         (Q) IMPAIRMENT OF LONG-LIVED ASSETS

         The Company has adopted Statement of Financial Accounting Standards No.
         121 (SFAS 121) "Accounting for the Impairment of Long-Lived  Assets and
         for Long-Lived  Assets to be Disposed Of." Under the provisions of this
         statement,   the  Company  has  evaluated  its  long-lived  assets  for
         financial  impairment,  and will continue to evaluate them as events or
         changes in  circumstances  indicated  that the carrying  amount of such
         assets may not be fully recoverable.

         The Company evaluates the  recoverability of long-lived assets not held
         for sale by  measuring  the carrying  amount of the assets  against the
         estimated  undiscounted  future cash flows associated with them. At the
         time such cash flows of certain long-lived assets are not sufficient to
         recover the carrying  value of such assets,  the assets are adjusted to
         their fair values.

         During the year ended  December 31,  2001,  the Company  recognized  an
         impairment loss of $4,764,259 (See Note 7(B)).


         (R) RECLASSIFICATIONS

         Certain  reclassifications  have been  made to the  December  31,  2000
         financial  statements  to conform to the  December  31, 2001  financial
         statement presentation.


NOTE 2     MARKETABLE SECURITIES

         The    Company's    marketable    securities    are    classified    as
         available-for-sale and are reported at fair value based upon the quoted
         market  prices of those  investments  at December  31, with  unrealized
         gains  (losses)  reported  as other  comprehensive  income  (loss) in a
         separate  component of  stockholders'  equity until they are sold.  Any
         realized  gains or losses are  included in net  earnings  (loss) at the
         time of sale (See Note 1(E)).

         The  composition  of  marketable  securities at December 31, 2001 is as
         follows:

                                             COST                FAIR VALUE
                                      -------------------     ------------------

       Common stock               $             212,276    $             3,639
                                      ===================     ==================


         There was no investment  income or expense for the years ended December
         31, 2001 and 2000.

         Unrealized gains (losses) included in other  comprehensive loss for the
         years ended December 31, 2001 and 2000 consisted of the following:

                                             2001                   2000
                                      -------------------     ------------------

                                  $               2,426    $           (30,932)
                                      ===================     ==================



                                      F-11
<PAGE>

                  TORQUE ENGINEERING CORPORATION AND SUBSIDIARY
                        NOTES TO CONSOLIDATED STATEMENTS
                        AS OF DECEMBER 31, 2001 AND 2000


NOTE 3     ACCOUNTS RECEIVABLE, CONCENTRATIONS AND FACTOR AGREEMENTS


         (A) ACCOUNTS RECEIVABLE

         Accounts receivable at December 31, 2001 and 2000 were as follows:

                                                      2001               2000
                                                 -------------       -----------

       Accounts receivable                     $     162,675      $     311,159

       Less: allowance for doubtful accounts          (6,571)              -
                                                 -------------       -----------

       Accounts receivable, net                $     156,104      $     311,159
                                                 =============       ===========


         In  March  2002,  the  Company  regained   possession  of  two  engines
         previously  sold  for  $219,586  (See  Note  3(C)).  The  engines  were
         recovered in connection with ongoing litigation surrounding a factoring
         agreement  (See Note 11(D)).  At December 31, 2001,  the portion of the
         original sale, in the amount  $94,437,  representing  the gross margin,
         was  recorded  as a sales  allowance  and as a  reduction  in  accounts
         receivable.  The remaining  $125,149 will be recorded as an increase in
         inventory in 2002 and a  corresponding  reduction of  receivables  upon
         receipt of the two engines (See Note 18(F)).


         (B) CONCENTRATIONS

         As  of  December  31,  2001  and  2000,   approximately  98%  and  98%,
         respectively, of accounts receivable were due from two customers. Sales
         during 2001 and 2000  primarily  related to three  engine sales and six
         engine sales, respectively, to the above customers.


         (C) FACTOR AGREEMENTS

         On May 2,  2001,  the  Company  entered  into  an  accounts  receivable
         financing  agreement with a factor.  The receivables  were  transferred
         with recourse and subject to a provision that could require the Company
         to repurchase the  receivables.  Under the terms of the agreement,  the
         factor  advances 65% of the face value of the  receivables  sold by the
         Company.  The Company is charged a variable  percentage  fee based upon
         the length of the collection period.  After 180 days, if the customer's
         accounts  receivable  is not paid,  the factor is  entitled to keep and
         assess the remaining 35% holdback reserve as a fee for service.  All of
         the Company's accounts  receivable,  equipment,  furniture and fixtures
         are pledged as collateral under this agreement.

         For the year ended December 31, 2001 the Company has financed  $219,586
         in accounts  receivable  (See Note 3(A)).  As of December 31, 2001,  no
         collections  had been made by the  factor  and the  period in which all
         collections would be due had passed. As of the date of this report, the
         entire $219,586 remains unpaid and continues to accrue interest at 12%.
         Additionally,  the account has been submitted for litigation  (See Note
         11(D)).


NOTE 4     PREPAID EXPENSES

         During  2001,   prepaid  expenses   primarily   included  the  cost  of
         promotional and marketing services totaling $39,506. As of December 31,
         2001,  $19,753 had been charged to  operations.  The remaining  $19,753
         will be expensed in 2002.

                                      F-12
<PAGE>

         During 2000,  prepaid expenses  primarily  included the value of a boat
         engine  exchanged for promotional and marketing  services for one year.
         The value of the engine  exchanged was $64,759,  and as of December 31,
         2000,  $16,190  had  been  charged  to  operations.  During  2001,  the
         remaining  $48,569 was charged to operations.  Due to the cost and fair
         value of the engine exchanged being  equivalent to marketing  services,
         no gain or loss was recognized on the exchange.


NOTE 5  ADVANCES TO SUPPLIERS

         The Company  maintains  deposits on account with various  vendors.  The
         Company,  upon  executing  a  purchase  order with  these  vendors,  is
         required to provide a deposit against which goods are shipped.


NOTE 6  INVENTORIES

         Inventories at December 31, 2001 and 2000 consisted of the following:

                                          2001                   2000
                                    ------------------     ------------------

       Parts                   $             258,459    $           376,532
       Engines in process                     51,549                184,405
       Completed engines                      38,744                228,198
                                    ------------------     ------------------
                               $             348,752    $           789,135
                                    ==================     ==================


         During 2001, management identified certain inventory that was no longer
         used in  production  and  charged  $129,896  to cost of  goods  sold to
         write-down these inventories to their net realizable values.

         During 2000, management  specifically  identified two engines that were
         no  longer  held for  commercial  sale and  their  carrying  value,  of
         $104,008,  was  charged to selling,  general  and other  administrative
         expenses for the year ended December 31, 2000.


NOTE 7     PROPERTY AND EQUIPMENT

         (A) PROPERTY AND EQUIPMENT

         Property and  equipment at December 31, 2001 and 2000  consisted of the
         following:

<TABLE>
<CAPTION>
                                                      2001                   2000
                                                ------------------     ------------------
<S>                                        <C>                      <C>
       Special tooling                     $           3,991,069    $         9,309,965
       Machinery and equipment                           498,398              1,155,278
       Equipment under capital leases                    276,985                646,307
       Vehicles                                            3,731                  8,706
       Computer equipment                                  5,854                 13,660
       Furniture and fixtures                             34,145                 79,673
                                                ------------------     ------------------
                                                       4,810,182             11,213,589
       Less: Accumulated depreciation                 (1,237,070)            (1,761,891)
                                                ------------------     ------------------

       Property and equipment - net        $           3,573,112    $         9,451,698
                                                ==================     ==================
</TABLE>


                                      F-13
<PAGE>

                  TORQUE ENGINEERING CORPORATION AND SUBSIDIARY
                        NOTES TO CONSOLIDATED STATEMENTS
                        AS OF DECEMBER 31, 2001 AND 2000


         (B) LOSS ON IMPAIRMENT

         During 2001,  the property and  equipment of the Company were deemed to
         be impaired and written down to their fair value. Fair value, which was
         determined by reference to the present  value of the  estimated  future
         cash  inflows  of  such  assets,   exceeded  their  carrying  value  by
         $4,764,259.


NOTE 8     NOTES PAYABLE

         (A) Note Payable - Officers

         (i)      During 2000, the Company  received  $71,656 in operating funds
                  from an officer.  The unsecured note bears interest at 10% and
                  the maturity  date was June 30, 2001. As of December 31, 2001,
                  the note was in default.  According to the  provisions  of the
                  note,  the  Company  will  accrue  interest  of $7,166.  As of
                  December  31,  2001,  the  entire  $78,822  of  principal  and
                  interest remain outstanding.

         (ii)     During 2001, the Company  received  $46,500 in operating funds
                  from an officer.  The unsecured note bears interest at 10% and
                  the maturity  date was  December 31, 2001.  As of December 31,
                  2001, the note was in default.  According to the provisions of
                  the note,  the Company  will  accrue  interest  $4,650.  As of
                  December  31,  2001,  the  entire  $51,150  of  principal  and
                  corresponding interest remain outstanding.

         (iii)    During 2001, the Company  received  $30,000 in operating funds
                  from an officer.  Under the terms of the note the principal is
                  due in June 2002.  The note is  non-interest  bearing,  due on
                  demand and unsecured.  However,  upon the maturity date of the
                  note,  if the  principal  is not paid in full,  a 10% interest
                  payment, in addition to principal, will become due and payable
                  immediately.


         (B) NOTE PAYABLE

         During 2001, the Company  received  $115,000 in operating funds from an
         unrelated  party.  The  unsecured  note bears  interest  at 10% and the
         maturity  date was August 31, 2001.  As of December 31, 2001,  the note
         was in default.  According to the  provisions of the note,  the Company
         will accrue  interest at $1,500.  As of December 31,  2001,  the entire
         $116,500 of principal and interest remain outstanding.


NOTE 9  CONVERTIBLE DEBENTURES


         (A) DEBENTURE OFFERING

         On November 14, 2001, in order to provide working capital,  the Company
         entered into an agreement whereby the Purchaser acquired $300,000 of 6%
         Convertible Subordinated Debentures, due November 13, 2006.

         Upon recording the convertible  debenture,  the Company  recognized and
         charged to interest expense, and credited additional paid in capital, a
         beneficial  conversion  feature of $62,069.  The charge  represents the
         amount by which the market price of the  Company's  common stock on the
         commitment  date  exceeds  the  conversion  price  times the  number of
         equivalent shares, which amount to 1,034,483 shares.

         The  Purchaser is entitled,  at its option,  to convert any part of the
         principal amount of the Debenture,  plus accrued interest,  into shares
         (the  "Conversion  Shares") of the Company's common stock, at the price
         per share (the "Conversion  Price") equal to either (a) an amount equal
         to 120% of the  closing  bid price of the  Common  Stock as listed on a
         Principal  Market,  as quoted  by  Bloomberg  L.P.  (the  "Closing  Bid
         Price"),  or (b) an  amount  equal  to 80% of the  average  of the four
         lowest Closing Bid Prices of the Common stock for the five trading days
         immediately preceding the Conversion Date.

                                      F-14
<PAGE>

                  TORQUE ENGINEERING CORPORATION AND SUBSIDIARY
                        NOTES TO CONSOLIDATED STATEMENTS
                        AS OF DECEMBER 31, 2001 AND 2000


         Interest  will be  paid at the  time of  maturity  or  conversion.  The
         Company  may  elect to pay  interest  in cash or in the form of  Common
         Stock.


         (B) CONVERSION

         On December 28, 2001,  the Holder  converted  $20,000 of principal into
         71,942  shares (See Note  13(A)).  Upon  conversion,  the Company  also
         recorded a  beneficial  conversion  feature  by  charging  to  interest
         expense, and crediting  additional paid-in capital,  $5,899. The amount
         represents the amount by which the market price of the Company's common
         stock on the  commitment  date exceeds the  conversion  price times the
         number of equivalent shares (See Note 18(B)(ii)).


NOTE 10  EQUITY LINE OF CREDIT

         On November 9, 2001, the Company  entered into an equity line of credit
         under which the Company may sell to the investor shares of common stock
         for a total  purchase  price of up to  $5,000,000.  For  each  share of
         common stock  purchased  under the Equity Line of credit,  the investor
         will pay 91% of the average of the 2 lowest closing bid prices on which
         the  common  stock is  traded  for  during  the five  days  immediately
         following the notice date. Unless waived by the investor, the amount of
         each  advance  is  subject  to a  monthly  maximum  advance  amount  of
         $208,333.33.  The  investor is  entitled  to retain 5% of each  advance
         under the equity line of credit.

         As of December  31, 2001 the Company had not drawn  against this equity
         line of credit.

         For additional activity see Notes 12(A) and 18(C).


NOTE 11  COMMITMENTS AND CONTINGENCIES


         (A) CAPITAL LEASES

         As of December 31, 2001 and 2000 the Company had non-cancelable capital
         lease agreements. Also see Note 7(B) for loss on impairment.

         Future minimum lease payments under the capital lease are as follows at
         December 31, 2001:

         Total future minimum lease payments              $         656,158
         Less: interest                                             (95,928)
                                                             ----------------
                                                                    560,230
         Less: current portion                                     (217,379)
                                                             ----------------
         Long-term obligation under capital leases        $         342,851
                                                             ================


         Future minimum lease payments for the capital leases as of December 31,
2001 are as follows:

                             2002                        $          217,379
                             2003                                   133,892
                             2004                                   144,553
                             2005                                    64,406
                             2006                                      -
                                                            -----------------
                                                         $          560,230
                                                            =================

                                      F-15
<PAGE>

                  TORQUE ENGINEERING CORPORATION AND SUBSIDIARY
                        NOTES TO CONSOLIDATED STATEMENTS
                        AS OF DECEMBER 31, 2001 AND 2000


         (B) OPERATING LEASE

         The Company  leases its  facilities  under an operating  lease  through
         2002.

         Future  minimum lease  payments for the operating  lease as of December
         31, 2001 are as follows:

                             2002                  $             40,000
                                                      -------------------
                                                   $             40,000
                                                      ===================


         Provided  for in the  agreement is an option to renew the lease for two
         periods of three years each.  Subsequent to December  2001, the Company
         elected  to  renew  the  lease  under  the  provisions  of the  current
         operating  lease  agreement  and will continue to pay a monthly rent of
         $10,000 as adjusted using the price index from 2001.


         (C) CONSULTING AGREEMENT

         In November  2001,  the  Company  entered  into an  investor  relations
         services  agreement.  Under the terms of the agreement,  the consultant
         will receive  50,000 shares of common stock and 200,000 stock  options,
         at a price of $.75 per  share,  exercisable  for two  years  (See  Note
         12(A)).

         The 50,000 shares were valued at $.51 per share for a total of $25,500.
         As of December  31,  2001,  the Company  recorded a  consulting  fee of
         $2,125 and  deferred  consulting  fees of  $23,375.  These  shares were
         issued in January 2002 (See Note 12(A)).

         For financial statement purposes,  the fair market value of the 200,000
         stock  options  granted  was  estimated  on the date of grant using the
         Black-Scholes  option  pricing  model in  accordance  with SFAS No. 123
         using the following  weighted average  assumptions:  expected  dividend
         yield  0%,  risk-free  interest  rate of 2%,  volatility  of  164%  and
         expected term of one year. Based on the preceding assumptions,  a total
         value of $51,997  was  computed  and  credited  to  additional  paid-in
         capital. Additionally, $4,333 was charged to operations and $47,664 was
         recorded as deferred compensation.

         Also see additional activity in Note 18(D).


         (D) LITIGATION

         In November  2001,  an action was filed  against the Company  regarding
         alleged deficiencies in the Company's engines and transmissions sold to
         them. In February  2002,  the Company filed a counter claim against the
         plaintiffs alleging that any damage resulting to the engines was caused
         by defective or negligent  rigging.  As of the date of this report,  no
         discovery  has been taken and at this time the ultimate  resolution  to
         this matter is indeterminable (See Note 3(A)).

         In  March  2002,  the  Company's   factor  filed  an  action   alleging
         non-payment under its security agreement against the plaintiff referred
         to in the preceding  paragraph  and the Company.  The claim against the
         Company is based upon its execution of recourse  commercial  paper upon
         which the Company is secondarily liable. As of the date of this report,
         no answer has yet been filed in this matter and the ultimate resolution
         to  this  matter  is  indeterminable.  As of  December  31,  2001,  the
         liability to the factor, in the amount of $219,586 is already reflected
         on the Company's balance sheet (See Notes 3(A) and (C) and 18(F)).


                                      F-16
<PAGE>

                  TORQUE ENGINEERING CORPORATION AND SUBSIDIARY
                        NOTES TO CONSOLIDATED STATEMENTS
                        AS OF DECEMBER 31, 2001 AND 2000


NOTE 12  STOCKHOLDERS' EQUITY

         (A) ISSUANCE OF COMMON STOCK AND COMMON STOCK TO BE ISSUED

         On December  28,  2001,  the Holder  converted  $20,000 of  convertible
         debentures to 71,492 shares having a fair value of $20,000.  The shares
         were issued on January 2, 2002 and are classified as common stock to be
         issued (See Notes 9(A) and 18(B)).

         In November 2001,  200,000  shares of Rule 144 restricted  common stock
         were issued, for $50,000, to a consultant for cash.

         In  November  2001,  625,000  shares of  common  stock  were  issued as
         compensation  to  Yorkville  Advisors  Management  LLC  to  induce  the
         transaction.  The  shares  were  valued  at $.42 per  share for a total
         amount of $262,500 (See Note 10).

         In  November  2001,  20,000  shares of common  stock  were  issued to a
         consultant  for business  consulting  services at $1.05 per share for a
         total of  $21,000.  As of  December  31,  2001 the  Company  recorded a
         consulting fee of $5,250 and deferred consulting fees of $15,750.

         In November  2001, the Company  entered into a consulting  agreement to
         issue 50,000 shares of common stock.  The shares were issued in January
         2002 and are classified as common stock to be issued (See Note 11(C)).

         In  July  2001,  180,000  shares  of  common  stock  were  issued  as a
         consulting fee at $.63 per share for a total of $113,400.

         On  May  15,  2001  35,543  shares  of  common  stock  were  issued  as
         compensation  to an  employee  $1.16 per share for a total of  $41,230.
         These  shares were  issued  upon the filing of a form S-8  registration
         statement under the Securities Act of 1933.

         On May 2, 2001,  180,000  restricted shares of common stock were issued
         as a consulting  fee at $1.07 per share for a total of $192,600.  Under
         the  terms  of the  agreement,  the  consultant  would  have  performed
         services  over a period  of seven  months.  As of June  30,  2001,  the
         Company had  recorded a  consulting  fee expense of $55,028.  Effective
         July 1,  2001,  the  Company  rescinded  the  consulting  contract  for
         nonperformance and as a result, the 180,000 shares of common stock were
         cancelled  and  returned to the Company and no  additional  expense was
         recorded.

         In February 2001,  125,000  shares of Rule 144 restricted  common stock
         were  issued  at  $2.00  per  share,  for a total of  $250,000,  to two
         officers and one  stockholder.  These shares were issued in reliance on
         the  exemption  from  registration  provided  by  Section  4(2)  of the
         Securities Act of 1933.


         (B) PRIVATE PLACEMENT

         As of December 31, 2000  proceeds of $913,000  for 578,359  shares were
         received from a private placement  pursuant to Rule 506 of Regulation D
         Section 4(2) of the Securities Act of 1933.


         (C) STOCK OPTIONS

         On October 7, 1999, the 1999 Stock Option Plan (the "Plan") was adopted
         by the Board of Directors of the Company and approved by the  Company's
         stockholders.  The  Plan  was  developed  to  provide  a means  whereby
         directors,  officers,  employees  of,  and  certain  persons  rendering
         services  to the  Company or any  subsidiary  may be  granted  stock to
         purchase common stock of the Company.


                                      F-17
<PAGE>

                  TORQUE ENGINEERING CORPORATION AND SUBSIDIARY
                        NOTES TO CONSOLIDATED STATEMENTS
                        AS OF DECEMBER 31, 2001 AND 2000


         The Plan  authorizes  options  up to  500,000  shares of the  Company's
         common  stock  and is  administered  by the Board of  Directors  of the
         Company or a committee of two or more members of the Board of Directors
         (the "Plan  Committee").  The Company grants incentive and nonqualified
         stock options. Incentive stock options are only granted to employees of
         the Company or any  subsidiary  thereof.  The  exercise  price which is
         established  by the Plan Committee may not be less than 85% of the fair
         market value of the common stock at the time of grant for  nonqualified
         stock  options,  may not be less than 100% of the fair market  value of
         the common stock at the time of grant for  incentive  stock options and
         may not be less than 110% of the fair market  value of the common stock
         at the  time of  grant  if  incentive  stock  options  are  granted  to
         employees  owning  more than ten percent of the total  voting  power or
         value of all  classes  of stock of the  Company.  The term of the stock
         options is  determined  by the Plan  Committee and shall not exceed ten
         years from the date of grant.  In the case of incentive  stock  options
         which are  granted to  employees  owning  more than ten  percent of the
         total voting power or value of all classes of stock of the Company, the
         term may not exceed  five  years.  During the year ended  December  31,
         1999,  the  Company  issued  240,000  stock  options  under the plan to
         employees and Board of Director  members.  The Company cancelled 10,000
         options under the plan to employees  during the year ended December 31,
         2000 and also granted  60,000  options  under the plan to employees and
         directors  during the year ended  December 31, 2000.  During 2001,  the
         Company  granted  30,000  options  under  the  Plan  to  employees  and
         directors. Also, the Company cancelled 42,000 options under the plan to
         employees.

         In accordance  with SFAS No. 123, for options issued to employees,  the
         Company  applies  APB Options  No. 25 and  related  interpretations  in
         accounting for the options issued.  Accordingly,  compensation costs of
         $7,178 and  $11,536  and  deferred  compensation  expense of $1,507 and
         $8,684 respectively,  were recognized as of December 31, 2001 and 2000,
         computed  in   accordance   with  the  intrinsic   value  method.   Had
         compensation  cost for the Company's  options been determined  based on
         the fair market value of the options at the grant date, consistent with
         SFAS No. 123, the  Company's  net loss for the year ended  December 31,
         2001 and 2000  would  have  been  increased  to the  pro-forma  amounts
         indicated below.

<TABLE>
<CAPTION>
                                                          2001                      2000
                                                    ------------------       -------------------
<S>                            <C>               <C>                      <C>
       Net loss                As reported       $        (8,534,825)     $         (2,752,608)
                               Pro forma         $        (8,684,259)     $         (3,045,648)

       Net loss per share      As reported       $              (.97)     $              (.343)
                               Pro forma         $              (.99)     $              (.380)
</TABLE>


         The  effect  of  applying  Statement  No.  123  is  not  likely  to  be
         representative  of the effects on reported  net income for future years
         due to, among other things, the effects of vesting.

         For financial  statement  disclosure  purposes the fair market value of
         each stock option  granted was estimated on the date of grant using the
         Black-Scholes  Option-Pricing  Model in  accordance  with SFAS No.  123
         using the following  weighted-average  assumptions:  expected  dividend
         yield 0%, risk-free  interest rate of 3.44% in 2001 and 5.125% in 2000,
         volatility  of 164% in 2001 and 229% in 2000 and expected term of three
         years in both 2001 and 2000.


                                      F-18
<PAGE>

                  TORQUE ENGINEERING CORPORATION AND SUBSIDIARY
                        NOTES TO CONSOLIDATED STATEMENTS
                        AS OF DECEMBER 31, 2001 AND 2000


         A summary of the  options  issued to  employees  and Board of  Director
         members as of December 31, 2001 and 2000 is presented below:

<TABLE>
<CAPTION>
                                                                  2001                              2000
                                                                  ----                              ----
                                                                         Weighted                         Weighted
                                                                          Average                         Average
                                                       Number of         Exercise        Number of        Exercise
                                                        Options            Price          Options           Price
                                                      -------------     ------------    -------------     -----------
<S>                                                       <C>        <C>                    <C>        <C>
       STOCK OPTIONS
        Balance at beginning of period                    290,000    $        2.67          240,000    $       2.77
        Granted                                            30,000             3.25           60,000            3.01
        Cancelled                                         (42,000)           (2.15)         (10,000)          (1.81)
        Exercised                                            -                -                -               -
        Forfeited/expired                                    -                -                -               -
                                                      -------------     ------------    -------------     -----------
        Balance at end of period                          278,000    $        2.16          290,000    $       2.67
                                                      -------------     ------------    -------------     -----------
        Options exercisable at end of period              274,100             3.02          250,626            2.93
                                                      -------------     ------------    -------------     -----------
        Weighted average fair value of options
         granted during the period                                   $        3.25                     $       3.01
</TABLE>


         The  following  table  summarizes   information   about  stock  options
         outstanding at December 31, 2001:

<TABLE>
<CAPTION>
                                 Options Outstanding                                      Options Exercisable
       ------------------------------------------------------------------------     ---------------------------------
                                                    Weighted
                                 Number              Average        Weighted           Number             Weighted
            Range Of         Outstanding At        Remaining         Average        Exercisable At         Average
            Exercise          December 31,        Contractual       Exercise         December, 31,        Exercise
              Price               2001                Life            Price              2001               Price
            -----------     -----------------     -------------    ------------     ----------------     ------------
<S>                                 <C>                     <C>          <C>               <C>                 <C>
         $       1.81                48,000                 7            1.81               44,000             1.81
         $       3.25               230,000                 3            3.25              230,000             3.25
                            -----------------     -------------    ------------     ----------------     ------------
                                    278,000                 5            3.00              274,100             3.02
                            =================     =============    ============     ================     ============
</TABLE>

NOTE 13  INCOME TAXES

         The  Company  and its  subsidiary  have  elected to file  separate  tax
         returns.  Income tax expense (benefit) for the years ended December 31,
         2001 and 2000 for the parent company is summarized as follows:

<TABLE>
<CAPTION>
                                                       2001                   2000
                                                 ------------------     ------------------
<S>                                         <C>                     <C>
       Current:
       Federal                              $               -       $              -
       State                                                -                      -
       Deferred-Federal and State                     (2,900,200)              (934,900)
       Change in Valuation Allowance                   2,900,200                934,900
                                                 ------------------     ------------------
       Income tax expense (benefit)         $               -       $              -
                                                 ==================     ==================
</TABLE>

                                            F-19
<PAGE>

                  TORQUE ENGINEERING CORPORATION AND SUBSIDIARY
                        NOTES TO CONSOLIDATED STATEMENTS
                        AS OF DECEMBER 31, 2001 AND 2000


         The Company's tax expense  differs from the  "expected" tax expense for
         the years ended December 31, 2001 and 2000, as follows:

<TABLE>
<CAPTION>
                                                                        2001                   2000
                                                                  ------------------     ------------------
<S>                                                          <C>                     <C>
       U.S. Federal income tax provision (benefit)           $          (2,900,200)  $           (934,900)
       Effect of unused net operating loss carryforward                  2,900,200                934,900
                                                                  ------------------     ------------------

                                                             $                -      $               -
                                                                  ==================     ==================
</TABLE>

         The tax effects of temporary  differences that gave rise to significant
         portions of deferred tax assets and  liabilities  at December 31 are as
         follows:

<TABLE>
<CAPTION>
                                                                     2001                   2000
                                                               ------------------     ------------------
<S>                                                       <C>                      <C>
       Deferred tax assets:
       Net operating loss carryforward                    $           4,065,100    $         1,164,900
       Less valuation allowance                                      (4,065,100)            (1,164,900)
                                                               ------------------     ------------------

       Net deferred tax assets                            $                -       $              -
                                                               ==================     ==================
</TABLE>

         At December 31, 2001, the Company has net operating loss  carryforwards
         of  approximately  $11,955,700  for U.S.  Federal  income tax  purposes
         available to offset  future  taxable  income  expiring on various dates
         through 2021.

         The  valuation  allowance  at January 1, 2001 was  $1,164,900.  The net
         change in the valuation  allowance  during the year ended  December 31,
         2001 was an increase of approximately $2,900,200.


NOTE 14  EXTRAORDINARY ITEM

         In June 2000, the Company's  subsidiary confirmed the extinguishment of
         debts  from  certain  affiliates  and a  former  shareholder,  totaling
         $28,708.  As a result,  an  extraordinary  gain was realized during the
         year ended December 31, 2000 (See Note 16).


NOTE 15  ACQUISITION

         Effective May 28, 1999,  the Company  acquired the  outstanding  common
         stock of IPSL a Nevada corporation,  incorporated on April 27, 1998, in
         exchange  for  1,500,000  shares of the  Company's  common  stock.  The
         acquisition  was accounted for under the purchase  method of accounting
         and the stock  was  valued at $7.84  per  share,  based on the  average
         quoted  trading price before and after the purchase was  determined and
         the announcement was made. The resulting purchase price was $11,760,000
         and was allocated,  based upon an independent  appraisal  performed for
         allocation purposes,  to the assets acquired and liabilities assumed as
         follows:

       Marketable securities                            $             637,045
       Inventory                                                    1,018,808
       Special tooling (See Note 7(B))                              9,256,014
       Machinery and equipment (See Note 7(B))                      1,122,509
       Furniture, fixtures, and other (See Note 7(B))                  34,363
       Loan fee payable                                              (200,875)
       Loan to stockholder                                           (107,864)
                                                             ------------------
                                                        $          11,760,000
                                                             ==================


                                      F-20
<PAGE>

                  TORQUE ENGINEERING CORPORATION AND SUBSIDIARY
                        NOTES TO CONSOLIDATED STATEMENTS
                        AS OF DECEMBER 31, 2001 AND 2000


NOTE 16  OTHER RELATED PARTY TRANSACTIONS

         As of December  31, 2000 the Company  owed two  principal  stockholders
         $28,708.  Pursuant  to an  agreement  entered  into  between  IPSL  and
         affiliates of a principal  stockholder of IPSL prior to the acquisition
         the Company owed the  affiliates  $28,708 at December 31, 1999 relating
         to prior loans made to the Company.  During 2000 the debt was cancelled
         and recorded as a gain on extinguishment of debt (See Note 14).

         During 2000, the Company  received  $60,000 in operating funds from two
         stockholders. In addition, $11,656 of reimbursable expenses was owed to
         one of the  stockholders  as of December 31,  2000.  All loans from the
         stockholders  were converted to non-interest  bearing notes payable due
         June 30, 2001 (See Note 8(A)(i)).


NOTE 17  GOING CONCERN

         The accompanying  financial statements have been prepared assuming that
         the Company will  continue as a going  concern.  The Company has a loss
         from  current  operations  of  $8,534,825,  a  negative  cash flow from
         operating  activities of $1,126,718 and a working capital deficiency of
         $725,507 at December 31, 2001. These conditions raise substantial doubt
         about the Company's ability to continue as a going concern.

         Realization  of a  major  portion  of the  assets  in the  accompanying
         balance sheet is dependent  upon  continued  operations of the Company,
         which in turn is  dependent  upon  the  Company's  ability  to meet its
         working capital requirements, and the success of its future operations.
         Management  believes  that action  presently  being taken to revise the
         Company's operating and financial  requirements provide the opportunity
         for the Company to continue as a going concern.


NOTE 18  OTHER SUBSEQUENT EVENTS


         (A) NOTE PAYABLE - OFFICER

         During March 2002, the Company received $10,000 in operating funds from
         an officer.  Under the terms of the note,  the principal is due in June
         2002. The note is  non-interest  bearing,  due on demand and unsecured.
         However,  upon the maturity  date of the note,  if the principal is not
         paid in full and the note is in  default,  a 10%  interest  payment  in
         addition  to  principal  will become due and  payable  immediately.  In
         addition,  the  Company  will also issue  42,000  shares of  restricted
         common  stock at a time yet to be  determined  for the working  capital
         funds.


         (B) CONVERTIBLE DEBENTURES

         (i)      On January 2, 2002, the Company issued 71,942 shares of common
                  stock  in  connection   with  the  conversion  of  $20,000  in
                  principal (See Note 9).

         (ii)     During  January,   February  and  March  2002,  an  additional
                  1,013,462  shares of common  stock were  issued in  connection
                  with the conversion of $130,000 in principal (See Note 9).


         (C) EQUITY LINE OF CREDIT

         In January 2002, the Company  obtained  $50,000 of working capital from
         its equity  line of credit and issued  806,452  shares of common  stock
         (See Note 10).


                                      F-21
<PAGE>

                  TORQUE ENGINEERING CORPORATION AND SUBSIDIARY
                        NOTES TO CONSOLIDATED STATEMENTS
                        AS OF DECEMBER 31, 2001 AND 2000


         (D) CONSULTING AGREEMENT

         In February 2002, the Company entered into a consulting  agreement with
         an individual to provide business advisory services. Under the Terms of
         the  agreement,  the consultant  will receive  900,000 shares of common
         stock,  valued at $.09 per share,  for a total of $81,000.  The term of
         the agreement is for one year.


         (E) LOANS

         In February 2002, the Company  received $25,000 in operating funds from
         an unrelated  individual.  In exchange for the loan, the Company issued
         105,000  shares of common stock valued at $.08 per share for a total of
         $8,400.  The loan is payable  contingent  upon the future  sales of two
         manufactured engines.


         (F) FACTOR AGREEMENT

         During  March 2002,  the two engines  previously  sold for $219,586 and
         factored  during 2001,  which are included in accounts  receivable  for
         $125,149,  were returned to the Company by the customer (See Notes 3(C)
         and 11(D)).


         (G) ENGINE SALES

         In February  2002,  the Company  entered into a sales  agreement with a
         customer to sell two engines for an aggregate of $209,910.


















                                      F-22