U.S. SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

þ		ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE FISCAL YEAR ENDED DECEMBER 31, 2009

o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE TRANSITION PERIOD FROM                      TO                     

TORVEC, INC.

NEW YORK		16-1509512
(State or other jurisdiction of		I R S Employer Identification No.
incorporation or organization)
1999 Mount Read Blvd.
Building 3
Rochester, New York		14615
(Address of principal executive offices)		(Zip Code)

Issuer’s Telephone Number, including Area Code: (585) 254-1100

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

		Name of each exchange on
Title of each class		which registered

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

$.01 par value common voting stock

(Title of class)

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o No þ

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o No þ

Note—Checking the box above will not relieve any registrant required to file reports pursuant to Section 13 or 15(d) of the Exchange Act from their obligations under those Sections.

Indicate by checkmark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 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 þ No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o No o

Indicate by checkmark if disclosure of delinquent filers in response to Item 405 of Regulation S-K (229.405 of this chapter) is not contained herein, and will not 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-K or any amendment to this Form 10-K. þ

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer o		Accelerated filer o		Non-accelerated filer o		Smaller reporting company þ
				(Do not check if a smaller reporting company)

Indicate by checkmark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes o No þ

State the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold, or the average bid and asked price of such common equity, as of the last business day of the registrant’s most recently completed second fiscal quarter. $ 9,835,710

State the number of shares outstanding of each of the issuer’s classes of common equity, as of March 30, 2010–36,480,367

 

 

TORVEC, INC. AND SUBSIDIARIES
(A Development Stage Company)

TABLE OF CONTENTS

		PAGE
PART I
Item 1. Description of Business			3
Item 1A. Risk Factors			7
Item 1B. Unresolved Staff Comments			8
Item 2. Properties			9
Item 3. Legal Proceedings			9
Item 4. Submission of Matters to a Vote of Security Holders			10
Item 5. Market for Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities			10
Item 6. Selected Financial Data			19
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations			19
Item 7A. Quantitative and Qualitative Disclosures About Market Risk			23
PART II — DECEMBER 31, 2009 and 2008 FINANCIAL INFORMATION
Item 8. Consolidated Financial Statements			F-1
Report of Independent Registered Public Accounting Firm			F-2
Torvec, Inc. and Subsidiaries Consolidated Balance Sheet as of December 31, 2009 and 2008			F-3
Torvec, Inc. and Subsidiaries Consolidated Statements of Operations for each of the years in the Two-Year Period Ended December 31, 2009 and for the Period from September 25, 1996 (Inception) through December 31, 2009			F-4
Torvec, Inc. and Subsidiaries Consolidated Statements of Changes in Stockholders’ Equity (Capital Deficit) for the Period from September 25, 1996 (Inception) through December 31, 2009			F-5 - F-12
Torvec, Inc. and Subsidiaries Consolidated Statements of Cash Flows for each of the years in The Two Year Period Ended December 31, 2009 and for the Period from September 25, 1996 (Inception) through December 31, 2009			F-13
Notes to Consolidated Financial Statements			F-14 - F-34
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure			24
Item 9A. Controls and Procedures			24
Item 9B. Other Information			25
PART III
Item 10. Directors, Executive Officers, Promoters and Control Persons; Compliance with Section 16(a) of the Exchange Act			25
Item 11. Executive Compensation			40
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters			48
Item 13. Certain Relationships and Related Transactions and Director Independence			50
Item 14. Principal Accountant Fees and Services			52
Item 15 Exhibits			53
SIGNATURES PAGE			58
EXHIBIT INDEX			59
Exhibit 23.1
Exhibit 31.1
Exhibit 32

PART I

Item 1.		DESCRIPTION OF BUSINESS

(a) History and Development of Our Inventions

Torvec, Inc. was incorporated as a New York business corporation on September 25, 1996. Upon its incorporation, the company acquired numerous patents, inventions and know-how created for more than fifty years by Vernon E. Gleasman and his sons, James and Keith Gleasman, a family with more than fifty years experience in the automotive industry. Upon its incorporation, the company commenced the development of its full terrain vehicle (“FTV”^®) — the merger of the speed and handling of a truck with the full terrain capability of a tracked vehicle. Through the ongoing creation, development and improvement of its FTV, the company created the following inventions relating to six distinct fields of automotive and related technology. Each of the following has individual commercial potential:

	(i)		Iso-torque® differential;
	(ii)		infinitely variable transmissions (“IVT”) for diesel and gasoline engines;
	(iii)		steering drive and suspension system for tracked vehicles;
	(iv)		high speed, steel-reinforced rubber tracks;
	(v)		hydraulic pump and motor;
	(vi)		constant velocity joint mechanism.

As a family, the Gleasmans’ manufactured, operated and sold their own innovative products for the thirty years prior to the company’s incorporation. The Gleasmans’ knowledge of the automotive industry and its trends was the basis of the invention of the company’s FTV. The Gleasmans’ creativity, experience and expertise have been recognized worldwide — in particular, Vernon E. Gleasman was the recipient of the Society of Automotive Engineers’ 1983 Schwitzer Award for the most innovative new product at the Indianapolis 500 and the 2001 Distinguished Inventor of the Year Award granted by the Rochester Intellectual Property Law Association. In addition Vernon Gleasman was nominated for the Lemelson-MIT prize, one of, if not the, most prestigious engineering awards in the world. After a long and productive life, Vernon Gleasman passed away on November 19, 2004 at age 92.

At the present time, management believes there is no worldwide, patented tracked vehicle with the high speed (highway driving speeds) and handling characteristics of the company’s FTV. To facilitate the development of the FTV the company had to resolve numerous engineering hurdles and the company’s success in so resolving these engineering problems led to the inventions described above. The company’s first generation FTV prototype was completed in February, 1999 and was initially showcased to the public in early spring, 1999. We have continued to improve the FTV since its introduction in the spring of 1999.

The company and its wholly-owned subsidiaries rely on the full-time services of Keith E. Gleasman, its president, a staff of six highly qualified engineers and technicians and an administrative staff consisting of two full-time consultants. The company also retains a full-time chief of security. James Y. Gleasman served as the company’s chief executive officer and interim chief financial officer from August, 2005 through his retirement effective March 14, 2010.

(b) Our Automotive Properties

The following is an overview of our automotive technologies:

(1) Full Terrain Vehicle (FTV^®)

Historically, wheeled trucks and cars have been able to travel at high speeds on prepared roads and are easy to drive and steer. However, wheeled trucks and cars have lacked the ability to traverse truly difficult terrain. On the other hand, tracked vehicles have the ability to traverse truly difficult terrain but are difficult to steer precisely, are cumbersome to drive and are limited to relatively low speeds even on prepared roads.

The company’s production-ready full terrain vehicle is a new type of vehicle which management believes combines the high speed capabilities of trucks and cars with the high traction capabilities of tracked vehicles. The FTV incorporates two company inventions — the steering drive and suspension system for tracked vehicles and high speed steel-reinforced rubber tracks. The company tested the FTV’s functionality and durability over the five years ending in October, 2008 at its facilities in Rochester, New York and over an eight month period ending in June, 2009, the United States Air Force tested the vehicle at Tyndale Air Force Base, Panama City, Florida.

Based upon these tests, the company believes it has shown that the FTV is relatively easy to drive and steers as easily as a car and that it has shown that this tracked vehicle can traverse most terrains, with driving speeds of up to 40-50 miles per hour being attainable on pavement and other relatively flat surfaces. The company also believes that it has shown that the FTV is environmentally sensitive due to its low ground pressure of approximately 2 pounds per square inch. The FTV does not damage paved road surfaces, leave ruts or cause potholes on unpaved surfaces. In comparison, a person displaces approximately 5 to 7 pounds per square inch. The FTV is able to perform as it does because of its unique steering mechanism, which is protected by several U.S., European and Asian patents. This steer-drive mechanism can best be described in engineering terms as a hydro-mechanical steering mechanism. The “mechanical” portion is manufactured from conventional, high volume gearing, while the “hydro” portion is provided by a hydraulic pump and motor.

(2) IsoTorque^® Differential

In 1951, Vernon E. Gleasman invented the dual-drive differential (the Torsen^®). For the next thirty years, Vernon Gleasman and his sons manufactured and marketed this differential for the military, for incorporation in high performance cars, off road cars and 4x4 trucks. In 1982 the Gleasman family sold the Torsen differential to the unrelated Gleason Corporation.

The company has been working with a number of Nissan-sponsored race car teams. The IsoTorque has proven to operate in the manner the company anticipated—it has, in the company’s opinion, shown itself to be an extremely reliable and efficient differential. Reliable—the race cars have used the IsoTorque differential for a complete racing season with no failures compared to conventional limited-slip differentials which experience failure after a few races. Efficient—the IsoTorque-equipped cars improved the lap times of non-Isotorque-equipped cars by one (1) to two (2) seconds per lap. In addition, according to the race car drivers, the handling and safety of the vehicle was greatly improved.

Interest in the IsoTorque differential has spread to several domestic automotive and truck companies.

(3) Infinitely Variable Transmission — Hydraulic Pump/Motor

The company variously has developed three distinct generations of infinitely variable transmissions (IVTs) for diesel and gasoline engines, namely, the first generation, hydro mechanical transmission configured for our Dodge Ram diesel 4x4, including an all-hydraulic variation configured for gasoline engines (2003, 2004 ) a second generation, modular, hydro mechanical transmission configured for both gasoline and diesel engines ( 2005 ) and the third generation, single hydraulic unit configured for both diesel and gasoline engines (2006). Each transmission provides an uninterrupted drive through an infinite number of speed ratios, allowing ideal torque flow to propel the vehicle while permitting the engine to run at optimum efficiency. The company believes that the next generation of diesel engines with state-of-the-art electronics will allow interfacing and provide the necessary mechanisms to adequately control the infinitely variable transmission. Industry data has shown that the use of continuously variable and infinitely variable transmissions improves the fuel efficiency of all engines (gas/diesel), thus leading to reduced pollution. The company believes its testing has proven that its infinitely variable transmission will permit automotive diesel/gasoline engines to operate at ideal combustion rates which will reduce pollution and provide improved fuel economy while operating.

In addition to having the potential of reducing diesel particulates and nitrogen-oxide, the company’s transmissions are less complicated and have approximately 2/3 fewer parts when compared to a conventional four or five speed automatic transmission, making it smaller in size and lighter in weight. The company’s transmissions, which the company believes will be simpler and less expensive to manufacture than conventional transmissions, should provide the automotive industry with a higher performing product at a lower manufacturing cost.

We began testing our IVT technology in March, 2008 using industry-accepted and EPA-sanctioned procedures. We have run identical side-by-side comparisons of the IVT to a four-speed automatic transmission utilizing the EPA-sanctioned New York City cycle test. The company’s IVT consistently achieved an approximate 20% gain in fuel economy as well as a dramatic reduction in particulates using filtered paper on the exhaust outlet.

Our testing uses a torque-load cell between the engine and the transmission, the most accurate and latest computer software and hardware, Maxx fuel-flow meters accurate to one-tenth of one percent and a Mustang chassis dynamometer to collect extremely accurate and repeatable data.

(4) Constant Velocity Joint Mechanism

Present day constant velocity joint technology was developed over eighty years ago and has remained virtually the same with a few minor improvements. Existing constant velocity joints function by allowing hardened steel balls to slide in hardened, steel curved tracks. This design creates an inherent lubrication problem as the balls move through their cycle. An additional, inherent weakness of this design is that torque is transferred by balls in a concentrated sliding contact point. Traditional constant velocity joint technology, therefore, requires tailor-made high pressure lubrication and extremely tight tolerances to function properly. Further, conventional constant velocity joint technology requires extensive, very accurate grinding on all surfaces, including the “inner and outer raceways”, i.e. the curved tracks. The ball cage must be spherically ground, both inside and outside. This grinding is done with ball grinders which lose tolerance very quickly, thus necessitating constant replacement. The ground surfaces are very hard and require a precision surface finish such that the hardened metal balls will fit exactly.

Our first rendition of the constant velocity joint uses gears rather than sliding balls to function. The gears have line contact, spreading the load over a long line, creating a rolling motion that is approximately 98% efficient. The company’s constant velocity joint, therefore, does not require high pressure lubrication and requires only conventional automotive tolerances to function. In addition, the company constant velocity joint design eliminates the need for extensive grinding, including the need for ball grinders.

We have continued development of our constant velocity joint technology in order to reduce complexity and manufacturing cost and improve functionality and efficiency. In this “next generation” version of the technology, we have retained our patented spherical gear design but have replaced the outer gear teeth with hardened steel balls while eliminating the expensive curved ball tracks and the internal steel cage. The balls now sit in a pocket and during operation perform a rolling rather than a sliding motion. The balls are the functional equivalent of a bearing which provides long life, greater efficiency and because it is relatively inexpensive to drill and size the holes for the steel balls, reduces overall manufacturing costs.

Management believes that we have significant competitive advantages consisting of less weight, less cost and greater efficiencies.

On December 12, 2007, the company granted High Density Poweretrain, Inc. of Waterford, Michigan (“HDP”) an exclusive, worldwide license to incorporate the company’s constant velocity joint technology in HDP’s family of highly-powered, multifueled, fuel efficient, light weight, cost effective internal combustion engines. In consideration for the grant of the license, the company will receive annual royalties equal to 5% of annual gross revenues generated by the sale of HDP’s multifuel engines, including all sublicense of such technology. There are no minimum royalty payments and the grant does not affect the company’s ability to commercialize its constant velocity joint technology in any other field and/or application. At December 31, 2009, the company had not earned any royalties under this agreement.

(c) Current Status of Product Development

A complete discussion concerning the current status of product development, including a description of current projects, is found under the caption “Management Discussion & Analysis of Financial Condition and Results of Operations.”

(d) Partnership with Rochester Institute of Technology

On July 31, 2009, the company and Rochester Institute of Technology (“RIT”) agreed to the establishment of a Safety and Efficiency in Automobiles Laboratory (“SEAL”) at RIT to explore the synergies that can be created by the mutual cooperation between the company, its management and its personnel and RIT, its faculty, staff and students towards development of advanced automotive and related energy technologies, including enhancing manufacturing efficiencies for their production. The initial goals of SEAL are:

	1.		to provide RIT’s faculty, staff, and students with the opportunity to participate in the ongoing refinement and enhancement of advanced automotive and related energy technologies designed for specific applications to the world-wide automotive and related energy industries;
	2.		to provide RIT’s students with cooperative educational opportunities with a view to future employment; through joint research, to further refine the company’s advanced automotive and related energy technologies, including product evaluation and testing to improve the production and manufacturing of such technologies;
	3.		to jointly obtain grants and other forms of governmental and nongovernmental research funding in order to implement the purposes of SEAL and advance research in the industry of automotive and related industries;
	4.		to establish SEAL as a leader in the technological and manufacturing applications of advanced automotive and related energy technologies including the development of new and increased employment opportunities in the automotive and related energy industries.

In order to implement the purposes and goals of SEAL, the company and RIT have agreed to:

	1.		affirmatively work to provide each other’s faculty, staff, students, and personnel with access to the company’s advanced automotive and related energy technologies, technical know-how, including Torvec personnel, offices and testing facilities, and RIT’s facilities and laboratories pursuant to other mutually agreeable contracts and/or sponsored research agreements between the company and RIT as applicable;
	2.		affirmatively work to engage each other’s faculty, staff, students, and personnel in opportunities through SEAL for refinement, evaluation and testing advanced automotive and related energy technologies, including designing, testing and evaluating such technologies (including the company’s) for possible production pursuant to other mutually agreeable contracts and/or sponsored research agreements between the company and RIT as applicable;
	3.		affirmatively participate in establishing educational and training programs for RIT personnel, including when and where appropriate, designing and creating cooperative educational and employment opportunities for RIT’s students in the fields of advanced automotive and related energy technologies;
	4.		affirmatively participate in jointly approved efforts to obtain governmental and nongovernmental funding to provide financial support for the purposes and programs of SEAL, including the prompt completion of any written proposals, required business plans, budgets and similar submissions and statements-of-work in pursuit of research, academic development, and business goals;
	5.		affirmatively seek to engage additional automotive and relate energy companies and organizations in the purposes and programs of SEAL.

The company and the Center for Integrated Manufacturing Studies at RIT entered into an agreement in October, 2009 to enable Torvec to test its constant velocity joint technology for the worldwide mining industry under SEAL’s auspices. To accomplish this goal, the company entered into an agreement on November 11, 2009 with Eastern Mining & Industrial Supply, Inc. of Chapmanville, West Virginia.

(e) Competition, Industry and Market Acceptance

The company believes that its automotive technology is superior to similar products manufactured in the worldwide automotive industry and in many instances represents a true paradigm shift with respect to presently known technology. However, through December 31, 2009, the company has not generated significant revenues from operations. It has taken the company time (due to both cash-flow restraints existing from time to time and the increasing demand on the part of the industry for production-ready prototypes) to develop its products so that each automotive product is ready for commercialization and production-ready.

Beginning in 2006, the company initiated a series of programs designed to demonstrate its FTV^®®, IsoTorque^® differential, infinitely variable transmission and constant velocity joint to representatives of multiple domestic and foreign automobile manufacturers and first-tier suppliers to the automotive industry.

The company’s ability to generate revenue and become profitable is considerably dependent upon acceptance by automotive manufacturers and/or first-tier suppliers of the technical superiority of the company’s products, their generally lower manufacturing costs, their generally lighter weight and beneficial impact upon the competitive, worldwide demand for raw materials and their environmentally-friendly attributes. The automotive industry, however, has committed substantial resources to product systems utilizing old technology as well as to new product systems (e.g. hybrids) which the industry believes may fulfill its short and long term needs. In addition, the industry historically has been characterized by a resistance to embracing new technologies from sources outside of the industry’s own research and development units (the “not invented here” syndrome).

Essentially, the market for all of the company’s automotive technologies, except for the FTV^®, is occupied by competing products manufactured and/or utilized by the very manufacturers and/or first tier suppliers which the company is attempting to attract. Thus, management is challenged to demonstrate that the company’s automotive technologies will result in a greater market share for the acquiring and/or licensing manufacturer and/or first-tier supplier, if not initially, then over a finite period of years (generally, in no case greater than the existing or expected patent protection for the technologies). Such demonstration, including significantly the expected revenues and profits to be achieved by virtue of such increased market share, becomes the basis for an evaluation of the company’s automotive technologies with such evaluation designed to generate a fair and adequate price for such technologies.

As the result of its initiatives commencing in 2006 and more fully implemented since 2007, the company is currently engaged in a number of projects with domestic and foreign enterprises, including General Motors, Ford Motor Company, Hyundai, Tesla as well as the United States Air Force, with respect to its FTV and IsoTorque^® differential technology. The company believes that the projects will become revenue-producing and involve tailor-making design-specific applications of these technologies for the end-user’s specifications.

The company’s FTV^® is a unique vehicle which has no direct, market competitor. Management’s opinion with respect to the uniqueness of the FTV was confirmed by the United States Air Force purchase of an FTV prototype on a “sole source” basis in the fall of 2008.

The company’s FTV can traverse road and off-road conditions, especially in the target market countries of Asia, Africa, Central and South America, which cannot be traversed by 4X4s at all. Secondly, no other comparable tracked vehicle can match the FTV’s speed (50-60mph) under normal road conditions. Consequently, at present, there is no identifiable category of vehicle that encompasses all of the capabilities of the FTV. The market for such a vehicle is, in a sense, “wide-open” and will be a composite of vehicles whose purpose is the transportation of people and goods in areas where highway infrastructure is poor or even nonexistent, vehicles for agricultural use that will eventually replace tractors and other traditional farm vehicles, vehicles for exploration, search, rescue and other emergencies as well as vehicles for military purposes. The challenge with respect to the profitable commercialization of the FTV is to demonstrate to potential buyers and/or licensees the FTV’s potential positive socioeconomic impact, on a year around basis, upon the communities in which it is introduced.

North American markets for the FTV include forestry, farming and ranching, mining, environmental protection, fire and rescue, border patrol, pipeline inspection, oil and gas exploration, construction, transportation and recreation.

Item 1A.		RISK FACTORS

The company faces a variety of risks inherent in perfecting its automotive technologies to production-ready models and in attempting to commercialize these technologies to generate revenues and profits. Management discusses below certain significant factors that could adversely affect the company and its prospects. Other factors may exist that the company cannot anticipate or that the company does not consider significant based upon information currently available. Additionally, because of the following risks and uncertainties, as well as other factors that could affect the company’s financial condition, the company’s past financial performance should not be considered as an indicator of future performance.

(1) The company has limited operating history, has not generated significant revenues since its founding in 1996 and may have to sell shares of its common and if possible convertible Preferred stock to continue and/or expand business operations.

(2) The company’s ability to generate significant revenue and sustainable profits is dependent upon its ability to demonstrate the technological superiority of its automotive technologies, their lower manufacturing costs, generally fewer parts and lighter weight, greater affinity for environmentally-sound applications and their beneficial impact upon the worldwide consumption of increasingly-scarce raw materials to an automotive industry that is heavily invested in conventional technologies and resistant to new technology unless developed by the auto companies themselves.

(3) The only market for the company’s automotive products is an automotive industry that, due to the economic downturn in 2008-2009, curtailed research and development expenditures, experienced significant management and corporate reorganization and delayed new product development. Such circumstances have delayed the company’s ongoing projects with the industry and may continue to delay them in the immediate and foreseeable future.

(4) In the event the company were unable to sell and/or license any of its automotive technologies to one or more automotive companies, first-tier suppliers, government agencies and/or the U.S. military, the company may have to embark upon the commercialization of one or more of its technologies itself, a situation which would require considerably more capital, personnel, regulatory compliance, time and other resources than is presently available to the company.

(5) The company’s common stock is traded on the over-the-counter bulletin board (OTCBB), an electronic inter-dealer quotation system, and is not listed for trading on any domestic or foreign securities exchange, including the National Association of Securities Dealers, Inc. (NASD). Consequently, the company is not required to meet certain quantitative and qualitative listing standards established by such exchanges for the protection of investors.

(6) The market for the company’s common stock is extremely limited, meaning that at any time and from time to time, there may not be enough sellers in the market to fill purchase orders and/or enough buyers in the market to fill sell orders for transactions where a given price is stipulated (i.e. “limit orders”). Such orders, therefore, may expire unfilled.

(7) The company’s common stock is volatile, meaning that purchase and/or sell orders for a numerically small number of shares (e.g. 500) may have a disproportionate positive or negative impact on the trading price at any time during any given trading day but especially, during the first and the last half-hour of trading.

(8) The market for the company’s common stock is disproportionately influenced by market makers (i.e. broker/dealers) who agree to buy a limited number of the company’s common shares [e.g. 500 share blocks] during the course of a given trading day at various specified prices [ the “bid”]) who may negatively affect the trading price by periodically “lowering the bid” for the company’s common stock without regard to company performance and/or disclosure of material events regarding the company’s activities.

(9) The price of the company’s common stock may be negatively influenced by significant “sell-side pressure” initiated by “short sellers” of the company’s stock. Short selling is simply selling a security that is not owned by the seller at the time of the sale. Short selling is generally accomplished by the investor borrowing the shares from an otherwise non-selling shareholder. The short seller’s profit is made when he purchases the number of shares borrowed at a price lower than the price at which he sold the borrowed shares.

(10) Unless the trading price for the company’s common stock is $5.00 or more, the stock constitutes “penny stock” requiring broker/dealers to determine whether the company’s stock is a “suitable” investment for his customer, requiring disclosure to the customer of certain bids, offers and quotations at least two days before executing a transaction and additionally requiring the broker/dealer to deliver certain information regarding the risks generally associated with penny stocks (e.g. lack of liquidity, volatility and the potential that the investor will lose his entire investment) at least two days prior to executing a penny stock transaction. These requirements may reduce the number of individuals who otherwise may purchase the company’s common stock in the open market.

(11) The company utilizes its common stock to pay various consultants for services rendered to the company. Such shares are issued in accordance with invoices submitted by such consultants and/or agreements entered into by the company and the consultant. Such shares have been registered by the company with the Securities and Exchange Commission so that they can be sold immediately by such consultants in open market transactions. The issuance of such shares is dilutive to the common shareholders. In addition, the immediate sale of such shares by such consultants may have an adverse impact upon the trading price of the company’s common stock.

Item 1B.		UNRESOLVED STAFF COMMENTS

Not Applicable.

Item 2.		PROPERTIES

Since September 14, 2007, the company has occupied facilities located at 1999 Mount Read Blvd., Rochester, New York. The facility consists of approximately 13,650 sq. ft., with executive and engineer offices, conference room, “clean room,” manufacturing and assembly space, automotive bays, dynamometer and lift facilities and approximately thirty acres of land suitable for vehicle testing and demonstration. On April 29, 2008, the company executed a five-year lease for the premises (with a December 1, 2007 lease commencement date) provide for rent to be paid at a rate of $5,687 per month ($68,244 per annum) and in addition, for the payment of the company’s proportionate share of yearly real estate taxes and yearly common area operating costs. Under the lease, monthly rental payments commenced June 1, 2008. The lease contains three 5-year renewal options and grants an option to the company to lease up to an additional 7,000 sq. ft. of adjacent manufacturing and assembly space.

Rental payments and certain other payments due to the landlord is to be paid in common shares of the company, based upon the closing price per share on the 15^th day of the calendar month immediately prior to the date any installment payment of monthly rent or other payment is due landlord.

The company believes that, given its present circumstances, the facilities located at Mount Read Blvd. are sufficient to meet the company’s anticipated plant requirements for the next twelve months. This situation could change if the company was to receive one or more orders requiring volume production of one or more of its technologies and the company were to elect to fill any such orders itself. In addition, this situation could change if the company’s planned entry into the C-5 and C-6 Corvette aftermarket in 2010 blossoms to significant orders faster than currently anticipated. See “Management Discussion and Analysis.”

Item 3.		LEGAL PROCEEDINGS

(1)		On March 6, 2009, the company settled, at no cost, a litigation commenced by the company in September, 2005 against a management consulting firm. The company had challenged the validity of consulting agreements alleged to have been executed between the parties in June, 2004 and April, 2005 as being null and void. In accordance with the terms of the settlement agreement, the parties released one another from all claims and counterclaims against each other and terminated any and all obligations emanating out of their relationship with each other, including any and all obligations under the purported agreements.
(2)		On October 8, 2007, the controlling persons of the company’s majority-owned subsidiary, Ice Surface Development, Inc. filed for arbitration of certain agreements they had with Ice Surface, claiming Ice Surface owed compensation to them for past services. On October 19, 2007, these same parties commenced a derivative action in Federal District Court for the Western District of New York challenging the company’s assignment of its ice technology license in June, 2007 on the grounds the assignment was made for inadequate consideration.
		On June 27, 2008, the Federal District Court dismissed, with prejudice, the derivative action as being without merit and, in the same action, affirmed that such persons had been fully paid for any services rendered by them to Ice Surface Development. As a consequence of the District Court’s decision, these individuals withdrew their arbitration claims on August 18, 2008.
(3)		On October 31, 2008, the company commenced an action in New York Supreme Court, County of New York, Commercial Division against Ice Engineering, LLC seeking the total balance owed by Ice Engineering to the company pursuant to an assignment agreement entered into by the parties, effective June 15, 2007, whereby the company assigned all of its rights and interest in an ice technology license granted by Dartmouth College to Ice Engineering in exchange for a 2.8% royalty interest and a cash reimbursement of $3,500,000. The suit was commenced after the company had been paid approximately $800,000.
		On January 27, 2010, the company and Ice Engineering settled this litigation. Under the settlement agreement, the company’s assignment of the ice technology license is made permanent; the company elected to forego its right to royalties and agreed to receive $1,100,000, with $300,000 paid to the company by Ice Engineering on January 27, 2010 and $800,000 paid to the company by Ice Engineering by February 26, 2010.

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

There were no matters submitted to the company’s shareholders during the fourth quarter of the year ending December 31, 2009.

Subsequent Event

The annual meeting of the company’s common shareholders was held on January 28, 2010. At the meeting, at which a quorum of the requisite number of common shares under the company’s bylaws for the conduct of business was present either in person or by proxy (30,912,267 common shares out of 35,817,422 common shares outstanding on the record date), the following items were voted on by the shareholders with the following results:

1.

Election of Directors

Election of Directors		For				Withheld
Daniel R. Bickel			18,341,133				1,203,016
William W. Destler			18,483,783				981,506
Herbert H. Dobbs			18,341,133				1,124,156
Asher J. Flaum			18,372,768				1,092,521
James Y. Gleasman**			17,941,754				1,523,535
Keith E. Gleasman			18,258,946				1,206,343
Joseph B. Rizzo			18,372,373				1,092,916
Gary A. Siconolfi			18,400,816				1,064,473

2.

Ratification of the appointment of Eisner LLP by the Audit Committee of the board of directors as the Independent Registered Public Accounting Firm of the company for its year ending December 31, 2009.

For		Against				Abstained
29,139,372			1,481,916				290,979

The number of “broker non-votes” was 11,446,978. Broker non-votes occur when common shares are held in “street name” (i.e. the shares are registered in the name of the broker, not the shareholder who is the beneficial owner) and the broker does not vote such shares in the absence of the beneficial owner’s instructions. The ratification of the audit committee’s appointment of Eisner LLP as the company’s Independent Registered Public Accounting Firm for the year ended December 31, 2009 is considered a “routine” matter upon which brokers voted without instructions from beneficial owners. On the other hand, beginning with the company’s annual meeting held on January 28, 2010 and for future annual meetings, the election of directors is considered a “non-routine” matter upon which brokers will not vote without specific instructions.

Item 5.		MARKET FOR COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

(a) Market Information

Effective September 23, 1998, the company’s $.01 par value common stock, as a class, was registered with the Securities and Exchange Commission under the Securities Exchange Act of 1934. As a result, shares of the company’s common stock which had been owned for one year or more became eligible for trading on the over-the-counter bulletin board maintained by the National Association of Securities Dealers, Inc. on December 22, 1998 (“NASD”). The company’s stock began trading on January 21, 1999 at $12.00 per share. The company has approximately 20 market makers for its common stock.

The company’s stock is traded on the over-the-counter bulletin board (OTCBB). The OTCBB is an electronic inter-dealer quotation system that displays real-time quotes, last-sale prices and volume information for shares of over-the-counter companies which file current financial reports with the Securities and Exchange Commission or, if applicable, such companies’ banking or insurance regulators. The NASD oversees the OTCBB.

The following table presents the range of high and low closing prices for the company’s $.01 par value common stock for each quarter during its last two calendar years. The source of the high and low closing price information is the OTCBB. The market represented by the OTCBB is extremely limited, is heavily influenced by market makers and the price for our common stock quoted on the OTCBB is not necessarily a reliable indication of the value of our common stock. The company also believes that the price of its common stock is significantly impacted by short-selling. Quotations reflect inter-dealer prices, without retail mark-up, mark-down or commission and may not represent actual transactions.

2009		High				Low
1st Quarter		$	1.65			$	0.70
2nd Quarter		$	0.90			$	0.52
3rd Quarter		$	1.05			$	0.51
4th Quarter		$	0.79			$	0.40

2008		High				Low
1st Quarter		$	3.14			$	2.32
2nd Quarter		$	2.85			$	2.02
3rd Quarter		$	2.40			$	1.35
4th Quarter		$	1.80			$	.60

(b) Holders of Common Stock

As of December 31, 2009, the company had approximately 300 shareholders of record and an estimated 3,400 beneficial owners of its common stock. As of December 31, 2009, the company had 35,811,192 common shares issued and outstanding.

(c) Dividend Policy on Common Stock

The company has not paid any dividends on its common stock since its inception. The declaration or payment of dividends, if any, on the company’s common stock is within the discretion of the board of directors and will depend upon the company’s earnings, capital requirements, financial condition and other relevant factors. Given the company’s current financial condition, the board of directors does not intend to declare or pay any dividends on its common stock and intends to retain any earnings to finance the growth of the company. In the event the company generates revenues as the result of one of more commercial transactions, the board intends to seek every opportunity to be in a position to declare dividends.

The payment of dividends on the company’s common stock is limited by provisions of the New York Business Corporation Law which permits the payment of dividends only if after the dividends are paid, a company’s net assets are at least equal to its stated capital. Payment of dividends on the company’s common stock is also subordinated to the requirement that the company pay all current and accumulated dividends on its Class A and Class B Preferred Shares prior to the payment of any dividends on its common stock.

(d) Securities Authorized for Issuance under Equity Compensation Plans

Number of securities

to be issued upon

Weighted average

exercise of

exercise price of

Number of securities

outstanding options,

outstanding options,

remaining available

warrants and rights

warrants and rights

for future issuance

Plan Category

(a)

(b)

(c)

Equity compensation plans approved by security holders

641,848

(1)

$

4.79

None (1)

Equity compensation plans not approved by security holders

1,229,500

(4)

$

3.83

None (2)-(4)

Total

1,871,348

(4)

$

4.18

None (1)-(4)

(e) Class A Preferred Stock

On August 30, 2000, the company amended its certificate of incorporation to permit the company to issue up to 100,000,000 shares of $.01 par value preferred stock. Under the amendment, the board of directors has the authority to allocate these shares into as many separate classes of preferred as it deems appropriate and with respect to each class, designate the number of preferred shares issuable and the relative rights, preferences, seniority with respect to other classes and to the company’s common stock and any limitations and/or restrictions that may be applicable without obtaining shareholder approval.

In March, 2002, the company’s board designated the first series of preferred shares, namely Class A Preferred. The relative rights, preferences and limitations of the Class A Preferred are as follows:

A.		Number of Shares
		The number of Class A Preferred initially authorized is 3,300,000 Class A Preferred. The initial number authorized shall be increased as required to provide Class A Preferred for payment of dividends as described in Section B, distribution to holders in accordance with Section C and as described in Section F.
B.		Dividends

	(i)		So long as any Class A Preferred is outstanding, the holders of the Class A Preferred will be entitled to receive cumulative preferential dividends in the amount of $.40 per share of Class A Preferred for each annual dividend period. The annual dividend period shall commence on the first day of each March and shall end on the last day of the immediately succeeding February, which February date is referred to as the “Dividend Accrual Date”.
	(ii)		When and as declared by the board, dividends payable on the Class A Preferred will be paid in cash out of any funds legally available for the payment of dividends or, in the discretion of the board, will be paid in Class A Preferred at a rate of 1 share of Class A Preferred for each $4.00 of dividends. No fractions of Class A Preferred shall issue. The Company shall pay cash in lieu of paying fractions of Class A Preferred on a pro rata basis.
	(iii)		Dividends shall be cumulative from the date of issuance of each share of Class A Preferred, whether or not declared and whether or not, in any annual dividend period(s), there are net profits or net assets of the Company legally available for the payment of dividends.
	(iv)		Accumulated and unpaid dividends on the Class A Preferred will not bear interest.

(v)

So long as any Class A Preferred is outstanding, the Company may not declare or pay any dividend, make any distribution, or fund, set aside or make monies available for a sinking fund for the purchase or redemption of, any shares or stock of the Company ranking junior to the Class A Preferred with respect to the payment of dividends, including the $.01 par value common stock of the Company (“Junior Stock”), unless all dividends in respect of the Class A Preferred for all past annual dividend periods have been paid and such dividends for the current annual dividend period have been paid or declared and duly provided for. Subject to the foregoing, and not otherwise, the dividends (payable in cash, stock or otherwise) as may be determined by the board, may be declared and paid on any Junior Stock from time to time out of any funds legally available therefore, and the Class A Preferred will be entitled to participate in any such dividends, whether payable in cash, stock or otherwise on a pro rata basis.

C.

Liquidation Rights

	(i)		In the event of any liquidation, dissolution or winding up of the Company, whether voluntary or involuntary, the holders of Class A Preferred then outstanding are entitled to be paid out of the assets of the Company available for distribution to its shareholders, whether such assets are capital, surplus or earnings, before any payment or declaration and setting apart for payment of any amount in respect of any shares of any Junior Stock with respect to the payment of dividends or distribution of assets on liquidation, dissolution or winding up of the Company, all accumulated and unpaid dividends (including a prorated dividend from the last Dividend Accrual Date) in respect of any liquidation, dissolution or winding up consummated except that, notwithstanding the provisions of Section B(ii), all of such accumulated and unpaid dividends will be paid in Class A Preferred at a rate of 1 share of Class A Preferred for each $4.00 of dividends. No fractions of Class A Preferred shall issue. The Company shall pay cash in lieu of paying fractions of Class A Preferred on a pro rata basis.
	(ii)		The Class A Preferred will be entitled to participate on a pro rata basis in any distribution of assets as may be made or paid on Junior Stock upon the liquidation, dissolution or winding up of the Company.
	(iii)		A consolidation or merger of the Company with or into any other corporation or corporations or any other legal entity will not be deemed to constitute a liquidation, dissolution or winding up of the Company as those terms are used in this Section C.

D.

Redemption

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

	•		Whether all or less than all of the outstanding Class A Preferred is to be redeemed and the total number of shares of Class A Preferred being redeemed;
	•		the number of shares of Class A Preferred held by the holder that the Company intends to redeem;
	•		the Redemption Date and Redemption Price; and
	•		that the holder is to surrender to the Company, in the manner and at the place designated in Section D(v), his or her certificate or certificates representing the number of shares of Class A Preferred to be redeemed.

(v)

On or before the date fixed for redemption, each holder of Class A Preferred must surrender the certificate or certificates representing the number of shares of Class A Preferred to the Company, accompanied by instruments of transfer satisfactory to the Company and sufficient to transfer the Class A Preferred being redeemed to the Company free and clear of any adverse interest, at the place designated in the Redemption Notice. The Redemption Price for the number of shares of Class A Preferred redeemed will be payable in cash on the Redemption Date to the person whose name appears on the certificate(s) as the owner of such certificate(s) as of the date of the Redemption Notice. In the event that less than all of the shares of Class A Preferred represented by any certificate(s) are redeemed, a new certificate will issued by the Company representing the unredeemed Class A Preferred to the same record owner.

	(vi)		As promptly as practicable after surrender of the certificate(s) representing the redeemed Class A Preferred, the Company will pay the Redemption Price to the record holder of the redeemed Class A Preferred.
	(vii)		Unless the Company defaults in the payment in full of the Redemption Price, the obligation of the Company to pay dividends on the Class A Preferred redeemed shall cease on the Redemption Date, and the holders of the Class A Preferred redeemed will cease to have any further rights with respect to such redeemed Class A Preferred on the Redemption Date, other than to receive the Redemption Price.
	(viii)		The holders of the Class A Preferred have no right to seek or to compel redemption of the Class A Preferred.

E.		Voting Rights The holders of Class A Preferred are not be entitled to vote in any and all elections of directors and with respect to any and all other matters as to which the vote or consent of shareholders of the Company shall be required or taken.
F.		Conversion Privilege

	(i)		The holders of the Class A Preferred have the right, at each holder’s option but subject to board approval in each case, to convert each share of Class A Preferred into 1 fully paid and nonassessable share of the $.01 par value common stock of the Company (“Common Share”) without payment of any conversion price or other consideration. Such 1 for 1 rate of conversion is subject to adjustment as set forth in F(x).
	(ii)		The Conversion Privilege set forth in this Section F may not be exercised by the holder of Class A Preferred until 1 year shall have elapsed from the issue date of the Class A Preferred held by such holder and may not be exercised if the board shall not have approved the actual exercise of such Conversion Privilege by such holder of Class A Preferred. Such approval shall not be unreasonably withheld. Upon receipt of the Notice of Conversion described in Section F(iii) below and the board’s approval of such conversion, the Company shall give a Notice of Approval to the holder within 48 hours of the receipt of the Notice of Conversion that the exercise of the Conversion Privilege by such holder is approved.
	(iii)		In order to exercise the Conversion Privilege, the holder of Class A Preferred must give written notice to the Company that the holder elects to covert the number of shares of Class A Preferred as specified in the Notice of Conversion. The Notice of Conversion will also state the name(s) and address (es) in which the certificate(s) for Common Shares issuable upon the conversion are to be issued. Upon receipt of the Company’s Notice of Approval, the holder of the Class A Preferred must surrender the certificate(s) representing the number of shares of Class A Preferred being converted to the Company, accompanied by instruments of transfer satisfactory to the Company and sufficient to transfer the Class A Preferred being converted to the Company free and clear of any adverse interest at the office maintained for such purpose by the Company. As promptly as practicable after the surrender of the certificate(s) representing the number of shares of Class A Preferred converted, the Company will issue and deliver to the holder, or to such other person designated by the holder’s written order, a certificate(s) for the number of full Common Shares issuable upon the conversion of the Class A Preferred in accordance with the provisions of this Section F(iii).
	(iv)		The Conversion Privilege may be exercised in whole or in part and, if exercised in part, a certificate(s) will be issued for the remaining number of Class A Preferred in any case in which fewer than all of the Class A Preferred represented by a certificate(s) are converted to the same record holder of Class A Preferred converted.
	(v)		Each conversion will be deemed to have been effective immediately prior to the close of business on the date on which the Class A Preferred will have been so surrendered as provided in Section F(iii) (the “Conversion Date”) and the person(s) in whose name(s) any certificate(s) for Common Shares will be issuable upon the conversion will be deemed to have become the holder(s) of record of the Common Shares on the Conversion Date. Effective as of the Conversion Date, the Company will have no obligation to pay dividends on the Class A Preferred converted provided that effective as of the Conversion Date, the Company shall pay all accumulated and unpaid dividends (including the prorated dividend from the last Dividend Accrual Date) on the Class A Preferred converted, payable in the discretion of the Board, in cash out of any funds legally available for payment of such dividends or in Class A Preferred.

	(vi)		The Conversion Privilege shall terminate with respect to Class A Preferred called for redemption by the mailing of a Redemption Notice described in Section D(iv) on the close of business on the date immediately preceding the Redemption Date.
	(vii)		Notwithstanding the requirement for board approval and the 1 year limit set forth in Section F(ii), in case of any consolidation or merger to which the Company is a party other than a merger or consolidation in which the Company is the surviving corporation or in case of any sale or conveyance to another corporation of all or substantially all of the assets of the Company or in the case of any statutory exchange of securities representing an excess of 50% of the total outstanding securities of the Company with another corporation (including any exchange effected in connection with a merger of a third corporation into the Company), the holders of Class A Preferred then outstanding will have the right to convert the Class A Preferred into the kind and amount of securities, cash or other property which the holder would have owned or have been entitled to receive immediately after the consolidation, merger, statutory exchange, sale or conveyance, had the Class A Preferred been converted immediately prior to the effective date of the consolidation, merger, statutory exchange, sale or conveyance as the case may be.
	(viii)		Notwithstanding the 1 year holding period set forth in Section F(ii), in the event the highest bid price for the Company’s $.01 par value common stock quoted on any exchange, automated quotation system or the OTC Bulletin Board on which such stock is actively traded is $20 or more on 5 consecutive trading days, the holders of Class A Preferred shall have the right to convert such Class A Preferred upon Board approval.
	(ix)		Common Shares delivered upon conversion of Class A Preferred will be, upon delivery, validly issued, fully paid and nonassessable, free of all liens and charges and not subject to any preemptive rights.

(x)

In case the Company

	•		Declares a dividend, or makes a distribution, on shares of its $.01 par value common stock in shares of its $.01 par value common stock; or
	•		Subdivides its outstanding shares of its $.01 par value common stock into a greater number of shares of its $.01 par value common stock; or
	•		Combines its outstanding shares of its $.01 par value common stock into a smaller number of shares of $.01 par value common stock, the number of Common Shares issuable upon the conversion of the Class A Preferred shall be adjusted at the time of the record date for the dividend or distribution or the effective date of the subdivision or a combination so that after such record or effective date, the holder of Class A Preferred will be entitled to receive the same percentage of ownership of the Company’s $.01 par value common stock as such holder would have been entitled to receive immediately prior to such record or effective date.

Since its designation in March, 2002, the company has sold an aggregate 765,512 shares of Class A Preferred for proceeds of $3,062,048. No shares of Class A Preferred were sold during the years ended December 31, 2009 and 2008.

Since its designation in March, 2002, Class A Preferred shareholders have converted an aggregate 124,605 Class A Preferred into the company’s common stock (on a one to one basis) through December 31, 2009, with 51,250 Class A Preferred converted in the year ending December 31, 2009.

Upon conversion, converting Class A Preferred shareholders are entitled to receive, in accordance with the terms of the Class A Preferred, dividends payable either in cash or in Class A Preferred shares calculated to the rate of 10 percent per annum.

At times, the board of the company may elect to settle the dividends through the issuance of common stock in lieu of cash. The amount of common stock shares issued is based on the market price of the stock of the company at the time of the conversion.

Through December 31, 2009, an aggregate Class A Preferred dividend amounting to $59,775 was settled through the issuance of 14,944 Class A Preferred shares of the Company. For the year ended December 31, 2009, the company settled Class A Preferred dividends amounting to $52,801 through the issuance of 65,965 shares of common stock.

At December 31, 2009, dividends payable upon conversion of 655,851 outstanding shares of Class A Preferred amounted to approximately $1,218,000.

(f) Class B Preferred Stock

On October 19, 2004, the company incorporated Iso-Torque Corporation in order to commercialize its Iso-Torque^® differential technology.

In September, 2004, the company created a new series of preferred stock—Class B Non-Voting, Cumulative Convertible Preferred Stock (“Class B Preferred”) to fund the business operations of Iso-Torque Corporation.

The designation, relative rights, preferences and limitations of the Class B Preferred, as fixed by the board of directors, are as follows:

A.

Three hundred thousand (300,000) authorized preferred shares of the par value of $.01 each as fixed by the board of directors, , shall be issued in and as a series to be designated Class B Non-Voting Cumulative Convertible Preferred Shares, $.01 par value. Said series is hereinafter called “Class B Preferred Shares”. The term preferred shares as used herein shall include all 100,000,000 of the preferred shares, $.01 par value authorized by the Certificate of Incorporation of the Corporation of which Class B Preferred Shares is the second series.

	B.		(1)		So long as any Class B Preferred are outstanding, the holders of the Class B Preferred will be entitled to receive cumulative preferential dividends in the amount of $.50 per share of Class B Preferred and no more for each annual dividend period. The annual dividend period shall commence on the first day of each September and shall end on the last day of the immediately succeeding August, which August date is referred to as the “Dividend Accrual Date”.
			(2)		When and as declared by the board, dividends payable on the Class B Preferred will be paid in cash out of any funds legally available for the payment of dividends or, in the discretion of the board, will be paid in Class B Preferred at a rate of 1 share of Class B Preferred for each $5.00 of dividends. No fractions of Class B Preferred shall be issued. The Corporation shall pay cash in lieu of paying fractions of Class B Preferred on a pro rata basis.
			(3)		Dividends shall be cumulative from the date of issuance of each share of Class B Preferred, whether or not declared and whether or not, in any annual dividend period(s), there are net profits or net assets of the Corporation legally available for the payment of dividends.
			(4)		Accumulated and unpaid dividends on the Class B Preferred will not bear interest.
			(5)		So long as any shares of Class B Preferred are outstanding, the Corporation may not declare or pay any dividend, make any distribution, or fund, set aside or make monies available for a sinking fund for the purchase or redemption of any shares or stock of the Corporation ranking junior to the Class B Preferred with respect to the payment of dividends, including the $.01 par value common stock of the company, for all past annual dividend periods have been paid and such dividends for the current annual dividend period have been paid or declared and duly provided for. Subject to the foregoing, and not otherwise, the dividends (payable in cash, stock or otherwise) as may be determined by the Board, may be declared and paid on any Junior Stock from time to time out of any funds legally available therefore, and the Class B Preferred will be entitled to participate in any such dividends, whether payable in cash, stock or otherwise, on a pro rata basis.

C.

The Class B Preferred shall rank junior and be classified as Junior Stock with respect to the Corporation’s Class A Preferred Shares in all respects.

D.

(1)

In the event of any liquidation, dissolution or winding up of the Corporation, whether voluntary or involuntary, the holders of Class B Preferred then outstanding are entitled to be paid out of the assets of the Corporation available for distribution to its shareholders, whether such assets are capital, surplus or earnings, before any payment or declaration and setting apart for payment of any amount in respect of any shares of any Junior stock with respect to the payment of dividends or distribution of assets on liquidation, dissolution or winding up of the Corporation, all accumulated and unpaid dividends (including a prorated dividend from the last Dividend Accrual Date) in respect of any liquidation, dissolution or winding up consummated except that, notwithstanding the provisions of Section B(2), all of such accumulated and unpaid dividends will be paid in shares of Class B Preferred at a rate of 1 share of Class B Preferred for each $5.00 of dividends. No fractions of Class B Preferred shall be issued. The Corporation shall pay cash in lieu of paying fractions of Class B Preferred on a pro rata basis. (2) The Class B Preferred will be entitled to participate on a pro rata basis in any distribution of assets as may be made or paid on Junior Stock upon the liquidation, dissolution or winding up of the Corporation.

	E.		(1)		The Corporation may in the absolute discretion of its board, redeem at any time and from time to time from any source of funds legally available any and all of the Class B Preferred at the Redemption Price.
			(2)		For each redemption, the Redemption Price for each share of Class B Preferred shall be equal to the sum of $5.00 per share of Class B Preferred, payable in cash, plus an amount payable (not withstanding the provisions of Section B(2) in cash equal to the sum of all accumulated unpaid dividends per share of Class B Preferred (including a prorated annual dividend from the last Dividend Accrual Date) to the respective date for each redemption on which the Corporation shall redeem any shares of Class B Preferred (the “Redemption Date”).
			(3)		In the event of a redemption of only a portion of the then outstanding Class B Preferred, the Corporation will affect the redemption pro rata according to the number shares held by each holder of Class B Preferred.
			(4)		Unless the Corporation defaults in the payment in full of the Redemption Price, the obligation of the Corporation to pay dividends on the Class B Preferred redeemed shall cease on the Redemption Date, and the holders of the Class B Preferred redeemed will cease to have any further rights with respect to such redeemed Class B Preferred on the Redemption Date, other than to receive the Redemption Price.
			(5)		The holders of the Class B Preferred have no right to seek or to compel redemption of the Class B Preferred.

F.

The holders of Class B Preferred are not entitled to vote in any and all elections of directors and with respect to any and all other matters as to which the vote or consent of shareholders of the Corporation shall be required or taken.

G.

(1)

The holders of the Class B Preferred have the right, at each holder’s option but subject to board approval in each case, to (i) convert each share of Class B Preferred into 1 fully paid and nonassessable share of the $.01 par value common stock of the Corporation (“Torvec Common”) without payment of any conversion price or other consideration; and to (ii) convert each share of Class B Preferred into 1 fully paid and nonassessable share of the $.01 par value common stock of Iso-Torque Corporation (“Iso-Torque Common”) without payment of any conversion price or other consideration upon the happening of any of the following events:

	(a)		the effectiveness of a registration statement as filed with the Securities and Exchange Commission pursuant to and under the Securities Act of 1933 with respect to an initial public offering of Iso-Torque Common; or
	(b)		the effectiveness of a registration statement as filed with the Securities and Exchange Commission pursuant to and under the Securities Exchange Act of 1934 with respect to an initial trading of Iso-Torque Common on a national exchange, the NASDAQ or the OTCBB; or
	(c)		notwithstanding the 1 year holding period set forth in Section G(2) the execution of a definitive agreement for the sale, transfer and/or exchange of all of the issued and outstanding Iso-Torque Common to a third party purchaser of such stock or by any of a business combination of Iso-Torque Corporation with an unrelated entity, other than a merger or consolidation in which Iso-Torque Corporation is the surviving corporation.

			(2)		The Conversion Privilege set forth in this Section G may not be exercised by the holder of Class B Preferred until 1 year shall have elapsed from the issue date of the Class B Preferred held by such holder and may not be exercised if the board shall not have approved the actual exercise of such Conversion Privilege by such holder of Class B Preferred. Such approval shall not be unreasonably withheld. Upon receipt of the Notice of Conversion and the board’s approval of such conversion, the Corporation shall give a Notice of Approval to the holder within 48 hours of the receipt of the Notice of Conversion that the exercise of the Conversion Privilege by such holder is approved.
			(3)		The Conversion Privilege may be exercised in whole or in part and, if exercised in part, a certificate(s) will be issued for the remaining Class B Preferred in any case in which fewer than all of the Class B Preferred represented by a certificate(s) are converted to the same record holder of Class B Preferred converted.
			(4)		Each conversion will be deemed to have been effective immediately prior to the close of business on the date on which the Class B Preferred will have been so surrendered (the “Conversion Date”) and the person(s) in whose name(s) any certificate(s) for Torvec Common or Iso-Torque Common will be issuable upon the conversion will be deemed to have become the holder(s) of record of the Torvec Common or Iso-Torque Common on the Conversion Date. Effective as of the Conversion Date, the Corporation will have no obligation to pay dividends on the Class B Preferred converted provided that effective as of the Conversion Date, the Corporation shall pay all accumulated and unpaid dividends (including the prorated dividend from the last Dividend Accrual Date) on the Class B Preferred converted, payable in the discretion of the board, in cash out of any funds legally available for payment of such dividends or in shares of Class B Preferred.

	(5)		The Conversion Privilege shall terminate with respect to Class B Preferred called for redemption by the mailing of a Redemption Notice on the close of business on the date immediately preceding the Redemption Date.
	(6)		Notwithstanding the requirement for board approval and the 1 year limit set forth in Section G(2), in case of any consolidation or merger to which the Corporation is a party other than a merger or consolidation in which the Corporation is the surviving corporation or in case of any sale or conveyance to another corporation of all or substantially all of the assets of the Corporation or in the case of any statutory exchange of securities representing an excess of 50% of the total outstanding securities of the Corporation with another corporation (including any exchange effected in connection with a merger of a third corporation into the Corporation), the holders of Class B Preferred then outstanding will have the right to convert the Class B Preferred into the kind and amount of securities, cash or other property which the holder would have owned or have been entitled to receive immediately after the consolidation, merger, statutory exchange, sale or conveyance, had the Class B Preferred been converted immediately prior to the effective date of the consolidation, merger, statutory exchange, sale or conveyance as the case may be.
	(7)		Notwithstanding the 1 year holding period set forth in Section G(2), in the event the highest bid price for the Corporation’s $.01 par value common stock quoted on any exchange, automated quotation system or the OTC Bulletin Board on which such stock is actively traded is $20 or more on 5 consecutive trading days, the holders of Class B Preferred shall have the right to convert such Class B Preferred upon board approval for such conversion period.
	(8)		Torvec Common or Iso-Torque Common delivered upon conversion of Class B Preferred will be, upon delivery, validly issued, fully paid and nonassessable, free of all liens and charges and not subject to any preemptive rights.
	(9)		In case the Corporation

	(a)		declares a dividend, or makes a distribution, on shares of its $.01 par value common stock in shares of its $.01 par value common stock; or
	(b)		subdivides its outstanding shares of its $.01 par value common stock into a greater number of shares of its $.01 par value common stock; or
	(c)		combines its outstanding shares of its $.01 par value common stock into a smaller number of shares of $.01 par value common stock, the number of Torvec Common issuable upon the conversion of the Class B Preferred shall be adjusted at the time of the record date for the dividend or distribution or the effective date of the subdivision or a combination so that after such record or effective date, each holder of Class B Preferred will be entitled to receive the same percentage of ownership of the Corporation’s $.01 par value common stock as such holder would have been entitled to receive immediately prior to such record or effective date.

Since its designation in September, 2004, the company has sold an aggregate 97,500 Class B Preferred in a number of private placements for proceeds of approximately $487,500. No Class B Preferred was sold during the years ending December 31, 2009 and 2008.

Since its designation, Class B Preferred shareholders have converted an aggregate 20,000 Class B Preferred into the company’s common stock (on a one to one basis) through December 31, 2009, with 20,000 Class B Preferred converted in the year ending December 31, 2009.

Upon conversion, converting Class B Preferred shareholders are entitled to receive, in accordance with the terms of the Class B Preferred, dividends payable, in the discretion of the board of directors, either in cash or in Class B Preferred shares calculated at the rate of 10 percent per annum. Through December 31, 2009, no Class B Preferred shares have been issued to converting Class B Preferred shareholders as a dividend.

Depending upon the company’s cash position, the company from time to time may request that a converting preferred shareholder receiving dividends in cash consent to receive shares of restricted common stock in lieu thereof. In 2009, the company issued 30,103 restricted common shares to a converting preferred shareholder in payment of dividends amounted to $24,082, based on the market value of the Company’s stock at the time of conversion.

At December 31, 2009, dividends payable upon the conversion of 77,500 outstanding shares of Class B Preferred amounted to approximately $166,000.

(g) Reports to Shareholders

The company furnishes its shareholders with an annual report containing audited financial statements and such other periodic reports as the company may determine to be appropriate or as may be required by law. The company complies with periodic reporting, proxy solicitation and certain other requirements of the Securities Exchange Act of 1934.

(h) Transfer Agent and Registrar

Continental Stock Transfer & Trust Company has been appointed as the company’s Transfer Agent and Registrar for its common stock and for its preferred stock.

Item 6.		SELECTED FINANCIAL DATA

As a smaller reporting company, we are not required to include information otherwise required by this item.

Item 7.		MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

(a) Overall Business Strategy

From its inception in 1996, the company’s overall business plan has been to design, develop, build and commercialize its FTV^® worldwide, especially in the Asian, African, South and Central American and Eastern European markets. In addressing issues and solving problems encountered in the design and development of the FTV, the company designed and developed a number of automotive drive-line technologies—i.e. the company’s hydraulic pump/motor system, infinitely variable transmissions, Iso-Torque^® differential and constant velocity joint technology.

The FTV^® has been developed and is ready for commercialization. In addition, each of the company’s other automotive technologies has been developed and are ready for commercialization — either independently on a stand-alone basis or as incorporated into the company’s FTV.

In present circumstances, the company intends to produce, market and distribute FTV’s by entering into a joint venture relationship with an automotive manufacturer. The company intends to incorporate its drive-line technologies into the FTV to enhance its marketability and value. The company also intends to license and/or enter into supply contracts with automotive manufacturers, military contractors, tier-one suppliers and possibly end-users for its drive-line technologies independent of their utilization in the FTV.

(b) Current Status of Business Plan and Ongoing Projects

The company’s plan of operation for the year ending December 31, 2010 is as follows:

1) to explore with the U.S. Air Force the military and commercial potential of the company’s FTV^® as an Advanced Combat Firefighting Vehicle capable of unprecedented speed and maneuverability with diverse applications for use in the most extreme and rugged terrain. The company has redelivered the FTV to the Air Force after making modifications to the vehicle based upon the Air Force’s recommendations which maximized its combat firefighting capabilities, including its robotic and autonomous potential. The company anticipates that ongoing and future discussions with the Air Force will crystallize the direction of the Air Force’s Advanced Combat Firefighting Vehicle program and the company’s participation in such program.

2) based in part upon results of the company’s discussions with the Air Force, to explore interest in the FTV among other branches of the U.S. military, the Department of Homeland Security, FEMA, the U.S. Forestry Service, as well as state and municipal governmental units for boarder patrol, off-highway emergencies, federal and state conservation and drug-enforcement efforts and, as a fast, highly maneuverable vehicle for combat and non-combat uses;

3) to ship Isotorque^® differentials to General Motors and Ford Motor Company for performance evaluation by such companies for their front-wheel drive vehicle platforms, to interface with such companies in their evaluations, to furnish additional IsoTorque differentials to such companies for additional evaluation and to engage such companies in discussions with respect to the general utilization by such companies of Torvec’s Isotorque differential technology;

4) to interface with General Motors with respect to the performance evaluation by GM of the IsoTorque differential shipped to it in early January, 2010 as installed in GM’s Cadillac CTS ( and perhaps in a new vehicle platform under consideration by GM), to furnish additional rear-wheel drive Isotorque differentials to GM for additional evaluation in the Cadillac CTS and to engage GM in discussions concerning the utilization of Torvec’s Isotorque differential technology for its rear-wheel drive automotive and truck fleets;

5) to ship IsoTorque differentials to Hyundai for installation and performance evaluation in its Genesis Coupe and to Tesla for installation and performance evaluation in its Roadster, to interface with both companies in their evaluations, to furnish additional IsoTorque differentials to such companies for additional evaluation and to engage such companies in discussions with respect to the general utilization by such companies of Torvec’s IsoTorque differential technology;

6) to enter the differential aftermarket by manufacturing, marketing and distributing IsoTorque differentials for Corvette C-5 and C-6 cars as well as for the SMS 620 Camaro sports car based upon management’s research that approximately 380,000 Corvette C-5 and C-6 cars have been produced since 1997 and up to 80,000 current-generation Camaros were produced and sold in 2009;

7) to build, test and evaluate the company’s constant velocity joint technology as specifically-designed for use in the worldwide mining industry in cooperation with Eastern Mining & Industrial Supply, Inc. of Chapmanville, West Virginia. This program will be conducted in partnership with the Center for Integrated Manufacturing Studies located on the campus of Rochester Institute of Technology and is funded, in part, by a grant from the New York State Office of Science, Technology and Academic Research (NYSTAR). The program will be conducted under the overall umbrella of the company’s partnership with Rochester Institute of Technology known as the Safety and Efficiency in Automobiles Laboratory (SEAL) created by agreement between the company and RIT in July, 2009;

8) to expand the manufacturing, marketing, distribution and commercializing programs undertaken by SEAL by attracting federal, state and local governmental funding for such programs and by increasing the number of private-sector partners participating in SEAL’s projects;

9) to continue to explore the interest of a major international truck manufacturer in the redesign of the axle used by it in order to integrate Torvec’s IsoTorque differential technology in its fleet of heavy-duty trucks.

In addition to the activities to be undertaken by the company to implement its plan of operation detailed immediately above, the company from time to time receives indications of interest in its technologies from additional sources which lead to projects and developments not specified in the plan. Information regarding the company and all of its automotive inventions, including regular updates on technological and business developments, can be found on the company’s website, www.torvec.com.

(c) Company Expenses

The net loss for the year ended December 31, 2009 was $3,272,000 as compared to the year ended December 31, 2008 net loss of $1,683,000. The increase in the net loss of $1,589,000 is principally related to the prior year gain on a settlement of debt of $1,541,000 and the receipts of state tax credits of $346,000.

Research and development expenses for the year ended December 31, 2009 amounted to $520,000 as compared to $535,000 for the year ended December 31, 2008. This decrease of $15,000 is principally attributable to the company’s decreased emphasis on research and development and increased efforts to sell products and place the technology in production.

General and administrative expenses for the year ended December 31, 2009 amounted to $2,877,000 as compared to $3,165,000 for the year ended December 31, 2008. This decrease amounted to $288,000 and is principally due to the decrease in professional and consulting expenses. The decrease is due in large part to the company’s response to the difficulties in cash flow.

(d) Liquidity and Capital Resources

The company’s business activities during its fiscal year ended December 31, 2009 were funded principally through:

	•		cash on hand at December 31, 2008, amounted to approximately $300,00 and mostly due to the receipt in the fourth quarter of 2008 of approximately $280,000 representing New York State corporate income tax refunds for credits allocable to certain research and development expenses incurred by the company in the years 2005-2007;
	•		the sale during the year 2009 of approximately 551,483 shares of the company’s common stock for approximately $335,000 in gross proceeds;
	•		the receipt of approximately $175,000 from the National Aeronautics and Space Administration in payment for delivery of seven infinitely variable transmissions to NASA.

During the fiscal year ended December 31, 2009 and 2008, the company issued 2,243,305 and 1,000,348 common shares to business consultants under its business consultants stock plan in exchange for ongoing corporate legal services, internal accounting services, business advisory services as well as legal fees and associated expenses for ongoing patent work and litigation. As of December 31, 2009 and 2008 there are 1,409,982 and 3,653,278 shares available for future issuances under the plan.

Effective January 1, 2008, the board of directors instituted a compensation plan for James and Keith Gleasman by which the company would compensate each of them for services performed and inventions and know-how transferred to the company at the rate of $300,000 per year. Actual payment of this compensation, or any portion thereof, was conditioned upon a board of director determination that the company had the requisite cash, after the complete funding of all ongoing company projects, to make payment.

Since the company did not have the requisite cash available to pay the Gleasmans’ compensation under this arrangement from January 1, 2008 through August 17, 2009, the date on which each of the Gleasmans waived all of his rights and interest in and to the board-created compensation plan, including all of his rights and interest in and to the amount(s) under the plan accrued to such date. As a result of such waiver, of the $942,000 amount accrued under the plan at June 30, 2009, namely $900,000 was reclassified to equity as a contribution of services and $42,000 accrued under the plan for payroll taxes was recorded as a reduction to general and administrative expenses in the quarter ended June 30, 2009.

For periods for which there is no compensation plan, the company is required to record the estimated value of each of the Gleasman’s services rendered to the company (estimated at $300,000 each per annum) as a contribution of services under generally accepted accounting principles applicable to the company and is required under the same accounting principles to allocate the amount of such contribution between research and development expenses on the one hand and general and administrative on the other hand. For the year ended December 31, 2009, the company recorded $100,000 to research and development expense and $200,000 to general and administrative expense, based upon management’s estimate.

Effective March 14, 2010, James Gleasman retired as the company’s chief executive officer and interim chief financial officer.

For the period from September 1996 (inception) through December 31, 2009, the company has accumulated a deficit of $53,213,000 and at December 31, 2009 has a working capital deficit of $1,424,000 and stockholders’ capital deficit of $1,235,000. The company has been dependent upon equity financing and advances from stockholders to meet its obligations and sustain operations. Management believes that based upon its current cash position, its budget for its business operations and collectability of its receivables in the ordinary course of business and the settlement of its litigation in January 2010 (proceeds of $1,100,000), the company will be able to continue operations through December 31, 2010. However, if its cash projections are less than expected, the Company may need to downsize operations, incur debt or raise additional capital. There can be no assurance, however, that the Company will be successful in raising additional capital or incur debt when needed on terms acceptable to the Company.

At December 31, 2009, the company had current liabilities (excluding deferred income) amounted to $748,000.

(e) Critical Accounting Policies

Revenue Recognition

The company’s terms provided that customers are obligated to pay for products sold to them within a specified number of days from the date that title to the products is transferred to the customer. The company’s standard terms are typically net 30 days. The company recognizes revenue when transfer of title occurs and risk of ownership passes to a customer at the time of shipment or delivery, depending on the terms of the agreement with a particular customer. The sale price of the company’s products is substantially fixed or determinable at the date of the sale based upon purchase orders generated by a customer and accepted by the company. To the extent that collectability of the receivable is not assured, the company follows the cost recovery approach. Accordingly, amounts collected will be accounted for as a reduction of costs.

Share-based Payments

The company accounts for the settlement of its commission arrangements to non-employee consultants, directors, executives and certain administrative personnel with the issuance of its business consulting shares under ASC 505 (Previously known as FASB Statement 123^® “Share Based Payment”), provided that there are sufficient shares available under the business consulting plan. Under ASC 505, the company measures commission arrangements at the fair value of the equity instruments issued. In the event that there are insufficient shares available to settle the obligation, the company will follow the provisions of ASC 815-40 (Previously known as: EITF 00-19 “Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company’s Own Stock”). Under ASC 815-40, the company will record a liability instrument for the resulting changes in fair value from the date due to the end of each reporting period until such liability is satisfied.

Recently Issued Accounting Principles

In June 2009, the FASB issued under ASC Topic 105 which establishes the Accounting Standards Codification (“ASC”; the “Codification”) as the source of authoritative accounting principles recognized by the FASB to be applied to nongovernmental entities in the preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (“GAAP”). ASC Topic 105 is effective for financial statements issued for interim and annual periods ending after September 15, 2009. Rules and interpretative releases of the Securities and Exchange Commission (“SEC”) under federal securities laws are authoritative GAAP for SEC Registrants. Upon adoption of this guidance under ASC Topic 105, the Codification superseded all then-existing non-SEC accounting and reporting standards. All other non-grandfathered non-SEC accounting literature not included in the Codification became non-authoritative.

In December 2007, the FASB issued ASC 805 (Prior authoritative literature: SFAS No. 141 (revised 2007), “Business Combinations”, which replaces FASB Statement No. 141). ASC 805-10 establishes principles and requirements for how an acquirer recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, any non controlling interest in the acquiree and the goodwill acquired. The Statement also establishes disclosure requirements which will enable users to evaluate the nature and financial effects of the business combination. ASC 805-10 will change how business combinations are accounted for and will impact financial statements both on the acquisition date and in subsequent periods. In April 2009, the FASB issued ASC 805-10-05 (Previously known as: Statement No. 141(R)-1 “Accounting for Assets Acquired and Liabilities Assumed in a Business Combination That Arises from Contingencies”). For business combinations, the standard requires the acquirer to recognize at fair value an asset acquired or liability assumed from a contingency if the acquisition date fair value can be determined during the measurement period. The adoption of FASB ASC 805-10 did not have an impact on the Company’s financial position and results of operations although it may have a material impact on accounting for business combinations in the future which can not currently be determined.

In December, 2007, the FASB issued ASC 810 (Previously known as: FASB Statement No. 160, “Noncontrolling Interests in Consolidated Financial Statements, an amendment of ARB No. 51”). The standard changes the accounting for noncontrolling (minority) interests in consolidated financial statements including the requirements to classify noncontrolling interests as a component of consolidated stockholders’ equity, and replace references “minority interest” with noncontrolling interests. ASC 810 also requires the amount of consolidated net loss attributable to the parent and the noncontrolling interest be clearly identified and presented on the face of the consolidated statements of operations and gain or loss on the deconsolidation of the subsidiaries be measured at fair value. The presentation and disclosure requirement of ASC were applied retrospectively.

In 2008, the FASB issued ASC 815 (Previously known as: EITF 07-05, Determining whether an Instrument (or Embedded Feature) Is Indexed to an Entity’s Own Stock). ASC 815 provides guidance on determining what types of instruments or embedded features in an instrument held by a reporting entity can be considered indexed to its own stock for the purpose of evaluating the first criteria of the scope exception in ASC 810-10-15 (Prior authoritative literature: paragraph 11(a) of SFAS 133). The adoption of ASC 815 effective January 1, 2009 did not have any impact on the Company’s financial statements.

In April 2009, the FASB issued ASC 825 (Previously known as: FASB Staff Position No. FAS 107-1) and ASC 270 (Prior authoritative literature: APB 28-1, “Interim Disclosures about Fair Value of Financial Instruments,”) which requires disclosures about fair value of financial instruments for interim reporting periods of publicly traded companies as well as in annual financial statements. This Staff Position is effective for interim reporting periods ending after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009. The Company adopted this pronouncement as of July 1, 2009 and it did not have a material impact on the financial statements.

In May 2009, the FASB issued ASC 855 (SFAS No. 165), “Subsequent Events” which establishes general standards for accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued. In February 2010, FASB issued ASU 2010-09 Subsequent Event (Topic 855) Amendments to Certain Recognition and Disclosure Requirements. ASU 2010-09 removes the requirement for an SEC filer to disclose a date in both issued and revised financial statements. All of the amendments in ASU 2010-09 are effective upon issuance of the final ASU, except for the use of the issued date for conduit debt obligors.

(f) Impact of Inflation

Inflation has not had a significant impact on the company’s operations to date and management is currently unable to determine the extent inflation may impact the company’s operations during its fiscal year ending December 31, 2009.

(g) Quarterly Fluctuations

As of December 31, 2009 and 2008, the company had not engaged in substantial revenue producing operations. Once the company actually commences significant revenue producing operations, the company’s operating results may fluctuate significantly from period to period as a result of a variety of factors, including purchasing patterns of consumers, the length of the company’s sales cycle to key customers and distributors, the timing of the introduction of new products and product enhancements by the company and its competitors, technological factors, variations in sales by product and distribution channel, product returns, and competitive pricing. Consequently, once the company actually commences significant revenue producing operations, the company’s product revenues may vary significantly by quarter and the company’s operating results may experience significant fluctuations.

Item 7A.		QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

As a smaller reporting company, we are not required to include information otherwise required by this item.

Item 8.		FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

TORVEC, INC. AND SUBSIDIARIES
(a development stage company)
Contents
Financial Statements

		Page
Report of Independent Registered Public Accounting Firm			F-2
Consolidated balance sheets as of December 31, 2009 and 2008			F-3
Consolidated statements of operations for each of the years in the two-year period ended December 31, 2009 and for the period from September 25, 1996 (inception) through December 31, 2009			F-4
Consolidated statements of changes in stockholders’ equity (capital deficit) for the period from September 25, 1996 (inception) through December 31, 2009			F-5 - F-12
Consolidated statements of cash flows for each of the years in the two-year period ended December 31, 2009 and for the period from September 25, 1996 (inception) through December 31, 2009			F-13
Notes to consolidated financial statements			F-14 - F-34

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Board of Directors and Stockholders
Torvec, Inc.

We have audited the accompanying consolidated balance sheets of Torvec, Inc. (a development stage company) and its subsidiaries as of December 31, 2009 and 2008, and the related consolidated statements of operations and cash flows for each of the years in the two-year period ended December 31, 2009 and for the period from September 25, 1996 (inception) through December 31, 2009 and changes in stockholders’ equity (capital deficit) for each of the periods from September 25, 1996 (inception) through December 31, 2009. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. We were not engaged to perform an audit of the Company’s internal control over financial reporting. Our audits include consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. 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 provides a reasonable basis for our opinion.

In our opinion, the financial statements enumerated above present fairly, in all material respects, the consolidated financial position of Torvec, Inc. and subsidiaries as of December 31, 2009 and 2008, and the consolidated results of their operations and their consolidated cash flows for each of the years in the two-year period ended December 31, 2009 and for the period from September 25, 1996 (inception) through December 31, 2009, in conformity with accounting principles generally accepted in the United States.

As described in Note B [11] to the Consolidated Financial Statements, effective January 1, 2009, the Company adopted accounting guidance for the presentation and disclosures involving non-controlling interests.

/s/ EISNER LLP
New York, New York
March 30, 2010

TORVEC, INC. AND SUBSIDIARIES
(a development stage company)

Consolidated Balance Sheets
December 31, 2009 and 2008

		2009				2008
ASSETS
Current assets:
Cash		$	41,000			$	304,000
Prepaid expenses and other receivable			111,000				102,000
Total current assets			152,000				406,000
Property and Equipment:
Office equipment			68,000				68,000
Shop equipment			139,000				139,000
Leasehold improvements			213,000				213,000
Transportation equipment			106,000				106,000
			526,000				526,000
Less accumulated depreciation and amortization			299,000				237,000
Net property and equipment			227,000				289,000
Total Assets		$	379,000			$	695,000
LIABILITIES
Current liabilities:
Notes payable — current		$	20,000			$	15,000
Accounts payable			255,000				177,000
Accrued liabilities			451,000				755,000
Due to related party			22,000				—
Deferred income			828,000				—
Total current liabilities			1,576,000				947,000
Deferred rent expense			29,000				39,000
Deferred income			—				800,000
Notes payable — long term			9,000				29,000
Total liabilities			1,614,000				1,815,000
Commitments, contingencies and other matters [Note I]
STOCKHOLDERS’ CAPITAL DEFICIT
Preferred stock, $.01 par value, 100,000,000 shares authorized 3,300,000 designated as Class A, non-voting, convertible, cumulative dividend $.40 per share, per annum, 2009 and 2008: 655,851 and 707,101 shares issued and outstanding, respectively, (liquidation preference 2009: $3,841,491 and 2008: $3,858,015) 300,000 designated as Class B, non-voting, convertible, cumulative dividend $.50 per share, per annum, 2009 and 2008: 77,500 and 97,500 shares issued and outstanding, respectively, (liquidation preference 2009: $552,795 and 2008: $634,497)			7,000				8,000
Common stock, $.01 par value, 400,000,000 shares authorized, 35,811,192 and 32,811,422 issued and outstanding at December 31, 2009 and 2008, respectively			358,000				328,000
Additional paid-in capital			51,613,000				48,485,000
Deficit accumulated during the development stage			(53,213,000	)			(49,941,000	)
Total Torvec, Inc. Capital Deficit			(1,235,000	)			(1,120,000	)
Non-controlling interest			—				—
Total Capital Deficit			(1,235,000	)			(1,120,000	)
Total Liability and Stockholders’ Capital Deficit		$	379,000			$	695,000

See notes to consolidated financial statements

TORVEC, INC. AND SUBSIDIARIES
(a development stage company)

Consolidated Statements of Operations

										September 25,
										1996
										(Inception)
		Year Ended								Through
		December 31,								December 31,
		2009				2008				2009
Revenue		$	175,000			$	121,000			$	422,000
Cost of goods sold			90,000				105,000				315,000
Gross Profit			85,000				16,000				107,000
Costs and expenses:
Research and development			520,000				535,000				15,855,000
General and administrative			2,877,000				3,165,000				39,853,000
Asset impairment			—				—				1,071,000
Loss from operations			(3,312,000	)			(3,684,000	)			(56,672,000	)
Other income			—				114,000				260,000
Loss before reversal of liability and tax benefit			(3,312,000	)			(3,570,000	)			(56,412,000	)
Reversal of liability on cancellation of debt			—				1,541,000				1,541,000
Net loss before income tax benefit			(3,312,000	)			(2,029,000	)			(54,871,000	)
Income tax benefit			40,000				346,000				386,000
Net loss			(3,272,000	)			(1,683,000	)			(54,485,000	)
Net loss attributable to non-controlling interests in consolidated subsidiary			—				—				1,272,000
Net loss attributable to Torvec, Inc.			(3,272,000	)			(1,683,000	)			(53,213,000	)
Preferred stock beneficial conversion feature			—				—				763,000
Preferred stock dividend			229,000				307,000				1,405,000
Net loss attributable to Torvec, Inc. common stockholders		$	(3,501,000	)		$	(1,990,000	)		$	(55,381,000	)
Basic and diluted net loss attributable to Torvec, Inc. common stockholders per share		$	(0.10	)		$	(0.06	)
Weighted average number of shares of Torvec, Inc. common stock — basic and diluted			34,035,000				32,196,000

See notes to consolidated financial statements

TORVEC, INC. AND SUBSIDIARIES
(a development stage company)

Consolidated Statements of Changes in Stockholders’ Equity (Capital Deficit)
For the Period from September 25, 1996 (Inception) through December 31, 2009

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

See notes to consolidated financial statements

TORVEC, INC. AND SUBSIDIARIES
(a development stage company)
Consolidated Statements of Changes in Stockholders’ Equity (Capital Deficit)
For the Period from September 25, 1996 (Inception) through December 31, 2009
(continued)

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