CRGS CurAegis Technologies Inc (CE)

 

 

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, 2008

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

FOR THE TRANSITION PERIOD FROM                      TO                     

Commission file number 000-24455

TORVEC, INC.

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

Issuer’s Telephone Number, including Area Code: (585) 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 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. $ 27,824,366.

State the number of shares outstanding of each of the issuer’s classes of common equity, as of March 30, 2009. 33,248,816

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

TABLE OF CONTENTS

		PAGE
PART I
Item 1. Description of Business			4
Item 1A. Risk Factors			11
Item 2. Properties			13
Item 3. Legal Proceedings			13
Item 4. Submission of Matters to a Vote of Security Holders			15
Item 5. Market for Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities			16
Item 6. Management’s Discussion and Analysis of Financial Condition and Results of Operations			26
Item 6A. Quantitative and Qualitative Disclosures About Market Risk
PART II — DECEMBER 31, 2008 and 2007 FINANCIAL INFORMATION
Item 7. 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, 2008 and 2007			F-3
Torvec, Inc. and Subsidiaries Consolidated Statements of Operations for each of the years in the Two-Year Period Ended December 31, 2008 and for the Period from September 25, 1996 (Inception) through December 31, 2008			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, 2008			F-5 – F-11
Torvec, Inc. and Subsidiaries Consolidated Statements of Cash Flows for each of the years in The Two Year Period Ended December 31, 2008 and for the Period from September 25, 1996 (Inception) through December 31, 2008			F-12
Notes to Consolidated Financial Statements			F-13
Item 8. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure			33
Item 8A. Controls and Procedures			33
Item 8B. Other Information			34
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons; Compliance with Section 16(a) of the Exchange Act			35
Item 10. Executive Compensation			48
Item 11. Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters			59
Item 12. Certain Relationships and Related Transactions and Director Independence			62
Item 13. Principal Accountant Fees and Services			64
Exhibits			65
SIGNATURES PAGE			70
EXHIBIT INDEX			71

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 James Y. Gleasman, its chief executive officer and Keith E. Gleasman, its President, a staff of six highly qualified engineering consultants and an administrative staff consisting of three full-time consultants. The company also retains a full-time chief of security.

(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 has tested the FTV over the past years. It has and continues to demonstrate the FTV in person to representatives of many governmental entities and private sector automotive companies as well as to many Tier I and Tier II automotive and truck componentry suppliers who are potential suppliers of the company’s FTV.

Based upon these tests, demonstrations and the reaction of governmental and industry representatives, 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 almost any terrain, with highway driving speeds being attainable on pavement and other relatively flat surfaces. The company also believes that it has shown that the FTV is also environmentally sensitive since its low ground pressure of approximately 2 pounds per square inch, does not damage paved road surfaces or 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.

It should be noted that unlike the United States, the vast majority of third world country roads are unpaved. The FTV is a highly desirable vehicle in these countries given their poor road conditions and weather extremes. The market is significant — approximately 4,000,000 four wheel drive vehicles and light trucks are sold in the Asian, African, Central and South American markets annually ( Automotive News , March 2003).

(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 (for further information on the Torsen, explore “Torsen” on the Google web searcher).

The company believes its IsoTorque ^® differential is dramatically less expensive, more efficient, lighter, and outperforms the Torsen. The Torsen is standard equipment on many major automobiles including Lexus, Mazda, Toyota, Audi, Land Rover, GM vehicles and others. The major hurdle to the Torsen’s utilization in a larger percentage of cars and trucks is price and weight. The company believes it’s the IsoTorque differential that eliminates these barriers.

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 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.

In December, 1999, the company finished an extensive CAD/CAM evaluation of its first generation infinitely variable transmission. The evaluation included finite element analysis, fluid dynamics analysis and material compatibility analysis for “real world conditions” under temperatures ranging from minus 20 degrees Fahrenheit to 120 degrees.

During the summer and fall of 2003, the company installed its first generation transmission configured for a 2003 Dodge Ram 3/4 ton 4x4 quad pick-up truck, with an electronically controlled 2004 emissions compliant Cummins turbo-diesel engine. This engine is 5.9 liters in displacement, 250 bhp at 2900 rpm and has 460 lb-ft of torque at 1400 rpm. We chose this engine size because it represents a huge market — SUVs, light trucks, delivery trucks, school buses, airport shuttle buses and class 3 to 5 trucks.

The company next engaged the independent engineering firm of Viewpoint Systems, Inc. (a “Select Integrator” of National Instruments) to conduct a series of fuel-efficiency tests on the transmission. Viewpoint’s tests, consisting of measuring replacement fuel by driving at steady-state on a closed course (i.e. racetrack) using the average of five test runs, demonstrated that the company’s 3/4-ton 4x4 Dodge Ram truck, utilizing the company’s first generation infinitely variable transmission with a diesel engine, generated a 96% improvement in fuel mileage over that obtained by a gasoline-powered, 4-speed automatic 4x4 truck of comparable weight and horsepower to the most popular SUVs. The tests also confirmed that the company’s 3/4 ton diesel truck:

•

generated a 38.5% improvement in fuel efficiency over a same-model Dodge 4x4 diesel truck with a 4-speed automatic; and

•

generated a 28.5% improvement in fuel efficiency over a same model Dodge 4x4 diesel truck with a manual transmission.

In addition to demonstrating that our first generation transmission achieved superior fuel economy, the tests also confirmed that two other objectives, long sought by the automotive industry, were achieved:

•

the elimination of “vehicle creep”, a characteristic of an automatic transmission vehicle at rest without application of the brake;

•

interchangeability, i.e. the transmission fit in the same space as an existing automatic transmission, thus, eliminating the need for major costly design changes to car and truck frames;

In April, 2004, we tested our hydraulic pump at the U.S. Environmental Protection Agency’s national laboratory in Ann Arbor, Michigan in order to determine its efficiency and to answer the question whether the first generation transmission which had been configured for the diesel Dodge Ram in 2003 could be adapted to a gasoline engine. This determination was necessary because diesel engines operate at low rpm and generate high torque, in contrast to gasoline engines that operate at high rpm and generate little torque and low fuel efficiencies at low rpm.

The question of suitability of our transmission for a gasoline engine lay primarily in the mechanical and volumetric efficiencies of our hydraulic pump and motor. We therefore installed our pump and motor as a stand alone transmission in a Tahoe and conducted a series of exhaustive tests, facilitated by our acquisition of a state-of-the-art dynamometer. Our tests were designed to demonstrate our transmission’s compatibility with a gasoline engine, its operating efficiencies, its durability and the fuel economy obtainable with the unit.

During this period, we made a number of improvements to the transmission, including creation of a more robust design for our hydraulic pump/motor units as well as improving their operating efficiencies.

We compared our all-hydraulic transmission to the Tahoe’s automatic transmission in side-by-side tests under simulated city driving scenarios, such as those found in New York City, Chicago, Los Angeles, Rio de Janeiro and Beijing. We then ran a series of side-by-side comparisons utilizing the then EPA-sanctioned New York City cycle test. Over the course of all of these tests, the all-hydraulic transmission achieved an average 4.33% improvement in fuel efficiency over the Tahoe automatic.

Having demonstrated the efficiencies of our transmission in the Dodge Ram diesel and the efficiencies of our all-hydraulic transmission in the Tahoe, we configured the two as a second generation, “modular” hydro mechanical infinitely variable transmission and in the third quarter of 2005, installed this unit in the Tahoe. We then proceeded to run this transmission under a “full load” (full vehicle weight, 5575 lbs., load resistance on our Mustang dynamometer) to both break it in and determine its mechanical capabilities. At the same time, we fine-tuned the computer software program we are using to control the transmission’s operation to enable us to accelerate, decelerate and break the vehicle and to perform the “steady state” tests requested of us by auto manufacturers.

During the course of refining the company’s second generation transmission, the company developed a new, third generation infinitely variable transmission which uses only one hydraulic mechanism (as opposed to both a pump and motor) and operates by slowing down an internal gear in the planetary gear arrangement to change its infinite ratios so that when the gear stops rotating, the transmission is in over-drive. At this point, the hydraulic mechanism is not operating and the transmission is operating entirely on its gears, thus achieving maximum efficiency. The company’s third generation transmission enhances engine management due to the seamless shifting of gear ratios through the control of only a single hydraulic device as opposed to the control of multiple clutches, brake bands and planet assemblies in relation to the automatic’s torque converter’s torques and speeds(i.e. creating multiple steps and engine speed changes). The third generation transmission has no clutches to engage and disengage, is smaller and more compact than conventional automatic transmissions as well as “innovative” constant velocity transmissions (“CVTS”), is not horsepower limited since the company’s transmission can be tailored to the smallest motorized vehicle as well as to the largest motorized vehicle, is interchangeable with any power source, e.g. diesel, gas, electric etc and lends itself to hydraulic and/or electric hybridization and is significantly less costly to manufacture than conventional transmissions due to its approximately 180 part count.

We have now produced the final design for our infinitely variable transmission. We have incorporated the best of all our previous designs. We began testing this unit in March, 2008. Using industry-accepted and EPA-sanctioned procedures, we ran 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 used 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.

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, higher operating angles 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, 2008, the company did not earn any royalties under this agreement.

(c) Our Ice Technology

On November 29, 2000, the company acquired Ice Surface Development, Inc. (“ISDI”), from UTEK Corporation, 202 South Wheeler Street, Plant City, Florida 33566. As a result of the merger, the company acquired a 20-year, exclusive worldwide license granted by the Trustees of Dartmouth College for land-based motorized applications to a novel ice adhesion modification system developed by Professor Victor F. Petrenko at Dartmouth’s Thayer School of Engineering.

Since its acquisition of the ice technology license from Dartmouth College, the company worked with Dr. Petrenko to refine the various methods for deicing and, during the same period, used its best efforts to sublicense such technology to one or more domestic and/or foreign glass manufacturers, automotive companies and other potential end-users. A considerable amount of the additional development work was performed at the Dartmouth College’s center for ice technology on the college’s campus, which work was supervised by Dr. Petrenko.

During the period beginning November 29, 2000 through to the year ending December 31, 2006, Dr. Petrenko’s efforts to develop the technology to where it would be capable of deicing large surface areas, such as the windshield of a car, truck and/or bus, appeared to be making steady progress. In addition, numerous companies, especially certain major glass manufacturers, continued to express relatively high interest in sublicensing the technology from the company or, at a minimum, provide dollars to the company to accelerate the development process.

However, despite the company’s best efforts, no glass manufacturer or other third party expressed continuing interest in sublicensing the technology from the company given its current stage of development. Moreover, no glass company or other third party was willing to provide the company with the development dollars necessary to enable the technology, even utilizing the pulse method favored by Dr. Petrenko, to deice relatively large surfaces within acceptable automotive power requirements.

During late 2006, the company was informed by Dr. Petrenko that while the physics underlying the ice technology is still valid and the technology remains promising, he could not estimate with any degree of assurance a time frame when the technology would be mature enough for automotive commercialization.

Given Dr. Petrenko’s assessment with respect to the ice technology and the reticence of glass companies to either sublicense or provide the company with development dollars, management concluded that the carrying amount of its Dartmouth College license as of December 31, 2006 ($1,071,000) exceeded the estimated cash flows the company reasonably expected to receive and therefore, determined that the full amount of such excess should be recorded as an impairment in accordance with SFAS No. 144 as of and for the year ended December 31, 2006.

During the first six months of 2007, the company and Dr. Petrenko discussed the terms and conditions under which the company would accept the offer of Dr. Petrenko to reacquire the ice technology license.

Effective June 15, 2007, the company assigned all of its right, title and interest in and to the license to Dr. Petrenko’s company (Ice Engineering, LLC) in exchange for a royalty interest equal to 5% of the gross revenues generated by the license and the assumption of the company’s obligations to Dartmouth College under the license.

Separately, Ice Engineering, LLC agreed to reimburse approximately $3,500,000 of acquisition and maintenance costs expended by the company in connection with the ice technology. Pursuant to the reimbursement agreement, the company received $500,000 on June 15, 2007. Under the license assignment agreement, the $3,000,000 balance is to be paid at the rate of $300,000 per quarter commencing March 1, 2008, less approximately $91,000 in fees payable to Dartmouth College accrued through June 14, 2007 to be deducted from the first quarterly installment amount.

The company received the first quarterly installment of $209,000, due March 1, 2008, on April 3, 2008. The company did not receive payment of the installments due June 1, 2008, September 1, 2008 and December 1, 2008 and Ice Engineering has apparently repudiated its remaining payment obligations under the agreement. On October 31, 2008, the company commenced an action in New York State 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 the June 15, 2007 agreement, namely $2,700,000. Ice Engineering has counterclaimed for the approximate $800,000 paid under the agreement thus far, alleging that the company failed to deliver certain “business information” to Ice Engineering as called for under the agreement.

The company has accounted for the receipt of installment proceeds as a recovery of its cost since such amounts represent an initial payment and is subject to additional installments and when payments received exceed the cost accumulated, revenue will be recorded under the cost recovery approach to the extent that the proceeds exceed the basis.

(d) Current Status of Product Development

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

(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, 2008, 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 in 2007 and 2008, the company is currently engaged in a number of projects with domestic and foreign enterprises, as well as the National Aeronautics and Space Administration, with respect to its IsoTorque ^® differential, constant velocity joint technology and infinitely variable transmission technology. The projects generally are 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. In these circumstances, management has expressed its opinion that without sufficient additional capital or long-term debt and ultimately, profitable operations, the company will not be able to continue as a going concern. As a result of Limited Capital resources and recurring net losses, our auditors have disclosed in their report on our financial statements that there is a substantial doubt about our ability to continue as a going concern.

(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 current economic downturn, is curtailing research and development expenditures, undergoing significant management and corporate reorganization and delaying new product development. Such circumstances may delay the company’s ongoing projects with the industry or curtail one or more of them altogether.

(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 quantative 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 nonselling shareholder. The short seller’s profit is made when he purchases the number of shares borrowed at a price lower than the price at which he sold the borrowed shares.

(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.

Item 1B. UNRESOLVED STAFF COMMENTS

Not Applicable.

Item 2. PROPERTIES

During 2006 and part of 2007, the company leased executive office space at Powder Mills Office Park, Pittsford, New York and leased research, development and manufacturing space in Webster, New York. The company terminated its Powder Mills lease as of June 30, 2007 and its Webster lease as of December 31, 2007 in order to access additional manufacturing and assembly space and to consolidate its executive and manufacturing functions under one roof. The company was released from all further obligations under these leases.

On September 14, 2007, the company moved to a new facility 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) providing for rent to be paid at a rate of $5,687.00 per month ($68,244.00 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 were 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.

Item 3. LEGAL PROCEEDINGS

(1)

On September 30, 2005, the company filed a declaratory judgment action in the Supreme Court of the State of New York for the Seventh Judicial District seeking that court’s determination that certain, purported agreements with a management consulting firm are null and void and unenforceable as against the company, its officers and directors. This litigation has been settled and, in accordance with the terms of the settlement agreement executed March 6, 2009, 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 April 12, 2007, the company commenced a second lawsuit against the same management consulting firm in the Supreme Court, Seventh Judicial District, alleging that such firm had fraudulently induced the company to enter into certain purported agreements with the management firm, did not perform the services for which the company had engaged the firm and that, as a result, the company has been damaged in excess of $6,000,000 by such firm. This litigation has been settled and, in accordance with the terms of the settlement agreement executed March 6, 2009, 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.
(3)		On October 8, 2007, the controlling persons of the company’s majority-owned subsidiary, Ice Surface Development, Inc.(“ISDI”), namely its chief executive officer, its chief operating officer and its vice-president of manufacturing, filed for arbitration of their claims that ISDI is obligated to pay them certain amounts under their employment contracts.
		On October 19, 2007, the same three persons commenced a shareholders’ derivative action in the Federal District Court for the Western District of New York claiming that the company and its president breached their fiduciary duties to the minority shareholders of ISDI in assigning the Dartmouth College ice technology license for inadequate consideration.
		On June 27, 2008, the Federal Court dismissed, with prejudice, the shareholders derivative action and the deadline for appealing the decision has expired.
		On August 18, 2008, the plaintiffs withdrew their arbitration claim, thus ending the litigation in its entirety.
(4)		On October 31, 2008, the company commenced an action in New York State 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 agreement entered into by the parties, effective June 15, 2007, namely, $2,700,000. Under the agreement, in connection with Torvec’s assignment of the ice technology license, Ice Engineering agreed to reimburse Torvec for approximately $3,500,000 the company previously had expended acquiring and maintaining the license. Ice Engineering has paid approximately $800,000 but is in arrears with respect to installments due June 1, 2008, September 1, 2008 and December 1, 2008 and apparently has repudiated its remaining payment obligations under the agreement. Ice Engineering has counterclaimed for the $800,000 paid under the agreement thus far, alleging that the company failed to deliver certain “business information” to Ice Engineering as called for under the agreement.

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, 2008.

Subsequent Event

The annual meeting of the company’s common shareholders was held on January 29, 2009. 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 (27, 159,425 common shares out of 32,695,556 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			26,960,435				198,990
Herbert H. Dobbs			26,935,709				223,716
Asher J. Flaum			26,951,958				207,467
James Y. Gleasman			26,952,935				206,490
Keith E. Gleasman			26,952,935				206,490
Joseph B. Rizzo			26,961,209				198,216
Gary A. Siconolfi			26,977,249				182,176

For		Against				Abstained
27,093,809			7,576				58,040

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 25 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.

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

2007		High				Low
1st Quarter		$	5.40			$	3.15
2nd Quarter		$	4.28			$	3.20
3rd Quarter		$	3.84			$	2.50
4th Quarter		$	4.56			$	2.84

(b) Holders of Common Stock

As of December 31, 2008, the company had approximately 297 shareholders of record and an estimated 3,600 beneficial owners of its common stock. As of December 31, 2008, the company had 32,811,422 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)

$

4.70

None (1)

Equity compensation plans not approved by security holders

1,214,500

(5)

$

3.30

None (2)-(5)

Total

1,856,348

(5)

$

4.00

None (1)-(5)

(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.

On January 30, 2002, the company engaged Pittsford Capital Group as its nonexclusive agent to raise up to $5,000,000 in capital through the sale of up to 2,000,000 shares of the company’s preferred stock. The board designated the preferred stock to be issued in the fund raising effort as Class A Preferred Shares (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 and no more for each annual dividend period. The annual dividend period shall commence on the first day of each March and shall end on the last day of the immediately succeeding February, which February date is referred to as the “Dividend Accrual Date”.
	(ii)		When and as declared by the board, dividends payable on the Class A Preferred will be paid in cash out of any funds legally available for the payment of dividends or, in the discretion of the board, will be paid in Class A Preferred at a rate of 1 share of Class A Preferred for each $4.00 of dividends. No fractions of Class A Preferred shall issue. The Company shall pay cash in lieu of paying fractions of Class A Preferred on a pro rata basis.
	(iii)		Dividends shall be cumulative from the date of issuance of each share of Class A Preferred, whether or not declared and whether or not, in any annual dividend period(s), there are net profits or net assets of the Company legally available for the payment of dividends.
	(iv)		Accumulated and unpaid dividends on the Class A Preferred will not bear interest.
	(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.

Pursuant to the offering, the company sold 38,500 shares of Class A Preferred for aggregate proceeds of $154,000 during the year ending December 31, 2002. The Pittsford Capital offering terminated on July 31, 2002.

Additional shares of Class A Preferred have been sold from time to time directly by the company in a number of private placements. During the years ending 2006, 2005, 2004 and 2003, the company sold 273,250, 200,000, 238,075 and 15,687 Class A Preferred for proceeds of approximately $1,093,000, $800,000, $952,300 and $62,748, respectively. No shares of Class A Preferred were sold during the year ended December 31, 2008.

During 2004, holders of Class A Preferred converted 38,500 Class A Preferred into 38,500 common shares and received dividends of 8,031 Class A Preferred upon conversion. In 2004, the 2,550 Class A Preferred issued as dividends were converted into 2,550 common shares.

32,305 Class A Preferred (including 1,055 Class A Preferred issued as dividends) were converted into 32,305 common shares during the year ended December 31, 2008.

At December 31, 2008, Class A Preferred dividends in arrears amounted to approximately $1,029,000.

(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. Such 1 for 1 rate of conversion is subject to adjustment as set forth in Section G(10); (ii) convert each share of Class B Preferred into 1 fully paid and nonassessable share of the $.01 par value common stock of Iso-Torque Corporation (“Iso-Torque Common”) without payment of any conversion price or other consideration upon the happening of any of the following events:

(a) the effectiveness of a registration statement as filed with the Securities and Exchange Commission pursuant to and under the Securities Act of 1933 with respect to an initial public offering of Iso-Torque Common; or

(b) the effectiveness of a registration statement as filed with the Securities and Exchange Commission pursuant to and under the Securities Exchange Act of 1934 with respect to an initial trading of Iso-Torque Common on a national exchange, the NASDAQ or the OTCBB; or

(c) notwithstanding the 1 year holding period set forth in Section G(2) the execution of a definitive agreement for the sale, transfer and/or exchange of all of the issued and outstanding Iso-Torque Common to a third party purchaser of such stock or by any of a business combination of Iso-Torque Corporation with an unrelated entity, other than a merger or consolidation in which Iso-Torque Corporation is the surviving corporation.

(2) The Conversion Privilege set forth in this Section G may not be exercised by the holder of Class B Preferred until 1 year shall have elapsed from the issue date of the Class B Preferred held by such holder and may not be exercised if the board shall not have approved the actual exercise of such Conversion Privilege by such holder of Class B Preferred. Such approval shall not be unreasonably withheld. Upon receipt of the Notice of Conversion and the board’s approval of such conversion, the Corporation shall give a Notice of Approval to the holder within 48 hours of the receipt of the Notice of Conversion that the exercise of the Conversion Privilege by such holder is approved.

(3) The Conversion Privilege may be exercised in whole or in part and, if exercised in part, a certificate(s) will be issued for the remaining Class B Preferred in any case in which fewer than all of the Class B Preferred represented by a certificate(s) are converted to the same record holder of Class B Preferred converted.

(4) Each conversion will be deemed to have been effective immediately prior to the close of business on the date on which the Class B Preferred will have been so surrendered (the “Conversion Date”) and the person(s) in whose name(s) any certificate(s) for Torvec Common or Iso-Torque Common will be issuable upon the conversion will be deemed to have become the holder(s) of record of the Torvec Common or Iso-Torque Common on the Conversion Date. Effective as of the Conversion Date, the Corporation will have no obligation to pay dividends on the Class B Preferred converted provided that effective as of the Conversion Date, the Corporation shall pay all accumulated and unpaid dividends (including the prorated dividend from the last Dividend Accrual Date) on the Class B Preferred converted, payable in the discretion of the board, in cash out of any funds legally available for payment of such dividends or in shares of Class B Preferred.

(5) The Conversion Privilege shall terminate with respect to Class B Preferred called for redemption by the mailing of a Redemption Notice on the close of business on the date immediately preceding the Redemption Date.

(6) Notwithstanding the requirement for board approval and the 1 year limit set forth in Section G(2), in case of any consolidation or merger to which the Corporation is a party other than a merger or consolidation in which the Corporation is the surviving corporation or in case of any sale or conveyance to another corporation of all or substantially all of the assets of 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.

During the years ending December 31, 2006 and 2004, the company sold 55,000 and 42,500 Class B Preferred in a number of private placements for proceeds of approximately $275,000 and $212,500, respectively. No Class B Preferred was sold during the years ending December 31, 2007 and 2008.

At December 31, 2008, Class B Preferred dividends in arrears amounted to approximately $147,000.

(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.		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 during the year ending December 31, 2009 is as follows:

1) to continue working with the U.S. Air Force to create an Advanced Combat Firefighting Vehicle capable of unprecedented speed, maneuverability with diverse applications for use in the most extreme and rugged terrain. The company has delivered an FTV ^® to the Air Force to maximize the FTVs combat firefighting capabilities, including its robotic and autonomous potential, at Tyndale Air Force Base in Florida;

2) to build a “second generation” FTV based upon the Air Force’s recommendations for delivery to the Air Force for integration in its Advanced Combat Firefighting Vehicle Program;

3) 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, will purchase design-specific FTVs for boarder patrol, off-highway emergencies, as an environmentally-friendly vehicle for federal and state conservation and drug-enforcement efforts and ,as a fast, highly maneuverable vehicle for combat and non-combat uses;

4) to explore the interest of a foreign truck manufacturer in licensing the rights to produce and market the FTV worldwide;

5) to complete and ship approximately seven design-specific infinitely variable transmissions to the National Aeronautics and Space Administration for use in that agency’s lunar rover in connection with NASA’s program titled “America’s return to the moon;” to continue to work with NASA as an “official” drive-line consultant to the lunar rover project;

6) to build an IsoTorque ^® differential for evaluation by a major American automotive manufacturer for integration in its front-wheel drive vehicles. Previously, in 2008, the manufacturer had evaluated the IsoTorque differential in its rear-wheel drive vehicles;

7) to create an active differential control device for a domestic manufacturer of axles for medium-duty trucks and heavy-duty trucks;

8) to redesign the axle used by a major international truck manufacturer to enable the manufacturer to integrate the company’s IsoTorque technology in its fleet of heavy-duty trucks.

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.

Through June 14, 2007, the company held a license to ice technology granted by the Trustees of Dartmouth College. This license was held through the company’s majority-owned subsidiary, Ice Surface Development, Inc. The license required the company to pay Dartmouth College a royalty of 3.5% of the net sales of licensed product with minimum annual payments of $25,000 through 2021. In addition, the license provided for the payment of 50% of sub-license fee income.

Since its acquisition of the ice technology license, the company worked with the technology’s inventor, Dr. Victor Petrenko at Dartmouth’s Thayer School of Engineering, to refine the various methods of deicing and used its best efforts to sublicense such technology to one or more domestic and/or foreign glass manufacturers, automotive companies and other potential end-users. A considerable amount of additional development work was performed at the Dartmouth College’s Center for Ice Technology on the college’s campus, which work was supervised by Dr. Petrenko.

In December, 2006, the company was informed by Dr. Petrenko that while the physics underlying the ice technology is still valid and the technology remains promising, he could not estimate a time frame when the technology would be mature enough for automotive commercialization.

Given Dr. Petrenko’s assessment with respect to the ice technology, management concluded that the carrying amount of the ice technology license as of December 31, 2006 ($1,071,000) exceeded the estimated cash flows the company reasonably expected to receive and, therefore, determined the full amount of such excess should be recorded as an impairment in accordance with SFAS No. 144 as of and for the year ended December 31, 2006.

During 2007, the company and Dr. Petrenko discussed the terms and conditions under which the company would accept Dr. Petrenko’s offer to purchase the license from the company. Effective June 15, 2007, the company assigned all of its rights, title and interest in and to the license to Dr. Petrenko’s company (Ice Engineering, LLC) in exchange for an agreement by Ice Engineering to pay the shareholders of Ice Surface Development a royalty equal to 5% of the gross revenues generated by the license and the assumption of the company’s obligations to Dartmouth College under the license.

Separately, Ice Engineering, LLC agreed to reimburse approximately $3,500,000 of acquisition and maintenance costs expended by the company in connection with the ice technology. Pursuant to the reimbursement agreement, the company received $500,000 on June 15, 2007. Under the license assignment agreement, the $3,000,000 balance is to be paid at the rate of $300,000 per quarter commencing March 1, 2008, less approximately $91,000 in fees payable to Dartmouth College accrued through June 14, 2007 to be deducted from the first quarterly reimbursement amount.

On October 31, 2008, the company commenced an action in New York State 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 agreement entered into by the parties, effective June 15, 2007, namely, $2,700,000. Under the agreement, in connection with Torvec’s assignment of the ice technology license, Ice Engineering agreed to reimburse Torvec for approximately $3,500,000 the company previously had expended acquiring and maintaining the license. Ice Engineering has paid approximately $800,000 but is in arrears with respect to installments due June 1, 2008, September 1, 2008 and December 1, 2008 and apparently has repudiated its remaining payment obligations under the agreement. Ice Engineering has counterclaimed for the $800,000 paid under the agreement thus far, alleging that the company failed to deliver certain “business information” to Ice Engineering as called for under the agreement.

The company has accounted for the receipt of reimbursement proceeds as a recovery of its cost since such amounts represent an initial payment and is subject to additional installments and when payments received exceed the cost accumulated revenue will be recorded under the cost recovery approach to the extent that the proceeds exceed the basis.

(c) Company Expenses

The net loss for the year ended December 31, 2008 was $1,683,000 as compared to the year ended December 31, 2007 net loss of $3,211,000. The decrease in the net loss of $1,528,000 is principally related to the gain on a settlement of debt of $1,541,000 and the receipts of state tax credits of $281,000.

Research and development expenses for the year ended December 31, 2008 amounted to $535,000 as compared to $710,000 for the year ended December 31, 2007. This decrease of $175,000 is principally attributable to decreased costs associated with developing our technologies. The company is strategically positioning itself towards production and manufacturing and this new focus will require less research and development cost.

General and administrative expenses for the year ended December 31, 2008 amounted to $3,165,000 as compared to $2,653,000 for the year ended December 31, 2007. This increase amounted to $512,000 and is principally due to the increase of $300,000 in stock based compensation from the prior year. The company made some significant reductions in the consultant expenses due to several changes in the structure of the equity compensation. This decrease in expense is primarily a non cash event due to the high percentage of consultant cost being met through the issuance of business consulting shares of common stock.

(d) Liquidity and Capital Resources

The company’s business activities during its fiscal year ended December 31, 2008 were funded principally through:

	•		the receipt in 2007 of the first installment of $500,000 of an aggregate $3,500,000 reimbursement payable in connection with the assignment of the company’s ice technology license and the receipt of $209,000 in April 2008 representing the second reimbursement installment;
	•		the receipt in 2007 of $126,000 in revenue from the sale of the company’s products to various end-users;
	•		the receipt of approximately $121,000 of revenue during the twelve month period ended December 31, 2008 attributable to the sale of the company’s products to various end users;
	•		the purchase of an aggregate 36,364 restricted common stock in June 2008 for $100,000 by an accredited investor at a price of $2.75 per common share.
	•		the purchase of an aggregate 50,000 restricted common shares in the fourth Quarter of 2008 for $75,000 by accredited investors at a price of $1.50 per common share.
	•		the receipt of $114,000 of other income for the testing of the company’s products for a potential customer.
	•		the receipt in the fourth quarter of approximately $280,000 representing New York State corporation income tax refundable credits allocable to certain research and development expenses incurred in the years 2005-2007.

During the fiscal year ended December 31, 2008 and 2007, the company issued 1,000,348 and 359,432 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, 2008 and 2007 there are 3,653,278 and 4,653,626 shares available for future issuances under the plan.

During the years ended December 31, 2004 through and including December 31, 2007, James and Keith Gleasman had a working arrangement with the company pursuant to which, on a noncompensated basis, each of them would provide consulting services and assign new patents, existing patent improvements and all know-how in connection with all their inventions to the company. In addition, Keith Gleasman agreed to serve as president and James Gleasman agreed to serve as chief executive officer and interim chief financial officer.

On March 28, 2008 the board of directors approved the governance and compensation committee’s recommendation that, effective January 1, 2008, each of the Gleasmans be compensated at the rate of $300,000 per year. Such amount is payable in cash. No payment of all or any portion of the Gleasmans’ compensation shall be paid unless and until the company shall have the requisite cash available. The determination of the availability of the requisite amount of cash shall be made by the board of directors in the light of approved-budgets, existing and anticipated capital requirements and existing and estimated cash flows. Unpaid amounts are accumulated and carry over from one year to the next. No amount was paid to either of the Gleasmans under this compensation arrangement during the year ended December 31, 2008. The amount of unpaid compensation accrued as of December 31, 2008 is $622,000 including accrued payroll taxes.

The company’s financial statements have been prepared assuming that it will continue as a going concern. For the period from September 1996 (inception) through December 31, 2008, the company has accumulated a deficit of $49,941,000, and at December 31, 2008 has a working capital deficit of $541,000 and stockholders’ capital deficit of $1,120,000. 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, collectability of its receivables in the ordinary course of business, the company will not be able to meet its anticipated cash requirements through December 31, 2009.

At December 31, 2008 and 2007, the company had accounts payable and accrued expenses of $932,000 and $1,965,000.

The company was a joint venture partner of Variable Gear, LLC through June 6, 2007. Under the operating agreement of Variable LLC, the company was required to purchase the 51% membership interest it did not own in such entity by January 1, 2007. Since inception, Variable Gear, LLC generated no revenues, incurred no expenses and had no operations. On June 3, 2007, the company and the 51% owner agreed that his membership would be purchased in exchange for 5,000 common shares of the company, valued at the close of trading on such date at $19,250 ($3.85 per share). Such purchase was closed on June 6, 2007.

Since there are no operations of the Variable Gear entity since inception, the company has concluded there is no future benefit to the purchased interest and has impaired the goodwill and recorded a charge of $19,000 at June 30, 2007.

(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 collectibility of the receivable is not assured, the company follows the cost recovery approach. Accordingly, amounts collected will be accounted for as a reduction of costs.

Impairment of Long-Lived Assets

The company has adopted SFAS No. 144, “Accounting for the Impairment of Disposal of Long-Lived Assets.” Accordingly, whenever events or circumstances indicate that the carrying amount of an asset may not be recoverable, management assesses the recoverability of the assets. Management is also required to evaluate the useful lives each reporting period. When events or circumstances indicate, our long-lived assets, including intangible assets with finite useful lives, are tested for impairment by using the estimated future cash flows directly associated with, and that are expected to arise as a direct result of, the use of the assets. If the carrying amount exceeds the estimated undiscounted cash flows, an impairment may be indicated. The carrying amount is then compared to the estimated discounted cash flows, and if there is an excess, such amount is recorded as an impairment.

In June 2006, the Financial Accounting Standards Board (“FASB”) has issued interpretation No. 48, “Accounting for Uncertainty in Income Taxes—An Interpretation of FASB Statement No. 109” (“FIN 48”), regarding accounting for, and disclosure of, uncertain tax positions. FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with FASB Statement No. 109, “Accounting for Income Taxes.” FIN 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. We adopted FIN 48 effective January 1, 2007. The adoption of FIN 48 did not have a material effect on the results of operations and financial position.

Recently Issued Accounting Principles

Effective January 1, 2008, the company adopted SFAS No. 157, “Fair Value Measurements” (“SFAS157”), which defines fair value, establishes a framework for measuring fair value and requires additional disclosures about fair value measurements. In February 2008, the FASB delayed the effective date of SFAS 157 for one year for all nonfinancial assets and nonfinancial liabilities, except for those items that are recognized or disclosed at fair value in the financial statements on a recurring basis. Management has determined that the adoption of SFAS 157 did not have a material effect on the company’s consolidated financial statements.

Effective January 1, 2008 the company adopted SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities – including an amendment of FASB Statement 115” (“SFAS 159”). This statement provides companies with an option to report selected financial assets and liabilities at fair value. As of December 31, 2008, the company has not elected to use the fair value option allowed by SFAS 159. Management has determined that the adoption of SFAS 159 did not have a material effect on the company’s consolidated financial position, results of operations, cash flows or financial statement disclosures.

In December 2007, the FASB issued Statement No. 141 (revised), “Business Combinations” (“SFAS 141 (R)”). The standard changes the accounting for business combinations including the measurement of acquirer shares issued in consideration for a business combination, the recognition of contingent consideration, the accounting for pre-acquisition gain and loss contingencies, the recognition of capitalized in-process research and development , the accounting for acquisition-related restructuring cost accruals, the treatment of acquisition related transaction costs and the recognition of changes in the acquirer’s income tax valuation allowance. SFAS 141(R) is effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2008, with early adoption prohibited. As such, the company is required to adopt these provisions at the beginning of the fiscal year ending December 31, 2009. SFAS 141(R) will be applied prospectively for acquisitions beginning in 2009 or thereafter.

In March 2008, the Financial Accounting Standards Boards (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 161, Disclosures about Derivative Instruments and Hedging Activities – an amendment of FASB Statement No. 133 ”. SFAS 161 requires enhanced disclosures about an entity’s derivative and hedging activities. SFAS 161 is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008 with early application encouraged. As such, the Company is required to adopt these provisions at the beginning of the fiscal year ended December 31, 2009. The Company has determined that SFAS 161 is not applicable and will have no effect to its consolidated financial statements.

In May 2008, the FASB issued Statement of Financial Accounting Standards No. 162 (SFAS 162), “The Hierarchy of Generally Accepted Accounting Principles.” SFAS 162 identifies the sources of accounting principles and the framework for selecting the principles to be used in the preparation of financial statements of nongovernmental entities that are presented in conformity with U.S. GAAP. SFAS 162 became effective in September 2008 following the approval by the SEC. The company currently adheres to the hierarchy of US GAAP and adoption did not have a material effect on its consolidated financial statements.

In 2008, the FASB issued EITF 07-05, Determining whether an Instrument (of Embedded Feature) Is Indexed to an Entity’s Own Stock, (“EITF 07-05”). EITF 07-05 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 paragraph 11(a) of SFAS 133. EITF 07-05 is effective for financial statements issued for fiscal years beginning after December 15, 2008 and early application is not permitted. Management believes the adoption of EITF 07-05 in fiscal 2009 will not have any impact on the company.

(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, 2008.

(g) Quarterly Fluctuations

As of December 31, 2008 and 2007, 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.

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, 2008 and 2007			F-3
Consolidated statements of operations for each of the years in the two-year period ended December 31, 2008 and for the period from September 25, 1996 (inception) through December 31, 2008			F-4
Consolidated statements of changes in stockholders’ equity (capital deficit) for the period from September 25, 1996 (inception) through December 31, 2008			F-5 — F-11
Consolidated statements of cash flows for each of the years in the two-year period ended December 31, 2008 and for the period from September 25, 1996 (inception) through December 31, 2008			F-12
Notes to consolidated financial statements			F-13

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, 2008 and 2007, and the related consolidated statements of operations and cash flows for each of the years in the two-year period ended December 31, 2008 and for the period from September 25, 1996 (inception) through December 31, 2008 and changes in stockholders’ equity (capital deficit) for each of the periods from September 25, 1996 (inception) through December 31, 2008. 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, 2008 and 2007, 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, 2008 and for the period from September 25, 1996 (inception) through December 31, 2008, in conformity with accounting principles generally accepted in the United States.

The accompanying consolidated financial statements have been prepared assuming that the company will continue as a going concern. As discussed in Note A to the consolidated financial statements, the Company has incurred recurring losses from operations, has limited revenues and has negative working capital and capital deficits at December 31, 2008. These factors raise substantial doubt about the Company's ability to continue as a going concern. Management’s plans in regard to these matters are also discussed in Note A. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

/s/ EISNER LLP
New York, New York
March 31, 2009

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

Consolidated Balance Sheets
December 31, 2008 and 2007

		2008				2007
ASSETS
Current assets:
Cash		$	304,000			$	192,000
Prepaid expenses and other receivable			102,000				43,000
Total current assets			406,000				235,000
Property and Equipment:
Office equipment			68,000				67,000
Shop equipment			139,000				129,000
Leasehold improvements			213,000				149,000
Transportation equipment			106,000				106,000
			526,000				451,000
Less accumulated depreciation and amortization			237,000				170,000
Net property and equipment			289,000				281,000
Total Assets		$	695,000			$	516,000
LIABILITIES
Current liabilities:
Notes payable — current		$	15,000			$	15,000
Accounts payable			177,000				261,000
Accrued liabilities			755,000				1,704,000
Total current liabilities			947,000				1,980,000
Deferred Rent Expense			39,000
Deferred revenue			800,000				500,000
Notes payable — long term			29,000				43,000
Total liabilities			1,815,000				2,523,000
Commitments, Contingencies and other matters
STOCKHOLDERS’ CAPITAL DEFICIT
Preferred stock, $.01 par value, 100,000,000 shares authorized 3,300,000 designated as Class A, non-voting, cumulative dividend $.40 per share, per annum, convertible 2008 and 2007: 707,101 and 732,493 shares issued and outstanding, respectively, (liquidation preference 2008: $3,858,015 and 2007: $3,701,162) 300,000 designated as Class B, non-voting, cumulative dividend $.50 per share, per annum, convertible 2008 and 2007: 97,500 shares issued and outstanding (liquidation preference 2008: $360,339 and 2007: $311,787)			8,000				9,000
Common stock, $.01 par value, 400,000,000 shares authorized, 32,811,422 and 31,640,045 issued and outstanding			328,000				316,000
Additional paid-in capital			48,485,000				45,926,000
Deficit accumulated during the development stage			(49,941,000	)			(48,258,000	)
Total Capital Deficit			(1,120,000	)			(2,007,000	)
Total Liability and Stockholders’ Capital Deficit		$	695,000			$	516,000

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,
		2008				2007				2008
Revenue
Sales		$	121,000			$	126,000			$	247,000
Cost of Goods Sold			105,000				120,000				225,000
Gross Profit			16,000				6,000				22,000
Costs and expenses:
Research and development			535,000				710,000				15,335,000
General and administrative			3,165,000				2,653,000				36,976,000
Asset Impairment			—				—				1,071,000
Loss from operations			(3,684,000	)			(3,357,000	)			(53,360,000	)
Other Income			114,000				146,000				260,000
Loss before Reversal of liability, minority interest and tax benefit			(3,570,000	)			(3,211,000	)			(53,100,000	)
Reversal of liability on Cancellation Debt			1,541,000				—				1,541,000
Minority interest in loss of consolidated subsidiary			—				—				1,272,000
Net Loss Before Income Tax Provision			(2,029,000	)			(3,211,000	)			(50,287,000	)
Income Tax Benefit			346,000				—				346,000
Net loss			(1,683,000	)			(3,211,000	)			(49,941,000	)
Preferred stock beneficial conversion feature			—				—				763,000
Preferred stock dividend			307,000				341,000				1,176,000
Net loss attributable to common stockholders		$	(1,990,000	)		$	(3,552,000	)		$	(51,880,000	)
Basic and diluted net loss attributable to common stockholders per share		$	(0.06	)		$	(0.11	)
Weighted average number of shares of common stock — basic and diluted			32,196,000				31,261,000

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, 2008

																																						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, 2008
(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