CurAegis (CRGS) 10-Q 2009 Q2 Quarterly report

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended June 30, 2009

OR

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 No. 000-24455

TORVEC, INC.

(Exact name of registrant as specified in its charter)

New York
(State or other jurisdiction of
incorporation or organization)
16-1509512
(I.R.S. Employer Identification No.)

1999 Mt. Read Blvd. Building 3, Rochester, New York 14615
(Address of principal executive offices and Zip Code)

(585) 254-1100
(Registrant’s telephone number, including area code)

(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark 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.

Yesþ Noo

Indicate by check mark whether the registrant (1) has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months(or for such shorter period that the registrant was required to submit and post such files).

Yeso Noo

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 filero Accelerated filero Non-accelerated filero
(Do not check if a smaller reporting company) Smaller reporting companyþ

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yeso Noþ

APPLICABLE ONLY TO CORPORATE ISSUERS:

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latestpracticable date:

	Number of Shares Outstanding at
Class	August 14, 2009
Common Stock, $.01 par value	34,287,553

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

INDEX

	PAGE
PART I — FINANCIAL INFORMATION
Item 1. Financial Statements		3
Condensed Consolidated Balance Sheets — June 30, 2009 (Unaudited) and December 31, 2008		3
Condensed Consolidated Statements of Operations—Three and six months Ended June 30, 2009 and 2008 and September 25, 1996 (Inception) through June 30, 2009 (Unaudited)		4
Condensed Consolidated Statements of Cash Flows — Six months Ended June 30, 2009 and 2008 and September 25, 1996 (Inception) through June 30, 2009 (Unaudited)		5
Notes to Condensed Consolidated Financial Statements(Unaudited)		6-23
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		24-29
Item 3. Quantitative and Qualitative Disclosures About Market Risk		29
Item 4. Controls and Procedures		29
PART II — OTHER INFORMATION
Item 1. Legal Proceedings		30
Item 1A. Risk Factors		30
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		31
Item 3. Defaults Upon Senior Securities		31
Item 4. Submission of Matters to a Vote of Security Holders		31
Item 5. Other Information		31
Item 6. Exhibits		31-36
SIGNATURE PAGE		36
EXHIBIT INDEX		38
Exhibit 31.1
Exhibit 32

PART I — FINANCIAL INFORMATION

Item 1. FINANCIAL STATEMENTS

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

Condensed Consolidated Balance Sheets

	June 30, 2009			December 31, 2008
	(Unaudited)
ASSETS
Current assets:
Cash	$	124,000		$	304,000
Prepaid expenses and other receivables		85,000			102,000
Total current assets		209,000			406,000
Property and Equipment:
Office equipment		68,000			68,000
Shop equipment		139,000			139,000
Leasehold improvements		213,000			213,000
Transportation equipment		106,000			106,000
		526,000			526,000
Less accumulated depreciation and amortization		(270,000	)		(237,000	)
Net property and equipment		256,000			289,000
Total Assets	$	465,000		$	695,000
LIABILITIES
Current liabilities:
Notes payable, current portion	$	15,000		$	15,000
Accounts Payable and Accrued Liabilities		172,000			177,000
Deferred Compensation and Other		1,270,000			755,000
Total current liabilities		1,457,000			947,000
Deferred revenue		800,000			800,000
Deferred rent expense		34,000			39,000
Notes payable, net of current portion		21,000			29,000
Total liabilities	$	2,312,000		$	1,815,000
Commitments and contingencies
STOCKHOLDERS’ CAPITAL DEFICIT
Preferred stock, $.01 par value, 100,000,000 shares authorized 3,300,000 designated as Class A, convertible Non-voting, cumulative dividend $.40 per share, per annum, June 30, 2009 and December 31, 2008: 655,851 and 707,101 shares issued and outstanding, respectively (liquidation preference $3,741,020 and $3,858,015, respectively)
300,000 designated as Class B, convertible Non-voting, cumulative dividend $.50 per share, per annum, June 30, 2009 and December 31, 2008: 77,500 and 97,500 shares issued and outstanding, respectively (liquidation preference $359,574 and $360,339, respectively)		8,000			8,000
Common stock, $.01 par value, 400,000,000 shares authorized, 34,022,236 and 32,811,422 issued and outstanding, at June 30,  2009 and December 31, 2008, respectively		334,000			328,000
Additional paid-in capital		49,381,000			48,485,000
Deficit accumulated during the development stage		(51,570,000	)		(49,941,000	)
Total Torvec, Inc. Stockholders’ Capital Deficit		(1,847,000	)		(1,120,000	)
Noncontrolling Interest of Subsidiary		—			—
Total Stockholders’ Capital Deficit		(1,847,000	)		(1,120,000	)
Total Liabilities and Stockholders’ Capital Deficit	$	465,000		$	695,000

See notes to condensed consolidated financial statements.

3

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

Condensed Consolidated Statements of Operations

													September
	Three			Three									25, 1996
	Months			Months			Six Months			Six Months			(Inception)
	ended June			ended June			ended June			ended June			through June
	30, 2009			30, 2008			30, 2009			30, 2008			30, 2009
Revenue	$	—		$	15,000		$	175,000		$	30,000		$	422,000
Cost of Goods Sold		—			6,000			90,000			11,000			315,000
Gross Profit		—			9,000			85,000			19,000			107,000
Costs and expenses
Research and development		96,000			114,000			229,000			262,000			15,564,000
General and administrative		834,000			734,000			1,485,000			1,781,000			38,461,000
Asset Impairments		—			—			—			—			1,071,000
Loss for operations	$	(930,000	)	$	(839,000	)	$	(1,629,000	)	$	(2,024,000	)	$	(54,989,000	)
Other Income		—			—			—			1,000			260,000
Loss before Reversal of liability and tax benefit	$	(930,000	)	$	(839,000	)	$	(1,629,000	)	$	(2,023,000	)	$	(53,188,000	)
Reversal of liability on Cancellation of debt		—			1,541,000			—			1,541,000			1,541,000
Net (Loss) Income Before Income Tax Provision	$	(930,000	)	$	702,000		$	(1,629,000	)	$	(482,000	)	$	(52,842,000	)
Income Tax Benefits		—			—			—			—			346,000
Net (Loss) Income	$	(930,000	)	$	702,000		$	(1,629,000	)	$	(482,000	)	$	(51,570,000	)
Less: Net Loss attributable to non-controlling interest in subsidiary		—			—			—			—			1,272,000
Net Loss (Income) attributable to Torvec, Inc	$	(930,000	)	$	702,000		$	(1,629,000	)	$	(482,000	)	$	(51,570,000	)
Preferred stock beneficial conversion feature		—			—			—			—			763,000
Preferred stock dividends		78,000			84,000			161,000			167,000			1,337,000
Net (Loss) Income attributable to common stockholder	$	(1,008,000	)	$	618,000		$	(1,790,000	)	$	(649,000	)	$	(53,670,000	)
Basic and Diluted net (loss) income attributable to common stock per share		(0.03	)		0.02			(0.05	)		(0.02	)
Weighted average number of shares of
Common stock, Basic		33,635,000			32,020,000			33,308,000			31,899,000
Common stock , Diluted		33,635,000			35,751,000			33,308,000			31,899,000

See notes to condensed consolidated financial statements.

4

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

Condensed Consolidated Statements of Cash Flows

								September 25,
								1996
								(Inception)
		Six months Ended						Through
		June 30,						June 30,
		2009			2008			2009
Cash flows from operating activities:	��
Net loss		$	(1,629,000	)	$	(482,000	)	$	(51,570,000	)
Adjustments to reconcile net loss to net cash used in operating activities:
Loss attributable to noncontrolling interest in consolidated subsidiary			—			—			(1,272,000	)
Depreciation and amortization			33,000			35,000			2,483,000
Loss on impairment of license			—			—			1,071,000
Impairment of goodwill			—			—			19,000
Gain on sale of fixed assets			—			—			(10,000	)
Compensation expense attributable to common stock in Subsidiary			—			—			619,000
Common stock issued for services			756,000			1,081,000			13,922,000
Shares issued for future consulting services			—			—			103,000
Stockholder contribution of services			—			—			2,409,000
Gain on cancellation of debt			—			—			(1,541,000	)
Contribution to Capital, Ford Truck			—			—			16,000
Common Stock Issued in connection with Commercializing Event			14,000			28,000			78,000
Compensatory common stock, options and warrants			—			249,000			17,835,000
Changes in:
Accounts receivable			—			—			—
Inventory			—			(46,000	)		—
Prepaid expenses and other receivables			17,000			6,000			76,000
Deferred Revenue			—			—			709,000
Deferred rent			(5,000	)		44,000			36,000
Accounts payable and accrued expenses			198,000			(1,475,000	)		4,134,000
Deferred Compensation and Other			374,000			398,000			1,083,000
Net cash used in operating activities			(242,000	)		(162,000	)		(9,800,000	)
Cash flows from investing activities:
Purchase of property and equipment			—			(11,000	)		(360,000	)
Cost of acquisition			—			—			(16,000	)
Proceeds from sale of fixed asset			—			—			10,000
Net cash used in investing activities			—			(11,000	)		(366,000	)
Cash flows from financing activities:
Net proceeds from sales of common stock and upon exercise of options and warrants			70,000			100,000			6,769,000
Net proceeds from sales of preferred stock			—			—			3,537,000
Net proceeds from sale of subsidiary stock			—			—			234,000
Proceeds from long-term borrowings			—			—			85,000
Repayments of long-term debt			(8,000	)		(6,000	)		(73,000	)
Proceeds from stockholders’ loan and advances			—			—			250,000
Repayment of stockholders’ loan and advances			—			—			(147,000	)
Distributions			—			—			(365,000	)
Net cash (used in) provided by financing activities			(62,000	)		94,000			10,290,000
Net (decrease) increase in cash			(180,000	)		(79,000	)		124,000
Cash at beginning of period			304,000			192,000
Cash at end of period		$	124,000		$	113,000		$	124,000
Supplemental Disclosures:
Interest paid		$	2,000		$	3,000		$	26,000
Income Tax Paid		$	—		$	—		$	1,000
Non cash investing and financing activities:
Shares issued for acquisition leasehold improvements		$	—		$	64,000		$	166,000
Issuance of common stock in settlement of payables			62,000			—			90,000
Preferred stock issued in payment of dividend			—			6,000			39,000
Shares issued for acquisition of Variable Gear			—			—			19,000
Issuance of common stock for license			—			—			3,405,000
Issuance of common stock, warrant and options in settlement of liabilities, except notes payable			—			—			2,907,000
Notes Payable exchanged for common stock			—			—			50,000
Advance settled with common stock			—			—			25,000
Loss on exchange of minority interest			—			—			232,000
Shares issued for future consulting services			—			—			103,000
Issuance of common stock for a finder fee			—			—			225,000
Advance from stockholder			—			—			250,000
Contribution of FTV Ford Truck			—			—			16,000
ICE payable netted against receivable			—			—			91,000
Common stock issued in settlement of payable			—			—			58,000
Common stock issued in settlement of Patent expense			—			—			117,000

See notes to condensed consolidated financial statements.

5

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

Notes to Condensed Consolidated Financial Statements

NOTE A — The Company and Basis of Presentation

The interim information contained herein with respect to the three and six month periods ended June 30, 2009 and 2008 and the period from September 25, 1996 (inception) through June 30, 2009 has not been audited but was prepared in conformity with generally accepted accounting principles for interim financial information and instructions for Form 10-Q. Accordingly, the condensed consolidated financial statements do not include all information and footnotes required by generally accepted accounting principles for financial statements. Included are ordinary adjustments which in the opinion of management are necessary for a fair presentation of the financial information for the three and six month periods ended June 30, 2009 and 2008 and since inception. The results are not necessarily indicative of results to be expected for the entire year.

Torvec, Inc. (the “company”) was incorporated as a New York State business corporation in September 1996. The company, which is in the development stage, has developed technology for use in automotive applications. In September, 1996, the company acquired numerous patents, inventions and know-how contributed by Vernon E. Gleasman, James Y. Gleasman and Keith E. Gleasman (the “Gleasmans”). The company has developed, designed and intends to commercialize its infinitely variable transmissions, its pumps/motors, its IsoTorque differential, its constant velocity joint and the substructure and components of its full terrain vehicle.

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 June 30, 2009, the company has accumulated a deficit of $51,570,000, and at June 30, 2009 has a working capital deficiency of $1,248,000 and a stockholders’ deficit of $1,847,000. The company has been dependent upon equity financing and advances from stockholders to meet its obligations and sustain operations. The company’s efforts have been principally devoted to the development of its technologies and commercializing its products. Management believes that based upon its current cash position; its budget for its business operations through June 30, 2010; the company will not be able to meet its anticipated cash requirements through June 30, 2010. The company is actively seeking additional sources of capital. There can be no assurance that the company will be able to raise sufficient capital on acceptable terms. Without sufficient additional capital or long term debt and ultimately profitable operating results, the company will not be able to continue as a going concern. These factors raise substantial doubt about the Company’s ability to continue as a going concern. The accompanying condensed consolidated financial statements do not include any adjustments relating to the recoverability and classification of asset carrying amounts or the amounts and classification of liabilities that may result from the outcome of this uncertainty.

6

NOTE B — Summary of Significant Accounting Policies

[1] Consolidation:

The financial statements include the accounts of the company, its majority-owned subsidiary, Ice Surface Development, Inc. (56% owned at June 30, 2009 and 2008), and its wholly-owned subsidiaries Iso-Torque Corporation, IVT Diesel Corp. and Variable Gear LLC. All material intercompany transactions and account balances have been eliminated in consolidation.

[2] Cash and Cash Equivalents:

Cash and cash equivalents include time deposits, certificates of deposit, and all highly liquid debt instruments with original maturities of three months or less. The company maintains cash and cash equivalents at financial institutions which periodically may exceed federally insured amounts, $250,000 through December 31, 2009 and $100,000 thereafter.

[3] Use of Estimates:

The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Such estimates are used in valuing the useful lives of its fixed assets and the future realizable value of such assets. These estimates are subject to a high degree of judgment and potential change. Actual results could differ from those estimates.

[4] Loss per Common Share:

FASB Accounting Standards Codification (“ASC”) 260-10 (Prior authoritative literature: FASB Statement 128, “Earnings Per Share”) requires the presentation of basic earnings per share, which is based on common stock outstanding, and dilutive earnings per share, which gives effect to options, warrants and convertible securities in periods when they are dilutive. For the three and six month periods ended June 30, 2009 and 2008 the company excluded 2,516,449 and 3,105,149 potential common shares, respectively, relating to convertible preferred stock outstanding, options and warrants from its diluted net loss per common share calculation because they are anti-dilutive.

[5] Income Taxes:

The company accounts for income taxes using the asset and liability method described in FASB ASC 740-10 (Prior authoritative literature: FASB Statement 109, “Accounting for Income Taxes,”) the objective of which is to establish deferred tax assets and liabilities for the temporary differences between the financial reporting and the tax bases of the company’s assets and liabilities at enacted tax rates expected to be in effect when such amounts are realized or settled. A valuation allowance related to deferred tax assets is recorded when it is more likely than not that some portion or all of the deferred tax assets will not be realized. We adopted FASB ASC 740-10-65 (Prior authoritative literature: FASB interpretation No. 48 “Accounting for Uncertainty in Income Taxes”, an interpretation of FASB Statement 109) on January 1, 2008. As a result of the implementation of FASB ASC 740-10, we recognized no adjustment for uncertain tax provisions. At the adoption date of January 1, 2008, we had a deferred tax asset which was fully reserved by a valuation allowance to reduce the deferred tax asset to the amount that more likely than not to be realized. As of June 30, 2009, we have not recognized an increase or decrease to reserves for uncertain tax positions nor have we accrued interest and penalties related to uncertain tax positions. The tax years 2006 — 2008 remain open to examination by the major tax jurisdictions to which we are subject.

7

[6] Fair Value of Financial Instruments:

The carrying amount of cash, prepaid expenses, accounts payable, accrued expenses and notes payable approximates their fair value due to the short maturity of those instruments.

[7] Inventory:

When applicable, all inventories are stated at the lower of cost or market with cost determined using the specific identification method. The Company had no inventory at June 30, 2009 and December 31, 2008.

[8] Stock-Based Compensation

In December 1997, the board of directors of the company approved a Stock Option Plan (the “Plan”) which provided for the grant of up to 2,000,000 shares of common stock, pursuant to which officers, directors, key employees and key consultants/advisors were eligible to receive incentive, nonstatutory or reload stock options. The Plan was terminated as of May 27, 2008 as to the grant of additional options. 641,848 previously granted and outstanding options remain exercisable in accordance with the terms of the options.

Stock based compensation is recognized as provided under FASB ASC 718-10 and FASB ASC 505-50 (Prior authoritative literature: FASB Statement 123(R), “Share Based Payment.”)

FASB ASC 718-10 requires all share-based payments to employees, including grants of employee stock options, to be recognized as compensation expense over the requisite service period (generally the vesting period) in the financial statements based on their fair values. The impact of forfeitures that may occur prior to vesting is also estimated and considered in the amount recognized. In addition, the realization of tax benefits in excess of amounts recognized for financial reporting purposes will be recognized as a financing activity.

No tax benefits were attributed to the stock-based compensation expense because a valuation allowance was maintained for substantially all net deferred tax assets. We elected to adopt the alternative method of calculating the historical pool of windfall tax benefits as permitted by FASB ASC 718-10-65 (Prior authoritative literature: FASB Staff Position (FSP) No. SFAS 123(R)-c, “Transition Election Related to Accounting for the Tax Effects of Share-Based Payment Awards.”) This is a simplified method to determine the pool of windfall tax benefits that is used in determining the tax effects of stock compensation in the results of operations and cash flow reporting for awards that were outstanding as of the adoption of FASB ASC 718-10.

8

[9] Revenue Recognition:

The company’s terms provide that customers are obligated to pay for products sold to them within a specified number of days from the date that title to the products is transferred to the customers. The company’s standard terms are typically net 30 days. The company recognizes revenue when transfer of title occurs, 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 and collection is reasonably assured. The sale price of the company’s products is substantially fixed and determinable at the date of the sale based upon purchase orders generated by a customer and accepted by the company.

[10] Recent Accounting Pronouncements:

In December 2007, the FASB issued FASB ASC 805-10 (Prior authoritative literature: FASB Statement 141 (R), “Business Combinations”, which replaces FASB Statement No. 141.) FASB ASC 805-10 is effective for the company January 1, 2009 and establishes principles and requirements for how an acquirer recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, any non controlling interest in the acquiree and the goodwill acquired. The Statement also establishes disclosure requirements which will enable users to evaluate the nature and financial effects of the business combination. FASB ASC 805-10 will change how business combinations are accounted for and will impact financial statements both on the acquisition date and in subsequent periods. The adoption of FASB ASC 805-10 did not have an impact on the Company’s financial position and results of operations although it may have a material impact on accounting for business combinations in the future which can not currently be determined.

In April 2009, the FASB issued FASB ASC 805-10-05 (Prior authoritative literature: FSP 141(R)-1 “Accounting for Assets Acquired and Liabilities Assumed in a Business Combination That Arises from Contigencies” ). For business combinations, the standard requires the acquirer to recognize at fair value an asset acquired or liability assumed from a contingency if the acquisition date fair value can be determined during the measurement period. FASB ASC 805-10-05 is effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2008, with early adoption prohibited. The company adopted these provisions at the beginning of the fiscal year January 1, 2009. FASB ASC 805-10-05 will be applied prospectively for acquisitions in 2009 or thereafter.

In December 2007, the FASB issued FASB ASC 810-10-65 (Prior authoritative literature: FASB Statement No. 160, “Noncontrolling Interests in Consolidated Financial Statements, an amendment of ARB No. 51”). The standard changes the accounting for noncontrolling (minority) interests in consolidated financial statements including the requirements to classify noncontrolling interests as a component of consolidated stockholders’ equity, and replace references “minority interest” with noncontrolling interests. Additionally, FASB ASC 810-10-65 revises the accounting for both increases and decreases in a parent’s controlling ownership interest. The company has adopted the standard as of January 1, 2009. The adoption of FASB ASC 810-10-65 did not have a significant impact on the company’s financial position except for the presentation of the statements of operation.

In June 2008, the FASB Task Force reached a consensus-for-exposure that an entity should determine whether an equity-linked financial instrument (or embedded feature) is indexed to its own stock first by evaluating the instrument’s contingent exercise provisions, if any, and then by evaluating the instrument’s settlement provisions. FASB ASC 815-40 (Prior authoritative literature: EITF 07-5, “Determining Whether an Instrument (or Embedded Feature) Is Indexed to an Entity’s Own Stock”). FASB ASC 810-10-15 (Prior authoritative literature: Paragraph 11(a) of FAS 133) specifies that a contract issued or held by the reporting entity that is both (a) indexed to its own stock and (b) classified in stockholders’ equity in its statement of financial position shall not be considered a derivative financial instrument for purposes of applying that Statement. If a freestanding financial instrument (for example, a stock purchase warrant) meets the scope exception in FASB ASC 810-10-15, it is classified as an equity instrument and is not accounted for as a derivative instrument. The adoption of FASB ASC 815-40 did not have a material impact on the company’s financial position.

In April 2009, the FASB issued FASB ASC 825-10-50 (Prior authoritative literature:FASB Staff Position No. FAS 107-1, “Disclosures about Fair Value of Financial Instruments”) and FASB ASC 270-10-05 (Prior authoritative literature: APB 28-1, “Interim Disclosures about Fair Value of Financial Instruments,” which requires disclosures about fair value of financial instruments for interim reporting periods of publicly traded companies as well as in annual financial statements. This Staff Position is effective for interim reporting periods ending after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009. The adoption of this accounting pronouncement did not have a material impact on the financial statements.

9

In June 2009, the FASB issued ASC topic 860 (SFAS No. 166) “Accounting for Transfers of Financial Assets—an amendment of FASB Statement No. 140”, improves the relevance, representational faithfulness, and comparability of the information that a reporting entity provides in its financial statements about a transfer of financial assets; the effects of a transfer on its financial position, financial performance, and cash flows; and a transferor’s continuing involvement, if any, in transferred financial assets. SFAS 166 is effective as of the beginning of each reporting entity’s first annual reporting period that begins after November 15, 2009, for interim periods within that first annual reporting period and for interim and annual reporting periods thereafter. The Company is evaluating the impact the adoption of SFAS 166 will have on its financial statements.

In June 2009, the FASB issued ASC topic 810 (“SFAS No. 167”) “Amendments to FASB Interpretation No. 46(R)” improves financial reporting by enterprises involved with variable interest entities and to address (1) the effects on certain provisions of FASB Interpretation No. 46 (revised December 2003), “Consolidation of Variable Interest Entities”, as a result of the elimination of the qualifying special-purpose entity concept in SFAS 166 and (2) constituent concerns about the application of certain key provisions of Interpretation 46(R), including those in which the accounting and disclosures under the Interpretation do not always provide timely and useful information about an enterprise’s involvement in a variable interest entity. SFAS 167 is effective as of the beginning of each reporting entity’s first annual reporting period that begins after November 15, 2009, for interim periods within that first annual reporting period, and for interim and annual reporting periods thereafter. The Company is evaluating the impact the adoption of SFAS 167 will have on its financial statements.

In May 2009, the FASB issued ASC Topic 855 (“SFAS No. 165”), “ Subsequent Events” establishes general standards for accounting for and disclosure of events that occur after the balance sheet date but before financial statements are available to be issued (“subsequent events”). More specifically, SFAS 165 sets forth the period after the balance sheet date during which management of a reporting entity should evaluate events or transactions that may occur for potential recognition in the financial statements, identifies the circumstances under which an entity should recognize events or transactions occurring after the balance sheet date in its financial statements and the disclosures that should be made about events or transactions that occur after the balance sheet date. SFAS 165 provides largely the same guidance on subsequent events which previously existed only in auditing literature. The disclosure is required in financial statements for interim and annual periods ending after June 15, 2009. The company has performed an evaluation of subsequent events through August 14, 2009, which is the date the financial statements are filed.

In June 2009, the FASB issued ASC 105 (“SFAS No. 168”), “The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles”. SFAS 168 replaces SFAS 162 and establishes the FASB Accounting Standards Codification as the source of authoritative accounting principles recognized by the FASB to be applied by nongovernmental entities in the preparation of financial statements in conformity with GAAP. SFAS 168 is effective for financial statements issued for interim and annual periods ending after September 15, 2009. The adoption of this pronouncement did not have a material impact on the financial statements.

10

NOTE C—License from the Trustees of Dartmouth College

On November 28, 2000, the company’s majority-owned subsidiary, Ice Surface Development LLC (“ICE Surface”) entered into a 20-year exclusive license with the Trustees of Dartmouth College for land-based applications to a novel ice adhesion modification system developed by Dr. Victor Petrenko at Dartmouth’s Thayer School of Engineering. Under the license agreement the company made a single payment of $140,000 in 2000 for sponsored research. The license agreement provided for a royalty of 3.5% based on the value of net sales of licensed product with minimum annual payments of $10,000 for the first two years, $15,000 for the third year and $25,000 per year through 2021. In addition, the agreement provided for the payment of 50% of sub-license fee income.

Effective June 15, 2007, Ice Surface assigned the license to an unrelated company, Ice Engineering, LLC (“Ice Engineering”) in exchange for Ice Engineering’s agreement to pay the shareholders of Ice Surface an annual royalty equal to 5% of the annual gross revenues generated by the license and its agreement to assume the obligations to Dartmouth under the license.

Separately, Ice Engineering, 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. The company received the first installment of $209,000 due March 1, 2008 on April 3, 2008 and has not received any other installments due since that date.

On October 31, 2008, the company commenced an action in New York State Supreme Court, County of New York, Commercial Division against Ice Engineering, 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. 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. On April 14, 2009, the Court denied the company’s motion for summary judgment without prejudice to re-file and ordered the parties to proceed with discovery. The parties have commenced the discovery process and this process remains ongoing.

The company has accounted for the receipt of the reimbursement proceeds as a recovery of costs since such amounts represent an initial payment and is recorded as deferred revenue. The assignment agreement 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.

11

NOTE D — Related Party Transactions

[1]

On March 28, 2008 the board of directors approved the governance and compensation committee’s recommendation that, effective January 1, 2008, each of Keith and James Gleasman 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 carried 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 and June 30, 2009 is $600,000 and $900,000, respectively.

Since the company did not have the requisite cash available to pay the Gleasmans’ compensation under this arrangement with the company for each of the three and six month periods ended June 30, 2009 and 2008, the company accrued an aggregate of $162,000 and $319,000, respectively, of compensation expense, including $12,000 and $19,000, respectively, of payroll taxes, for each period and recorded the compensation expense of $100,000 to research and development and $200,000 to general and administrative expense for each period based upon management’s estimate.

[2]	During the three and six month periods ended June 30, 2009 and 2008, the company incurred an expense of $25,350 and $50,700 for both periods to a member of the Gleasman family for administrative, technological and engineering consulting services. Management believes this compensation is reasonable.
	For the three and six months ended June 30, 2009, the company issued 16,900 and 66,711 business consultant common shares in connection with this liability. For the three and six months period ended June 30, 2008, the company issued 9,281 and 19,500 business consultant common shares in connection with this liability.

[3]	During the three and six month periods ended June 30, 2009 and 2008, the company incurred an expense of $23,270 and $46,540 for both periods to a family member of its general counsel for engineering services rendered to the company. Management believes this compensation is reasonable.
	For the three and six months ended June 30, 2009, the company issued 15,531 and 61,237 business consultant common shares in connection with this liability. For the three and six months period ended June 30, 2008, the company issued 8,462 and 17,900 business consultant common shares in connection with this liability.

[4] On September 14, 2007, the company moved its executive offices and engineering operations from Pittsford and Webster, New York to a Rochester, New York facility, which includes both manufacturing and executive office space. The Rochester facility is owned by a partnership, in which Asher J. Flaum, a company director is a partner. On April 28, 2008, the company’s board of directors approved the terms of a lease for these premises and such lease was executed on April 29, 2008. (See Note F 2).

12

NOTE E — Stockholders’ Equity (Capital Deficit)

[1] Common Stock

On April 27, 2009, the company sold an aggregate 64,103 restricted common shares at $0.78 per share for proceeds of $50,000 to three accredited investors in a private placement.

On June 10 and 16, 2009, the company sold an aggregate 30,000 restricted common shares at $0.667 per share for proceeds of $20,000 to two accredited investors in a private placement.

For the three month period ended June 30, 2009, the company issued 5,000 restricted common shares valued at $4,000 to an accounting firm in partial payment for services rendered.

[2] Class A Preferred stock:

In January 2002, the company authorized the sale of up to 3,300,000 shares of its Class A Non Voting Cumulative Convertible Preferred Stock (“Class A Preferred”) at $4.00 per share. Each share of Class A Preferred is convertible into one share of voting common stock and entitles the holder to dividends, at $.40 per share per annum. The holder has the right to convert after one year subject to board approval.

The company has sold an aggregate 765,512 Class A Preferred for aggregate proceeds of $3,062,046. The company has issued an aggregate 198,349 common stock warrants in connection with the sale of Class A Preferred to the holders of the Class A Preferred, all exercisable over a 10 year period at $.01 per common share. 182,099 of these warrants have been exercised through June 30, 2009.

The company did not sell any Class A Preferred or issue any warrants during the three and six month periods ended June 30, 2009 and 2008.

From April 19, 2004 through June 30, 2009, eight Class A Preferred holders have converted an aggregate 189,125 Class A Preferred (including 79,464 Class A issued as dividends) into an equal number of common shares. For the three and six month period ended June 30, 2009, 117,215 and 117,215 (including 65,770 issued as dividends) Class A Preferred were converted. For the three and six month period ended June 30, 2008, -0- and 25,000 Class A Preferred were converted.

From September 2004 through June 30, 2009, an aggregate 79,464 Class A Preferred have been issued as dividends.

At June 30, 2009 and 2008, Class A Preferred dividends in arrears amounted to approximately $1,114,000 and $891,000, respectively.

13

[3] Class B Preferred stock:

On October 21, 2004, the company authorized the sale of up to 300,000 shares of its Class B Non-Voting Cumulative Convertible Preferred Stock (“Class B Preferred”) at $5.00 per share. Each share of Class B Preferred pays cumulative dividends at $.50 per share per annum and is convertible into either one share of voting common stock of the company or one share of common stock of Iso-Torque Corporation under certain circumstances. The holder has the right to convert after one year subject to Board approval.

The company has sold an aggregate 97,500 Class B Preferred for aggregate proceeds of $487,500.

During the three and month periods ended June 30, 2009 and 2008, the company did not sell any Class B Preferred. For the three and six month period end June 30, 2009 and since issuance 20,000 Class B Preferred were converted. For the three and six month period ended June 30, 2008, -0- and -0- Class B Preferred were converted.

At June 30, 2009 and 2008, Class B Preferred dividends in arrears amounted to approximately $146,000 and $123,000, respectively.

[4] Stock-Option Plan:

In December, 1997, the board of directors adopted and on May 28, 1998, the company’s shareholders ratified the creation of a Stock Option Plan (the “Option Plan”) which provides for the grant of up to 2,000,000 common stock options to officers, directors and consultants who are eligible to receive incentive, nonqualified or reload stock options. Options granted under the Option Plan are exercisable for a period of up to ten years from the date of grant at an exercise price which is not less than the per share trading price of the underlying common stock on the date of grant, except that the exercise period for options granted to a greater than 10% shareholder may not exceed five years and the exercise price may not be less than 110% of such trading price per share on the date of grant.

	Six Months Periods Ended June 30,
					2009				2008
			Weighted		Weighted							Weighted
			Average		Average		Aggregate					Average
			Exercise		Remaining		Intrinsic					Exercise
	Shares		Price		Life in Years		Value		Shares			Price
Outstanding at beginning of period		641,848	$	4.70		4.3				1,021,848		$	4.77
Granted		—		—		—				—			—
Expired		—		—		—				(380,000	)		—
Outstanding at end of period		641,848		4.70		4.3	$	—		641,848			4.70
Options exercisable at end of period		641,848		4.70		4.3	$	—		641,848			4.70
Options Vested and Expected to Vest		641,848		4.70		4.3	$	—		641,848			4.70

By its terms, the company’s Option Plan terminated as to the grant of future options on May 27, 2008. Consequently, no additional stock options will be granted under the Option Plan, although outstanding options remain available for exercise in accordance with their terms. No options were exercised for the three and six month periods ended June 30, 2009 and 2008.

As of June 30, 2009, the company did not have any unrecognized stock compensation related to unvested awards 13

14

[5] Business Consultants Stock Plan:

For the three month periods ended June 30, 2009 and 2008, the company issued 506,998 and 202,286 and common shares to business consultants under the Business Consultants Stock Plan and charged $401,000 and $509,000 to operations in connection with these share issuances. For the six month periods ended June 30, 2009 and 2008, the company issued 944,392 and 432,975 common shares to business consultants under the Plan and charged operations $770,000 and $1,109,000 in connection with these services including stock issued in connection with commercializing event. Share issuances are valued generally on the date immediately prior to the date of issuance, except for shares issued to pay invoices which are valued as of the invoice date and except for shares issued under the Nonmanagement Directors Plan which are valued as of the end of each month effective February 17, 2009. As of June 30, 2009, 2,708,886 shares are available for future issuances under the Business Consultants Stock Plan.

[6] Nonmanagement Directors Plan:

On October 1, 2004, the board of directors approved a Nonmanagement Directors Plan pursuant to which each nonmanagement director is entitled to receive, if certain conditions are met, on an annual basis for services rendered as a director, warrants to purchase 12,000 shares of the company’s common stock at $.01 per share. In addition, the chairman of the audit committee is entitled to receive, on an annual basis for services rendered as chairman, additional warrants for 5,000 shares of the company’s common stock at $.01 per share.

Due to changes made to the Nonmanagement Directors Plan described below, the company did not issue any warrants under the plan for the three and six month periods ended June 30, 2009 and 2008. No previously issued warrants were exercised during the three and six month periods ended June 30, 2009 and 2008.

On October 10, 2007, the Nonmanagement Directors Plan was modified to increase the fees payable to the company’s nonmanagement directors. As adjusted, each nonmanagment director (a total of 4 persons) would receive $26,460 for board and committee service per annum. The chairman of the audit committee would receive an additional $12,600 per annum and the chairman of the nominating committee would receive an additional $5,355 per annum. These fees are payable with common stock from the Business Consulting Stock Plan, with the valuation date of the common stock at the end of each quarter.

The Nonmanagement Directors Plan was also modified to provide that the chairman of the board, chairman of the executive committee and chairman of the governance and compensation committee, one person, will be paid an aggregate $110,000 per annum for all services rendered by him as a director and in such capacities. This proposal was made in the light of the risks associated with the positions he has undertaken as well as the fact that he is and has been since the summer of 2005, serving the company in these positions on a full-time basis. The proposal was also made in recognition of the fact that the services required to be performed by the chairman of the board’s executive committee and of its governance and compensation committee have expanded both in responsibilities covered and time expended.The effective date for these adjustments to the plan was July 1, 2007.

15

On April 28, 2008, the plan was again modified to increase the compensation of the person serving as chairman of the board, chairman of the executive committee, chairman of the governance and compensation committee (one person) to $125,000 per annum.

For the three month periods ended June 30, 2009 and 2008, the company issued 93,885 and 25,388 common shares under the plan to satisfy the payables for each of such periods in the amount of $62,000 and $62,000 and recorded charges of $62,000 and $62,000 for such periods, respectively. For the six month periods ended June 30, 2009 and 2008, the company issued 165,875 and 44,243 common shares under the plan to satisfy payables in the amount of $124,000 and $121,000 recorded a charge of $124,000 and $121,000 for such periods. On April 28, 2008, the board of directors approved a one-time payment to its chairman of the governance and compensation committee of $46,000 for special services rendered in connection with required compliance under the Sarbanes-Oxley Act. This amount was paid by the issuance of 19,167 common shares valued as of the closing price on April 28, 2008. The company charged $46,000 to operations in connection with such services.

[7] Business, Financial and Engineering Consultants:

Through June 30, 2009, the company has issued 1,376,583 common stock warrants to various business, financial and engineering consultants, of which 91,583 have been exercised for proceeds of $915 and 445,000 cancelled in exchange for the participation of certain engineers in the company’s 2008 Commercializing Event Plan. (Note E [11]).

On March 28, 2008, the board approved the issuance of an aggregate 195,000 warrants, immediately exercisable at $5.00 per common share until 2016, to two consultants who elected not to participate in the company’s 2008 Commercializing Event Plan as described in Note E (10). The company recorded a charge in the amount of $249,000 to general and administrative expense.

[8] Warrants:

As of June 30, 2009, outstanding warrants to acquire shares of the company’s common stock are as follows:

						Number of
Exercise						Shares
Price			Expiration			Exercisable
		(a)			(a)		125,000	(a)
$	.75			None			500,000	(b)
$	.01			None			54,500	(c)
$	.01 - 5.00			None			39,000	(d)
$	5.00			2015			255,000	(e)
$	.01			None			6,000	(f)
$	.01			None			16,250	(g)
$	1.00			None			20,500	(h)
$	3.27			2016			400,000	(i)
$	3.75			2016			200,000	(j)
$	5.00			2017			50,000	(k)
$	5.00			2017			100,000	(l)

(a) Exercisable only if the company has an IPO and exercisable at the IPO price five years from IPO. Through the quarter June 30, 2009, the company has not conducted an IPO.

16

(b)	On April 15, 2002, the company issued 1,000,000 warrants to purchase common stock at prices ranging from $.30 to $.75 to its then chairman of the board of directors and chief executive officer. Of the total warrants, 250,000 were exercisable at $.30, and 250,000 were exercisable at $.50 on the date the then board elected the executive to the board and named him chief executive officer. During the year ended December 31, 2002, 250,000 warrants were exercised for $.30 per share, resulting in proceeds of $75,000. During the year ended December 31, 2003, 250,000 warrants were exercised for $.50 per share, resulting in proceeds of $125,000. The remaining 500,000 warrants are exercisable upon the execution of the company of a binding agreement for the sale, transfer, license or assignment for value of any and/or all of its company’s automotive technology at $.75 per share. The company will record a charge representing the fair value of the warrants when the warrants become exercisable.
(c)	The company has issued an aggregate 123,500 warrants to its nonmanagement directors for services rendered to the board under its Nonmanagement Directors Stock Plan prior to its amendment on October 13, 2006. No further warrants are issuable under the Plan as modified by the board of directors on October 13, 2006 (See Note E [6]). An aggregate 69,000 warrants have been exercised for approximately $630 of proceeds, with 6,000 warrants exercised during the second quarter of 2008 for proceeds of $60. No warrants were exercised during the three and six month periods ended June 30, 2009.
(d)	In 2005, the company issued 12,000 warrants to a consultant, immediately exercisable at .01 per common share. During 2005, 3,000 warrants were exercised for proceeds of $30. In 2006, the company issued 30,000 warrants to consultants exercisable immediately for a ten year term at $5.00 per common share. None of these warrants were exercised during the three and six month periods ended June 30, 2009 and 2008.
(e)	During 2005, the company issued 210,000 warrants to certain engineering and administrative consultants, exercisable immediately for a ten year term at $5.00 per common share. During 2006, the company issued 295,000 warrants to certain engineering consultants exercisable over a ten year term at $5.00 per common share, but only exercisable if the company sells, licenses or otherwise transfers one or more technologies for value. The engineering consultants holding 445,000 of these warrants agreed to cancel them in the fourth quarter of 2008 in exchange for their participation in the company’s Commercializing Event Plan. On March 28, 2008, the company issued an aggregate 195,000 warrants exercisable until 2016 at $5.00 per common shares to two consultants who elected not to participate in the company’s 2008 Commercializing Event Plan. The company recorded a charge of $249,000 to general and administrative expense.
(f)	During 2005, the company issued 6,000 warrants to a consultant, exercisable immediately for a five year term at .01 per common share. None of these warrants have been exercised through June 30, 2009.
(g)	During 2005, the company issued 62,500 warrants to investors in connection with their purchase of 62,500 Class A Preferred, immediately exercisable at $.01 per common share. During 2006, the company issued 135,849 warrants to investors along with their purchase 162,000 Class A Preferred and 20,000 Class B Preferred, all immediately exercisable at $.01 per common share. At December 31, 2008 an aggregate 182,099 of these warrants have been exercised for proceeds of approximately $1,258. No additional warrants were issued in the three and six month periods ended June 30, 2009.
(h)	During 2006, one investor purchased 20,500 warrants immediately exercisable immediately for a five year term at $1.00 per common share for a purchase price of $2,000. None of these warrants have been exercised through June 30, 2009.
(i)	During 2006, the company issued 400,000 warrants immediately exercisable for ten years at an exercise price of $3.27 per common share to a business consultant. None of these warrants have been exercised through June 30, 2009.

17

(j)	During 2006, the company issued 200,000 warrants immediately exercisable for ten years at an exercise price of $3.75 per common share to a former governmental affairs consultant. None of these warrants have been exercised through June 30, 2009.
(k)	During 2007, the company issued 50,000 warrants exercisable for ten years at $5.00 per common share upon the happening of a commercializing event. The warrants were issued to a consultant who assisted the company to potentially place its products in various state school bus programs. The company recorded a charge of $249,000 to general and administrative expenses. None of these warrants have been exercised through June 30, 2009.
(l)	During 2007, the company issued 100,000 warrants immediately exercisable for ten years at an exercise price of $5.00 per common share to two engineering consultants in connection with the company’s engagement to furnish constant velocity joints to a military contractor. The company recorded a charge of $401,000 to general and administrative expenses. None of these warrants have been exercised through June 30, 2009.

The following summarizes the activity of the company’s outstanding warrants for the six month periods ended June 30, 2009 and 2008.

					Weighted
			Weighted		Average
			Average		Remaining	Aggregate
			Exercise		Contractual	Intrinsic
	Warrants		Price		Term	Value
Outstanding at January 1, 2009		1,766,250	$	4.25	4.13 years	$	—
Granted
Exercised
Canceled or expired
Outstanding at June 30, 2009		1,766,250	$	4.25	3.63 years	$	44,000
Exercisable at June 30, 2009		1,141,250	$	5.68	3.63 years	$	—

18

						Weighted
				Weighted		Average
				Average		Remaining
				Exercise		Contractual
	Shares			Price		Term
Outstanding at January 1, 2008		2,084,950		$	3.14	4.90 years
Granted		195,000		$	5.01	8.84 years
Exercised		(2,500	)		0.01
Canceled or expired
Outstanding at June 30, 2008		2,277,450		$	3.30	4.64 years
Exercisable at June 30, 2008		1,652,450		$	3.93	4.42 years

[9] Shares Issued to Trust for Consulting Services:

On September 17, 2005, certain consultants created a trust to enable them to sell business consultants shares issued to them by the company under their consultant agreements. The company issues business consultant common shares to the trust from time to time, contingent on the performance of services by the consultants under such consultant agreements. The company fair values the shares issued to the trust using the closing market price on the date immediately prior to the date of issuance. Amounts in excess of the consulting invoices are classified as shares issued for consulting services in stockholders’ (capital deficit) equity.

During the three and six month periods ended June 30, 2009, the company issued 188,500 and 331,055 business consultants shares of common stock valued at $143,700 and $281,150, respectively, to the trust to satisfy the payment of invoices submitted by the consultants for services rendered during such periods.

During the three and six month periods ended June 30, 2008, the company issued 70,000 and 130,000 business consultants shares of common stock valued at $184,300 and $349,300, respectively, to the trust to satisfy the payment of invoices submitted by the consultants for services rendered during such periods.

The company’s payment obligations with respect to the consultant agreements are met once it has issued shares of common stock to the trust in accordance with directives received from the consultants and the consultants, not the company, bear the risk of loss in the event the proceeds of stock sales by the trustee are less than the value of the stock contributed to the trust by the company on the date of contribution.

19

[10] Commercializing Event Plan:

On October 13, 2006, the board of directors adopted a Commercializing Event Plan (“2006 Event Plan”) designed to reward the company’s directors, executives and certain administrative personnel for the successful completion of one or more commercializing events. No payments were made under the 2006 Event Plan and the 2006 Event Plan was terminated on October 31, 2007.

On October 31, 2007, the board terminated the 2006 Event Plan and adopted a new 2007 Commercializing Event Plan (the “2007 Event Plan”). The 2007 Event Plan provides that upon the happening of any commercializing event, each of the directors and executive officers of the company as well as certain management personnel shall be entitled to share equally in 6% of the gross amount derived or to be derived from the commercializing event transaction(s). Similarly, certain of the company’s engineers are entitled to share equally in 2% of such gross amount.

In order to actually receive payment under the 2007 Event Plan, each participant must be both a) employed by, a consultant to or associated with the company and b) judged to be “in good standing” with the company at the time payment is made, all as determined by the board as of the date of the board’s authorization of payments to be made.

During the three and six month periods ended June 30, 2008, the company issued an aggregate 3,648 common shares under the 2007 Event Plan. For the three and six month periods ended June 30, 2009, the company issued 4,669 and 4,669 common shares under the 2007 Event Plan.

For the three and six month periods ended June 30, 2009, the company charged $14,000 and $14,000 under the Commercializing Event Plan. For the three and six month periods ended June 30, 2008, the company charged $17,000 and $28,000 under the Commercializing Event Plan.

20

The company accounts for the settlement of its commission arrangements to non-employee consultants, directors, executives and certain administrative personnel with the issuance of its business consulting shares under FASB ASC 505-50(Prior authoritative literature: FASB Statement 123(R) “Share Based Payment”, provided that there are sufficient shares under the business consultants plan. Under FASB ASC 505-50, the company measures commission arrangements at the fair value of the equity instruments issued. In the event that there are insufficient shares available to settle the obligation, the company will follow the provisions of FASB ASC 815-40(Prior authoritative literature: EITF 00-19 “Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company’s Own Stock”). Under FASB ASC 815-40, the company will record a liability instrument for the resulting changes in fair value from the date due to the end of each reporting period until such liability is satisfied.

In the fourth quarter of 2007, certain engineering consultants agreed to cancel 445,000 warrants issued in 2005 and 2006 in exchange for their participation in the 2007 Event Plan. The exchange of the warrants for the participation rights in a commercialization event did not result in an accounting charge. The warrants at the date of the exchange were considered to have no value because the underlying condition for vesting the warrants was not satisfied. The company determined that the fair value of the rights to be de minimis at the date of the exchange based on management’s estimate.

On March 28, 2008, the board of directors approved the grant of an aggregate 195,000 common stock warrants exercisable until December 1, 2016 at $5.00 per share to two engineering consultants in lieu of their participation in the 2007 Event Plan. The company valued the warrants at $249,000 using the Black-Scholes option/pricing model and charged operations.

June 30, 2008
Black-Scholes Inputs

Term	8.84 years
Expected forfeiture rate		-0-	%
Risk-free rate		2.89	%
Volatility		0.55
Dividend yield		0.0	%

NOTE F — Commitments and Other Matters

[1] Consulting Agreements:

On February 6, 2009, the company signed a consulting agreement with a strategic planning, government relations, marketing and public relations firm to render consulting services for a one year period. Under the agreement, the company is obligated to pay the consulting firm $20,000 per month, except that, until the consultant has assisted the company secure an agreed-upon level of governmental and /or private funding, the company’s monthly obligation is limited to $4,000. As of June 30, 2009, no funding had been obtained and as a result, the company’s monthly obligation is $4,000.

No additional securities were issued under new and/or existing consulting agreements during the three and six month period ended June 30, 2009 and no outstanding securities issued under these consulting agreements were exercised during the three and six month period ended June 30, 2009.

21

[2] Leases:

The company leases a facility, from a Director, 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) which provides 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 15th day of the calendar month immediately prior to the date any installment payment of monthly rent or other payment is due landlord.

Rent expense for the three and six months ended June 30, 2009 and 2008 are $15,000 and $30,000 and $16,000, $49,000, respectively. For the three and six months ended June 30, 2009, the company issued 53,655 and 83,680 business consultant common shares in payment for rent. For the three and six months period ended June 30, 2008, the company issued 14,864 and 36,258 business consultant common shares in payment for rent.

22

Note G— Management Agreement

On February 20, 2004 the company entered into an agreement with a management firm to develop and implement a business plan to commercialize its full terrain vehicle. In June, 2004, the company engaged three members of the management firm as the company’s chief executive officer, chief financial officer and chairman of its board of directors. In June, 2004 and in April, 2005, the company and the management firm purported to execute agreements reflecting the company-related capacities of the management firm’s three members and reflecting the management firm’s reorganization, respectively.

In September, 2005, the company commenced litigation challenging the validity of the June, 2004 and April, 2005 agreements. On March 6, 2009, the company and the management firm executed a Settlement Agreement and Release pursuant to which any and all claims and counterclaims the parties had or may have had arising out of or related to their relationship, arrangement or services provided one to the other were resolved and released and any and all obligations between and among them, specifically including the contested agreements, were terminated effective December 31, 2008.

No amount was paid to the management firm by the company during the three and six month periods ended June 30, 2009 and 2008.

NOTE H — Litigation

On October 31, 2008, the company commenced an action in New York State Supreme Court, County of New York, Commercial Division against Ice Engineering, 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 in 2008 and thereafter 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.

On April 14, 2009, the Court denied the company’s motion for summary judgment without prejudice to re-file and ordered the parties to proceed with discovery. The parties have commenced discovery and this process is continuing.

NOTE I — Royalty Agreement

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 June 30, 2009, the company did not receive any royalties under this agreement.

23

Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

PLAN OF OPERATION

(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) 2009 Plan of Operation

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 delivered an FTV^® to the Air Force in December 2008 to maximize the FTVs combat firefighting capabilities, including its robotic and autonomous potential, at Tyndale Air Force Base in Florida. The Air Force has completed its evaluation of the FTV, has recommended that certain design-specific modifications be made to the vehicle and the company is in the process of making these changes prior to returning the vehicle to the Air Force for final approval;

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 FirefightingVehicle 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, in acquiring 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;

24

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

5) 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;

6) 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.

The company completed the axle redesign and has forwarded a proposal to the manufacturer for its review and acceptance.

During the first quarter of 2009, the company shipped 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.” The company anticipates that it will continue to work in 2009 with NASA as an “official” drive-line consultant to the lunar rover project.

Information regarding the company and all of its automotive inventions, including regular updates on technological and business developments, can be found on the company’s website, www.torvec.com.

(c) Ice Technology License

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.

25

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.

Ice Engineering has paid approximately $800,000 under the assignment agreement but is in arrears with respect to quarterly installments due beginning June 1, 2008 and has repudiated its 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 agreement, namely, $2,700,000. 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 filed a motion for summary judgment with respect to its claims and on April 14, 2009, the Court denied the motion without prejudice which means that the company can re-file the motion after discovery has been completed. The parties have commenced discovery and the process is continuing.

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.

(d) Results of Operations

The net loss for the three month period ended June 30, 2009 was $930,000 as compared to the three month period ended June 30, 2008 of a net income of $702,000. The net loss for the six month period ended June 30, 2009 was $1,629,000 as compared to the six month period ended June 30, 2008 net loss of $482,000. The increase of net loss of $1,632,000 and $1,147,000, respectively, is principally related to the gain on cancellation of debt which provided the company with other income of $1,541,000 during the prior compared periods.

Research and development expenses for the three month period ended June 30, 2009 amounted to $96,000 as compared to $114,000 for the three month period ended June 30, 2008. Research and development expenses for the six month period ended June 30, 2009 amounted to $229,000 as compared to $262,000 for the six month period ended June 30, 2008. The decrease of $18,000 and $33,000 in the three and six month comparative is due to decreased cost associated with commercializing our technologies. Management expects research and development to continue in this trend of decrease expense in comparison to prior periods due to the emphasis on commercialization.

General and administrative expense for the three month period ended June 30, 2009 amounted to $834,000 compared to $734,000 for the three month period ended June 30, 2008. General and administrative expenses for the six month period ended June 30, 2009 amounted to $1,485,000 as compared to $1,781,000 for the six month period ended June 30, 2008. This decrease in the six month period amounted to $296,000 and is due, in large part, to the decrease spending on consulting services. The increase of $100,000 in the three month period is due in part to a increase of professional fees.

26

(f) Liquidity and Capital Resources

The company’s business activities during the three and six month periods ended June 30, 2009 were funded principally through the receipt in the fourth quarter of 2008 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 and the receipt of approximately $70,000 from the sale of 94,103 restricted common shares to accredited investors during the second quarter of 2009.

For the six month periods ended June 30, 2009 and 2008, the company issued 944,392 and 432,975 common shares to business consultants under the Business Consultants Stock Plan in exchange for ongoing business advisory services, engineering services, legal fees, including patent services, internal accounting services and other corporate services. As of June 30, 2009, 2,708,886 shares are available for future issuances under the Business Consultants Stock Plan

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 six month periods ended June 30, 2009 and 2008. The amount of cumulative unpaid compensation accrued as of June 30, 2009 is $942,000, including accrued payroll taxes of $42,000.

At June 30, 2009, the company’s cash position was $124,000 and the company had a working capital deficit of $1,248,000. The company’s cash position at anytime during the three and six month periods ended June 30, 2009 was dependent upon its success in selling its common stock, reimbursement of research credits by New York State and revenues generated by limited sale of its products. Since our inception, we have incurred significant operating and net losses and have not generated positive cash flows from operations. The balance of cash and cash equivalents as of June 30, 2009 will not be sufficient to meet our anticipated cash requirements through June 30, 2010, based on our present plan of operation. As a result, we are seeking to raise additional capital. Additional capital may not be available on acceptable terms or at all. Equity financings may be dilutive to existing stockholders. If we are unable to obtain sufficient capital as and when needed, we may be forced to delay, scale back or eliminate some or all of our operations including our research and development programs and commercialization plans, and/or license to third parties certain products or technologies that we would otherwise seek to commercialize independently. Our ability to continue is dependent on obtaining additional long-term financing and ultimately achieving profitable operating results. Please see Note A of our condensed consolidated financial statements for the three and six month periods ended June 30, 2009. Unless we are able to obtain financing and ultimately achieve profitability we will not be able to continue as a going concern. These factors raise substantiated doubt about the Company’s ability to continue as a going concern. The report of our Independent Registered Public Accounting Firm contained in our fiscal 2008 Annual report, on Form 10K, also contains an explanatory paragraph referring to an uncertainty concerning our ability to continue as a going concern.

At June 30, 2009, the company had accounts payable, accrued expenses, and deferred compensation and other expenses totaling $1,440,000 (of which $942,000 is attributed to the Gleasmans’ unpaid but accrued compensation and accrued payroll taxes).

27

(g) 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 customers. The company’s standard terms are typically net 30 days. The company recognizes revenue when transfer of title occurs and risk of ownership passes to a customer at the time of shipment or delivery depending on the terms of the agreement with a particular customer. The sale price of the company’s products is substantially fixed and determinable at the date of the sale based upon purchase orders generated by a customer and accepted by the company.

Recent Accounting Pronouncements:

In December 2008, the FASB issued FASB ASC 810-10-65(Prior authoritative literature: FASB Statement No. 160, “Noncontrolling Interests in Consolidated Financial Statements, an amendment of ARB No. 51”). The standard changes the accounting for noncontrolling (minority) interests in consolidated financial statements including the requirements to classify noncontrolling interests as a component of consolidated stockholders’ equity, and the elimination of “minority interest” accounting in results of operations with earnings attributable to noncontrolling interests reported as part of consolidated earnings. Additionally, FASB ASC 810-10-65 revises the accounting for both increases and decreases in a parent’s controlling ownership interest. The company has adopted the standard as of January 1, 2009. The adoption of FASB ASC 810-10-65 did not have a material impact on the company’s financial position except for the presentation of the statements of operation.

In March 2008, the FASB issued FASB ASC 810-10-65(Prior authoritative literature: FASB Statement No. 161,“Disclosures about Derivative Instruments and Hedging Activities-an amendment of FASB Statement No. 133)”.FASB ASC 810-10-65 161 requires enhanced disclosures about an entity’s derivative and hedging activities. FASB ASC 810-10-65 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. In review of FASB ASC 810-10-65, the Company has determined that it is not applicable and will have no effect to its consolidated financial statements.

In June 2008, the FASB Task Force reached a consensus-for-exposure that an entity should determine whether an equity-linked financial instrument (or embedded feature) is indexed to its own stock first by evaluating the instrument’s contingent exercise provisions, if any, and then by evaluating the instrument’s settlement provisions. FASB ASC 815-40(Prior authoritative literature: EITF 07-5, “Determining Whether an Instrument (or Embedded Feature) Is Indexed to an Entity’s Own Stock”). FASB ASC 810-10 (Prior authoritative literature: Paragraph 11(a) of FAS 133) specifies that a contract issued or held by the reporting entity that is both (a) indexed to its own stock and (b) classified in stockholders’ equity in its statement of financial position shall not be considered a derivative financial instrument for purposes of applying that Statement. If a freestanding financial instrument (for example, a stock purchase warrant) meets the scope exception in paragraph 11(a) of FAS 133, it is classified as an equity instrument and is not accounted for as a derivative instrument. The adoption of FASB ASC 815-40(Prior authoritative literature:EITF 07-5) did not have a significant impact on the company’s financial position.

In April 2009, the FASB issued FASB ASC 825-10-65(Prior authoritative literature: FASB Staff Position No. FAS 107-1 and APB 28-1, “Interim Disclosures about Fair Value of Financial Instruments,”) which requires disclosures about fair value of financial instruments for interim reporting periods of publicly traded companies as well as in annual financial statements. This Staff Position is effective for interim reporting periods ending after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009. The Company does not expect the adoption of this accounting pronouncement to have a material impact on the financial statements.

In May 2009, the FASB issued SFAS No. 165, “ Subsequent Events” (“SFAS 165”). SFAS 165 establishes general standards for accounting for and disclosure of events that occur after the balance sheet date but before financial statements are available to be issued (“subsequent events”). More specifically, SFAS 165 sets forth the period after the balance sheet date during which management of a reporting entity should evaluate events or transactions that may occur for potential recognition in the financial statements, identifies the circumstances under which an entity should recognize events or transactions occurring after the balance sheet date in its financial statements and the disclosures that should be made about events or transactions that occur after the balance sheet date. SFAS 165 provides largely the same guidance on subsequent events which previously existed only in auditing literature. The disclosure is required in financial statements for interim and annual periods ending after June 15, 2009. The company has performed an evaluation of subsequent events through August 14, 2009, which is the date the financial statements are filed.

28

In June 2009, the Financial Accounting Standards Board issued Statement of Financial Accounting Standard (“SFAS”) No. 168, “The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles”. SFAS 168 replaces SFAS 162 and establishes the FASB Accounting Standards Codification as the source of authoritative accounting principles recognized by the FASB to be applied by nongovernmental entities in the preparation of financial statements in conformity with GAAP. SFAS 168 is effective for financial statements issued for interim and annual periods ending after September 15, 2009. The adoption of this pronouncement did not have a material impact on the financial statements.

(h) Impact of Inflation

The extent inflation may impact the company’s operations during the three and six month periods ended June 30, 2009, has been determined by management not to have a significant impact on the company’s operations to date.

Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not Applicable

Item 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

The company maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed by the company in reports it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized, and reported on a timely basis and that such information is accumulated and communicated to management, including the chief executive officer and the chief financial officer, as appropriate, to allow for timely decisions regarding required disclosure.

The company’s management, including the chief executive officer and interim chief financial officer, conducted an evaluation of the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) of the Exchange Act) as of June 30, 2009 pursuant to Rule 13a-15(b) under the Exchange Act and has concluded that our disclosure controls and procedures were effective as of June 30, 2009.

Changes in Internal Control Over Financial Reporting

The company’s management, with the participation of the company’s chief executive officer and interim chief financial officer, has concluded that there were no changes in the company’s internal control over financial reporting that occurred during the quarter ended June 30, 2009 that has materially affected, or is reasonably likely to materially affect, the company’s internal control over financial reporting.

29

PART II — OTHER INFORMATION

Item 1. Legal Proceedings

(1)	On February 20, 2004 the company entered into an agreement with a management firm to develop and implement a business plan to commercialize its full terrain vehicle. In June, 2004, the company engaged three members of the management firm as the company’s chief executive officer, chief financial officer and chairman of its board of directors. In June, 2004 and in April, 2005, the company and the management firm purported to execute agreements reflecting the company-related capacities of the management firm’s three members and reflecting the management firm’s reorganization, respectively.
	In September, 2005, the company commenced litigation challenging the validity of the June, 2004 and April, 2005 agreements. On March 6, 2009, the company and the management firm executed a Settlement Agreement and Release pursuant to which any and all claims and counterclaims the parties had or may have had arising out of or related to their relationship, arrangement or services provided one to the other were resolved and released and any and all obligations between and among them, specifically including the contested agreements, were terminated effective December 31, 2008.
(2)	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 filed a motion for summary judgment with respect to its claims and on April 14, 2009, the Court denied the motion without prejudice which means that the company can re-file the motion after discovery has been completed. The parties have commenced discovery and that process is continuing.

Item 1A. Risk Factors

There have been no significant changes to the risk factors facing the company as disclosed in the company’s Form 10-K for the year ended December 31, 2008.

30

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

On April 27, 2009, the company sold an aggregate 64,103 restricted common shares at $0.78 per share for proceeds of $50,000 to three accredited investors in a private placement.

On June 10 and 16, 2009, the company sold an aggregate 30,000 restricted common shares at $0.667 per share for proceeds of $20,000 to two accredited investors in a private placement.

The investors are qualified accredited investors within the meaning of regulation D promulgated under the Securities Act of 1933 and the company is therefore relying on section 4(2) of said Act as a transaction by an issuer not involving a public offering.

Item 3. Defaults Upon Senior Securities

None

Item 4. Submission of Matters to a Vote of Security Holders

None

Item 5. Other Information

None.

Item 6. Exhibits

Exhibits as required by Item 601 of Regulation S-K, as applicable, are attached to this quarterly report (Form 10-Q). The Exhibit Index is found on the page immediately succeeding the signature page, and the Exhibits follow on the pages immediately succeeding the Exhibit Index.

(2) Plan of acquisition, reorganization, arrangement, liquidation, or succession

2.1 Agreement and Plan of Merger, dated November 29, 2000 by and among Torvec Subsidiary Corporation, Torvec, Inc., UTEK Corporation and ICE Surface Development, Inc. incorporated by reference to Form 8-K filed November 30, 2000 and Form 8K/A filed February 12, 2001.

(3) Articles of Incorporation, By-laws

3.1	Certificate of Incorporation, incorporated by reference to Form 10-SB/A , Registration Statement, registering Company’s $.01 par value common stock under section 12(g) of the Securities Exchange Act of 1934;
3.2	Certificate of Amendment to the Certificate of Incorporation dated August 30, 2000, incorporated by reference to Form SB-2 filed October 19, 2000;
3.3	Certificate of Correction dated March 22, 2002, incorporated by reference to Form 10-KSB filed for fiscal year ended December 31, 2002;
3.4	By-laws, as amended by shareholders on January 24, 2002, incorporated by reference to Form 10-KSB filed for fiscal year ended December 31, 2002;
3.5	Certification of Amendment to the Certificate of Incorporation dated October 21, 2004 setting forth terms and conditions of Class B Preferred, incorporated by reference to Form 10-QSB filed for fiscal quarter ended March 31, 2004.
3.6	Certificate of Amendment to the Certificate of Incorporation dated January 26, 2008 increasing the authorized common shares from 40,000,000 to 400,000,000 common shares, incorporated by reference to annual report (Form 10-K) filed for the calendar year ended December 31, 2006.

(4) Instruments defining the rights of holders including indentures

None

31

(9) Voting Trust Agreement

None

(10) Material Contracts

10.1	Certain Employment Agreements, Consulting Agreements, certain assignments of patents, patent properties, technology and know-how to the Company, Neri Service and Space Agreement and Ford Motor Company Agreement and Extension of Term, all incorporated by reference to Form 10-SB/A, Registration Statement, registering Company’s $.01 par value common stock under section 12(g) of the Securities Exchange Act of 1934;
10.2	The Company’s 1998 Stock Option Plan and related Stock Options Agreements, incorporated by reference to Form S-8, Registration Statement, registering 2,000,000 shares of the Company’s $.01 par value common stock reserved for issuance thereunder, effective December 17, 1998;
10.3	The Company’s Business Consultants Stock Plan, incorporated by reference to Form S-8, Registration Statement, registering 200,000 shares of the Company’s $.01 par value common stock reserved for issuance thereunder, effective June 11, 1999, as amended by reference to Form S-8 Registration Statements registering an additional 200,000, 200,000, 100,000, 800,000, 250,000, 250,000, 350,000, 250,000, 2,500,000 and 5,000,000 shares of the Company’s $.01 par value common stock reserved for issuance thereunder, effective October 5, 2000, November 7, 2001, December 21, 2001, February 1, 2002, November 12, 2002, January 22, 2003, May 23, 2003, November 26, 2003, April 20, 2004 and October 13, 2006, respectively;
10.4	Termination of Neri Service and Space Agreement dated August 31, 1999, incorporated by reference to Form 10-QSB filed for the quarter ended March 31, 1999;
10.5	Operating Agreement of Variable Gear, LLC dated June 28, 2000, incorporated by reference to Form 10-QSB filed for the quarter ended March 31, 2000;
10.6	License Agreement between Torvec, Inc. and Variable Gear, LLC dated June 28, 2000, incorporated by reference to Form SB-2 filed October 19, 2000;
10.7	Investment Agreement with Swartz Private Equity, LLC dated September 5, 2000, together with attachments thereto, incorporated by reference to Form 8-K filed October 2, 2000;
10.8	Extension of and Amendment to Consulting Agreement with James A. Gleasman, incorporated by reference to Form 10-KSB filed for the fiscal year ended December 31, 2000;
10.9	Extension of and Amendment to Consulting Agreement with Keith E. Gleasman, incorporated by reference to Form 10-KSB filed for the fiscal year ended December 31, 2000;
10.10	Extension of and Amendment to Consulting Agreement with Vernon E. Gleasman, incorporated by reference to Form 10-KSB filed for the fiscal year ended December 31, 2000;
10.11	Option and Consulting Agreement with Marquis Capital, LLC dated February 10, 1999, incorporated by reference to Form 10-QSB filed for quarter ended March 31, 2001;
10.12	Option and Consulting Agreement with PMC Direct Corp., dated February 10, 1999, incorporated by reference to Form 10-QSB filed for quarter ended March 31, 2001;
10.13	Investment Banking Services Agreement with Swartz Institutional Finance (Dunwoody Brokerage Services, Inc.) dated December 8, 2000, incorporated by reference to Form 10-QSB filed for quarter ended March 31, 2001;

32

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

33

10.31	Bill of Sale between Dynamx, Inc. and Torvec, Inc. for equipment and machinery, incorporated by reference to Form 10-KSB filed for fiscal year ended December 31, 2004;
10.32	Lease and Services Agreement between Robert C. Horton as Landlord and Torvec, Inc. as Tenant dated March 18, 2005, incorporated by reference to Form 10-KSB filed for fiscal year ended December 31, 2004;
10.33	Settlement Agreement and Mutual Release between Torvec, Inc. and ZT Technologies, Inc. dated March 29, 2005, incorporated by reference to Form 10-QSB filed for fiscal quarter ended March 31, 2005;
10.34	Advisory Agreement between Robert C. Horton and Torvec, Inc. dated February 15, 2005, incorporated by reference to Form 10-QSB filed for fiscal quarter ended March 31, 2005;
10.35	Lease and Services Agreement between Dennis J. Trask as Landlord and Torvec, Inc. as Tenant dated April 18, 2005, incorporated by reference to Form 10-QSB filed for fiscal quarter ended March 31, 2005;
10.36	Consulting Agreement with Matthew R. Wrona, dated March 31, 2005, incorporated by reference to Form 10-QSB filed for fiscal quarter ended March 31, 2005;
10.37	Option Agreement between Matthew R. Wrona and Torvec, Inc. dated March 31, 2005, incorporated by reference to Form 10-QSB filed for fiscal quarter ended March 31, 2005;
10.38	Trust Agreement between Matthew R. Wrona, Donald Gabel, Lawrence Clark, Steven Urbanik, Floyd G. Cady, Jr., and Michael Pomponi as Grantors and Richard B. Sullivan as Trustee, dated September 22, 2005, incorporated by reference to Form 10-QSB filed for fiscal quarter ended March 31, 2005;
10.39	Consultant Agreement with Floyd G. Cady, Jr., dated October 1, 2005, incorporated by reference to Form 10-QSB filed for fiscal quarter ended March 31, 2005;
10.40	Consultant Agreement with Lawrence W. Clark, dated October 1, 2005, incorporated by reference to Form 10-QSB filed for fiscal quarter ended March 31, 2005;
10.41	Consultant Agreement with Donald W. Gabel, dated October 1, 2005, incorporated by reference to Form 10-QSB filed for fiscal quarter ended March 31, 2005;
10.42	Consultant Agreement with Michael A. Pomponi, dated October 1, 2005, incorporated by reference to Form 10-QSB filed for fiscal quarter ended March 31, 2005;
10.43	Consultant Agreement with Steven Urbanik, dated October 1, 2005, incorporated by reference to Form 10-QSB filed for fiscal quarter ended March 31, 2005;
10.44	Consultant Agreement with Kiwee Johnson, dated March 31, 2005, incorporated by reference to Form 10-QSB filed for fiscal quarter ended March 31, 2005;
10.45	Confidentiality Agreement with Joseph B. Rizzo, dated October 24, 2005, incorporated by reference to Form 10-QSB filed for fiscal quarter ended March 31, 2005.
10.46	Minutes of meeting Board of Directors Torvec, Inc., held October 19, 2004, creating the non-management directors plan, incorporated by reference to Form 10-KSB filed for the fiscal year ended December 31, 2006.

34

	10.47	Excerpts from minutes of the meeting of Board of Directors Torvec, Inc., adopting changes to the non-management directors plan creating, a commercialized event plan, approving an increase in shares to be issued under business consulting plan and adopting recommendation that shareholders increase number of authorized common shares from 40,000,000 to 400,000,000 common shares, incorporated by reference to Form 8-K filed on October 16, 2006.
	10.48	Order of Supreme Court of the State of New York with respect to litigation between the company and a management consulting firm, incorporated by reference to Form 8-K filed on June 20, 2006;
	10.49	Letter agreement with American Continental Group, LLC, executed on October 22, 2006, incorporated by reference to Form 8-K filed on October 30, 2006;
	10.50	New York State School Bus Proposal incorporated by reference to Form 10-Q filed for quarter ended March 31, 2006;
	10.51	Order of Supreme Court of the State of New York directing the Monroe County Clerk to release back to the company 40,000 common shares and 245,000 common stock warrants issued to a management consulting firm with which the company is in litigation and held in escrow by such Clerk by virtue of a previous court order and directing the return to the company of a $250,000 (less administrative fee) undertaking deposited with the Monroe County Treasurer in connection with the same litigation, incorporated by reference to Form 10-Q filed for the quarter ended March 31, 2008;
	10.52	License Assignment and Transfer Agreement by and between Ice Engineering, LLC and Torvec, Inc. made effective June 15, 2008 assigning license granted by Dartmouth College with respect to ice technology from Torvec to Ice Engineering, incorporated by reference to Form 8-K filed on July 18, 2008.
	10.53	License Agreement by and between High Density Powertrain and Torvec, Inc. dated December 12, 2008, incorporated by reference to current report (Form 8-K) filed December 14, 2008;
	10.54	Consulting Agreement by and between Clifford Carlson and Torvec, Inc. dated December 12, 2008, incorporated by reference to current report (Form 8-K) filed December 14, 2008;
	10.55	Minutes of meeting of Governance and Compensation Committee dated February 19, 2008 establishing compensation for the company’s president and chief executive officer and amending the company’s commercializing event plan, incorporated by reference to annual report (Form 10-K) filed for year ended December 31, 2007;
��	10.56	Consulting Agreement by and between Capital Campaigns, Inc. and Torvec, Inc., dated February 6, 2009, incorporated by reference to annual report (Form 10-K) filed for the year ended December 31, 2008;
	10.57	Settlement and Release Agreement by and between CXO on the GO of Delaware, LLC, et. al and Torvec, Inc. et. al., dated March 6, 2009, incorporated by reference to annual report (Form 10-K) filed for the year ended December 31,2008;

(11) Statement regarding computation of per share earnings (loss)

Not applicable

(14) Code of Ethics

(16) Letter on change in certifying accountant

None

35

(18) Letter regarding change in accounting principles

None

(20) Other documents or statements to security holders

None

(21)	Subsidiaries of the registrant
	Ice Surface Development, Inc. (New York)
	Iso-Torque Corporation (New York)
	IVT Diesel Corp. (New York)
	Variable Gear, LLC (New York)
(22)	Published report regarding matters submitted to vote of security holders

None

(23)	Consents of experts and counsel
(24)	Power of attorney

None

(31.1)	Rule 13(a)-14(a)/15(d)-14(a) Certifications
(32)	Section 1350 Certifications
(99)	Additional exhibits

None

36

SIGNATURES

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

	TORVEC, INC.
Date: August 14, 2009
	By:	/s/ James Y. Gleasman
		James Y. Gleasman, Chief Executive Officer

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

Dated: August 14, 2009	By:	/s/ James Y. Gleasman
		James Y. Gleasman, Chief Executive Officer and
		Interim Chief Financial Officer

37

EXHIBIT INDEX

(31.1)	Rule 13(a)-14(a)/15(d)-14(a) Certifications
(32)	Section 1350 Certifications

38