U.S. SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

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

1169 Pittsford-Victor Road
Building 3, Suite 125
Pittsford, New York		14534
(Address of principal executive offices)		(Zip Code)

Issuer’s Telephone Number, including Area Code: (585) 248-0740

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

Title of each class		Name of each exchange on
		which registered

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

$.01 par value common voting stock

(Title of class)

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

Yes o      No þ

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.

Yes o      No þ

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

Indicate by checkmark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes þ      No o

Indicate by checkmark if disclosure of delinquent filers in response to Item 405 of Regulation S-K (229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o

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

Large accelerated filer o      Accelerated filer o      Non-accelerated filer þ

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

Yes o      No þ

 

 

     State the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold, or the average bid and asked price of such common equity, as of the last business day of the registrant’s most recently completed second fiscal quarter. $30,616,054.

     State the number of shares outstanding of each of the issuer’s classes of common equity, as of the latest practicable date. 31,367,039

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

TABLE OF CONTENTS

		PAGE
PART I
Item 1. Description of Business			4- 10
Item 1A Risk Factors			11- 12
Item 2. Properties			13
Item 3. Legal Proceedings			13 -14
Item 4. Submission of Matters to a Vote of Security Holders			15
Item 5 Market for Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities			16 -28
Item 6 Selected Financial Data			29
Item 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations			30- 33
Item 7A Quantitative and Qualitative Disclosures About Market Risk			33
PART II — FINANCIAL INFORMATION
Item 8. Consolidated Financial Statements
Report of Independent Registered Public Accounting Firm			F- 2
Torvec, Inc. and Subsidiaries Consolidated Balance Sheet as of December 31, 2006 and 2005			F -3
Torvec, Inc. and Subsidiaries Consolidated Statements of Operations for each of the years in the Three-Year Period Ended December 31, 2006 and for the Period from September 25, 1996 (Inception) through December 31, 2006			F- 4
Torvec, Inc. and Subsidiaries Consolidated Statements of Changes in Stockholders’ Equity (Capital Deficit) for the Period from September 25, 1996 (Inception) through December 31, 2006			F- 5
Torvec, Inc. and Subsidiaries Consolidated Statements of Cash Flows for each of the years in The Three Year Period Ended December 31, 2006 and for the Period from September 25, 1996 (Inception) through December 31, 2006			F -11
Notes to Consolidated Financial Statements			37- 64
Item 9 Changes in and Disagreements with Accountants on Accounting and Financial Disclosure			65
PART III
Item 10 Directors, Executive Officers, Promoters and Control Persons; Compliance with Section 16(a) of the Exchange Act			66
Item 11 Executive Compensation			76
Item 12 Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters			84
Item 13 Certain Relationships and Related Transactions and Director Independence			86
Item 14 Principal Accountant Fees and Services			88
Exhibits			90- 95
SIGNATURES PAGE			96
EXHIBIT INDEX			97
EX - 3.6
EX - 23.1
EX- 31.1
EX - 32
EX-3.6
EX-23.1
EX-31.1
EX-32

(b) Our Automotive Properties

     The following is an overview of our automotive technologies:

      (1) Full Terrain Vehicle (FTV)

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

     The company’s production-ready full terrain vehicle is a new type of vehicle which management believes combines the high speed capabilities of trucks and cars with the high traction capabilities of tracked vehicles. The FTV incorporates two company inventions – the steering drive and suspension system for tracked vehicles and high speed steel-reinforced rubber tracks. The company has tested the FTV over the past 6 years. It has and continues to demonstrate the FTV in person to representatives of many governmental entities and private sector automotive companies as well as to many Tier I and Tier II automotive and truck componentry suppliers who are potential suppliers of the company’s FTV.

     Based upon these tests, demonstrations and the reaction of industry representatives, the company believes it has shown that the FTV is relatively easy to drive and steers as easily as a car and that it has shown that this tracked vehicle can traverse almost any terrain, with highway driving speeds being attainable on pavement and other relatively flat surfaces. The company also believes that it has shown that the FTV is also environmentally sensitive since its low ground pressure, less than 2 pounds per square inch, does not damage paved road surfaces or leave ruts or cause potholes on unpaved surfaces. The FTV is able to perform as it does because of its unique steering mechanism, which is protected by several U.S., European and Asian patents. This steer-drive mechanism can best be described in engineering terms as a hydro-mechanical steering mechanism. The “mechanical” portion is manufactured from conventional, high volume gearing, while the “hydro” portion is our patented hydraulic pump and motor. Conventional hydraulic pumps and motors are large, noisy and inefficient at low revolutions per minute. The company believes its patented hydraulic pump and motor has solved these problems.

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

      (2) IsoTorque Differential

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

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

      (3) Infinitely Variable Transmission — Hydraulic Pump/Motor

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

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

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

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

     The company next engaged the independent engineering firm of Viewpoint Systems, Inc. (a “Select Integrator” of National Instruments) to conduct a series of fuel-efficiency tests on the transmission. These independent tests confirmed that the company’s 3/4-ton 4x4 Dodge Ram truck, utilizing the company’s first generation infinitely variable transmission with a diesel engine, generated a 96% improvement in fuel mileage over that obtained by a gasoline-powered, 4-speed automatic 4x4 truck of comparable weight and horsepower to the most popular SUVs. The tests also confirmed that the company’s 3/4 ton diesel truck —

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

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

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

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

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

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

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

     During this period, we made a number of improvements to the transmission, including a major design improvement to our motor, enabling it to operate over an infinite range of ratios (previously, a design capability only provided by the pump).

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

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

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

Constant Velocity Joint Mechanism

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

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

     Management believes that a highly significant feature of the company’s constant velocity technology is its greater operating angle, that is, the angle that a vehicle wheels can be turned in order to navigate and complete a full circle. The highest operating angle achieved by conventional technology is 52%. The company’s constant velocity joint has an operating angle of 60%. This 8% greater angle permits a vehicle to have tighter turning circles, thus improving the vehicle’s drivability.

(c) Our Ice Technology

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

     The ice technology may allow for the rapid deicing of vehicle surfaces utilizing three variations for deicing and corresponding process technologies, although Dr. Petrenko has informed the company that the “pulse method” shows the most promise for future commercialization:

	(i)		direct current method — through electrolysis, creates a pressurized gas that breaks up and ejects ice, which is ideal for initial ice removal;
	(ii)		alternating current (high frequency) method — melts interfacial ice with minimal heat exchange to the surrounding environment thereby reducing power requirements — this method is capable of continuously maintaining ice-free surfaces;
	(iii)		pulse method-creates a short-term water barrier that enables ice to be easily removed. This method works well for initial removal and is relatively simple to produce.

     The company acquired ISDI from UTEK to integrate the Dartmouth de-icing technology into its FTV™ as well as to sub-license the technology for a wide-assortment of land-based motorized vehicle applications (e.g. cars, trucks, trains and trailers), including their components (e.g. windshields).

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

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

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

     Recently, the company was informed by Dr. Petrenko that while the physics underlying the ice technology is still valid and the technology remains promising, he can not estimate with any degree of assurance a time frame when the technology will be mature enough for automotive commercialization, although he does believe such maturation will not occur in the next twelve months.

     Given Dr. Petrenko’s assessment with respect to the ice technology and the reticence of glass companies to either sublicense or provide the company with development dollars, management has concluded that the carrying amount of its Dartmouth College license as of December 31, 2006 ($1,071,000) exceeds the estimated discounted cash flows the company reasonably expects to receive for the twelve month period beginning January 1, 2007 and ending December 31, 2007 and therefore, has determined that the full amount of such excess should be recorded as an impairment in accordance with SFAS No. 144 as of and for the year ended December 31, 2006.

     Management has further determined that, while it will continue its non-monetary support of Dr. Petrenko’s work to further develop the technology, neither the company nor its majority-owned subsidiary, Ice Surface Development, Inc. (the entity holding the license) will make any further expenditure for such development. However, the company does not intend to abandon the technology and will continue to meet its obligations under the license respecting its allocable share of patent fees and its minimum royalty. Despite the accounting treatment accorded the license, the company will continue to offer the technology for sale to interested parties from time to time and will continue to include the deicing technology in presentations made and valuation reports furnished to third parties interested in acquiring the entire company.

(d) Current Status of Product Development

     See Management’s Discussion and Analysis of Financial Condition and Results of Operations, page 33.

(e) Competition, Industry and Market Acceptance

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

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

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

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

     The company’s ability to generate revenue is also dependent, in part, upon the successful implementation of its National and New York State School Bus Program announced in mid-2006. The program initially calls for the retrofit of up to 55,000 New York State school buses with the company’s third generation infinitely variable transmission and its IsoTorque differential. The next stage of the program entails the retrofit of the rest of the nation’s approximately 500,000 school buses with the same technologies.

     The company’s ability to generate revenue is also dependent, in part, upon the successful performance of its third generation infinitely variable transmission and IsoTorque differential in each successive generation of lunar rovers as designed and developed by the National Aeronautics and Space Administration (NASA) for that agency’s planned return to the moon by the year 2020.

     The company’s full terrain vehicle is a unique vehicle which has no direct, market competitor. The company’s FTV can traverse road and off-road conditions, especially in the target market countries of Asia, Africa, Central and South America, which cannot be traversed by 4X4s at all. Secondly, no other comparable tracked vehicle can match the FTV’s speed (50-60mph) under normal road conditions. Consequently, at present, there is no identifiable category of vehicle that encompasses all of the capabilities of the FTV. The market for such a vehicle is, in a sense, “wide-open” and will be a composite of vehicles whose purpose is the transportation of people and goods in areas where highway infrastructure is poor or even nonexistent, vehicles for agricultural use that will eventually replace tractors and other traditional farm vehicles, vehicles for exploration, search, rescue and other emergencies as well as vehicles for military purposes. The challenge with respect to the profitable commercialization of the FTV is to demonstrate to potential buyers and/or licensees the FTV’s potential positive socioeconomic impact, on a year around basis, upon the communities in which it is introduced. Examples of such benefits include providing speed and traction capability to enhance commerce in developing countries, streamlining agricultural production (“a one vehicle fits all” for both plowing and hauling), opening geographically remote areas, increasing the availability and efficiency of emergency treatment and, in the case of the U.S. military, providing a new class of vehicle for combat, security and border patrol operations.

Item 1A. RISK FACTORS

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

      (1) The company has no operating history, has not generated any revenues since its founding in 1996 and, currently, is dependent upon sales of its common and various classes of its Preferred stock to fund its business.

     If the company were unable to sell sufficient equity in one or more private offerings to provide monies to pay its annual fixed costs (such as rent, utilities, patent expenses, including patent maintenance fees), the costs associated with technology refinement and testing(e.g. continued refinement of the electronic controls for the third generation transmission) and the costs associated with the building production-ready models for certain users, the company’s ability to continue its activities at the levels it has reached within the past twelve months would be jeopardized.

      (2) The company’s ability to initiate the first phase of its New York State and National School Bus Program is conditioned upon the receipt by the company of sufficient monies to acquire a facility for installation of the third generation infinitely variable transmission and IsoTorque differential in a reasonable number of school buses to demonstrate the requisite fuel-savings and improved vehicle handling to justify the program, to acquire a dynamometer of sufficient-size to conduct fuel-saving testing and to compensate additional engineering personnel needed for the project.

     Unless the company receives monies, estimated to be up to $5,000,000, from one or more local, state and/or national agencies or is able to generate such monies itself to initiate the first phase of its school bus program, such program would have to be considerably modified from its present configuration which may make it less likely that New York, any other state, municipality and/or school district would participate in the program.

      (3) The company’s ability to sell and/or license all or any one of its non-FTV automotive technologies at a fair and adequate price is dependent upon its ability to demonstrate that their technical superiority , their lower manufacturing costs, generally fewer parts and lighter weight, their beneficial impact upon the worldwide demand for raw materials and their greater affinity for environmentally — sound applications will generate a significantly greater share of the world’s automotive markets to an automotive industry that is heavily invested in conventional technologies and resistant to new technology unless developed by the auto companies themselves.

     Unless at least one domestic or foreign automotive company and/or first tier supplier recognizes that the acquisition or license and commercialization of the company’s non-FTV technologies will generate a significantly greater market share for that company’s products at least during the period such technologies are patent-protected, and is willing to offer a price which is fair and adequate based upon the expected realization of such increased market share, the company’s ability to generate significant revenues and profits would be severely impacted.

      (4) The company’s ability to sell and/or license its full terrain vehicle at a fair and adequate price is dependent upon its ability to demonstrate to potential acquirers the FTV’s positive socioeconomic impact, on a year round basis, upon the U.S. and foreign communities in which it is introduced, for example, the transportation of people and goods in areas where highway infrastructure is poor or nonexistent, the replacement of tractors and other traditional farm vehicles, the increased efficiency of search, rescue and emergency vehicles, the opening of geographically remote areas to civilization and, in the case of the U.S. military, the development of a new class of vehicle for combat, security and border patrol.

     Unless at least one domestic or foreign automotive company and/or first tier supplier recognizes that the acquisition or license and commericialization of the company’s full terrain vehicle can bring significant socioeconomic benefits on a year round basis (as opposed to a few months per year in some locales) to the communities in which it is introduced, thus enabling such company to capture a significant worldwide market for which there is (and during the period the FTV is patent-protected) no comparable vehicle and is willing to offer a price which is fair and adequate based upon the expected penetration of that market, the company’s ability to generate significant revenues and profits would be severely impacted.

      (5) In the event the company were unable to sell or license any of its automotive technologies to one or more automotive companies, first-tier suppliers and/or to a government agency and/or the U.S. military, the company may be required to commercialize one or more of its technologies itself, a situation which would require considerable additional capital, personnel, regulatory compliance and other resources.

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

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

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

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

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

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

Item 1B. UNRESOLVED STAFF COMMENTS

      Not Applicable.

On April 27, 2006, the Court dismissed the company’s summary judgment motion as to the illegality of the agreements. In addition, the Court granted the management consulting firm’s motion for summary judgment as to a limited number of counterclaims brought against the company solely with respect to the February 20th agreement. On May 8, 2006, the Court entered a judgment and order directing the company to honor the exercise of two warrants (under both the February and June agreements) which had previously presented to the company for an aggregate 40,000 common shares and, in addition, grant a warrant to the management consulting firm for 245,000 common shares under the contested equity incentive provision, exercisable at $.01 per common share. The Court also ordered the company to honor the approximately 511,200 additional warrants previously granted to the firm under the contested June and April agreements if and to the extent such firm exercised such warrants.

     On June 16, 2006, the Court granted the company’s request to stay the terms of its May 8, 2006 judgment and order, conditioned upon the deposit of the 40,000 shares and 245,000 warrants with the Monroe County Clerk and further conditioned upon the deposit of $250,000 in escrow with the Monroe County Treasurer. The company complied with both conditions on June 19, 2006 and, therefore, the stay became, is and remains effective as of the year ended December 31, 2006.

Compliance with the Court’s May 8, 2006 order has required the company to issue 40,000 shares of common stock and grant of 245,000 common stock warrants. Compliance with future adverse orders, if any, rendered by the Court similarly may require the issuance of additional shares of common stock, the issuance of additional warrants and/or the payment of damages. The 40,000 shares represent the number of warrants tendered for exercise by the management consulting firm, which the company had not honored upon presentation. The company has previously recorded a charge at the date of grant. The 245,000 common stock warrants were fair valued and the company recorded a compensation charge of $629,000 as of the year ended December 31, 2006.

The company believes the Court’s May 8, 2006 judgment, order and decision contain numerous reversible errors and on May 9, 2006, the company filed a notice of appeal with respect to the Court’s judgment, order and decision with the Appellate Division of the Supreme Court, Fourth Department (“Appellate Court”).

On September 21, 2006, the company filed its brief with the Appellate Court to support its appeal. On October 23, 2006, the management consulting firm filed its answering brief with the Appellate Court to which the company replied on November 2, 2006.

On March 16, 2007, the Appellate Court unanimously reversed the lower Court’s judgment, ruling that provisions of a contract requiring directors of a corporation to select and maintain certain individuals as corporate officers are void because they are in violation of New York Business Corporation Law section 701. The Appellate Court further determined that whether such illegal provisions unduly restricted the company’s board is a question of fact. In addition, the Appellate Court stated that the lower Court abused its discretion by refusing to permit the company to amend its complaint to allege fraud in the inducement.

As the result of the Appellate Court’s decision, the company is entitled to rescind the issuance of 40,000 shares of common stock and 245,000 common stock warrants to the management consulting firm. In addition, the company is no longer obligated to honor the approximately 511,200 common stock warrants registered to the management consulting firm during the pendency of the dispute. Finally, the company will no longer be required to maintain a $250,000 escrow with the Monroe County Treasurer.

In effect, the Appellate Court determined that the company and the management consulting firm should be afforded the opportunity to litigate their various claims rather than having such claims accepted or rejected through the procedure of summary judgment. The company intends to pursue its claims against the management consulting firm vigorously.

(c) Dividend Policy on Common Stock

     The company has not paid any dividends on its common stock since its inception. The declaration or payment of dividends, if any, on the company’s common stock is within the discretion of the board of directors and will depend upon the company’s earnings, capital requirements, financial condition and other relevant factors. The board of directors does not currently intend to declare or pay any dividends on its common stock in the foreseeable future and intends to retain any earnings to finance the growth of the company.

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

(d) Securities Authorized for Issuance Under Equity Compensation Plans

( e) Performance Graph—Comparison of 5 Year Cumulative Total Return among Torvec, Inc.,

      The Russell MicroCap Index and The RDG Technology Composite Index

COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN*

Among Torvec Inc, The Russell MicroCap Index

And The RDG Technology Composite Index

* 100 Invested on 12/31/01 in stock or index-Including reinvestment of dividends. Fiscal year ending December 31.

Copyright © 2007, Standard & Poor’s, a division of The McGraw-Hill companies, Inc. All rights reserved.
www.researchdatagroup.com/S&P.htm

(f) Class A Preferred Stock

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

     On January 30, 2002, the company engaged Pittsford Capital Group as its nonexclusive agent to raise up to $5,000,000 in capital through the sale of up to 2,000,000 shares of the company’s $.01 par value preferred stock. The Board designated the preferred stock to be issued in the fund raising effort as Class A Preferred Shares. The relative rights, preferences and limitations of the Class A Preferred Shares are as follows:

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

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

C.

Liquidation Rights

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

D.

Redemption

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

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

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

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

F.

Conversion Privilege

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

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

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(x)

In case the Company

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

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

     Additional shares of Class A Preferred have been sold from time to time directly by the company in a number of private placements. During the years ending 2006, 2005, 2004 and 2003, the company sold 273,250, 200,000, 238,075 and 15,687 Class A Preferred for proceeds of approximately $1,093,000, $800,000, $952,300 and $62,748, respectively.

     During 2004, Class A Preferred holders converted 38,500 Class A Preferred into 38,500 common shares and received dividends of 8,031 Class A Preferred upon conversion. In 2005, these shares issued as dividends were converted into 2,550 common shares.

(g) Class B Preferred Stock

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

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

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

A.

Three hundred thousand (300,000) authorized preferred shares of the par value of $.01 each as fixed by the Board of Directors, none of which has been issued, shall be issued in and as a series to be designated Class B Non-Voting Cumulative Convertible Preferred Shares, $.01 par value. Said series is hereinafter called “Class B Preferred Shares”. The term preferred shares as used herein shall include all 100,000,000 of the preferred shares, $.01 par value authorized by the Certificate of Incorporation of the Corporation of which Class B Preferred Shares is the second series.

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B.		(1) So long as any Class B Preferred Shares are outstanding, the holders of the Class B Preferred Shares will be entitled to receive cumulative preferential dividends in the amount of $.50 per Class B Preferred Share and no more for each annual dividend period. The annual dividend period shall commence on the first clay of each September and shall end on the last day of the immediately succeeding August, which August date is referred to as the “Dividend Accrual Date”.
		(2) When and as declared by the Board, dividends payable on the Class B Preferred Shares will be paid in cash out of any funds legally available for the payment of dividends or, in the discretion of the Board, will be paid in Class B Preferred Shares at a rate of 1 Class B Preferred Shares for each $5.00 of dividends. No fractions of Class B Preferred Shares shall be issued. The Corporation shall pay cash in lieu of paying fractions of Class B Preferred Shares on a pro rata basis.
		(3) Dividends shall be cumulative from the date of issuance of Class B Preferred Shares, whether or not declared and whether or not, in any annual dividend period(s), there are net profits or net assets of the Corporation legally available for the payment of dividends.
		(4)Accumulated and unpaid dividends on the Class B Preferred Shares will not bear interest.
		(5) So long as any Class B Preferred Shares are outstanding, the Corporation may not declare or pay any dividend, make any distribution, or fund, set aside or make monies available for a sinking fund for the purchase or redemption of any shares or stock of the Corporation ranking junior to the Class B Preferred Shares with respect to the payment of dividends, including the $.01 par value common stock of the Class B Preferred Shares for all past annual dividend periods have been paid and such dividends for the current annual dividend period have been paid or declared and duly provided for. Subject to the foregoing, and not otherwise, the dividends (payable in cash, stock or otherwise) as may be determined by the Board, may be declared and paid on any Junior Stock from time to time out of any funds legally available therefore, and the Class B Preferred Shares will be entitled to participate in any such dividends, whether payable in cash, stock or otherwise, on a pro rata basis.
C.		The Class B Preferred Shares shall rank junior and be classified as Junior Stock with respect to the Corporation’s Class A Preferred Shares in all respects.
D.		(1) In the event of any liquidation, dissolution or winding up of the Corporation, whether voluntary or involuntary, the holders of Class B Preferred Shares then outstanding are entitled to be paid out of the assets of the Corporation available for distribution to its shareholders, whether such assets are capital, surplus or earnings, before any payment or declaration and setting apart for payment of any amount in respect of any shares of any Junior stock with respect to the payment of dividends or distribution of assets on liquidation, dissolution or winding up of the Corporation, all accumulated and unpaid dividends (including a prorated dividend from the last Dividend Accrual Date) in respect of any liquidation, dissolution or winding up consummated except that, notwithstanding the provisions of Section B(2), all of such accumulated and unpaid dividends will be paid in Class B Preferred Shares at a rate of 1 Class B Preferred Share for each $5.00 of dividends. No fractions of Class B Preferred Shares shall be issued. The Corporation shall pay cash in lieu of paying fractions of Class B Preferred Shares on a pro rata basis.

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

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

27

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

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

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

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

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

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

(6) Notwithstanding the requirement for Board approval and the 1 year limit set forth in Section G(2), in case of any consolidation or merger to which the Corporation is a party other than a merger or consolidation in which the Corporation is the surviving corporation or in case of any sale or conveyance to another corporation of all or substantially all of the assets of the Corporation or in the case of any statutory exchange of securities representing an excess of 50% of the total outstanding securities of the Corporation with another corporation (including any exchange effected in connection with a merger of a third corporation into the Corporation), the holders of Class B Preferred Shares then outstanding will have the right to

28

convert the Class B Preferred Shares into the kind and amount of securities, cash or other property which the holder would have owned or have been entitled to receive immediately after the consolidation, merger, statutory exchange, sale or conveyance, had the Class B Preferred Shares been converted immediately prior to the effective date of the consolidation, merger, statutory exchange, sale or conveyance as the case may be.

(7) Notwithstanding the 1 year holding period set forth in Section G(2), in the event the highest bid price for the Corporation’s $.01 par value common Stock quoted on any exchange, automated quotation system or the OTC Bulletin Board on which such Stock is actively traded is $20 or more on 5 consecutive trading days, the holders of Class B Preferred Shares shall have the right to convert such Class B Preferred Shares upon Board approval for such conversion period.

(8) Torvec Common or Iso-Torque Common delivered upon conversion of Class B Preferred Shares will be, upon delivery, validly issued, fully paid and nonassessable, free of all liens and charges and not subject to any preemptive rights.

(9) In case the Corporation

(a) declares a dividend, or makes a distribution, on shares of its $.01 par value common stock in shares of its $.01 par value common stock; or

(b) subdivides its outstanding shares of its $.01 par value common stock into a greater number of shares of its $.01 par value common stock; or

(c) combines its outstanding shares of its $.01 par value common stock into a smaller number of shares of $.01 par value common stock,

the number of Torvec Common issuable upon the conversion of the Class B Preferred Shares shall be adjusted at the time of the record date for the dividend or distribution or the effective date of the subdivision or a combination so that after such record or effective date, the holder of Class B Preferred Shares will be entitled to receive the same percentage of ownership of the Corporation’s $.01 par value common stock as such holder would have been entitled to receive immediately prior to such record or effective date.”

     For the years ending 2006, 2005 and 2004, the company sold 55,000, 0 and 42,500 Class B Preferred in a number of private placements for proceeds of approximately $274,000, $0 and $212,500, respectively.

(h) Reports to Shareholders

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

(i) Transfer Agent and Registrar

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

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(b) Current Status of Product Development

     Each of the company’s automotive technologies, namely the full terrain vehicle ( including the steer drive, suspension system and high speed tracks), the generation III infinitely variable transmission, the IsoTorque differential and the constant velocity joint, have been researched, designed, developed, built, tested and refined to become production-ready. In this sense, the company is no longer “developing” its technologies. The company has satisfied itself that each of the technologies functions as it was designed to function and no further development is required to “prove” the functionality of the technologies.

     The next phase will require that each of the company’s technologies be modified and adapted to accommodate the design specifications presented by automotive manufacturers, first-tier suppliers, municipalities, local, state and national governmental agencies and other end-users with whom the company has established working relationships and arrangements. That is, each technology must be made “design specific.” For example, the company presently has a working relationship with the National Aeronautics and Space Administration to supply an electrically modified version of its generation III transmission and its IsoTorque differential for NASA’s lunar rover for that agency’s planned return to the moon. Since the moon’s lack of atmosphere does not lend itself to the use of hydraulics, the company had to adapt the transmission to utilize electricity as the variator to change its ratios.

     Similarly, the company has been requested to provide a quotation to a major U.S. municipality for installation of its generation III transmission and IsoTorque differential in that municipality’s fleet of trucks and buses. This process entails reviewing the design, torque, sizing, durability and similar specifications for these vehicles as provided by the municipality and modifying the transmission and IsoTorque differential to meet such requirements.

     As a further illustration, a large manufacturer is interested utilizing the company’s constant velocity joint, transmission and IsoTorque differential technology to enable the manufacturer qualify its vehicle design for a major production contract. This is requiring the company to analyze the vehicle design specifications provided to it by the manufacturer and adapt its technologies to meet the production contract’s requirements.

     The company is presently engaged in making the modifications necessary to accommodate the vehicle specifications required by various end-users with whom the company has working relationships and/or arrangements. The company anticipates that additional end-users will be interested in pursuing similar-type working relationships with respect to the company’s automotive technologies.

     After the company’s technologies have been validated with respect to specific end-user vehicle applications, it is anticipated that one or more end-users will enter into licensing agreements, supply contracts and/or similar arrangements resulting in the profitable commercialization of the company’s technologies. One or more end-users may also seek to acquire all of the company’s automotive technologies by an outright purchase of the company using cash, stock or a combination of stock and cash as the consideration for such purchase.

(c) Company Expenses

     The net loss for the year ended December 31, 2006 was $7,727,000 as compared to the year ended December 31, 2005 net loss of $5,445,000. The increase in the net loss of $2,282,000 is principally related to increases in general and administrative expense and the impairment of its Ice Technology.

     Research and development expenses for the year ended December 31, 2006 amounted to $1,313,000 as compared to $2,719,000 for the year ended December 31, 2005. This decrease of $1,406,000 is principally attributable to decreased costs associated with commercializing our technologies.

     General and administrative expenses for the year ended December 31, 2006 amounted to $5,351,000 as compared to $2,999,000 for the year ended December 31, 2005. This increase amounted to $2,352,000 and is principally due to the expensing of warrants issued to one of the company’s directors, to the engineering staff, to a former management consulting firm totaling $1,992,000, and as well increased costs associated with Sarbanes-Oxley compliance.

     Asset impairment expense for the year ended December 31, 2006 amounted to $1,071,000 as a result of the Company determining its ice technology was impaired.

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(d) Liquidity and Capital Resources

     The company’s business activities during its fiscal year ended December 31, 2006 were funded principally through the sale of 273,250 shares of Class A Preferred for $1,093,000 and sale of 55,000 shares of Class B Preferred for $274,000. The company’s business activities during its fiscal year ended December 31, 2005 were funded principally through the sale of 200,000 shares of Class A Preferred for $800,000.

     During the fiscal year ended December 31, 2006 and 2005, the company issued 983,230 and 836,309 shares to business consultants under its Business Consultants Stock Plan in exchange for ongoing corporate legal services, internal accounting services, business advisory services as well as legal fees and associated expenses for ongoing patent work and litigation. As of December 31, 2006 and 2005 there are 4,966,629 and 1,049,859 shares available for future grants under the plan. The increase in the number of shares available under the plan as of December 31, 2006, is attributable to the approval by the company’s Board of Directors on October 13, 2006, to increase the number of shares authorized for issuance under the plan to 10,000,000.

     James and Keith Gleasman have developed a working arrangement with the company that assures the company with continued access to the Gleasmans’ expertise without unduly burdening the company’s financial statements with the continuing expense of consulting fees. Under this arrangement, James and Keith Gleasman will continue to provide consulting services and assign new patents, existing patent improvements and all know-how in connection with all their inventions to the company. In addition, Keith Gleasman will continue to serve as president and as a director and James Gleasman will continue to serve as chief executive officer, interim chief financial officer and as a director.

     For calendar 2006, each of the Gleasmans from time to time expected to sell, from his own personal holdings of Torvec, an average of approximately 500 common shares at prevailing market prices at the time of sale. The total number of shares sold under this plan, if shares were sold on a daily basis throughout the year, would represent approximately 3% of the current Gleasman family holdings. No shares were sold by the Gleasmans under this plan for the year ended December 31, 2006.

     At December 31, 2006 and 2005, the company’s cash position was $720,000 and $51,000, and the company had a working capital deficiency of $1,157,000 and $1,576,000. The company’s cash position at anytime during the fiscal year ended December 31, 2006 and 2005 was directly dependent upon its success in selling Class A Preferred since the company did not generate any revenues. The company believes that current, ongoing discussions with governmental and private sector companies worldwide could very well create a revenue producing event during fiscal, 2007. However, it can not predict when such a transaction will be consummated and therefore, the company does not know whether it will generate revenues from its business activities during fiscal, 2007.

     At December 31, 2006 and 2005, the company had accounts payable and accrued expenses of $1,686,000 and $1,689,000.

     The company has an obligation to repurchase 51% of Variable Gear, LLC on January 1, 2008. The purchase price is equal to 51% of the then value of Variable Gear as determined by an independent appraiser selected by the parties. This liability can not be estimated at this time. We believe that a combination of cash flows from operations, financing and strategic alliances will produce sufficient cash flow to fund this obligation. The company is also exploring alternatives with Variable Gear, LLC to relieve the company of this obligation.

(e) Critical Accounting Policies

Revenue Recognition

     Revenue in connection with the granting of the license to Variable Gear, LLC is to be recognized when all conditions for earning such fee is complete. Generally, revenue is only recorded when no future performance is required related to the item.

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Impairment of Long-Lived Assets

     The Company has adopted SFAS No. 144, “Accounting for the Impairment of Disposal of Long-Lived Assets.” Accordingly, whenever events or circumstances indicate that the carrying amount of an asset may not be recoverable, management assesses the recoverability of the assets. Management is also required to evaluate the useful lives each reporting period. When events or circumstances indicate, our long-lived assets, including intangible assets with finite useful lives, are tested for impairment by using the estimated future cash flows directly associated with, and that are expected to arise as a direct result of, the use of the assets. If the carrying amount exceeds the estimated undiscounted cash flows, an impairment may be indicated. The carrying amount is then compared to the estimated discounted cash flows, and if there is an excess, such amount is recorded as an impairment. See management’s discussion of its determination that the carrying value of the company’s ice technology was impaired under SFAS No. 144 as of December 31, 2006 on page 9 of this annual report.

     In June 2006, the Financial Accounting Standards Board (“FASB”) has issued interpretation No. 48, “Accounting for Uncertainty in Income Taxes—An Interpretation of FASB Statement No. 109” (“FIN 48”), regarding accounting for, and disclosure of, uncertain tax positions. FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with FASB Statement No. 109, “Accounting for Income Taxes.” FIN 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. FIN 48 is effective for fiscal years beginning after December 15, 2006. The Company is currently evaluating the impact FIN 48 will have on its results of operations and financial position.

     In September 2006, the Securities and Exchange Commission (SEC) issued Staff Accounting Bulletin 108, “Considering the Effects on Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements,” (“SAB 108”). SAB 108 requires registrants to quantify errors using both the income statement method (i.e. iron curtain method) and the rollover method and requires adjustment if either method indicates a material error. If a correction in the current year relating to prior year errors is material to the current year, then the prior year financial information needs to be corrected. A correction to the prior year results that are not material to those years, would not require a “restatement process” where prior financials would be amended. SAB 108 is effective for fiscal years ending after November 15, 2006. We do not anticipate that SAB 108 will have a material effect on our financial position, results of operations or cash flows.

     In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements,” to define fair value, establish a framework for measuring fair value in accordance with generally accepted accounting principles, and expand disclosures about fair value measurements. SFAS No. 157 will be effective for fiscal years beginning after November 15, 2007, the beginning of the Company’s 2008 fiscal year. The Company is assessing the impact the adoption of SFAS No. 157 will have on the Company’s financial position and results of operations.

     In February, 2007 the FASB issued SFAS No. 159 “The Fair Value Option for Financial Assets and Financial Liabilities”. SFAS No. 159 permits entities to choose to measure many financial assets and financial liabilities at fair value. Unrealized gains and losses on items for which the fair value option has been elected are reported in earnings. SFAS no. 159 is effective for fiscal years beginning after November 15, 2007. We are currently assessing the impact of SFAS No. 159 on our financial position and results of operations.

(f) Impact of Inflation

     Inflation has not had a significant impact on the company’s operations to date and management is currently unable to determine the extent inflation may impact the company’s operations during its fiscal year ending December 31, 2006.

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(g) Quarterly Fluctuations

     As of December 31, 2006 and 2005, the company had not engaged in revenue producing operations. Once the company actually commences significant revenue producing operations, the company’s operating results may fluctuate significantly from period to period as a result of a variety of factors, including purchasing patterns of consumers, the length of the company’s sales cycle to key customers and distributors, the timing of the introduction of new products and product enhancements by the company and its competitors, technological factors, variations in sales by product and distribution channel, product returns, and competitive pricing. Consequently, once the company actually commences significant revenue producing operations, the company’s product revenues may vary significantly by quarter and the company’s operating results may experience significant fluctuations.

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TORVEC, INC.
(a development stage company)

CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2006 and 2005

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

Contents

		Page
Financial Statements
Report of Independent Registered Public Accounting Firm		F-2
Consolidated balance sheets as of December 31, 2006 and 2005		F-3
Consolidated statements of operations for each of the years in the three-year period ended		F-4
December 31, 2006 and for the period from September 25, 1996 (inception) through December 31, 2006
Consolidated statements of changes in stockholders’ equity (capital deficit) for the period		F-5
from September 25, 1996 (inception) through December 31, 2006
Consolidated statements of cash flows for each of the years in the three-year period ended		F-11
December 31, 2006 and for the period from September 25, 1996 (inception) through December 31, 2006
Notes to consolidated financial statements		37-63

F-1

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Board of Directors and Stockholders
Torvec, Inc.

We have audited the accompanying consolidated balance sheet of Torvec, Inc. (a development stage company) and its subsidiaries as of December 31, 2006 and 2005, and the related consolidated statements of operations and cash flows for each of the years in the three-year period ended December 31, 2006 and for the period from September 25, 1996 (inception) through December 31, 2006 and changes in stockholders’ equity (capital deficit) for each of the periods from September 25, 1996 (inception) through December 31, 2006. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

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

In our opinion, the financial statements enumerated above present fairly, in all material respects, the consolidated financial position of Torvec, Inc. and subsidiaries as of December 31, 2006 and 2005, and the consolidated results of their operations and their consolidated cash flows for each of the years in the three-year period ended December 31, 2006 and for the period from September 25, 1996 (inception) through December 31, 2006, in conformity with U.S. generally accepted accounting principles.

As discussed in Note B[8] to the consolidated financial statements, effective January 1, 2006, the Company changed its method of accounting for stock-based compensation in accordance with Statement of Financial Accounting Standards No. 123 (R), “Share-Based Payment”.

/s/ EISNER LLP
New York, New York
March 30, 2007

See notes to consolidated financial statements

F-4

See notes to consolidated financial statements

F-5