NOTE B — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The financial statements include the accounts of the company, our wholly-owned subsidiaries Iso-Torque Corporation and Variable Gear LLC, and our majority-owned joint venture, Torvec China, LLC, (60% ownership interest at June 30, 2011). All material intercompany transactions and account balances have been eliminated in consolidation.
 Cash and Cash Equivalents
Cash and cash equivalents may include time deposits, certificates of deposit, and highly liquid debt instruments with original maturities of three months or less. We maintain cash and cash equivalents at financial institutions which periodically may exceed federally insured amounts.
 Accounts Receivable
We carry our accounts receivable at invoice amount less an allowance for doubtful accounts. On a periodic basis, we evaluate our accounts receivable and establish an allowance for doubtful accounts, based on a history of past write-offs and collections and current credit conditions. We do not accrue interest on past due invoices. There was no allowance for doubtful accounts as of June 30, 2011 and December 31, 2010, as determined by management.
 Property and Equipment
Equipment is stated at cost less accumulated depreciation. Depreciation is provided using the straight-line method over the estimated useful lives of the assets which range from three to seven years. Leasehold improvements are being amortized over the shorter of lease term or useful life.
Depreciation expense for property and equipment was approximately $12,000 and $31,000 for the three and six month periods ended June 30, 2011, respectively, and approximately $13,000 and $28,000 for the three and six month periods ended June 30, 2010, respectively.
 Research and Development and Patents
Research and development costs and patent expenses are charged to operations as incurred. Research and development includes personnel costs, purchase of parts and materials, depreciation and consulting services. Depreciation expense charged to research and development was approximately $4,000 and $10,000 in the three and six month periods ended June 30, 2011, respectively, and approximately $4,000 and $8,000 in the three and six month periods ended June 30, 2010, respectively.
Patent costs were approximately $60,000 and $79,000 in the three and six month periods ended June 30, 2011, respectively, and approximately $0 and $11,000 in the three and six month periods ended June 30, 2010, respectively.
 Income Taxes
We account for income taxes using the asset and liability method described in FASB (Financial Accounting Standards Board) ASC (Accounting Standards Classification) 740-10 which requires recording of deferred tax assets and liabilities for the temporary differences between the financial reporting and the tax bases of our assets and liabilities at enacted tax rates expected to be in effect when such amounts are realized or settled. A valuation allowance related to deferred tax assets is recorded when it is more likely than not that some portion or all of the deferred tax assets will not be realized. We adopted FASB ASC 740-10 relating to "accounting for uncertainty in income taxes" on January 1, 2008. As a result of the implementation of FASB ASC 740-10, we recognized no adjustment for uncertain tax positions. As of June 30, 2011, we have not recognized an increase or decrease to reserves for uncertain tax positions nor have we accrued interest and penalties related to uncertain tax positions. The tax years 2007 through 2010 remain open to examination by the federal and state tax jurisdictions to which we are subject.
 Use of Estimates
The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Such estimates are used in valuing the useful lives of any intangible assets and the future realizable value of such assets. These estimates are subject to a high degree of judgment and potential change. Actual results could differ from those estimates.
 Earnings / Loss per Common Share
FASB ASC 260-10 (previously known as FASB Statement 128, "Earnings Per Share") requires the presentation of basic earnings per share, which is based on common stock outstanding, and dilutive earnings per share, which gives effect to options, warrants and convertible securities in periods when they are dilutive. For each of the three and six month periods ended June 30, 2011, we excluded 10,059,199 potential common shares relating to convertible preferred stock outstanding, options and warrants from our diluted net loss per common share calculation because they are anti-dilutive. For the three and six months ended June 30, 2010, we excluded 2,572,949 and 2,505,699 potential common shares, respectively, relating to convertible preferred stock outstanding, options and warrants from our diluted net loss and net earnings per common share calculations because they are anti-dilutive. We also excluded 625,000 warrants at June 30, 2011 and 2010 as the performance-based conditions for their vesting were not yet satisfied.
 Fair Value of Financial Instruments
The carrying amount of cash, accounts payable, and accrued expenses approximates their fair value due to the short maturity of those instruments. The carrying amount of notes payable approximates fair value since the outstanding balance resulted from funds borrowed in the fourth quarter of 2010 based on interest rates in effect at that time.
 Stock-Based Compensation
FASB ASC 718-10 requires all share-based payments to employees, including grants of employee stock options, to be recognized as compensation expense over the requisite service period (generally the vesting period) in the consolidated financial statements based on their fair values on the grant date. The impact of forfeitures that may occur prior to vesting is also estimated and considered in the amount recognized. In addition, the realization of tax benefits in excess of amounts recognized for financial reporting purposes will be recognized as a financing activity in accordance with FASB ASC 718-10.
No tax benefits were attributed to the stock-based compensation expense because a valuation allowance was maintained for substantially all net deferred tax assets. We elected to adopt the alternative method of calculating the historical pool of windfall tax benefits as permitted by FASB ASC 718-10-65 (previously known as FASB Staff Position (FSP) No. SFAS 123(R)-c, "Transition Election Related to Accounting for the Tax Effects of Share-Based Payment Awards"). This is a simplified method to determine the pool of windfall tax benefits that is used in determining the tax effects of stock compensation in the results of operations and cash flow reporting for awards that were outstanding as of the adoption of FASB ASC 718-10.
We account for the settlement of our commission arrangements to non-employee consultants, directors, executives and certain administrative personnel with the issuance of business consulting shares under FASB ASC 505 (previously known as FASB Statement 123(R) "Share Based Payment"), provided that there are sufficient shares available under the business consulting plan. Under FASB ASC 505, we measure commission arrangements at the fair value of the equity instruments issued. In the event that there are insufficient shares available to settle the obligation, we will follow the provisions of FASB ASC 815-40 (previously known as EITF 00-19 "Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company's Own Stock"). Under FASB ASC 815-40, we will record a liability instrument for the resulting changes in fair value from the date incurred to the end of each reporting period until such liability is satisfied.
 Revenue Recognition
Our terms provide that customers are obligated to pay for products sold to them within a specified number of days from the date that title to the products is transferred to the customers. Our standard terms are typically net 30 days. We recognize revenue when transfer of title occurs, risk of ownership passes to a customer at the time of shipment or delivery depending on the terms of the agreement with a particular customer and collection is reasonably assured. The sale price of our products is substantially fixed and determinable at the date of the sale based upon purchase orders generated by a customer and accepted by us.
We occasionally enter into prototype development contracts with customers. In such cases, revenue is recognized using either (a) the proportional effort method based on the relationship of costs incurred to date to the total estimated cost to complete a contract, or (b) where appropriate, the milestone method, if milestones are clearly identifiable and substantive. In January 2011, we adopted FASB Accounting Standards Update ("ASU") No. 2010-17, "Revenue Recognition — Milestone Method (Topic 605): Milestone Method of Revenue Recognition — a consensus of the FASB EITF". The adoption of this pronouncement did not have a significant impact on our financial statements.
During the first quarter of 2011, we entered into a prototype development agreement to design, build and integrate our IsoTorque differential into the product of a customer for total consideration of $120,000. Milestones include completion of design, manufacturing of a prototype, and installation / integration of the prototype. The payment required for each milestone was considered to be substantive based on the fact that performance required by us in order to achieve the milestone enhanced the value of the item delivered and is reasonable in relation to all of the deliverables. Through June 30, 2011, the first milestone, consisting of the completion and delivery of the design for the prototype, was completed and delivered and resulted in the recognition of revenue in the amount of $30,000, as well as the related costs incurred to complete this milestone. Further revenue will be recognized, as well as related costs, upon reaching certain other milestones defined in the contract. Costs related to milestones not yet reached are deferred and included in other current assets.
 Recent Accounting Pronouncements
In October 2009, the FASB issued ASU No. 2009-13, "Revenue Recognition (Topic 605): Multiple-Deliverable Revenue Arrangements — a consensus of the FASB EITF". FASB ASU No. 2009-13 eliminates the residual method of accounting for revenue on undelivered products and instead, requires companies to allocate revenue to each of the deliverable products based on their relative selling price. In addition, this ASU expands the disclosure requirements surrounding multiple-deliverable arrangements. FASB ASU No. 2009-13 was effective for revenue arrangements entered into for fiscal years beginning on or after June 15, 2010. The adoption of this pronouncement did not have a significant impact on our financial statements.
Certain reclassifications have been made to prior year balances to conform to the current year's presentation.