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                                                                    EXHIBIT 10.4


                              SETTLEMENT AGREEMENT


         This Agreement (hereinafter the "Agreement") is entered into this 30th
day of September, 2003, by and between Nicholas Anderson ("Anderson") and Power
Efficiency Corporation ("PEC").

         WHEREAS, PEC's former President, Stephen Shulman, filed a claim against
PEC claiming that a transaction PEC entered into with Summit Energy Ventures,
LLC triggered a change of control provision in Mr. Shulman's employment
agreement;

         WHEREAS, Anderson has a change of control provision in his employment
agreement similar to the provision in Mr. Shulman's employment agreement;

         WHEREAS, Anderson and PEC have reached an agreement regarding the
waiver by Anderson of any claim Anderson has to payment pursuant to the change
of control provision in his employment agreement; and

         WHEREAS, Anderson and PEC, voluntarily and with full knowledge of their
respective rights and the provisions herein, now agree to the terms and
conditions set forth herein;

         NOW, THEREFORE, in consideration of the foregoing and of the promises
and covenants contained herein, it is hereby covenanted and agreed as follows:

         1.       Anderson does hereby fully release, acquit, discharge and hold
                  harmless PEC of and from any and all actions, causes of
                  action, suits, covenants, contracts, agreements or other
                  liability or relief related to Article 5 (Severance and Change
                  in Control) of Anderson's employment agreement with PEC dated
                  April 1, 2001 that resulted from the transaction evidenced by
                  the Series A Convertible Stock Purchase Agreement by and
                  between PEC and Summit Energy Ventures, LLC dated June 14,
                  2002.

         2.       Anderson's employment agreement dated April 1, 2001 is hereby
                  amended to remove PEC's ability under section 3.1 to defer the
                  salary increases provided for in such section.

         3.       PEC shall provide to Anderson life insurance as provided for
                  in Section 6.3 of Anderson's employment agreement with PEC
                  dated April 1, 2001.

         4.       Upon execution of this Agreement, PEC will issue to Anderson
                  225,000 shares of unregistered Common Stock of PEC, to be
                  delivered within seven (7) days of the execution of this
                  Agreement.


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         5.       Acknowledgments; Economic Risk; No Liquidity. Anderson
                  understands and agrees that the purchase of the Shares is not
                  a liquid investment. In particular and in addition to the
                  representations in Section 3 hereof, Anderson recognizes,
                  acknowledges and agrees that:

                  a.       Anderson must bear the economic risk of investment in
                           the Shares for an indefinite period of time since the
                           Shares have not been registered under the Securities
                           Act of 1933, as amended (the "Securities Act") or
                           applicable state securities laws ("State Acts"), and,
                           therefore, cannot be transferred or sold unless
                           either they are subsequently registered under the
                           Securities Act and applicable State Acts, or an
                           exemption from registration is available and a
                           favorable opinion of counsel to that effect is
                           obtained.

                  b.       Although there is a limited public market for the
                           Company's Common Stock, which is thinly traded on the
                           National Association of Securities Dealers' Over the
                           Counter Bulletin Board ("OTCBB") under the symbol
                           "PREF", the Shares are being issued in a private
                           transaction exempt from the registration requirements
                           of the Securities Act and therefore cannot be freely
                           resold. The Shares are restricted securities. The
                           Shares may be resold in accordance with the
                           provisions of Securities Act Rule 144.

         6.       Representations. Anderson represents to, and agrees with the
                  Company that:

                  a.       Anderson has carefully reviewed and understands the
                           risks of and other considerations relating to a
                           purchase of the Shares.

                  b.       Anderson is acquiring the Shares for which he hereby
                           subscribes as principal for his own investment
                           account, and not (1) with a view to the resale or
                           distribution of all or any part thereof, or (2) on
                           behalf of another person. No person other than the
                           undersigned will have a direct or indirect interest
                           in the Shares subscribed for hereby.

                  c.       Anderson consents to the placement of a legend on any
                           certificate(s) evidencing the Shares stating that
                           such securities have not been registered under the
                           Securities Act and setting forth or referring to the
                           restrictions on transferability and sale thereof. The
                           Anderson is aware that the Company will make a
                           notation in its appropriate records with respect to
                           the restrictions on the transferability of such
                           securities.

         7.       The parties agree that the validity, interpretation and effect
                  of this Agreement be governed by the laws of the State of
                  Delaware, and that if any provision of this Agreement is held
                  to be invalid, such provision shall be deleted and the
                  remainder of this Agreement shall remain in full force and
                  effect.


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         8.       The parties agree that this Agreement represents the entire
                  agreement of the parties and that no modification or amendment
                  of this Agreement shall be binding or effective, unless such
                  modification or amendment is in writing and executed by each
                  party hereto.

         9.       This Agreement may be executed in several counterparts, each
                  of which when so executed shall be deemed to be an original
                  and such counterparts together shall constitute one and the
                  same Agreement. Any counterpart of this Agreement shall be
                  validly and effectively delivered, if delivered by facsimile
                  transmission.

                    [Signature page to immediately follow.]


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         IN WITNESS WHEREOF, the parties hereto have executed this Settlement
Agreement dated September 30.




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POWER EFFICIENCY CORPORATION,                Nicholas Anderson, individually
a Delaware Corporation

                                             -----------------------------------
By:
   -----------------------------------
Name:  Richard Koch
Title: President & CEO

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