<PAGE>

                                                                    EXHIBIT 10.2


                              EMPLOYMENT AGREEMENT

         EMPLOYMENT AGREEMENT (the "Agreement") is dated October 6, 2003 to be
effective as of the 16th day of October, 2003 between POWER EFFICIENCY
CORPORATION, a Delaware corporation (the "Corporation"), with principal
executive offices located at 4220 Varsity Drive, Suite E, Ann Arbor, MI 48108;
and THOMAS A. MILLS JR., residing at 3115 34th Street, NW, Washington, DC 20008
(the "Executive").

                              W I T N E S S E T H:

         WHEREAS, the Corporation desires to employ Executive as the
Corporation's Vice President of Governmental Operations to engage in such
activities and to render such services under the terms and conditions hereof and
has authorized and approved the execution of this Agreement; and

         WHEREAS, Executive desires to be employed by the Corporation under the
terms and conditions hereinafter provided;

         NOW, THEREFORE, in consideration of the mutual covenants and
undertakings herein contained, the parties agree as follows:

         1.       Employment, Duties and Acceptance.

                  1.1      Services. The Corporation hereby employs Executive,
for the Term (as hereinafter defined in Section 2 hereof), to render services to
the business and affairs of the Corporation in the office referenced in the
recitals hereof and, in connection therewith, shall perform such duties as
directed by the Chief Executive Officer of the Corporation, and shall perform
such other duties as shall be consistent with the responsibilities of such
office (collectively the "Services"). Specifically, Executive shall be
responsible for running the Corporation's governmental operations division
("Governmental Operations" or the "Division"), which includes (i) incentive
operations, as a value-added service, and (ii) overseeing sales to governmental
authorities and non-profit and public-sector entities at the federal, state and
local levels. Executive shall devote 100% of his business efforts, time, skill
and abilities to promote the interests of the Corporation and its subsidiaries.
Executive shall spend a sufficient number of days each month in Ann Arbor,
Michigan at the Corporation's corporate offices (the "Headquarters Office") to
accomplish his responsibilities under this Agreement. The parties acknowledge
that this will initially be 1 to 2 days every other week. If this amount of time
in the Headquarters Office is not sufficient for Executive to accomplish his
responsibilities, in the reasonable estimation of both parties, Executive agrees
to travel the additional time necessary to fully accomplish his
responsibilities. The Executive's expenses incurred during any trips to the
Headquarters Office will not be reimbursed by the Corporation unless the travel
is combined with another authorized business trip, or unless otherwise
authorized by the Chief Executive Officer.

                  1.2      Acceptance. Executive hereby accepts such employment
and agrees to render the Services.


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                  1.3      Representations of the Executive. The Executive
represents and warrants to the Corporation that his execution and delivery of
this Agreement, his performance of the Services hereunder and the observance of
his other obligations contemplated hereby will not (i) violate any provisions of
or require the consent or approval of any party to any agreement, letter of
intent or other document to which he is a party or (ii) violate or conflict with
any arbitration award, judgment or decree or other restriction of any kind to or
by which he is subject or bound.

                  1.4      Prior Agreements. This Agreement supersedes and
replaces all prior agreements between the parties, including the engagement
agreement between the Corporation and LECG, LLC, for the services of the
Executive, dated October 16, 2002 (the "LECG Agreement"), except as described in
Section 3.2 below.

         2.       Term of Employment.

         The initial term of Executive's employment under this Agreement (the
"Term") shall commence on September 22, 2003 (the "Commencement Date") and shall
terminate on September 21, 2005, unless sooner terminated pursuant to Sections 9
or 5.1 of this Agreement (the "Initial Term") provided, however, that if the
Corporation shall fail to give Executive written notice of nonrenewal not less
than 90 days prior to the scheduled expiration of the Initial Term or any
extension thereof, the Initial Term shall automatically be extended for an
additional one (1) year period. Notwithstanding anything to the contrary
contained herein, the provisions of this Agreement governing Protection of
Confidential Information shall continue in effect as specified in Section 10
hereof.

         3.       Base Salary and Expense Reimbursement.

                  3.1      Base Salary. During the Term, as base compensation
for the Services, the Corporation agrees to pay Executive a minimum base salary
("Base Salary") at the annual rate of $100,000. The Executive shall be eligible
for annual salary increases in such amount(s) as the Corporation's Chief
Executive Officer shall determine. Base Salary is subject to withholding and
other applicable taxes, payable during the term of this Agreement in accordance
with the Corporation's customary payment practices, but not less frequently than
monthly.

                  3.2      Division Profit Participation. During the Term, the
Corporation agrees to pay Executive a percentage ("Profit Participation") of the
Division net profit ("Division Net Profit") of Governmental Operations, with the
operations of Governmental Operations accounted for as a true profit center, in
accordance with generally accepted accounting principles and in accordance with
the Corporation's accounting practices. Executive understands that all of the
Corporation's expenses shall be allocated among the Corporation's various
divisions. Currently, the Corporation is expected to have three divisions:
Governmental Operations, National Sales, and Distributors but the number of
divisions may increase or decrease. Each expense of the Corporation shall be
allocated among the divisions based on the connection between such expense and
each division. General expenses not connected with any division shall generally
be allocated among the divisions based on revenue. The Corporation's Chief
Executive Officer shall make the final determinations related to the allocation
of expenses. Revenues of the Corporation shall be allocated among the divisions
based on the connection between the revenue and each division. There may be
times when it will be appropriate to allocated revenue from a single source
between two or more divisions. The Corporation's Chief Executive Officer shall
make the final determinations related to the allocation of revenues. Executive
shall receive a Profit Participation of 20% (Twenty Percent) of Division Net
Profit for accrued Division Net Profit up to and including $1,000,000 (One
Million Dollars) per annual Corporation fiscal reporting period, and 10% (Ten
Percent) of Division Net Profit above $1,000,000 per annual Corporation fiscal
reporting period. Profit Participation payments will be made to Executive in
arrears, on an annual basis after the financial statements for the year are
completed. However the Executive will be entitled to receive interest at the
prime rate on the profit participation as it accumulates during the year and
executive is entitled to borrow up to 75% of the tentative profit participation,
also at the prime rate, on a monthly basis provided that the loan amounts do not
exceed the accrued profit participation. Any loans taken by the Executive shall
be due on March 31 of the following year. The Corporation agrees to make such
"Success Fee" payments as may be due under the LECG Agreement, in accordance
with the terms of the LECG Agreement. The Executive acknowledges that the
"Success Fee" payments will necessarily reduce the Governmental Operations
Division revenues by the amount of the Success Fee payments.


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                  3.3      Stock Options. In connection with this Agreement, the
Corporation shall on the date hereof grant the Executive incentive stock options
(the "ISO Options") to purchase up to 400,000 shares of the Corporation's common
stock, $.001 par value per share (the "Common Stock"), at a per share purchase
price of $0.87. The options shall be exercisable for a period of ten (10) years
commencing on the date hereof and shall vest as follows:

<TABLE>
<CAPTION>
          Date                 Number of ISO Options            Number of NQSO Options            Total Options
------------------------------------------------------------------------------------------------------------------
<S>                                   <C>                               <C>                         <C>
   September 30, 2003                  80,000                             --                          80,000
   September 30, 2004                  80,000                             --                          80,000
   September 30, 2005                  80,000                             --                          80,000
   September 30, 2006                  80,000                             --                          80,000
   September 30, 2007                  80,000                             --                          80,000
                                                                                                ------------------
                                                                                                     400,000
</TABLE>

The grant of the options is conditioned upon and subject to the Executive
executing the incentive stock option agreement, attached hereto as Exhibit A,
the terms of which are hereby incorporated by reference.

                  3.4      Business Expense Reimbursement. Upon submission to,
and approval by, an officer of the Corporation designated by the Board of
Directors of the Corporation of a statement of expenses, reports, vouchers or
other supporting information, which approval shall be granted or withheld based
on the Corporation's policies in effect at such time, the Corporation shall
promptly reimburse the Executive for all reasonable business expenses actually
incurred or paid by him during the Term or renewals thereof in the performance
of the Services, including, but not limited to, expenses for entertainment,
travel and similar items.


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         4.       Bonuses

                  4.1      Bonus. The Executive shall be eligible to receive
bonuses in such amount(s) as the Corporation's Compensation Committee shall
determine in its absolute discretion. If there is no Compensation Committee,
such determination shall be made by the entire Board of Directors.

                  4.2      Nothing in this Section 4 shall be construed as
conferring on the Executive any right (i) normally associated with the ownership
of capital stock; (ii) to continue in the employ of the Corporation or any
affiliate of the Corporation, or (iii) to interfere in any way with the right of
the Corporation to terminate this Agreement in accordance with the provisions
hereof. Nothing in this Agreement shall be construed to imply that any specific
assets of the Corporation have been set aside to provide for payments under this
Agreement. Any payments under this Agreement shall be made solely from general
assets of the Corporation existing at the time such payments are due.

         5.       Severance.

                  5.1      Termination Without Cause or for Good Reason. In the
event that Executive's employment hereunder shall be terminated by the
Corporation without Cause (as defined in Section 9.4 hereof) or terminated by
the Executive for Good Reason (as defined in Section 9.5 hereof) at any time
prior to the end of the Term, the Executive shall be entitled to receive from
the Corporation, in addition to any Base Salary earned to the date of
termination, a severance payment in an amount equal to $50,000, which shall be
paid in bi-monthly (every two weeks) increments during the six-month period
following such termination (the "Post-Termination Period). Should Executive
secure employment or a consulting engagement during the Post-Termination Period,
then the compensation from this employment or consulting shall be deducted from
the bi-monthly payments the Corporation is obligated to pay Executive. If the
Executive's compensation from this employment or consulting is higher than
$8,333 in any given calendar month during the Post-Termination Period, then the
Corporation shall not be obligated to make payments to Executive for that month,
without prejudice to Executive's right to receive payments for any subsequent
calendar month during the Post-Termination Period in which his other
compensation is less than $8,333.

         6.       Additional Benefits.

                  6.1      In General. In addition to the compensation, bonuses,
expenses and other benefits to be paid under Sections 3, 4 and 5 hereof,
Executive will be entitled to all rights and benefits for which he shall be
eligible under any insurance, health and medical, incentive, bonus,
profit-sharing, pension or other extra compensation or "fringe" benefit plan of
the Corporation or any of its subsidiaries now existing or hereafter adopted for
the benefit of the executives or employees generally of the Corporation. The
provisions of this Agreement which incorporate employee benefit packages shall
change as and when such employee benefit packages change.


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         7.       Vacation.

         The Executive shall be entitled each year during the Term of this
Agreement to a vacation period of 3 (Three) weeks, during which all salary,
compensation, benefits and other rights to which the Executive is entitled to
hereunder shall be provided in full. Such vacation may be taken in the
Executive's discretion, and such time or times as are not inconsistent with the
reasonable business needs of the Corporation. If the Executive does not take the
3 weeks of paid vacation in any year during the term of the Agreement, the
unused vacation days will accrue until they are used, this Agreement is
terminated or Executive retires. In the event of termination, Executive
retirement or other resignation, Executive shall receive a payment for all
accrued but unused vacation days equal to the amount Executive would have been
paid if Executive continued as an employee of Corporation for such number of
accrued but unused vacation days.

         8.       Insurability; Right to Insure. Executive agrees that the
Corporation shall have the right during the Term to insure the life of Executive
by a policy or policies of insurance in such amount or amounts as it may deem
necessary or desirable, and the Corporation shall be the beneficiary of any such
policy or policies and shall pay the premiums or other costs thereof. The
Corporation shall have the right, from time to time, to modify any such policy
or policies of insurance or to take out new insurance on the life of Executive.
Executive agrees, upon request, at any time or times prior to the commencement
of or during the Term to sign and deliver any and all documents and to submit to
any physical or other reasonable examinations which may be required in
connection with any such policy or policies of insurance or modifications
thereof.

         9.       Termination.

                  9.1      Death. If Executive dies during the Term of this
Agreement, Executive's employment hereunder shall terminate upon his death and
all obligations of the Corporation hereunder shall terminate on such date,
except that Executive's estate or his designated beneficiary shall be entitled
to payment of any unpaid accrued Base Salary through the date of his death.

                  9.2      Disability. Subject to the provisions of Section 6.1,
if Executive shall be unable to perform a significant part of his duties and
responsibilities in connection with the conduct of the business and affairs of
the Corporation and such inability lasts for (i) a period of at least sixty (60)
consecutive days, or (ii) periods aggregating at least ninety (90) days during
any three hundred sixty-five (365) consecutive days, by reason of Executive's
physical or mental disability, whether by reason of injury, illness or similar
cause, Executive shall be deemed disabled, and the Corporation any time
thereafter may terminate Executive's employment hereunder by reason of the
disability. Upon delivery to Executive of such notice, all obligations of the
Corporation hereunder shall terminate, except that Executive shall be entitled
to payment of any unpaid accrued Base Salary through the date of termination.
The obligations of Executive under Section 10 hereof shall continue
notwithstanding termination of Executive's employment pursuant to this Section
9.2.

                  9.3      Termination For Cause.

                           9.3.1    Grounds. The Corporation may at any time
during the Term, without any prior notice, terminate this Agreement and
discharge Executive for Cause, whereupon the Corporation's obligation to pay
compensation or other amounts payable hereunder to or for the benefit of
Executive shall terminate on the date of such discharge. Furthermore, the
Executive shall be entitled to all options which have vested as of the
termination date and all options which have not vested shall be cancelled. As
used herein the term "Cause" shall mean: (i) a willful and material breach by
Executive of the terms of this Agreement; (ii) willful violation of specific and
lawful written direction from the Chief Executive Officer of the Corporation;
provided such direction is not inconsistent with the Executive's duties and
responsibilities under the office the Executive is holding at the time of the
directive; or (iii) conviction of the Executive of a felony by a federal or
state court of competent jurisdiction.


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                           9.3.2    Written Warning. The foregoing
notwithstanding, the Corporation agrees that, on the first occasion on which it
believes that the Executive's conduct would otherwise justify his termination
for Cause under subsections (i) or (ii), above, the Corporation shall give
Executive written notice of the offending conduct, together with the
instructions to cease or modify such conduct so as to avoid Termination
("Written Warning"). Executive shall have 24 hours from actual receipt of such
Written Warning to cease or modify the offending conduct in a manner
satisfactory to the Corporation in its sole, good-faith discretion, and to
convey this fact to Corporation in writing. If Executive fails to cease or
modify his conduct to the Corporation's satisfaction during the 24-hour hour
cure period, then the Corporation may terminate Executive for cause. Executive
shall not be entitled to receive nor Corporation to grant a second Written
Warning during the term of this Agreement or any continuation or extension
hereof; rather, any second incident of misconduct under subsections (i) and
(ii), above, shall be grounds for immediate termination for Cause. The
Corporation's obligation to provide Written Warning is without prejudice to its
other rights and remedies against Executive, including the right to seek
immediate injunctive relief under ss. 10.5 hereof.

                           9.3.3    Continuing Obligations. The obligations of
the Executive under Section 10 shall continue notwithstanding termination of the
Executive's employment pursuant to this Section 9.3.

                  9.4      Termination Without Cause. The Corporation shall have
the option to terminate this Agreement without Cause without any prior notice to
the Executive. In the event the Corporation terminates this Agreement without
Cause as defined above, the Corporation shall pay the Executive upon
termination, the amount required pursuant to Section 5.1. In addition, all
options granted to the Executive shall immediately vest and be exercisable by
the Executive. The obligations of the Executive under Section 10 hereof shall
continue notwithstanding termination of the Executive's employment pursuant to
this Section 9.4.

                  9.5      Termination by Executive. The Executive shall have
the right to terminate this Agreement for Good Reason, as hereinafter defined.
"Good Reason" shall mean any of the following: (i) the assignment to the
Executive of duties inconsistent with the Executive's position, duties,
responsibilities, titles or offices as described herein; (ii) any material
reduction by the Corporation of the Executive's duties and responsibilities; or
(iii) any reduction by the Corporation of the Executive's compensation or
benefits payable hereunder (it being understood that a reduction of benefits
applicable to all executives of the Corporation, including the Executive, shall
not be deemed a reduction of the Executive's compensation package for purposes
of this definition). In the event the Executive terminates this Agreement for
Good Reason as defined above, the Corporation shall pay the Executive upon
termination, the amount required pursuant to Section 5.1. In addition, all
options granted to the Executive shall immediately vest and be exercisable by
the Executive. The obligations of the Executive under Section 10 hereof shall
continue notwithstanding termination of the Executive's employment pursuant to
this Section 9.5. In the event the Executive terminates this Agreement without
Good Reason, the Executive shall be entitled to Base Salary accrued from the
most recent pay period through the date of termination but shall otherwise be
treated as if this Agreement had been terminated pursuant to Section 9.3.


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         10.      Protection of Confidential Information.

         In view of the fact that Executive's work for the Corporation will
bring him into close contact with confidential information and plans for future
developments, Executive agrees to the following:

                  10.1     Secrecy. To keep secret and retain in the strictest
confidence all confidential matters of the Corporation, including, without
limitation, trade "know how" and trade secrets, customer lists, pricing
policies, marketing plans, technical processes, formulae, inventions and
research projects, and other business affairs of the Corporation, learned by him
heretofore or hereafter, and not to disclose them to anyone inside or outside of
the Corporation, except in the course of performing the Services hereunder or
with the express written consent of the Chief Executive Officer or Board of
Directors of the Corporation and except to the extent such information is
already known to the general public.

                  10.2     Return Memoranda, etc. To deliver promptly to the
Corporation on termination of his employment, or at any other time as the Chief
Executive Officer or the Board of Directors of the Corporation may so request,
all memoranda, notes, records, reports, manuals, drawings, blueprints and other
documents (and all copies thereof) relating to the Corporation's business and
all property associated therewith, which he may then possess or have under his
control.

                  10.3     Covenants.

                           10.3.1   Non-Competition. Executive agrees that at
all times while he is employed by the Corporation and, regardless of the reason
for termination of his employment or this Agreement, for a period of six (6)
months thereafter, he will not, as a principal, agent, employee, employer,
consultant, stockholder, investor, director or co-partner of any person, firm,
corporation or business entity other than the Corporation, or in any individual
or representative capacity whatsoever, directly or indirectly, without the
express prior written consent of the Corporation:

                           (i)      engage or participate in any business whose
                           products or services are competitive with that of the
                           Corporation, which business is the manufacture and
                           sale of energy saving equipment, and which conducts
                           or solicits business, or transacts with suppliers or
                           customers located within the United States;

                           (ii)     aid or counsel any other person, firm,
                           corporation or business entity to do any of the
                           above;


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                           (iii)    become employed by a firm, corporation,
                           partnership or joint venture which competes with the
                           business of the Corporation within the United States;
                           or

                           (iv)     approach, solicit business from, or
                           otherwise do business or deal with any customer of
                           the Corporation in connection with any product or
                           service competitive to any provided by the
                           Corporation.

                           10.3.2   Anti-Raiding. Executive agrees that during
the term of his employment hereunder, and, thereafter for a period of one (1)
year, he will not, as a principal, agent, employee, employer, consultant,
director or partner of any person, firm, corporation or business entity other
than the Corporation, or in any individual or representative capacity
whatsoever, directly or indirectly, without the prior express written consent of
the Corporation approach, counsel or attempt to induce any person who is then in
the employ of the Corporation to leave the employ of the Corporation or employ
or attempt to employ any such person or persons who at any time during the
preceding six months was in the employ of the Corporation.

                           10.3.3   Executive's Acknowledgements. Executive
acknowledges (i) that his position with the Corporation requires the performance
of services which are special, unique, and extraordinary in character and places
him in a position of confidence and trust with the customers and employees of
the Corporation, through which, among other things, he shall obtain knowledge of
the Corporation's "technical information" and "know-how" and become acquainted
with its customers, in which matters the Corporation has substantial proprietary
interests; (ii) that the restrictive covenants set forth above are necessary in
order to protect and maintain such proprietary interests and the other
legitimate business interests of the Corporation; and (iii) that the Corporation
would not have entered into this Agreement unless such covenants were included
herein.

                  Executive also acknowledges that the business of the
Corporation presently will extend throughout the United States, and that he will
personally supervise and engage in such business on behalf of Corporation and,
accordingly, it is reasonable that the restrictive covenants set forth above are
not more limited as to geographic area than is set forth therein. Executive also
represents to the Corporation that the enforcement of such covenants will not
prevent Executive from earning a livelihood or impose an undue hardship on the
Executive.

                  10.4     Severability. If any of the provisions of this
Section 10, or any part thereof, is hereinafter construed to be invalid or
unenforceable, the same shall not affect the remainder of such provision or
provisions, which shall be given full effect, without regard to the invalid
portions. If any of the provisions of this Section 10, or any part thereof, is
held to be unenforceable because of the duration of such provision, the area
covered thereby or the type of conduct restricted therein, the parties agree
that the court making such determination shall have the power to modify the
duration, geographic area and/or other terms of such provision and, as so
modified, said provision(s) shall then be enforceable. In the event that the
courts of any one or more jurisdictions shall hold such provisions wholly or
partially unenforceable by reason of the scope thereof or otherwise, it is the
intention of the parties hereto that such determination not bar or in any way
affect the Corporation's right to the relief provided for herein in the courts
of any other jurisdictions as to breaches or threatened breaches of such
provisions in such other jurisdictions, the above provisions as they relate to
each jurisdiction being, for this purpose, severable into diverse and
independent covenants.


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                  10.5     Injunctive Relief. Executive acknowledges and agrees
that, because of the unique and extraordinary nature of his services, any breach
or threatened breach of the provisions of Sections 10.1, 10.2 or 10.3 hereof
will cause irreparable injury and incalculable harm to the Corporation, and the
Corporation shall, accordingly, be entitled to injunctive and other equitable
relief for such breach or threatened breach and that resort by the Corporation
to such injunctive or other equitable relief shall not be deemed to waive or to
limit in any respect any right or remedy which the Corporation may have with
respect to such breach or threatened breach. The Corporation and Executive agree
that any such action for injunctive or equitable relief shall be heard in a
state or federal court situated in Delaware and each of the parties hereto,
hereby agrees to accept service of process by registered mail and to otherwise
consent to the jurisdiction of such courts.

                  10.6     Expenses of Enforcement of Covenants. In the event
that any action, suit or proceeding at law or in equity is brought to enforce
the covenants contained in Sections 10.1, 10.2, or 10.3 hereof or to obtain
money damages for the breach thereof, the party prevailing in any such action,
suit or other proceeding shall be entitled upon demand, to reimbursement from
the other party for all expenses (including, without limitation, reasonable
attorneys' fees and disbursements) incurred in connection therewith.

                  10.7     Separate Agreement. The provisions of this Section 10
shall be construed as an agreement on the part of the Executive independent of
any other part of this Agreement or any other agreement, and the existence of
any claim or cause of action of the Executive against the Corporation, whether
predicated on this Agreement or otherwise, shall not constitute a defense to the
enforcement by the Corporation of the provisions of this Section 10.

         11.      Indemnification.

         The Corporation shall provide the Executive (including his heirs,
executors and administrators) with coverage under a standard directors and
officers liability insurance policy at the Corporation's expense to the same
extent as provided for any other director, officer or trustee of the
Corporation. In addition, the Corporation shall indemnify the Executive (and his
heirs, executors and administrators) to the fullest extent permitted under the
law of its state of incorporation against all expenses and liabilities
reasonably incurred by him in connection with or arising out of any action, suit
or proceeding in which the Executive may be involved by reason of his having
been a director or officer of the Corporation or any subsidiary thereof. Such
expenses and liabilities shall include, but not be limited to, judgments, court
costs and attorneys' fees and the cost of reasonable settlements, such
settlements to be approved by the Board if such action is brought against the
Executive in his capacity as a director or officer of the Corporation or any
subsidiary thereof. The Corporation shall, upon the request of the Executive,
advance to the Executive such amounts as necessary to cover expenses, including
without limitation legal fees and expenses, incurred by the Executive in
connection with any suit or proceeding in which the Executive may be involved by
reason of his being or having been a director or officer of the Corporation or
of any subsidiary thereof. Such indemnity and advance of expenses, however,
shall not extend to matters as to which the Executive is finally adjudged to be
liable for willful misconduct in the performance of his duties.


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         12.      Arbitration.

         Except with respect to any proceeding brought under Section 10 hereof,
any controversy, claim, or dispute between the parties, directly or indirectly,
concerning this Employment Agreement or the breach hereof, or the subject matter
hereof, including questions concerning the scope and applicability of this
arbitration clause, shall be finally settled by arbitration in Ann Arbor,
Michigan pursuant to the Commercial Arbitration Rules or similar rules then
applying of the American Arbitration Association. The arbitrator shall be
selected by the mutual agreement of the parties. If the parties can not agree on
a neutral arbitrator they will each select one representative who will select
the arbitrator who will preside over the arbitration.. If the parties'
representatives are unable to agree on a neutral arbitrator within three days of
their designation, then a single, neutral arbitrator shall be selected by and
through the procedures established by the American Arbitration Association. The
parties agree to expedite the arbitration proceeding in every way, so that the
arbitration proceeding shall be commenced within thirty (30) days after request
therefore is made, and shall continue thereafter, without interruption, and that
the decision of the arbitrators shall be handed down within thirty (30) days
after the hearings in the arbitration proceedings are closed. The cost of the
arbitration proceedings, including reasonable attorney's fees, shall be awarded
to the prevailing party . Should either the Corporation or the Executive fail to
comply with these requirements as required by this Section 12 within thirty (30)
days after receiving written notice from the other party to do so, the other
party shall have the right to name the arbitrator who will act for all of the
parties and his decision in writing shall be binding and conclusive on all of
the parties to this Agreement. The decision or award of the arbitrator shall be
final and conclusive on the parties to this Agreement; judgment upon such
decision or award may be entered in any competent Federal or state court located
in the United States of America; and the application may be made to such court
for confirmation of such decision or award for any order of enforcement and for
any other legal remedies that may be necessary to effectuate such decision or
award.

         13.      Notices.

         All notices, requests, consents and other communications required or
permitted to be given hereunder, shall be in writing and shall be deemed to have
been duly given if delivered personally or sent by prepaid telegram, telecopy or
mailed first-class, postage prepaid, by registered or certified mail to the
parties at their respective addresses hereinabove set forth, or to such other
address as either party shall designate by notice in writing to the other in
accordance herewith. Notices delivered by telecopy shall be deemed made on the
date transmitted upon proof of satisfactory transmission; notices delivered by
hand, by overnight delivery, or by registered or certified mail shall be deemed
made on the day of actual receipt upon proof of such receipt; notices made by
first-class mail shall be deemed made three days after the date of mailing.

         14.      General.

                  14.1     Governing Law. This Agreement shall be governed by
and construed and enforced in accordance with the local laws of the State of
Delaware.


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                  14.2     Captions. The section headings contained herein are
for reference purposes only and shall not in any way affect the meaning or
interpretation of this Agreement.

                  14.3     Entire Agreement. This Agreement sets forth the
entire agreement and understanding of the parties relating to the subject matter
hereof, and supersedes in their entirety all prior agreements, arrangements and
understandings, written or oral, relating to the subject matter hereof
including. No representation, promise or inducement has been made by either
party that is not embodied in this Agreement, and neither party shall be bound
by or liable for any alleged representation, promise or inducement not so set
forth.

                  14.4     Severability. If any of the provisions of this
Agreement shall be unlawful, void, or for any reason, unenforceable, such
provision shall be deemed severable from, and shall in no way affect the
validity or enforceability of, the remaining portions of this Agreement.

                  14.5     Waiver. Neither the failure to assert nor any delay
in asserting any right hereunder shall be deemed a waiver of such right absent a
written waiver signed by the party against whom such waiver is asserted. The
waiver by any party hereto of a breach of any provision of this Agreement by any
other party shall not operate or be construed as a waiver of any subsequent
breach of the same provision or any other provision hereof.

                  14.6     Counterparts. This Agreement may be executed in one
or more counterparts, each of which shall be deemed an original, but all of
which taken together shall constitute one and the same Agreement.

                  14.7     Assignability. This Agreement, and Executive's rights
and obligations hereunder, may not be assigned by Executive. The Corporation may
assign its rights, together with its obligations, hereunder in connection with
any sale, transfer or other disposition of all or substantially all of its
business or assets; in any event the rights and obligations of the Corporation
hereunder shall be binding on its successors or assigns, whether by merger,
consolidation or acquisition of all or substantially all of its business or
assets. This Agreement shall inure to the benefit of, and be binding upon, the
Executive and his executors, administrators, heirs and legal representatives.

                  14.8     Amendment. This Agreement may be amended, modified,
superseded, cancelled, renewed or extended and the terms or covenants hereof may
be waived, only by a written instrument executed by both of the parties hereto,
or in the case of a waiver, by the party waiving compliance. No superseding
instrument, amendment, modification, cancellation, renewal or extension hereof
shall require the consent or approval of any person other than the parties
hereto.

                     [Signature page to immediately follow]


                                      -11-
<PAGE>

         IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first above written.


POWER EFFICIENCY CORPORATION

By:
   -----------------------------------------
     Richard Koch, Chief Executive Officer



--------------------------------------------
Thomas A. Mills Jr., individually


                                      -12-