Line of Credit Agreement

Bank One, Michigan (the "Bank"), whose address is 611 Woodward Avenue,  Detroit,
Michigan   48226-3947,   has  approved  the  credit   facilities   listed  below
(collectively,  the "Credit Facilities," and, individually, as designated below)
to Power Efficiency Corporation (the "Borrower"),  whose address is 4220 Varsity
Drive,  Suite E, Ann Arbor,  MI 48108  subject to the terms and  conditions  set
forth in this agreement.

1.0      Credit Facilities.

         1.1 Facility A. The Bank has approved a credit facility to the Borrower
         in the principal sum not to exceed  $750,000.00 in the aggregate at any
         one time  outstanding  ("Facility A"). Credit under Facility A shall be
         in the form of  disbursements  evidenced  by credits to the  Borrower's
         account and shall be  repayable  as set forth in a  Revolving  Business
         Credit Note executed  concurrently  (referred to in this agreement both
         singularly and together with any other  promissory  notes referenced in
         this  Section 1 as the  "Notes").  The  proceeds of Facility A shall be
         used for the  following  purpose:  Working  Capital.  Facility  A shall
         expire April 30, 2001 unless earlier withdrawn. $200,000.00 of Facility
         A is enrolled in Michigan Strategic Fund Capital Access Program.

2.0      Conditions Precedent.

         2.1      Conditions  Precedent to Initial  Extension of Credit.  Before
                  the first extension of credit under this agreement, whether by
                  disbursement  of a loan,  issuance of a letter of credit,  the
                  funding of a Lease or otherwise, the Borrower shall deliver to
                  the Bank, in form and substance satisfactory to the Bank:

                  A.       Loan  Documents.  The Notes,  and if applicable,  the
                           Leases,  the  letter  of  credit  applications,   the
                           security agreement,  financing statements,  mortgage,
                           guaranties,  subordination  agreements  and any other
                           loan documents which the Bank may reasonably  require
                           to give effect to the transactions  described by this
                           agreement;

                  B.       Evidence  of  Due  Organization  and  Good  Standing.
                           Evidence   satisfactory   to  the  Bank  of  the  due
                           organization  and good  standing of the  Borrower and
                           every other  business  entity that is a party to this
                           agreement or any other loan document required by this
                           agreement;

                  C.       Evidence of Authority  to Enter into Loan  Documents.
                           Evidence satisfactory to the Bank that (i) each party
                           to  this   agreement  and  any  other  loan  document
                           required by this  agreement  is  authorized  to enter
                           into the transactions described by this agreement and
                           the other loan documents, and (ii) the person signing
                           on behalf of each party is authorized to do so; and

         2.2      Conditions  Precedent to Each Extension of Credit.  Before any
                  extension   of  credit  under  this   agreement,   whether  by
                  disbursement  of a loan,  issuance of a letter of credit,  the
                  funding  of a Lease or  otherwise,  the  following  conditions
                  shall have been satisfied:

                  A.       Representations.  The  Representations  contained  in
                           this agreement shall be true on and as of the date of
                           the extension of credit;
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                  B.       No Event of Default.  No event of default  shall have
                           occurred and be  continuing  or would result from the
                           extension of credit;

                  C.       Additional Approvals,  Opinions,  and Documents.  The
                           Bank  shall  have  received  such  other   approvals,
                           opinions and documents as it may reasonably request.

3.0      Borrowing Base/Annual Pay Down.

         3.1      Borrowing  Base.  Notwithstanding  any other provision of this
                  agreement,  the aggregate  principal amount outstanding at any
                  one time  under  Facility A shall not exceed the lesser of the
                  Borrowing Base or $750,000.00. Borrowing Base means:

                  A.       80% of the Borrower's  trade  accounts  receivable in
                           which  the  Bank  has  a  perfected,  first  priority
                           security  interest,  excluding  accounts more than 90
                           days  past due from  the  date of  invoice,  accounts
                           subject  to offset or  defense,  government,  bonded,
                           affiliate and foreign  accounts,  accounts from trade
                           debtors  of which  more  than  -0-% of the  aggregate
                           amount owing from the trade debtor to the Borrower is
                           more than 90 days past due,  and  accounts  otherwise
                           unacceptable to the Bank, plus

                  B.       Inventory  of the  Borrower  in which  the Bank has a
                           perfected first priority security interest, valued at
                           the  lower  of  cost  or  market  but  not  exceeding
                           $500,000.00,  reducing to  $450,000  at February  28,
                           2001,  $400,000 at March 31, 2001,  and $350,00.00 at
                           April 30, 2000 in the aggregate, as follows:
                                    (1)  50% of raw material inventory; and
                                    (2)  50% of finished goods inventory, plus

4.0      Fees and Expenses.

         4.1      Fees. Upon execution of this agreement, or as set forth below,
                  the Borrower  shall pay the Bank the  following  fees,  all of
                  which the Borrower  acknowledges have been earned by the Bank:
                  $5,000.00 plus 10,000 shares of Power Efficiency  common stock
                  to be delivered upon Bank's request.  Capital Access fee of 3%
                  of $200,000 ($6,000.00).

         4.2      Out-of-Pocket  Expenses. The Borrower shall reimburse the Bank
                  for its out-of-pocket expenses, and reasonable attorney's fees
                  (including  the fees of  in-house  counsel)  allocated  to the
                  Credit Facilities.

5.0      Security.

         5.1      Payment of the borrowings and all other  obligations under the
                  Credit  Facilities  shall  be  secured  by  a  first  security
                  interest  and/or  real  estate  mortgage,  as the case may be,
                  covering  the  following   property  and  all  its  additions,
                  substitutions,  increments, proceeds and products, whether now
                  owned or later acquired ("Collateral"):


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                  A.       Accounts Receivable.  All of the Borrower's accounts,
                           chattel paper, general intangibles,  instruments, and
                           documents (as those terms are defined in the Michigan
                           Uniform Commercial Code),  rights to refunds of taxes
                           paid at any time to any governmental  entity, and any
                           letters  of credit  and  drafts  under  them given in
                           support  of  the  foregoing,  wherever  located.  The
                           Borrower shall deliver to the Bank executed  security
                           agreements  and  financing 9  statements  in form and
                           substance satisfactory to the Bank.

                  B.       Inventory. All of the Borrower's inventory,  wherever
                           located.  The  Borrower  shall  deliver  to the  Bank
                           executed security agreements and financing statements
                           in form and substance satisfactory to the Bank.

                  C.       Equipment. All of the Borrower's equipment,  wherever
                           located.  The  Borrower  shall  deliver  to the  Bank
                           executed security agreements and financing statements
                           in form and substance satisfactory to the Bank.

         5.2      No  forbearance  or extension  of time granted any  subsequent
                  owner  of the  Collateral  shall  release  the  Borrower  from
                  liability.

         5.3      Additional Collateral/Setoff. To further secure payment of the
                  borrowings  and  all  other   obligations   under  the  Credit
                  Facilities and all of the Borrower's other  liabilities to the
                  Bank,  the Borrower  grants to the Bank a continuing  security
                  interest  in: (i) all  securities  and other  property  of the
                  Borrower  in the  custody,  possession  or control of the Bank
                  (other  than  property  held by the Bank solely in a fiduciary
                  capacity)  and (ii) all  balances  of deposit  accounts of the
                  Borrower  with the Bank.  The Bank shall have the right at any
                  time to apply its own debt or liability to the Borrower, or to
                  any other party  liable for payment of the  obligations  under
                  the Credit  Facilities,  in whole or  partial  payment of such
                  obligations  or other present or future  liabilities,  without
                  any requirement of mutual maturity.

         5.4      Cross Lien. Any of the Borrower's  other property in which the
                  Bank has a security  interest  to secure  payment of any other
                  debt,  whether  absolute,   contingent,  direct  or  indirect,
                  including  the  Borrower's  guaranties of the debts of others,
                  shall also secure payment of and be part of the Collateral for
                  the Credit Facilities.

6.0      Subordination.   The  Credit  Facilities  shall  be  supported  by  the
         subordination  of all debt owing  from the  Borrower  to Scott  Caputo,
         including  without  limitation  debt  currently  owing in the amount of
         $100,000.00, in manner and by agreement satisfactory to the Bank.

7.0      Affirmative  Covenants.  So long  as any  debt  or  obligation  remains
         outstanding under the Credit Facilities,  the Borrower, and each of its
         subsidiaries, if any, shall:

         7.1      Insurance.  Maintain  insurance  with  financially  sound  and
                  reputable   insurers  covering  its  properties  and  business
                  against those  casualties and  contingencies  and in the types
                  and amounts as shall be in accordance  with sound business and
                  industry practices.

         7.2      Existence.  Maintain its existence and business  operations as
                  presently in effect in accordance with all applicable laws and
                  regulations,  pay its  debts  and  obligations  when due under
                  normal terms,  and pay on or before their due date, all taxes,
                  assessments, fees and other governmental monetary obligations,
                  except  as they may be  contested  in good  faith if they have
                  been  properly  reflected  on its  books  and,  at the  Bank's
                  request, adequate funds or security has been pledged to insure
                  payment.


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         7.3      Financial  Records.  Maintain  proper  books  and  records  of
                  account,  in accordance  with  generally  accepted  accounting
                  principles  where  applicable,  and consistent  with financial
                  statements  previously submitted to the Bank. The Bank retains
                  the right to  inspect  the  Collateral  and  business  records
                  related to it at such times and at such  intervals as the Bank
                  may reasonably require.

         7.4      Notice.  Give prompt  notice to the Bank of the  occurrence of
                  (i) any  Event of  default,  and (ii) any  other  development,
                  financial  or  otherwise,  which would  affect the  Borrower's
                  business,  properties  or  affairs  in  a  materially  adverse
                  manner.

         7.5      Collateral  Audits.  Permit  the Bank or its agents to perform
                  audits of the  Collateral.  The Borrower shall  compensate the
                  Bank for such audits in accordance with the Bank's schedule of
                  fees as amended from time to time.

         7.6      Financial Reports.  Furnish to the Bank whatever  information,
                  books, and records the Bank may reasonably request,  including
                  at a minimum: (If the Borrower has subsidiaries, all financial
                  statements  required will be provided on a consolidated and on
                  a separate basis.)

                  A.       Within 30 days after each monthly  period,  a balance
                           sheet as of the end of that period and  statements of
                           income retained  earnings,  and cash flows,  from the
                           beginning  of  that  fiscal  year  to the end of that
                           period, certified as correct by one of its authorized
                           agents.

                  B.       Within 120 days after,  and as of the end of, each of
                           its  fiscal  years,  a detailed  financial  statement
                           including a balance  sheet and  statements of income,
                           cash  flows,  and  retained  earnings,  audited by an
                           independent certified public accountant of recognized
                           standing.

                  C.       Within  15  days  after  and  as of the  end of  each
                           calendar month, the following  lists,  each certified
                           as correct by one of its authorized agents:

                                    (1)      a list of accounts receivable, aged
                                             from date of invoice;

                                    (2)      a list of  accounts  payable,  aged
                                             from date of receipt;

                                    (3)      a list of inventory,  valued at the
                                             lower of cost or market.

8.0      Negative Covenants.

         8.1      Definitions.  As used in this agreement,  the following  terms
                  shall have the following respective meanings:

         8.2      Unless otherwise  noted, the financial  requirements set forth
                  in this section shall be computed in accordance with generally
                  accepted  accounting  principles applied on a basis consistent
                  with financial statements previously submitted by the Borrower
                  to the Bank.

         8.3      Without the written  consent of the Bank,  so long as any debt
                  or obligation remains outstanding under the Credit Facilities,
                  the Borrower shall not: (where appropriate, covenants apply on
                  a consolidated basis).

                  A.       Dividends.  Acquire  or retire  any of its  shares of
                           capital  stock,  or declare or pay  dividends or make
                           any  other  distributions  upon any of its  shares of
                           capital  stock  or  percentage  ownership  interests,
                           except  dividends  payable in its  capital  stock and
                           dividends   payable  to  "Subchapter  S"  corporation
                           shareholders and distributions payable to LLC members
                           in amounts  sufficient  to pay the  shareholders'  or
                           members'  income  tax  obligations   related  to  the
                           Borrower's taxable income.


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                  B.       Sale of Shares.  Issue,  sell or otherwise dispose of
                           any shares of its capital stock or other  securities,
                           or rights, warrants or options to purchase or acquire
                           any such shares or securities.

                  C.       Debt.  Incur, or permit to remain  outstanding,  debt
                           for borrowed money or installment obligations, except
                           debt reflected in the latest  financial  statement of
                           the Borrower furnished to the Bank prior to execution
                           of this agreement and not to be paid with proceeds of
                           borrowings or leases under the Credit Facilities. For
                           purposes of this  covenant,  the sale of any accounts
                           receivable  shall be deemed the incurring of debt for
                           borrowed money.

                  D.       Guaranties.  Guarantee or otherwise  become or remain
                           secondarily  liable on the  undertaking  of  another,
                           except  for  endorsement  of drafts for  deposit  and
                           collection in the ordinary course of business.

                  E.       Liens.  Create  or permit to exist any lien on any of
                           its  property,  real or  personal,  except:  existing
                           liens  known to the Bank;  liens to the  Bank;  liens
                           incurred in the ordinary course of business  securing
                           current nondelinquent liabilities for taxes, worker's
                           compensation, unemployment insurance, social security
                           and  pension  liabilities;  and liens for taxes being
                           contested in good faith.

                  F.       Advances  and  Investments.  Purchase  or acquire any
                           securities  of, or make any loans or advances  to, or
                           investments  in,  any  person,  firm or  corporation,
                           except  obligations of the United States  Government,
                           open market commercial paper rated one of the top two
                           ratings by a rating agency of recognized standing, or
                           certificates   of  deposit   in   insured   financial
                           institutions.

                  G.       Use of  Proceeds.  Use, or permit any proceeds of the
                           Credit Facilities to be used, directly or indirectly,
                           for the purpose of "purchasing or carrying any margin
                           stock"  within the meaning of Federal  Reserve  Board
                           Regulation  U. At the Bank's  request,  the  Borrower
                           shall furnish to the Bank a completed Federal Reserve
                           Board Form U-1.

9.0      Representations  by Borrower.  Each Borrower  represents  that: (a) the
         execution and delivery of this agreement, the Notes, and the Leases and
         the performance of the obligations  they impose do not violate any law,
         conflict with any agreement by which the Borrower is bound,  or require
         the consent or approval of any  governmental  authority  or other third
         party;  (b) this  agreement,  the  Notes,  and the Leases are valid and
         binding agreements, enforceable in accordance with their terms; and (c)
         all balance  sheets,  profit and loss  statements,  and other financial
         statements  furnished to the Bank are  accurate and fairly  reflect the
         financial  condition  of the  organizations  and  persons to which they
         apply on their effective  dates,  including  contingent  liabilities of
         every type,  which financial  condition has not changed  materially and
         adversely  since those dates.  Each  Borrower,  if other than a natural
         person, further represents that: (a) it is duly organized, existing and
         in good standing under the laws of the jurisdiction  under which it was
         organized;  and (b) the execution and delivery of this  agreement,  the
         Notes,  and the  Leases and the  performance  of the  obligations  they
         impose (i) are within its powers; (ii) have been duly authorized by all
         necessary action of its governing body; and (iii) do not contravene the
         terms of its articles of incorporation or organization,  its bylaws, or
         any partnership, operating or other agreement governing its affairs.


<PAGE>

10.0     Default/Acceleration.

         10.1     Events of Default/Acceleration. If any of the following events
                  occurs,   the  Credit   Facilities  shall  terminate  and  all
                  borrowings  and  other  obligations  under  them  shall be due
                  immediately,  without  notice,  at the Banks option whether or
                  not the Bank has made demand.

                  A.       The  Borrower or any  guarantor  of any of the Credit
                           Facilities,  the  Notes or the  Leases  ("Guarantor")
                           fails to pay when due any  amount  payable  under the
                           Credit   Facilities   or  under  any   agreement   or
                           instrument evidencing debt to any creditor;

                  B.       The Borrower or any Guarantor (a) fails to observe or
                           perform any other term of this agreement,  the Notes,
                           or the Leases; (b) makes any materially  incorrect or
                           misleading  representation,  warranty, or certificate
                           to the Bank;  (c) makes any  materially  incorrect or
                           misleading  representation in any financial statement
                           or other  information  delivered to the Bank;  or (d)
                           defaults   under  the  terms  of  any   agreement  or
                           instrument  relating to any debt for  borrowed  money
                           (other than borrowings  under the Credit  Facilities)
                           such that the  creditor  declares the debt due before
                           its maturity;

                  C.       There  is a  default  under  the  terms  of any  loan
                           agreement,  mortgage, security agreement or any other
                           document  executed as part of the Credit  Facilities,
                           or any guaranty of the  obligations  under the Credit
                           Facilities becomes unenforceable in whole or in part,
                           or any Guarantor fails to promptly  perform under its
                           guaranty;

                  D.       A  "reportable  event" (as  defined  in the  Employee
                           Retirement  Income  Security  Act of 1974 as amended)
                           occurs that would permit the Pension Benefit Guaranty
                           Corporation to terminate any employee benefit plan of
                           the Borrower or any affiliate of the Borrower;

                  E.       The Borrower or any  Guarantor  becomes  insolvent or
                           unable to pay its debts as they become due;

                  F.       The Borrower or any Guarantor (a) makes an assignment
                           for the  benefit of  creditors;  (b)  consents to the
                           appointment  of a custodian,  receiver or trustee for
                           it or for a  substantial  part of its assets;  or (c)
                           commences  any  proceeding   under  any   bankruptcy,
                           reorganization,  liquidation  or similar  laws of any
                           jurisdiction;

                  G.       A custodian, receiver or trustee is appointed for the
                           Borrower or any Guarantor or for a  substantial  part
                           of its assets  without its consent and is not removed
                           within 60 days after such appointment;

                  H.       Proceedings are commenced against the Borrower or any
                           Guarantor  under  any   bankruptcy,   reorganization,
                           liquidation, or similar laws of any jurisdiction, and
                           such proceedings remain undismissed for 60 days after
                           commencement;  or the Borrower or Guarantor  consents
                           to the commencement of such proceedings;


<PAGE>

                  I.       Any  judgment is entered  against the Borrower or any
                           Guarantor, or any attachment,  levy or garnishment is
                           issued  against any  property of the  Borrower or any
                           Guarantor;

                  J.       The Borrower or any Guarantor dies;

                  K.       The  Borrower  or any  Guarantor,  without the Bank's
                           written  consent,  (a) is  dissolved,  (b)  merges or
                           consolidates with any third party, (c) leases,  sells
                           or otherwise conveys a material part of its assets or
                           business outside the ordinary course of business, (d)
                           leases,  purchases,  or otherwise acquires a material
                           part  of the  assets  of  any  other  corporation  or
                           business  entity,  except in the  ordinary  course of
                           business,  or (e) agrees to do any of the  foregoing,
                           (notwithstanding  the  foregoing,  any subsidiary may
                           merge, or consolidate with any other  subsidiary,  or
                           with the  Borrower,  so long as the  Borrower  is the
                           survivor);

                  L.       The loan-to-value  ratio of any pledged securities at
                           any time exceeds N/A%, and such excess  continues for
                           five  (5)  days  after  notice  from  the Bank to the
                           Borrower;

                  M.       There is a  substantial  change  in the  existing  or
                           prospective I financial  condition of the Borrower or
                           any Guarantor which the Bank in good faith determines
                           to be materially adverse; or

                  N.       The Bank in good faith shall deem itself insecure.

         10.2     Remedies.  If the borrowings and all other  obligations  under
                  the Credit  Facilities  are not paid at  maturity,  whether by
                  acceleration  or  otherwise,  the Bank  shall  have all of the
                  rights and  remedies  provided  by any law or  agreement.  Any
                  requirement  of  reasonable  notice  shall  be met if the Bank
                  sends the notice to the Borrower at least seven (7) days prior
                  to the date of sale, disposition or other event giving rise to
                  the required  notice.  The Bank is  authorized to cause all or
                  any part of the  Collateral to be transferred to or registered
                  in its  name  or in the  name  of any  other  person,  firm or
                  corporation,  with or without  designation  of the capacity of
                  such nominee.  The Borrower shall be liable for any deficiency
                  remaining after disposition of any Collateral. The Borrower is
                  liable to the Bank for all  reasonable  costs and  expenses of
                  every kind  incurred in the making or collection of the Credit
                  Facilities,    including,   without   limitation,   reasonable
                  attorney's  fees and court costs (whether  attributable to the
                  Bank's in-house or outside counsel).  These costs and expenses
                  shall  include,  without  limitation,  any  costs or  expenses
                  incurred  by  the  Bank  in  any  bankruptcy,  reorganization,
                  insolvency or other similar proceeding.

11.0     Miscellaneous.

         11.1     Notice from one party to another  relating  to this  agreement
                  shall  be  deemed  effective  if  made in  writing  (including
                  telecommunications)  and delivered to the recipient's address,
                  telex  number or fax number set forth  under its name below by
                  any of the following means: (a) hand delivery,  (b) registered
                  or  certified  mail,  postage  prepaid,  with  return  receipt
                  requested,  (c) first class or express mail,  postage prepaid,
                  (d) Federal  Express or like overnight  courier service or (e)
                  fax,  telex  or  other  wire  transmission  with  request  for
                  assurance  of  receipt  in a manner  typical  with  respect to
                  communication  of that type.  Notice made in  accordance  with
                  this  section  shall  be  deemed  delivered  upon  receipt  if
                  delivered by hand or wire transmission,  3 business days after
                  mailing  if mailed by first  class,  registered  or  certified
                  mail,  or one  business  day after  mailing or deposit with an
                  overnight  courier  service if  delivered  by express  mail or
                  overnight courier.


<PAGE>

         11.2     No delay on the part of the Bank in the  exercise of any right
                  or remedy  shall  operate  as a waiver.  No single or  partial
                  exercise by the Bank of any right or remedy shall preclude any
                  other future exercise of it or the exercise of any other right
                  or remedy.  No waiver or indulgence by the Bank of any default
                  shall be  effective  unless in writing and signed by the Bank,
                  nor shall a waiver on one occasion be construed as a bar to or
                  waiver of that right on any future occasion.

         11.3     This  agreement,  the Notes,  the Leases and any related  loan
                  documents  embody  the  entire  agreement  and   understanding
                  between  the  Borrower  and the Bank and  supersede  all prior
                  agreements  and  understandings   relating  to  their  subject
                  matter.  If any one or more of the obligations of the Borrower
                  under  this  agreement,  the  Notes  or the  Leases  shall  be
                  invalid,  illegal or  unenforceable in any  jurisdiction,  the
                  validity,   legality  and   enforceability  of  the  remaining
                  obligations  of the Borrower  shall not in any way be affected
                  or   impaired,    and   such    invalidity,    illegality   or
                  unenforceability  in one  jurisdiction  shall not  affect  the
                  validity, legality or enforceability of the obligations of the
                  Borrower under this agreement,  the Notes or the Leases in any
                  other jurisdiction.

         11.4     The Borrower, if more than one, shall be jointly and severally
                  liable.

         11.5     This  agreement  is  delivered  in the State of  Michigan  and
                  governed by Michigan  law.  This  agreement  is binding on the
                  Borrower and its successors, and shall inure to the benefit of
                  the Bank, its successors and assigns.

         11.6     Section  headings are for  convenience  of reference  only and
                  shall not affect the interpretation of this agreement.

12.0     Information  Sharing.  The Bank may  provide,  without  any  limitation
         whatsoever,  any  information  or knowledge the Bank may have about the
         undersigned  or any matter  relating to this  agreement and any related
         documents  to  BANK  ONE  CORPORATION,  or any of its  subsidiaries  or
         affiliates  or their  successors,  or to any one or more  purchasers or
         potential  purchasers of this agreement or any related  documents,  and
         the  undersigned  waives any right to privacy the  undersigned may have
         with respect to such matters.  The Borrower agrees that the Bank may at
         any  time  sell,   assign  or  transfer   one  or  more   interests  or
         participations  in all or any part of its rights or obligations in this
         agreement to one or more purchasers whether or not related to the Bank.

13.0     Waiver  of  Jury  Trial.  The  Bank  and  the  Borrower  knowingly  and
         voluntarily  waive any right  either of them have to a trial by jury in
         any proceeding  (whether  sounding in contract or tort) which is in any
         way connected with this or any related  agreement,  or the relationship
         established  under  them.  This  provision  may only be  modified  in a
         written instrument executed by the Bank and the Borrower.



<PAGE>


Executed by the parties on:  December 6 , 2000.


Bank One, Michigan                        Borrower

                                          POWER EFFICIENCY CORPORATION
By: /s/ J. Eric Lehmann
   ----------------------------
    J. Eric Lehmann
                                          By:/s/ Arthur H. Smith
                                             -----------------------------------
Its: First Vice
President                                 Its:
-------------------------------
                                          Treasurer
                                          ---------------------------

Address for Notices                       Address for Notices

10 S. Main, Suite 104                     4220 Varsity Drive, Suite E
Mt. Clements, MI 48043                    Ann Arbor, MI 48108



<PAGE>


Revolving Business Credit Note
--------------------------------------------------------------------------------

 Due April 30, 2001                      $750,000.00

 No.                                     Date: December 6, 2000
    --------------------

Promise  to Pay.  On or  before  April  30,  2001,  for  value  received,  Power
Efficiency  Corporation (the "Borrower")  promises to pay to Bank One,  Michigan
(the "Bank"), or order, at any office of the Bank in the State of Michigan,  the
sum of Seven Hundred Fifty Thousand DOLLARS ($750,000.00), or such lesser sum as
is indicated on Bank records,  plus interest computed on the basis of the actual
number of days elapsed in a year of 360 days at the rate of:

          2.0% per annum above the Prime Rate (the "Note Rate")  until  maturity
          whether by  acceleration  or otherwise and at the rate of 3% per annum
          above the Note Rate on overdue  principal from the date when due until
          paid.  "Prime  Rate" means a rate per annum equal to the prime rate of
          interest  announced from time to time by the Bank or its parent (which
          is not necessarily the lowest rate charged to any customer),  changing
          when and as said prime rate changes.

In no event shall the interest  rate exceed the maximum rate allowed by law; any
interest  payment which would for any reason be deemed unlawful under applicable
law shall be applied to principal.

Interest will be computed on the unpaid principal  balance from the date of each
borrowing.

 Until  maturity,  the Borrower will pay  consecutive  monthly  installments  of
 interest only commencing January 10 , 2001.

Late Fee. If any payment is not  received by the Bank within  fifteen days after
its due date,  the Bank may  assess  and the  Borrower  agrees to pay a late fee
equal to the lesser of five percent of the past due amount or $200.

Credit Facility. The Bank has authorized a credit facility to the Borrower in a,
principal amount not to exceed the face amount of this note. The credit facility
is in the form of loans made from time to time by the Bank to the Borrower. This
note  evidences the  Borrower's  obligation to repay those loans.  The aggregate
principal  amount of debt  evidenced by this note shall be the amount  reflected
from  time to time in the  records  of the Bank but shall  not  exceed  the face
amount of this note.  Until  maturity,  the Borrower may borrow,  pay down,  and
reborrow under this note so long as the aggregate  principal amount  outstanding
at any one time does not exceed the face amount of this note.

Credit Agreement. This note evidences a debt under the terms of a Line of Credit
Agreement  between  the Bank and the  Borrower  dated  December 6 2000,  and any
amendments (the "Agreement").

Security.  To secure the  payment  of this note and all other  present or future
liabilities of the Borrower to the Bank,  whether  several,  joint, or joint and
several,  the  Borrower  pledges  and grants to the Bank a  continuing  security
interest  in  the  following  described  property  and  all  of  its  additions,
substitutions,  increments,  proceeds and  products,  whether now owned or later
acquired ("Collateral"):
<PAGE>

1.       All  securities  and other  property of the  Borrower  in the  custody,
         possession or control of the Bank (other than property held by the Bank
         solely in a fiduciary capacity);

2.       All  property or  securities  declared or  acknowledged  to  constitute
         security for any past,  present or future  liability of the Borrower to
         the Bank;

3.       All balances of deposit accounts of the Borrower with the Bank;

4.       The  following  additional  property:  General  Lien  on all  Corporate
         Assets.

Bank's  Right to Setoff.  The Bank shall have the right at any time to apply its
own debt or  liability to the Borrower or to any other party liable on this note
in whole or partial payment of this note or other present or future liabilities,
without any requirement of mutual maturity.

Representations by Borrower.  Each Borrower  represents:  (a) that the execution
and delivery of this note and the  performance of the  obligations it imposes do
not  violate  any law,  conflict  with any  agreement  by which it is bound,  or
require  the  consent or approval  of any  governmental  authority  or any third
party;  (b)  that  this  note  is a valid  and  binding  agreement,  enforceable
according  to its  terms;  and (c)  that all  balance  sheets,  profit  and loss
statements,  and other financial  statements  furnished to the Bank are accurate
and fairly reflect the financial  condition of the  organizations and persons to
which they apply on their effective dates,  including contingent  liabilities of
every type, which financial  condition has not changed  materially and adversely
since  those  dates.  Each  Borrower,  other  than  a  natural  person,  further
represents:  (a)  that  it is duly  organized,  existing  and in  good  standing
pursuant to the laws under which it is organized; and (b) that the execution and
delivery of this note and the  performance of the obligations it imposes (i) are
within its powers and have been duly  authorized by all necessary  action of its
governing  body;  and  (ii) do not  contravene  the  terms  of its  articles  of
incorporation  or organization,  its by laws, or any  partnership,  operating or
other agreement governing its affairs.

Events of Default/Acceleration. If any of the following events occurs, this note
shall be due immediately, without notice, at the Bank's option.

1.       The Borrower or any guarantor of this note  ("Guarantor")  fails to pay
         when due any amount  payable  under this note or under any agreement or
         instrument evidencing debt to any creditor;

2.       The Borrower or any Guarantor (a) fails to observe or perform any other
         term of this note;  (b) makes any  materially  incorrect or  misleading
         representation,  warranty,  or  certificate  to the Bank; (c) makes any
         materially  incorrect or  misleading  representation  in any  financial
         statement or other  information  delivered to the Bank; or (d) defaults
         under the terms of any agreement or instrument relating to any debt for
         borrowed  money (other than the debt  evidenced by this note) such that
         the creditor declares the debt due before its maturity;

3.       There is a default  under the  terms of any loan  agreement,  mortgage,
         security agreement,  or any other document executed as part of the loan
         evidenced by this note,  or any guaranty of the loan  evidenced by this
         note becomes  unenforceable in whole or in part, or any Guarantor fails
         to promptly perform under its guaranty;


<PAGE>

4.       A  "reportable  event" (as defined in the  Employee  Retirement  Income
         Security  Act of 1974 as amended)  occurs that would permit the Pension
         Benefit Guaranty  Corporation to terminate any employee benefit plan of
         the Borrower or any affiliate of the Borrower;

5.       The Borrower or any  Guarantor  becomes  insolvent or unable to pay its
         debts as they become due;

6.       The Borrower or any Guarantor  (a) makes an assignment  for the benefit
         of creditors; (b) consents to the appointment of a custodian, receiver,
         or trustee for itself or for a substantial  part of its assets;  or (c)
         commences  any  proceeding   under  any   bankruptcy,   reorganization,
         liquidation, insolvency or similar laws of any jurisdiction;

7.       A custodian,  receiver, or trustee is appointed for the Borrower or any
         Guarantor or for a substantial  part of its assets  without the consent
         of the party against which the  appointment  is made and is not removed
         within 60 days after such appointment;

8.       Proceedings  are commenced  against the Borrower or any Guarantor under
         any  bankruptcy,  reorganization,  liquidation,  or similar laws of any
         jurisdiction, and such proceedings remain undismissed for 60 days after
         commencement; or the Borrower or Guarantor consents to the commencement
         of such proceedings;

9.       Any judgment is entered  against the Borrower or any Guarantor,  or any
         attachment,  levy, or garnishment is issued against any property of the
         Borrower or any Guarantor;

10.      The Borrower or any Guarantor dies;

11.      The Borrower or any Guarantor,  without the Bank's written consent, (a)
         is  dissolved,  (b) merges or  consolidates  with any third party,  (c)
         leases,  sells or  otherwise  conveys a material  part of its assets or
         business outside the ordinary course of business, (d) leases, purchases
         or  otherwise  acquires  a  material  part of the  assets  of any other
         corporation  or  business  entity  except  in the  ordinary  course  of
         business, or (e) agrees to do any of the foregoing (notwithstanding the
         foregoing,  any  subsidiary  may  merge or  consolidate  with any other
         subsidiary,  or  with  the  Borrower  so long  as the  Borrower  is the
         survivor);

12.      The loan-to-value  ratio of any pledged  securities at any time exceeds
         N/A% and such excess  continues for five (5) days after notice from the
         Bank to the Borrower;

13.      There is a substantial change in the existing or prospective  financial
         condition of the Borrower or any Guarantor which the Bank in good faith
         determines to be materially adverse;

14.      The Bank in good faith deems itself insecure.

Remedies.  If this note is not paid at  maturity,  whether  by  acceleration  or
otherwise,  the Bank shall have all of the rights and  remedies  provided by any
law or agreement.  Any requirement of reasonable notice shall be met if the Bank
sends the notice to the  Borrower  at least  seven (7) days prior to the date of
sale, disposition or other event giving rise to the required notice. The Bank is
authorized to cause all or any part of the  Collateral to be  transferred  to or
registered in its name or in the name of any other person,  firm or corporation,
with or without designation of the capacity of such nominee.  The Borrower shall
be liable for any deficiency remaining after disposition of any Collateral.  The
Borrower is liable to the Bank for all  reasonable  costs and  expenses of every
kind  incurred  in the making or  collection  of this note,  including,  without
limitation, reasonable attorneys' fees and court costs. These costs and expenses
shall include, without limitation, any costs or expenses incurred by the Bank in
any bankruptcy, reorganization, insolvency or other similar proceeding.


<PAGE>

Waiver.  Each endorser and any other party liable on this note severally  waives
demand,  presentment,  notice of  dishonor  and  protest,  and  consents  to any
extension or  postponement of time of its payment without limit as to the number
or  period,  to any  substitution,  exchange  or  release  of all or part of the
Collateral, to the addition of any party, and to the release or discharge of, or
suspension of any rights and remedies against,  any person who may be liable for
the  payment of this note.  No delay on the part of the Bank in the  exercise of
any right or remedy shall operate as a waiver.  No single or partial exercise by
the Bank of any right or remedy shall  preclude any other future  exercise of it
or the  exercise of any other right or remedy.  No waiver or  indulgence  by the
Bank of any default shall be effective unless in writing and signed by the Bank,
nor shall a waiver on one  occasion be  construed  as a bar to or waiver of that
right on any future occasion.

Miscellaneous.  The Borrower,  if more than one,  shall be jointly and severally
liable,  and the term  "Borrower"  shall mean any one or more of them. This note
shall be binding on the  Borrower  and its  successors,  and shall  inure to the
benefit of the Bank, its successors and assigns. Any reference to the Bank shall
include any holder of this note. This note is delivered in the State of Michigan
and governed by Michigan law.  Section headings are for convenience of reference
only and shall not affect the interpretation of this note.

Information  Sharing. The Bank may provide,  without any limitation  whatsoever,
any  information  or knowledge  the Bank may have about the  undersigned  or any
matter relating to this note and any related  documents to BANK ONE CORPORATION,
or any of its subsidiaries or affiliates or their  successors,  or to any one or
more purchasers or potential  purchasers of this note or any related  documents,
and the  undersigned  waives any right to privacy the  undersigned may have with
respect to such matters. The Borrower agrees that the Bank may at any time sell,
assign or transfer one or more interests or participations in all or any part of
its rights or obligations in this note to one or more purchasers  whether or not
related to the Bank.

Waiver of Jury Trial. The Bank and the Borrower  knowingly and voluntarily waive
any  right  either of them  have to a trial by jury in any  proceeding  (whether
sounding in contract  or tort)  which is in any way  connected  with this or any
related  agreement,  or the relationship  established under them. This provision
may  only be  modified  in a  written  instrument  executed  by the Bank and the
Borrower.

Address:                                  Borrower:

4220 Varsity Drive, Suite E               POWER EFFICIENCY CORPORATION
Ann Arbor, MI 48108
                                          By:   /s/ Arthur H. Smith
                                                --------------------------------
                                          Its:             Treasurer
                                                 -------------------------------



<PAGE>


Continuing Security Agreement
--------------------------------------------------------------------------------
Power Efficiency Corporation (the "Debtor")

Taxpayer I.D. No.: 22-3337365

Chief executive office: 4220 Varsity Drive, Suite E, Ann Arbor, MI 48108

Grant of Security Interest. The Debtor grants to Bank One, Michigan, the secured
party  referred to as "Bank",  whose  address is 611 Woodward  Avenue,  Detroit,
Michigan 48226, a continuing  security  interest in the Collateral listed below,
to secure the payment and performance of all of the Debtor's debt to the Bank.

Debt shall include each and every debt  liability  and  obligation of every type
and description now owed or arising at a later time,  whether they are direct or
indirect,  joint,  several,  or joint and several and whether or not of the same
type or class as presently outstanding,  which shall collectively be referred to
as "Liabilities."  Liabilities shall also include all interest,  costs, expenses
and reasonable attorney's fees accruing to or incurred by the Bank in collecting
the  Liabilities  or in  the  protection,  maintenance  or  liquidation  of  the
Collateral.

Collateral: Accounts Receivable, Inventory, Equipment, Instruments

Description  of Collateral.  The Collateral  covered by this agreement is all of
the Debtor's property indicated above and as defined below,  present and future,
including but not limited to any items listed on any schedule or list  attached.
Also  included  are all  proceeds,  including  but not limited to stock  rights,
subscription rights,  dividends,  stock dividends,  stock splits, or liquidating
dividends,  and all cash,  instruments,  accounts,  chattel  paper  and  general
intangibles  arising  from  the  sale,  rent,  lease,  casualty  loss  or  other
disposition of the Collateral, and any Collateral returned to, repossessed by or
stopped in transit by the  Debtor.  Also  included  are the  Debtor's  books and
records  which  relates  to  the  Collateral.  Where  the  Collateral  is in the
possession  of the Bank,  the Debtor  agrees to deliver to the Bank any property
which  represents  an increase in the  Collateral  or profits or proceeds of the
Collateral.

Definitions.

1. "Accounts  Receivable"  shall consist of accounts,  chattel paper and general
intangibles as those terms are defined in the Michigan  Uniform  Commercial Code
("UCC"). Also included is any right to a refund of taxes paid at any time to any
governmental entity. Also included are letters of credit, and drafts under them,
given in  support  of  Accounts  Receivable.  Debtor  warrants  that  its  chief
executive office is at the address shown above.

2.  "Inventory"  shall  consist of all  property  held at any location by or for
Debtor for sale,  rent; or lease,  or furnished or to be furnished by the Debtor
under an  contract  of service,  or raw  materials  or work in process and their
products,  or  materials,  used or consumed in its  business,  and shall include
containers  and  shelving  useful for  storing.  Without  limiting  the security
interest granted, Inventory is presently located at 4220 Varsity Drive, Suite E,
Ann Arbor, MI 48108.

3. "Equipment" shall consist of any goods at any time acquired, owned or held by
Debtor at any location  primarily  for use in its business,  including,  but not
limited to, machinery,  fixtures,  furniture,  furnishings and vehicles, and any
accessions,   parts,   attachments,   accessories,   tools,   dies,   additions,
substitutions,  replacements and  appurtenances to them or intended for use with
them.  Without limiting the security  interest  granted,  Equipment is presently
located at 4220 Varsity Drive, Suite E, Ann Arbor, MI 48108.


<PAGE>

4.  "Instruments"  shall  consist  of  Debtor's  interest  of  any  kind  in any
negotiable  instrument or security as those terms are defined in the UCC, or any
other writing which evidences a right to payment of money and is of a type which
is, in the ordinary  course of  business,  transferred  by delivery  alone or by
delivery with any necessary endorsement or assignment.

Warranties and Covenants. The Debtor warrants and covenants to the Bank that:

1. It will pay its Liabilities to the Bank secured by this agreement;
2. It is or will  become  the  owner of the  Collateral  free  from  any  liens,
encumbrances  or security  interests,  except for this  security  interest,  and
existing liens disclosed to and accepted by the Bank in writing, and will defend
the  Collateral  against  all  claims  and  demands  of all  persons at any time
claiming  any  interest  in it;  3. It will keep the  Collateral  free of liens,
encumbrances and other security  interests,  maintain it in good repair, not use
it illegally,  and exhibit it to the Bank on demand; 4. At its own expense,  the
Debtor will maintain  comprehensive casualty insurance on the Collateral against
such risks,  in such amounts,  with such  deductibles and with such companies as
may be  satisfactory  to the Bank,  and provide the Bank with proof of insurance
acceptable  to the Bank.  Each  insurance  policy shall  contain a lender's loss
payable  endorsement   satisfactory  to  the  Bank  and  a  prohibition  against
cancellation  or  amendment  of the  policy or removal of the Bank as loss payee
without at least 30 days prior written  notice to the Bank.  In all events,  the
amounts of such insurance  coverages shall conform to prudent business practices
and  shall be in such  minimum  amounts  that the  Debtor  will not be  deemed a
co-insurer;  5. It will  not sell or offer  to sell or  otherwise  transfer  the
Collateral,  nor change the  location  of the  Collateral,  without  the written
consent of the Bank,  except in the ordinary course of business;  6. It will pay
promptly when due all taxes and assessments upon the Collateral,  or for its use
or  operation;  7.  No  financing  statement  covering  all or any  part  of the
Collateral or any proceeds is on file in any public office,  unless the Bank has
approved  that filing.  At the Bank's  request,  Debtor will execute one or more
financing  statements  in form  satisfactory  to Bank  and  will pay the cost of
filing  them in all  public  offices  wherever  filing  is  deemed by Bank to be
desirable;  8. It will immediately  notify Bank in writing of any name change or
any change in business  organization;  9. It will provide any  information  that
Bank may reasonably  request,  and will permit Bank upon prior notice to inspect
and copy its books and records during normal business hours.

Accounts  Receivable.  The Debtor  acknowledges that if the Collateral  includes
"Accounts  Receivable,"  then  until  the Bank  gives  notice  to  Debtor to the
contrary,  Debtor will,  in the usual course of its business and at its own cost
and  expense,  on the  Bank's  behalf but not as the  Bank's  agent,  demand and
receive  and use its best  efforts to collect all moneys due or to become due on
the Accounts  Receivable.  Until the Bank gives notice to Debtor to the contrary
or until  the  Debtor  is in  default,  it may use the  funds  collected  in its
business.  Upon notice from the Bank or upon default, the Debtor agrees that all
sums of money it  receives  on account of or in  payment  or  settlement  of the
Accounts  Receivable  shall  be  held by it as  trustee  for  the  Bank  without
commingling  with any of its funds,  and shall  immediately  be delivered to the
Bank with endorsement to the Bank's order of any check or similar instrument. It
is agreed that,  at any time the Bank elects,  it shall be entitled,  in its own
name or in the name of the Debtor or  otherwise,  but at the expense and cost of
the Debtor,  to collect,  demand,  receive,  sue for or  compromise  any and all
Accounts Receivable,  and to give good and sufficient  releases,  to endorse any
checks, drafts or other orders for the payment of money payable to the Debtor in
payment and, its discretion, to file any claims or take any action or proceeding
which the Bank may deem necessary or advisable.  It is expressly  understood and
agreed,  however, that the Bank shall not be required or obligated in any manner
to make any demand or to make any inquiry as to the nature or sufficiency of any
payment  received by it or to present or file any claim or take any other action
to collect or enforce the payment of any amounts which may have been assigned to
it or to which it may be entitled at any time or times.  All notices required in
this paragraph will be immediately effective when sent. Such notices need not be
given prior to the Bank taking action.


<PAGE>

Representations by Debtor.  Each Debtor  represents:  (a) that the execution and
delivery of this agreement and the  performance of the obligations it imposes do
not  violate  any law,  conflict  with any  agreement  by which it is bound,  or
require  the  consent or approval  of any  governmental  authority  or any third
party;  (b) that this  agreement is a valid and binding  agreement;  enforceable
according  to its  terms;  and (c)  that all  balance  sheets,  profit  and loss
statement, and other financial statements furnished to the Bank are accurate and
fairly reflect the financial condition of the organizations and persons to which
they apply on their effective dates,  including contingent  liabilities of every
type, which financial  condition has not changed  materially and adversely since
those dates. Each Debtor, other than a natural person,  further represents:  (a)
that it is duly  organized,  existing and in good standing  pursuant to the laws
under which it is  organized;  and (b) that the  execution  and delivery of this
agreement and the  performance of the  obligations it imposes (i) are within its
powers and have been duly  authorized by all  necessary  action of its governing
body;  (ii) do not  contravene  the terms of its  articles of  incorporation  or
organizations,  its by-laws,  or any  partnership,  operating or other agreement
governing its affairs.

Pledge.  If the  Debtor  is not  liable  for all or any  part of the  Borrower's
obligations to the Bank (the "Debt"), then it agrees that:

(a) If any monies  become  available  to the Bank that it can apply to any Debt,
the Bank may apply  them to Debt not  secured  by this  agreement.  (b)  Without
notice to or the  consent  of the  Debtor,  the Bank may (i) take any  action it
chooses  against any Borrower,  against any  collateral for the Debt, or against
any other  person  liable for the Debt;  (ii)  release any Borrower or any other
person liable for the Debt,  release any collateral for the Debt, and neglect to
perfect any interest in any such  collateral;  (iii) forbear or agree to forbear
from exercising any rights or remedies,  including any right of setoff,  that it
has against the  Borrower,  any other person  liable for the Debt,  or any other
collateral  for the Debt;  (iv)  extend to any  Borrower  additional  Debt to be
secured by this agreement;  or (v) renew, extend,  modify or amend any Debt, and
deal with any Borrower or any other person liable for the Debt as it chooses.
(c) None of the Debtor's  obligations  under this agreement shall be affected by
(i)  any  act or  omission  of the  Bank;  (ii)  the  voluntary  or  involuntary
liquidation, sale or other disposition of all or substantially all of the assets
of any Borrower; (iii) any receivership,  insolvency, bankruptcy, reorganization
or other similar  proceedings  affecting  any Borrower or any of its assets;  or
(iv) any change in the  composition  or structure of any Borrower or any Debtor,
including a merger or consolidation with any other entity.


<PAGE>

(d) The Bank's rights under this section and this  agreement  are  unconditional
and  absolute,  regardless  of  the  unenforceability  of any  provision  of any
agreement  between any Borrower and the Bank,  or the  existence of any defense,
setoff or counterclaim that any Borrower may be able to assert against the Bank.
(e) It waives all rights of subrogation, contribution, reimbursement, indemnity,
exoneration,  implied  contract,  recourse to security,  and any other claim (as
that term is defined in the federal  Bankruptcy  Code,  as amended  from time to
time) that it may have or acquire in the future against any Borrower,  any other
person  liable  for the Debt,  or any  collateral  for the Debt,  because of the
existence of this agreement,  the Debtor's performance under this agreement,  or
the Bank's availing itself of any rights or remedies under this agreement.
(f) If any payment to the Bank on any Debt is wholly or  partially  invalidated,
set aside,  declared  fraudulent  or  required  to be repaid to the  Borrower or
anyone  representing  the  Borrower  or  the  Borrower's  creditors,  under  any
bankruptcy or insolvency  act or code,  under any state or federal law, or under
common law or equitable  principles,  then this  agreement  shall remain in full
force and effect or be reinstated,  as the case may be, until payment in full to
the Bank of the  repaid  amounts,  and of the Debt.  If this  agreement  must be
reinstated,  the Debtor agrees to execute and deliver to the Bank new agreements
and financing statements,  if necessary, in form and substance acceptable to the
Bank, covering the Collateral.

Default/Remedies.  If  the  Debtor  or the  Borrower  fails  to  pay  any of the
Liabilities  when due, or if a default by anyone  occurs  under the terms of any
agreement  related to any of the Liabilities,  or if the Debtor dies or fails to
observe or  perform  any term of this  agreement,  or if any  representation  or
warranty contained in this agreement is untrue, or if there is a material change
in the financial condition of the Debtor which the Bank in good faith determines
to be  materially  adverse,  then the Bank shall  have the  rights and  remedies
provided  by law or this  agreement,  including  but not limited to the right to
require the Debtor to assemble the  Collateral and make it available to the Bank
at a place to be designated  by the Bank which is reasonably  convenient to both
parties,  the right to take  possession of the Collateral with or without demand
and with or without  process of law, and the right to sell and dispose of it and
distribute  the proceeds  according to law. In connection  with the right of the
Bank to take possession of the  Collateral,  the Bank may take possession of any
other  items  of  property  in or on  the  Collateral  at  the  time  of  taking
possession,  and hold them for the Debtor  without  liability on the part of the
Bank. If there is any statutory requirement,  for notice, that requirement shall
be met if the Bank sends  notice to the Debtor at least  seven (7) days prior to
the date of sale, disposition or other event giving rise to the required notice.
The Debtor shall be liable for any deficiency remaining after disposition of the
Collateral.

Miscellaneous.

1. Where the Collateral is located at, used in or attached to a facility  leased
by the Debtor,  the Debtor will obtain from the lessor a consent to the granting
of this security  interest and  a subordination  of the lessor's interest in any
of the Collateral, in form acceptable to the Bank.
2. At its  option  the Bank may,  but shall be under no duty or  obligation  to,
discharge taxes,  liens,  security  interests or other  encumbrances at any time
levied or placed on the Collateral, pay for insurance on the Collateral, and pay
for the maintenance and preservation of the Collateral, and the Debtor agrees to
reimburse  the Bank on demand for any  payment  made or expense  incurred by the
Bank, with interest at the maximum legal rate.
3. No delay on the part of Bank in the  exercise  of any right or  remedy  shall
operate as a waiver,  no single or partial  exercise by the Bank of any right or
remedy  shall  preclude  any other  exercise of it or the  exercise of any other
right or remedy, and no waiver or indulgence by the Bank of any default shall be
effective  unless in writing  and signed by the Bank,  nor shall a waiver on one
occasion be construed as a waiver of that right on any future occasion.
4. If any provision of this agreement is invalid,  it shall be ineffective  only
to the extent of its invalidity, and the remaining provisions shall be valid and
effective.
5. Notice from one party to another  relating to this agreement  shall be deemed
effective if made in writing (including telecommunications) and delivered to the
recipient's address, telex number or telecopier number set forth above by any of
the following  means:  (a) hand  delivery,  (b)  registered  or certified  mail,
postage prepaid, with return receipt requested, (c) first class or express mail,
postage  prepaid,  (d)  Federal  Express,  Purolator  Courier or like  overnight
courier service or (e) telecopy,  telex or other wire  transmission with request
for assurance of receipt in a manner typical with respect to  communications  of
that type. Notice made in accordance with this section shall be deemed delivered
on receipt if delivered by hand or wire transmission,  on the third business day
after mailing if mailed by first class,  registered or certified mail, or on the
next business day after mailing or deposit with an overnight  courier service if
delivered by express mail or overnight courier.
6. All rights of the Bank shall  inure to the  benefit of the Bank's  successors
and assigns;  and all  obligations of the Debtor shall bind the Debtor's  heirs,
executors,  administrators,  successors  and assigns.  If there is more than one
Debtor, their obligations are joint and several.
7. A carbon, photographic or other reproduction of this agreement is sufficient,
and can be filed as a financing statement. The Bank is irrevocably appointed the
Debtor's  attorney-in-fact to execute any financing statement on Debtor's behalf
covering the Collateral.
8. The terms and provisions of this security agreement shall be governed by
Michigan law.


<PAGE>

Information  Sharing. The Bank may provide,  without any limitation  whatsoever,
any  information  or knowledge  the Bank may have about the  undersigned  or any
matter  relating  to  this  agreement  and any  related  documents  to BANK  ONE
CORPORATION, or any of its subsidiaries or affiliates or their successors, or to
any one or more  purchasers  or potential  purchasers  of this  agreement or any
related  documents,  and  the  undersigned  waives  any  right  to  privacy  the
undersigned  may have with respect to such  matters.  The Debtor agrees that the
Bank may at any  time  sell,  assign  or  transfer  one or   more  interests  or
participations in all or any part of its rights or obligations in this agreement
to one or more purchasers whether or not related to the Bank.

Waiver of Jury Trial.  The Bank and the Debtor  knowingly and voluntarily  waive
any  right  either of them  have to a trial by jury in any  proceeding  (whether
sounding in contract  or tort)  which is in any way  connected  with this or any
related  agreement,  or the relationship  established under them. This provision
may  only be  modified  in a  written  instrument  executed  by the Bank and the
Debtor.

Dated: December 6, 2000
                                  Debtor:

                                  POWER EFFICIENCY CORPORATION

                                  By:  /s/ Arthur H. Smith
                                       ---------------------

                                  Its:          Treasurer
                                         -------------------------------------



<PAGE>

<TABLE>
<CAPTION>
This FINANCING STATEMENT is presented for filing                                              FOR FILING OFFICER
pursuant to the Michigan Uniform Commercial Code.     (Please Type All Information)         (Date, Time, Number,
and Filing Officer)
---------------------------------------------------------- --- -------------------------------------------------
<S>          <C>                                               <C>               <C>
1. Debtor(s) (Last Name, First, If Individual) &               Soc. Security      DO NOT WRITE IN THIS SPACE
Address(es)       Soc. Security #/Tax ID #                     #/Tax ID #
   Power Efficiency Corporation                                  22-3337365
  22-3337365

                                                               -------------------
----------------------------------------------------------
Address
   4220 Varsity Drive, Suite E
----------------------------------------------------------
------------------------------ ------- -------------------     -------------------
City                           Stale     Zip Code
Ann Arbor                      MI        48108
----------------------------------------------------------     -------------------
Debtor(s) (Last Name, First, if Individual) & Address(es)
                                                               -------------------
----------------------------------------------------------     -------------------

----------------------------------------------------------     -------------------
Address

----------------------------------------------------------
------------------------------ ------- -------------------     -------------------
City                           Stale      Zip Code


------------------------------ ---------------------- ------------------------------------------------
2. If filing without debtor    3. Secured Party(ies) and Address(es)  Secured   5.  No. of Add'l Sheets    6. State Account No.
signature Item a, b, c, or d                                                                       Party #
must be marked [X].            Bank One, Michigan                     M00003
a. [   ] Collateral was        c/o American National Bank
already subject to the         120 S. LaSalle Street
security interest in another   B2-IL1-1145
state when it was brought      Chicago, IL  60603
into Michigan, or when the
Debtor's location changed to                                          --------------------------------------------------------------
Michigan;                      4. MAIL ACKNOWLEDGEMENT COPY TO:                 7. (Mark [X] if applicable):
b. [   ] Collateral is
proceeds of the original       Bank One, Michigan                               [ ] Products of collateral
collateral in which a          c/o American National Bank
security interest was          120 S. LaSalle Street
perfected;                     B2-IL1-1145                                      [ ]  The  debtor  is a
c. [   ] A previous filing     Chicago, IL  60603                                      transmitting
covering the collateral has                                                            utility  as defined
lapsed (Pre. Filing                                                                    in    MCLA
#                );                                                                    440.9105(1)(o).
d. [   ] The filing covers
collateral acquired after a    -------------------------------------- ---------------------------------------------------
change of name identity, or                                                     8.  Assignee(es) (if any) and
corporate structure of                                                                         Address(es)
Debtor (MCLA 440.9402(2) &
(7))
FROM:

(Prev. Filing
#                         ).

--------------------------------------------------------------------------------
9. This financing statement covers the following types (or items) of property:

All  present  and future  equipment  wherever  located.  All  present and future
accounts,  chattel paper,  instruments and general intangibles.  All present and
future inventory, wherever located.


---------------------------------------------------------------------------------------------------------------------------------
POWER EFFICIENCY CORPORATION                                                            BANK ONE, MICHIGAN

x  /s/ Arthur H. Smith                                                          x /s/ J. Eric Lehmann
-------------------------------------------------                               -------------------------------------------------
Signature(s) of Debtor(s)                                                       Signature(s) of Secured Party(ies)
or Assignee(s) of Record

Its:  Treasurer                                                                     J. Eric Lehmann, First Vice
President

x                                                                               x
-------------------------------------------------                               -------------------------------------------------
Signature(s) of Debtor(s)                                                       Signature(s) of Secured Party(ies)
or Assignee(s) of Record

IF YOU WISH THE ACKNOWLEDGEMENT COPY TO BE MAILED TO AN ADDRESS OTHER THAN THE SECURED PARTY SHOWN IN ITEM 3,
PROVIDE


</TABLE>


<PAGE>


                                    EXHIBIT 1

           BORROWER'S REPRESENTATIONS REGARDING LOAN LOSS RESERVE FUND


          The   undersigned   borrower   (the   "Borrower")   acknowledges   and
understands:

           (a)  that  the  loan  to be  made by  Bank  One-Michigan,  N.A.  (the
"Lender") to the Borrower will be filed for enrollment by the Lender in the Loan
Loss  Reserve  Program (the "Program"),  a program  established  by the Michigan
Strategic Fund (the "MSF"), an agency of the State of Michigan;

           (b) that the purpose of the Program is to assist the Lender in making
loans that might otherwise not qualify for a loan from the Lender;

           (c) that as a condition  of having the loan filed for  enrollment  in
the Program, the Borrower is required to pay a non-refundable  premium charge to
an  administrative  account  called the  Reserve  Fund,  which  Reserve  Fund is
established by the Michigan  Strategic Fund to help cover losses that the Lender
may sustain on loans enrolled in the Program; and

           (d) that the Borrower's payment of its non-refundable  premium charge
will be collected by the Lender for the  transmittal  to the Reserve  Fund,  and
that other  payments or transfers will be made to the Reserve Fund by the Lender
and the Michigan Strategic Fund.

           The Borrower  acknowledges  the foregoing and hereby  represents  and
warrants that it has no, and has not been promised or told by anyone that it has
any,   legal,   beneficial   or   equitable   interest  in  the   aforementioned
non-refundable  premium charges or any other funds credited to the Reserve Fund,
and hereby waives any right, claim or interest to any and all such funds paid or
credited to the Reserve Fund from time to time.

Borrower:         POWER EFFICIENCY CORPORATION

By: /s/ Arthur H. Smith
    --------------------------------

Dated:    12/6/00



<PAGE>


                                    EXHIBIT 2

                               NOTICE TO BORROWER

         This notice is provided to borrowers who may receive a loan from a bank
under the Loan Loss Reserve  Program of the Michigan  Strategic Fund, a State of
Michigan agency.

         The purpose of this program is to assist banks to make loans that might
otherwise  not qualify  for a bank loan.  The  program  utilizes a special  loss
reserve to assist the bank in covering  losses from a portfolio  of loans that a
bank  makes  under the  program.  The  borrower  pays a premium  payment  to the
reserve, which is matched by a bank premium payment to the reserve. The Michigan
Strategic Fund will then match the combined  total of the Borrower's payment and
the bank's payment.

          It is  important  to  emphasize  that the loan is private  transaction
between the bank and the borrower.  While the program may assist a bank in being
able to take more risk than normal,  it is important  to  understand  that it is
still the bank that is bearing the risk of the loan. The Michigan Strategic Fund
is not a party  to the  loan and  plays  no role at all in the  bank's  decision
regarding  whether or not to make the loan,  or in the  setting of the  interest
rate, fees,  duration,  or any other terms or conditions of the loan. The bank's
rights and remedies are delineated in the loan contract and in law applicable to
any decision by the bank with respect to enforcing  the bank's  rights under the
loan contract.

         While the program is intended to assist the bank in providing  you with
access to bank  financing,  you should  understand  that it is likely to be more
expensive for the borrower than would be the case with a conventional bank loan.
Not only does the  borrower  make a payment to the  reserve,  but it is expected
that the bank may, in some  manner,  recover  from the  borrower the cost of the
bank's payment into the reserve.