<PAGE>


EXHIBIT 10.1

                              EMPLOYMENT AGREEMENT

         EMPLOYMENT AGREEMENT (the "Agreement") is dated June 9, 2003 to be
effective as of the 9th day of June, 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 RICHARD KOCH,
residing at 105 Hallbrook Farms Drive; Wilmington, NC 28411 (the "Executive").

                               W I T N E S E T H:

         WHEREAS, the Corporation desires to employ Executive as the
Corporation's Chief Executive Officer 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 Board of Directors of the Corporation from time to time, in its reasonable
discretion, and shall perform such other duties as shall be consistent with the
responsibilities of such office (collectively the "Services"). Executive shall
perform activities related to such office as he shall reasonably be directed or
requested to so perform by the Corporation's Board of Directors, to whom he
shall report. Executive shall use his best efforts, skill and abilities to
promote the interests of the Corporation and its subsidiaries.

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

                  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.

<PAGE>


         2. Term of Employment.

         The term of Executive's employment under this Agreement (the "Term")
shall commence on June 9, 2003 (the "Commencement Date") and shall terminate on
June 9, 2008, unless sooner terminated pursuant to Sections 9 or 5.2 of this
Agreement; provided, however, if the Corporation shall fail to give Executive
notice of nonrenewal not less than 90 days prior to the scheduled expiration of
the Term or any extension thereof, the 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 full compensation for the
Services, the Corporation agrees to pay Executive a minimum base salary ("Base
Salary") at the annual rate of $240,000. The Executive shall be eligible for
annual salary increases in such amount(s) as the Corporation's Compensation
Committee shall determine in its absolute discretion. If there is no
Compensation Committee, such determinations shall be made by the entire Board of
Directors. During the first 12 months of the Term, an amount equal to $60,000
per year of the Base Salary shall be accrued and paid to the Executive at such
time as the net cash provided by the operating activities of the Corporation is
greater than zero for a period of three (3) consecutive months ("Cash Flow
Positive"). Upon satisfying this requirement, the Executive shall be paid his
accrued but unpaid salary in monthly installments of $10,000 (each payment a
"Salary Increment") until such time as all of the Executive's accrued salary has
been paid. In the event the Corporation is unable to pay a Salary Increment, the
Board of Directors of the Corporation may elect to defer such payment. In the
event of deferment, the Salary Increment payments shall resume when the
Corporation is financially able to make such payments. In the event that the
Corporation is never Cash Flow Positive during the Term, then the Corporation
has no obligation to pay executive the accrued portion of his salary. 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 Stock Options. In connection with this Agreement, the
Corporation shall on the date hereof grant the Executive: (i) incentive stock
options (the "ISO Options") to purchase up to 631,578 shares of the
Corporation's common stock, $.001 par value per share (the "Common Stock"), at a
per share purchase price of $.95; and (ii) nonqualified stock options (the "NQSO
Options") to purchase up to 368,422 shares of the Corporation's Common Stock, at
a per share exercise price of $.81. The options shall be exercisable for a
period of ten (10) years commencing on the date hereof and shall vest as
follows:


                                      -2-

<PAGE>

<TABLE>
<CAPTION>

          Date                 Number of ISO Options            Number of NQSO Options            Total Options
  --------------------       -------------------------        -------------------------         -----------------
  <S>                        <C>                              <C>                               <C>
      June 9, 2003                    105,263                           94,737                       200,000
      June 9, 2004                    105,263                           54,737                       160,000
      June 9, 2005                    105,263                           54,737                       160,000
      June 9, 2006                    105,263                           54,737                       160,000
      June 9, 2007                    105,263                           54,737                       160,000
      June 9, 2008                    105,263                           54,737                       160,000
                                                                                                -----------------
                                                                                                    1,000,000

</TABLE>

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

                  3.3 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.

         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
determinations shall be made by the entire Board of Directors.

                  4.2 Nothing in this Section 4 shall be construed as conferring
upon 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.

                  4.3 Change in Control Bonus. Upon the occurrence of either of
the following events ("Triggering Events"): (i) the purchase, either directly
from the Corporation and/or from existing stockholders of the Corporation, by an
Outside Party (as defined below), of the Corporation's Common Stock, which
results in the Outside Party acquiring more than 50% of the issued and
outstanding shares of Common Stock of the Corporation (assuming the full
exercise of the Stock Purchase Warrant issued to Summit Energy Ventures, LLC
("Summit") on June 14, 2002 (the "Summit Warrant")); or (ii) the sale/transfer
by Summit of over 50% of the shares of Common Stock held by Summit, calculated
on a fully converted basis and assuming full exercise of the Summit Warrant, to
an Outside Party who is not a Summit Affiliate (as defined below); the Executive
shall be entitled to receive a bonus in an amount equal to the Applicable
Percentage (as defined below) of the Enterprise Value (as defined below) of the
Corporation. The Applicable Percentage shall equal (a) 2% of the Enterprise
Value of the Corporation which is in excess of $35,000,000 but less than
$70,000,000; plus (b) 2.5% of the Enterprise Value of the Corporation which is
in excess of $70,000,000 but less than $105,000,00; plus (c) 3.0% of the
Enterprise Value of the Corporation which is in excess of $105,000,000.


                                      -3-

<PAGE>

         For purposes of this Section 4.3:

                   (i) "Outside Party" shall mean any third party that purchases
the securities of PEC;

                  (ii) "Summit Affiliate" shall mean: (a) the limited partners
of, or other investors in, Summit, (b) Northwest Power Management or other funds
affiliated with Northwest Power Management, or (c) Steven Strasser or funds
affiliated with or managed by Mr. Strasser;

                  (iii) "Enterprise Value" shall refer to the value of the
Corporation on the date of the Triggering Event. The Enterprise Value shall be
calculated as follows: (a) if the shares are purchased by a third party in the
open market, the Enterprise Value shall be calculated by taking the average of
the closing price of the Corporation's Common Stock for each of the thirty (30)
trading days (the "Average Trading Price") immediately prior to the date of the
Triggering Event, multiplied by the number of shares of Common Stock outstanding
on date of the Triggering Event (assuming (1) the exercise of the Summit
Warrant, and (2) the conversion of all shares of preferred stock of the
Corporation into Common Stock); or (b) if the shares of Common Stock are
purchased by the third party in either a private sale transaction or via a
tender offer, the Enterprise Value shall be calculated by taking the per share
price of Common Stock in either the private transaction or tender offer, as
applicable, multiplied by the number of shares of Common Stock outstanding on
the date of the Triggering Event (assuming (1) the exercise of the Summit
Warrant; and (2) the conversion of all the shares of preferred stock of the
Corporation into Common Stock).

         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: (i) the Executive's Base Salary in the event that
the Corporation is Cash Flow Positive, or (ii) $180,000, if the Corporation is
not Cash Flow Positive; either of which, as the case may be, shall be paid in
biweekly (every two weeks) increments during the two-year period following such
termination. Should Executive secure employment or a consulting engagement
during the two-year period after termination, then the compensation from this
employment or consulting shall be deducted from the bi-weekly payments the
Corporation is obligated to pay Executive. If the Executive's compensation from
this employment or consulting is higher than $15,000 per month, the
Corporation's obligation to make payments to executive shall cease.



                                      -4-

<PAGE>

         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.

                  6.2 Automobile. The Corporation shall provide the Executive an
automobile allowance at a monthly rate not to exceed $800 for the term of this
Agreement.

                  6.3 Moving and Living Expenses. The Corporation shall
reimburse Executive for reasonable moving expenses in an amount not to exceed
$35,000. The Corporation shall reimburse Executive for reasonable living
expenses in an amount not to exceed $2,500 per month. Effective June 9, 2003,
the Corporation shall reimburse Executive's living expenses until the earlier
of: (i) the Corporation moves its corporate offices from Palm Desert to Las
Vegas, (ii) the Corporation decides that Palm Desert will be the main corporate
office, or (iii) October 9, 2003.

                  6.4 Health Exam. The Executive shall annually have a
comprehensive physical examination. The Corporation shall reimburse up to $1,000
of Executive's expenses (medical and out of pocket) associated with this exam.
In the event that the examination reveals that the Executive has a health
condition that may impact his ability to perform his duties owed to the
Corporation, the Executive shall reveal such results to the Corporation.

         7. Vacation.

         The Executive shall be entitled each year during the Term of this
Agreement to a vacation period of four (4) 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
four (4) 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.


                                      -5-

<PAGE>


         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. In
addition, any accrued and unpaid Bonus shall be paid in accordance with Section
4 hereof.

                  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. In
addition, any accrued and unpaid Bonus shall be paid in accordance with Section
4 hereof. 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. 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 Board of Directors 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. The obligations of the Executive under
Section 10 shall continue notwithstanding termination of the Executive's
employment pursuant to this Section 9.3.


                                      -6-

<PAGE>


                  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 as Chief Executive
Officer; 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.

         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.


                                      -7-

<PAGE>


                  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 two (2) years
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 supplier 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;

                           (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 two (2) years,
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.


                                      -8-

<PAGE>


                  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.

                  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 New York County, New York 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.


                                      -9-

<PAGE>


                  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.

         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 New York County,
New York pursuant to the rules then applying of the American Arbitration
Association. The arbitrators shall consist of one representative selected by the
Corporation, one representative selected by the Executive and one representative
selected by the first two arbitrators. 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 arbitrators shall have the right and
authority to assess the cost of the arbitration proceedings and to determine how
their decision or determination as to each issue or matter in dispute may be
implemented or enforced. The decision in writing of any two of the arbitrators
shall be binding and conclusive on all of the parties to this Agreement. Should
either the Corporation or the Executive fail to appoint an arbitrator as
required by this Section 12 within thirty (30) days after receiving written
notice from the other party to do so,


                                      -10-

<PAGE>


the arbitrator appointed by the other party shall act for all of the parties
and his decision in writing shall be binding and conclusive on all of the
parties to this Employment Agreement. Any decision or award of the arbitrators
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 (notices
sent by telegram or mailed shall be deemed to have been given on the date sent),
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.

         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.

                  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, but not limited to, the Previous Employment Agreement. 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. 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.


                                      -11-

<PAGE>


                  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. The failure of either party at any time or times to require performance
of any provision hereof shall in no matter affect the right at a later time to
enforce the same. No waiver by either party of the breach of any term or
covenant contained in this Agreement, whether by conduct or otherwise, in any
one or more instances, shall be deemed to be, or construed as, a further or
continuing waiver of any such breach, or a waiver of the breach of any other
term or covenant contained in this Agreement.

                     [Signature page to immediately follow]



                                      -12-

<PAGE>



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


POWER EFFICIENCY CORPORATION

By:_________________________________________
     Steven Strasser, Chairman of the Board



____________________________________________
Richard Koch, individually





                                      -13-