<PAGE>


                       Securities and Exchange Commission
                             Washington, D.C. 20549

                                   FORM 10-KSB

         [X]      Annual report under Section 13 or 15(d) of the Securities
                  Exchange Act of 1934

                  For the fiscal year ended December 31, 2003

         [ ]      Transition report under Section 13 or 15(d) of the Securities
                  Exchange Act of 1934

                  For the transition period from ____________ to ____________


                        Commission File Number: 000-31805

                          Power Efficiency Corporation
                          ----------------------------
                 (Name of Small Business Issuer in its Charter)


          Delaware                                     22-3337365
(State or Other Jurisdiction of                    (I.R.S. Employer
Incorporation or Organization)                    Identification No.)

             35432 Industrial Road
                  Livonia, MI                               48150
    (Address of Principal Executive Offices)              (Zip Code)

                                 (734) 464-6711
                (Issuer's Telephone Number, Including Area Code)

         Securities Registered under Section 12(g) of the Exchange Act:

                         Common Stock, $.001 Par Value
                         -----------------------------
                                (Title of Class)

Check whether the registrant: (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days. Yes [X] No___

Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. [ ]

The issuer's revenues for the year ended December 31, 2003 were $397,673.

As of March 1, 2004, the aggregate market value of the common stock held by
non-affiliates of the issuer was approximately $2,132,604. This amount is based
on the closing price of $1.50 per share for the registrant's stock as of such
date.

On March 1, 2004 there were 5,006,837 shares of the registrant's common stock
outstanding.



<PAGE>



                           FORWARD-LOOKING STATEMENTS

This report and the documents incorporated into this report contain
forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995 (the "PSLRA"), including, but not limited to,
statements relating to the Registrant's business objectives and strategy. Such
forward-looking statements are based on current expectations, management
beliefs, certain assumptions made by the Registrant's management, and estimates
and projections about the Registrant's industry. Words such as "anticipates,"
"expects," "intends," "plans," "believes," "seeks," "estimates," "forecasts,"
"is likely," "predicts," "projects," "judgment," variations of such words and
similar expressions are intended to identify such forward-looking statements.
These statements are not guarantees of future performance and are subject to
certain risks, uncertainties and assumptions that are difficult to predict with
respect to timing, extent, likelihood and degree of occurrence. Therefore,
actual results and outcomes may differ materially from those expressed,
forecasted, or contemplated by any such forward-looking statements. The PSLRA
does not apply to initial public offerings.

Factors that could cause actual events or results to differ materially include,
but are not limited to, the following: continued market acceptance of the
Registrant's line of Power Commander(R) products; the Registrant's ability to
expand and/or modify its line of Power Commander(R) products on an ongoing
basis; general demand for the Registrant's products, intense competition from
other developers, manufacturers and/or marketers of energy reduction and/or
power saving products; the Registrant's negative net tangible book value; the
Registrant's negative cash flow from operations; delays or errors in the
Registrant's ability to meet customer demand and deliver Power Commander(R)
products on a timely basis; the Registrant's lack of working capital; the
Registrant's need to upgrade its facilities; changes in laws and regulations
affecting the Registrant and/or its products; the impact of technological
advances and issues; the outcomes of pending and future litigation and
contingencies; trends in energy use and consumer behavior; changes in the local
and national economies; local and global uncertainties created by the terrorist
acts of September 11 and the current war against terrorism; and other risks
inherent in and associated with doing business in an engineering and technology
intensive industry. See "Management's Discussion and Analysis or Plan of
Operation." Given these uncertainties, investors are cautioned not to place
undue reliance on any such forward-looking statements.

Unless required by law, the Registrant undertakes no obligation to update
publicly any forward-looking statements, whether as a result of new information,
future events or otherwise. However, readers should carefully review the risk
factors set forth in other reports or documents that the Registrant files from
time to time with the Securities and Exchange Commission (the "SEC"),
particularly Annual Reports on Form 10-KSB, Quarterly Reports on Form 10-QSB and
any Current Reports on Form 8-K.


<PAGE>

                                GLOSSARY OF TERMS

Set forth below are technical terms used in the discussion in this document and
explanations of the meanings of those terms.

Alternating Current (AC)          A type of electrical current, the
                                  direction of which is reversed at regular
                                  intervals or cycles; in the U.S. the standard
                                  is 120 reversals or 60 cycles per second;
                                  typically abbreviated as AC.

Ampere (amp)                      A unit of measure for an electrical
                                  current; the amount of current that flows in a
                                  circuit; abbreviated as amp.

Current (Electrical)              The flow of electrical energy (electricity)
                                  in a conductor, measured in amperes.

Cycle                             In an alternating current, the current goes
                                  from zero potential (or voltage) to a
                                  maximum in one direction, back to zero, and
                                  then to a maximum potential (or voltage) in
                                  the other direction. The number of complete
                                  cycles per second determines the current
                                  frequency; in the U.S. the standard for
                                  alternating current is 60 cycles.

Efficiency                        Efficiency is the ratio of work (or energy)
                                  output to work (or energy) input, and cannot
                                  exceed 100 percent.

Energy                            The capability of doing work.

Horsepower (HP)                   A unit for measuring the power of motors
                                  or the rate of doing work. One horsepower
                                  equals 33,000 foot-pounds of work per minute
                                  or 746 watts.

Induction                         The production of an electric current in a
                                  conductor by the variation of a magnetic field
                                  in its vicinity.

Induction Motor                   The simplest and most rugged electric
                                  motor, it consists of a wound stator and a
                                  rotor assembly. The AC induction motor is so
                                  named because the electric current flowing in
                                  its secondary member (the rotor) is induced by
                                  the alternating current flowing in its primary
                                  member (stator). The power supply is connected
                                  only to the stator. The combined
                                  electromagnetic efforts of the two currents
                                  produce the force to create rotation.

Inrush Current                    The current that flows at the instant
                                  of connection of a motor to the power source.
                                  Usually expressed as a multiple of motor
                                  full-load current.

Kilowatt (kW)                     A standard unit of electrical power equal to
                                  one thousand watts.

Load                              The demand on an energy producing system. The
                                  energy consumption or requirement of a
                                  piece or group of equipment.

Motor                             A machine supplied with external energy that
                                  is converted into force and/or motion.

Power                             The rate at which work is done, typically
                                  measured in Watts or horsepower.

Power Factor                      The ratio of watts to volt-amperes of an
                                  AC electric circuit.

Soft-start                        Soft-start is the regulation of the supply
                                  voltage from an initial low value to full
                                  voltage during the starting process.

Torque (Motor)                    The rotating force provided by a
                                  motor. The units of torque may be expressed as
                                  pound-foot, pound-inch (English system), or
                                  newton-meter (metric system).

Torque (Starting)                 This torque is what is available to initially
                                  get the load moving and begin its
                                  acceleration.

Transformer                       An electromagnetic device that changes the
                                  voltage of alternating current electricity; it
                                  consists of an induction coil having a primary
                                  and secondary winding and a closed iron core.

Voltage                           The amount of electromotive force, measured
                                  in volts, that exists between two points.

Watt                              The amount of power required maintaining a
                                  current of one ampere at a pressure of one
                                  volt when the two are in phase with each
                                  other. One horsepower is equal to 746 watts.


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                                     PART I

Item 1. Description of Business

         (a)Business Development

Formation

Power Efficiency Corporation (the "Registrant" or the "Company") was
incorporated in Delaware on October 19, 1994. From inception through 1997, the
Registrant was a development stage entity that sought to become engaged in the
design, development, marketing and sale of proprietary solid state electrical
components designed to effectively reduce energy consumption in alternating
current induction motors. Alternating current induction motors are commonly
found in industrial and commercial facilities throughout the world.

         (b)Business of the Registrant

The Registrant's Principal Products

In 1995, the Registrant commenced the sale of the Power Commander(R), its
principal and proprietary product that reduces energy consumption in alternating
current induction motors in certain industrial applications. In addition, the
Power Commander(R) extends motor life, minimizes maintenance, results in cooler
running, reduces stress and strain on the motor, and reduces stress and strain
on accompanying electrical and mechanical systems. Technology and circuitry
included in the Registrant's Power Commander(R) is the subject of a United
States Patent granted in 1998. The Registrant offers the Power Commander(R) in
two versions, each of which is a distinctly different product having different
applications. These two products are:

    o   the Three-Phase Power Commander(R)used in industrial and
        commercial applications; and

    o   the Single-Phase Power Commander(R) is also used in industrial and
        commercial applications and is currently in research and development for
        use in consumer applications such as home appliances and the like.

The Registrant's motor starter product is designed to soft start a motor, save
energy, and protect and conserve the motor. It also has the capacity to act as a
remote-switching device.

The Registrant offers the Power Commander(R) in a Three-Phase version and a
Single-Phase version. The Registrant's marketing efforts have been initially
focused on the Three-Phase Power Commander(R). Both versions of the Power
Commander(R) reduce energy consumption on electrical equipment by electronically
sensing and controlling the amount of energy the motor consumes. A motor with a
Power Commander(R) installed only uses the energy it needs to perform its work
task, thereby increasing its efficiency. The result is a reduction of energy
consumption of up to 15% to 35% in certain applications which do not always run
at peak load levels.

The Registrant's management believes that the Power Commander(R) line offers
certain advantages over competing products for the following reasons:

    o   The Power Commander(R) is the result of field and laboratory engineering
        refinements undertaken since 1994. These refinements enable the Power
        Commander(R) to offer a control system which measures and monitors key
        motor operating conditions and adapts motor operating parameters during
        rapid changes in motor load, all without excessive vibration,
        synchronization problems or other material adverse effects to the motor
        or surrounding electrical and mechanical systems.

    o   Energy savings and motor efficiencies were verified through tests of the
        Power Commander(R) performed by three independent laboratories. Oak
        Ridge National Laboratory tested the Power Commander(R) and concluded
        that "significant energy savings due to lower electrical power demand
        can clearly be obtained in medium-sized and especially large-sized motor
        applications where the motor is frequently operating with no load." Oak
        Ridge's conclusions were based on tests that examined energy savings,
        motor temperature, and soft start impact.


<PAGE>

    o   Another independent laboratory at Oregon State University determined
        that the Power Commander(R) converted electrical energy into mechanical
        energy at a more efficient rate than a motor without the unit. The test
        compared energy consumption and torque on a 15HP motor with and without
        the unit installed.

    o   Finally, Medsker Electric, Inc., an independent electric motor repair
        and test laboratory, performed a series of inrush current and energy
        savings tests on the Power Commander(R). The tests compared the
        Registrant's product to the products of three competitors. In its
        conclusions, Medsker stated that the Registrant's Power Commander(R)
        "exhibited twice the energy savings of the next nearest competitor." In
        addition, Medsker concluded that the Power Commander(R) "exhibited the
        best soft-start performance, reducing the motor inrush current by 71%."
        Finally, Medsker concluded that the Power Commander(R) "was the simplest
        to install and test, and was the best performer in terms of energy
        savings and inrush current reduction."

    o   In addition to the tests performed by independent laboratories, the
        Power Commander(R) was subjected to a performance case study by one of
        the Registrant's customers, Otis Elevator Company. In the Otis Elevator
        case study, the Power Commander(R) resulted in reduced energy
        consumption and lower operating temperatures. The case study examined
        the effects and energy savings obtained with a Power Commander(R)
        installed on a 10 horsepower AC induction motor operating a single
        width, single level escalator.

Three-Phase Power Commander(R)

The initial market for the Three-Phase Power Commander(R) is the elevator and
escalator industry, although the Registrant is actively marketing this product
to other industries such as the plastics manufacturing, crude oil, and forest
products industries. According to the Freedonia Group, the U.S. elevator and
escalator industry is estimated at $11 billion, and growing at a rate of 6.5%
annually. Extrapolating from trade journals (e.g. Elevator World Source Book
2001-2002), there are approximately 854,000 elevators and 45,400 escalators in
operation in the U.S. and Canada in 2004. Additionally, approximately 24,725 new
elevators and 1,400 new escalators, respectively, are installed annually in the
domestic market. The installed base of escalators and the 350,000 elevators that
have motor-generator sets are potential candidates for the retrofit of the
Three-Phase Power Commander(R). The Registrant is currently conducting tests
with a major hotel chain to determine if the Three-Phase Power Commander(R) will
save energy on hydraulic elevators, which represent approximately 373,000 of the
total installed base of elevators and is the largest and fastest growing segment
of new elevator installations.

Industries that operate other equipment such as conveyor systems, machine tools,
mining equipment, crude oil pumps, metal stamping presses, etc., are believed to
be viable target markets for the Three-Phase Power Commander(R) and the
Registrant is seeking to build its base of Original Equipment Manufacturers
("OEM"), distributors, and manufacturer representatives to address these
markets.

Single-Phase Power Commander(R)

Like the Registrant's Three-Phase Power Commander(R) described above, the
Registrant's Single-Phase Power Commander(R) reduces energy consumption in
electrical equipment by sensing and controlling the amount of energy the motor
consumes. Most motors commonly used in-home appliances and other consumer goods
are single-phase motors.

Since the Single-Phase Power Commander(R) is usable in a broad variety of
contexts and can be installed when the motor is assembled with little effort and
expense, it is a product suitable for installation at the OEM level or large
volume sales and installation. Consequently, the Registrant's marketing plan for
the Single-Phase Power Commander(R) is to identify the major OEMs that can best
utilize the Single-Phase Power Commander(R).

Registrant's Motor Starter Product

The Registrant's motor starter product is designed to soft start a motor, which
saves energy and protects the motor, and has the capacity to act as a
remote-switching device. The expected release date of this product is uncertain
at this time as the Registrant's R&D efforts are currently focusing on the
development of its medium voltage and single phase controllers.


<PAGE>
Marketing and Sales

The Registrant's marketing efforts for the Power Commander(R) have been
concentrated in the elevator and escalator industry; national electrical supply
houses; large real estate property management companies; the oilfield supply
industry; and public transportation systems. Other customers and end users of
the Registrant's products include retail chains, hotels, manufacturers and
federal government facilities.

As the Registrant's operations are scaled up and revenues from the sale of the
Power Commander(R) grow, the Registrant intends to simultaneously (i) market the
Power Commander(R) through OEMs to other compatible industries such as conveyor
and production line systems, machine tools and other industrial applications,
(ii) expand its direct sales force, develop a network of distributors and
manufacturer representatives to reach the end users who receive the most benefit
from the Registrants controllers, and (iii) continue to develop and market new
products (medium voltage controller, improved single phase controller, motor
starter product) using a direct sales force, distributors and manufacturer
representatives.

Manufacturing

The Registrant has an arrangement with a manufacturer in the electronics
industry, Q.C. Corporation d/b/a System Controls. System Controls manufactures
units for the Registrant on an as-needed basis. Under the arrangement, the
Registrant issues a purchase order to System Controls that outlines, among other
things, the number of units to be manufactured and the price per unit. System
Controls is under no obligation to accept the order and the Registrant is under
no obligation to use System Controls for its manufacturing needs. Management
believes the arrangement between the Registrant and System Controls has been
mutually beneficial to both parties and expects that the relationship will
continue. System Controls' production capacity is approximately 1,000 units per
month.

Additionally, the Registrant is actively seeking to enter into agreements with
additional manufacturers. The Registrant leases space in Livonia, Michigan,
where it performs activities such as component assembly, quality assurance,
quality control and packaging.

The Registrant has completed the pre-production testing of compact, low cost
electronic modules designed to replace other more costly components used in the
manufacture of certain Power Commander(R) models and eliminate several
labor-intensive assembly steps. Total per unit cost savings (component cost
savings and labor cost savings) are estimated to be approximately 30% of the
production cost by current methods.

Product cost-reduction efforts are, and will remain, an objective of the
Registrant. One key element of the program includes an aggressive manufacturing
and engineering effort to reduce production cycle times as well as material and
processing costs. A second element of the program is to out-source production
operations. The Registrant out sources the assembly of printed circuit boards to
qualified suppliers with automated assembly and test equipment, which reduces
costs and ensures quality. As the product volumes increase, the Registrant
expects to recognize favorable purchasing economies, increased labor
efficiencies and improved overhead absorption. In addition, the Registrant is
continuing to evaluate additional domestic, Canadian and offshore sources of
contract manufacturing in order to reduce production costs further.

Competition

The principal competitive factors in the Registrant's markets include innovative
product design, product quality, product performance, utility rebate acceptance,
established customer relationships, name recognition, distribution and price.

The Registrant competes against a number of companies, many of which have longer
operating histories, established markets and far greater financial, advertising,
research and development, manufacturing, marketing, personnel and other
resources than the Registrant currently has or may reasonably be expected to
have in the foreseeable future. This competition may have an adverse effect on
the ability of the Registrant to commence and expand its operations or operate
in a profitable manner.

Three-Phase Competition. Although the Registrant has not conducted any formal
market study, the Registrant believes its Three-Phase Power Commander(R) has the
following competitive advantages:

    o   The Power Commander(R) is the only device management is aware of that
        combines soft start features with energy savings features in a single
        integrated unit that achieves energy savings levels of up to 15% to 35%;

    o   The Power Commander(R)analog circuitry is proprietary and protected
        by a patent; and
<PAGE>

    o   Energy saving motor controllers claimed to be competitive with the Power
        Commander(R) (i.e., Fairford, Power Boss and Power Planner) utilize
        technologies inferior to the Registrant's technology because (i) their
        products achieve lower levels of energy savings in comparable
        applications compared to the Power Commander(R) (see Part I, Item 1
        "Description of Business," for a description of the independent tests
        performed on the Registrant's products); and (ii) their digital design
        produces extensive harmonic distortion.


Single-Phase Competition. There have been several companies that have, with
different technologies, attempted to exploit this market due to the enormous
opportunity in single-phase motor applications. These products include "Green
Plug" (voltage clamping), "Power Planner" (digital microchip) and "Econelectric"
(power factor control).

High Efficiency Motors. Insofar as high efficiency motor replacement is
concerned, management believes that the energy savings gain attributable to high
efficiency motors is materially lower than that of the Power Commander(R) on
unloaded motor applications. In addition, the in-rush amperage needed to start
an energy efficient motor is many times higher than that needed to start a
conventional motor. This factor is made worse because the purchase of a new
motor does not provide a soft starting capability without the purchase of a
separate soft start device.

Motor Starter Competition. The Registrant believes that expected competition in
the motor starter market will be more intense than that for the Power
Commander(R) because:

    o   The potential market for the Registrant's motor starter product is much
        larger than that for motor controllers in general and the Power
        Commander(R) in particular;

    o   Competitors in the motor starter field are more numerous and generally
        much larger compared to competitors in the motor controller field; and

    o   The motor starter is a staple product type and is currently being sold
        by nearly all companies in the electrical component business.

However, Management believes it has a competitive advantage in this market
because the Power Commander(R) is the only device management is aware of that
combines soft start features with energy savings features in a single integrated
unit that achieves energy savings levels of up to 15% to 35%.

Source of Supply and Availability of Raw Materials

The Power Commander(R) motor controller and the Registrant's motor starter
product have both been designed to use standard, off-the-shelf, easily acquired
components. Such components are basic items that are readily available worldwide
at competitive prices. They come in standard and miniature versions and offer
the Registrant large latitude in product design. Both the Power Commander(R)
motor controller and the motor starter use a combination of components. Although
the Registrant believes that most of the key components required for the
production of its products are currently available in sufficient production
quantities from multiple sources, there can be no assurance that they will
remain so readily available.

Customers

The Registrant currently does business with approximately 30 customers. Of this
number, four, including KONE, Inc., Macy's, The May Department Stores, and
Schindler Elevator, presently account for approximately 78% of the Registrant's
gross revenues. In light of the Registrant's intentions to focus its business on
OEMs in the elevator, oil field pump and manufacturing industries, the
Registrant is, and may continue to be, dependent upon a small number of
customers. Accordingly, the loss of one or more of these customers is likely to
have a material adverse effect upon the Registrant's business.

Patents and Proprietary Rights

The Registrant currently relies on a combination of trade secrets,
non-disclosure agreements and a patent to establish and protect its proprietary
rights in its products. There can be no assurance that these mechanisms will
provide the Registrant with any competitive advantages. Furthermore, there can
be no assurance that others will not independently develop similar technologies,
or duplicate or "reverse engineer" the proprietary aspects of the Registrant's
technology.


<PAGE>

The Registrant has one U.S. patent issued with respect to its products. The
"Balanced and Synchronized Phase Detector for an AC Induction Motor Controller,"
No. 5,821,726, was issued on October 13, 1998 and expires in 2017. This patent
covers improvements to the technology under the NASA License Agreement
(described below), which were developed by the Registrant. Management believes
this patent protects the Registrant's intellectual property position beyond the
expiration of the NASA License Agreement because:

    o   the circuitry covered by the Registrant's patent more effectively
        reduces the motor vibration; and

    o   the circuitry eliminates most of the balance and synchronization
        problems that are created by other energy saving motor controllers,
        including those that would eventually use the licensed NASA technology
        upon the expiration of the underlying NASA patents.

The Registrant has additional proprietary technology being assessed for patent
filing.

NASA License Agreement

The Registrant had been the exclusive United States licensee of certain power
factor controller technology owned by the United States of America, as
represented by NASA. This license agreement covered the United States and its
territories and possessions and did not require the Registrant to pay royalties
to NASA in connection with the Registrant's sale of products employing
technology utilizing the licensed patents. The Registrant's rights under the
license agreement were non-transferable and were not to be sublicensed without
NASA's consent. The license agreement terminated on December 16, 2002 with the
expiration of all of the licensed patents.

The Registrant believes that its products and other proprietary rights do not
infringe any proprietary rights possessed by third parties. There can be no
assurance, however, that third parties will not assert infringement claims in
the future, the defense costs of which could be substantial.

The Registrant has obtained U.S. Trademark registration of the Power
Commander(R) mark.

Government Regulation

The Registrant is not required to be certified by any government agencies.
However, the Registrant's products are manufactured to comply with specific
Underwriters' Laboratory codes that meet national safety standards. Presently,
the Registrant's products comply with UL 508 Industrial Control Equipment and
the Registrant has also received certification meeting CSA (Canadian Standards
Association) CSA-B44.1-96/ASME-17.5-1996 Elevator and Escalator Electrical
Equipment. Registrant's products are also CE compliant. The CE certificate
number is C1282PEC1.TLS.doc. The Department of Commerce does not require the
Registrant's technology to be certified for export. The Registrant's industrial
code is 421610 and the SIC code is 5063.

Deregulation of Electrical Energy

Sales of the Registrant's product are not dependant on continued deregulation of
the electrical energy market as the Registrant's product can be sold in
regulated and deregulated markets.

Research and Development

The Registrant intends to continue its research and development effort to
introduce new products based on the Power Commander(R) solid-state technology.
Towards this end, the Registrant spent $420,376 and $426,106 in fiscal years
2003 and 2002, respectively, on research and development activities, virtually
none of which was borne by customers. A major focus of the Registrant's
foreseeable research and development activities will be on consumer applications
for the single-phase unit. The Registrant intends to limit its research and
development activities on secondary products for Three-Phase industrial and
commercial AC induction motors. Two of these products are (i) a soft starting
motor starter (without energy saving features) to compete with existing
transformer and other electro-mechanical type motor starters; and (ii) a medium
voltage energy saving motor controller for motors ranging in sizes from 2000 to
6000 volts.


<PAGE>

Effect of Environmental Regulations

The Registrant is not aware of any federal, state, or local provisions
regulating the discharge of materials into the environment or otherwise relating
to the protection of the environment with which compliance by the Registrant has
had, or is expected to have, a material effect upon the capital expenditures,
earnings, or competitive position of the Registrant.

Employees

At the date of this document, the Registrant employs 17 people on a full time
basis. Of this number, two people are engaged in executive management and
finance, one in operations management, seven in sales and marketing, two in
research and development, one in legal counsel, three in engineering and
production, and one in clerical and reception. At such time as business
conditions dictate, the Registrant expects to hire additional personnel for,
among other things, increased production, marketing and sales. The Registrant
has no collective bargaining agreements and considers its relationship with its
employees to be good. The Registrant utilizes consultants in the areas of
electrical and mechanical engineering, manufacturing engineering, and financing
and strategy on an ongoing basis.

RISK FACTORS

Limited Capitalization

As of the date of this document, the Registrant continues to have limited
working capital and will be dependent upon additional financing to meet its
capital needs. There can be no assurance that any additional financing will be
available on acceptable terms, if at all. The Registrant needs additional
capital to expand its operations and fully implement its business plan.

Limited Operating History, Manufacturing and Distribution Arrangements

To date, and principally attributable to a lack of working capital, the
Registrant's operations have been limited in scale. Although the Registrant has
an arrangement with an automated production facility, has established
relationships with suppliers, and received contracts for its products, the
Registrant may experience difficulties in production scale-up, inventory
management, product distribution and obtaining and maintaining working capital
until such time as the Registrant's operations have been scaled-up to normal
commercial levels. There can be no assurance that the Registrant will operate
profitably.

Registrant's License From NASA Has Expired

The basic technology upon which the Registrant's products are based is derived
from a patent license agreement by and between the Registrant and NASA, which
expired on December 16, 2002. The license expired upon expiration of NASA's
underlying patents, at which time anyone, including the Registrant, became free
to use the underlying NASA technology. The Registrant has also made certain
improvements to the basic technology covered by the NASA license, which may
place the Registrant in a competitively superior position. No assurance can be
given, however, that others will not seek to improve the basic technology in a
manner similar to that of the Registrant.

Supplier Dependence

Although the Registrant believes that most of the key components required for
the production of its products are currently available in sufficient production
quantities from multiple sources, there can be no assurance that they will
remain so readily available. It is possible that other components required in
the future may necessitate custom fabrication in accordance with specifications
developed or to be developed by the Registrant. Also, in the event that the
Registrant, or its contract manufacturer, as applicable, is unable to develop or
acquire components in a timely fashion, the Registrant's ability to achieve
production yields, revenues and net income would be adversely affected.

Sales and Marketing Risks

The Registrant's products have been distributed primarily through OEMs. In the
second half of 2003 Registrant began pursuing an expanded distribution strategy
designed to reduce its reliance on OEM's. Pursuant to this strategy the
Registrant is increasing the size of its direct sales force, recruiting
manufacturer representatives (primarily in the United States) and independent
distributors (primarily in foreign markets). The Registrant's future growth and
profitability will depend upon the successful development of business
relationships with additional OEMs, manufacturing representatives and
distributors and their ability to penetrate the market with the Registrant's
products.


<PAGE>

Competition and Rapid Technological Change

The Registrant competes against a number of companies, many of which have longer
operating histories, established markets and far greater financial, advertising,
research and development, manufacturing, marketing, personnel and other
resources than the Registrant currently has or may reasonably be expected to
have in the foreseeable future. This competition may have an adverse effect on
the ability of the Registrant to expand its operations or operate profitably.
The motor control industry is highly competitive and characterized by rapid
technological change. The Registrant's future performance will depend in large
part upon its ability to become and remain competitive and to develop,
manufacture and market acceptable products in these markets. Competitive
pressures may necessitate price reductions, which can adversely affect revenues
and profits. If the Registrant is not competitive in its ongoing research and
development efforts, its products may become obsolete, or be priced above
competitive levels. Although management believes that, based upon their
performance and price, the Registrant's products are attractive to customers;
there can be no assurance that competitors will not introduce comparable or
technologically superior products, which are priced more favorably than the
Registrant's products.

Retail Price of Electrical Energy

A customer's decision to purchase the Power Commander(R) is primarily driven by
the payback on the investment resulting from the increased energy savings.
Although management believes that current retail energy prices support an
attractive return on investment for the Registrant's products, there can be no
assurances that future retail pricing of electrical energy will remain at such
levels.

No Cash Dividends on Common Stock

The Registrant has not paid or declared any dividends on its common stock and
does not anticipate paying or declaring any cash dividends on its common stock
in the foreseeable future.

Possible Resales under Rule 144

Of the 5,006,837 shares of the Registrant's common stock outstanding on March 1,
2004, 480,991 shares are freely trading in the market place (the "Free Trading
Shares"). The Free Trading Shares are comprised mostly of shares that were
originally issued in transactions that were exempt from registration under the
Securities Act, which shares were, over time, resold pursuant to Rule 144, as
set forth below.

The remaining 4,525,846 shares of the Registrant's common stock outstanding are
restricted securities as defined in Rule 144 under the Securities Act and under
certain circumstances may be resold without registration pursuant to Rule 144.

In addition, the Registrant has approximately 82,140 common stock purchase
warrants outstanding and has approximately 566,588 common stock options
outstanding. Neither the granting of options nor the issuance of warrants have
been registered under the Securities Act, but may, under certain circumstances,
be available for public sale in the open market pursuant to Rule 144, subject to
certain limitations.

In general, under Rule 144, a person (or persons whose shares are aggregated)
who has satisfied a one-year holding period may, under certain circumstances,
sell within any three-month period a number of securities which does not exceed
the greater of 1% of the then outstanding shares of common stock or the average
weekly trading volume of the class during the four calendar weeks prior to such
sale. Rule 144 also permits, under certain circumstances, the sale of
securities, without any limitation, by a person who is not an Affiliate, as such
term is defined in Rule 144(a)(1), of the Registrant and who has satisfied a
two-year holding period. Any substantial sale of the Registrant's common stock
pursuant to Rule 144 may have an adverse effect on the market price of the
Registrant's shares.

Common Stock Price Volatility

The Company's common stock is traded on the National Association of Securities
Dealers' Over the Counter Bulletin Board ("OTCBB"), under the symbol "PEFF".
There can be no assurance that a regular market for the Company's common stock
will be sustained. The OTCBB offers less trading liquidity than NASDAQ. Quotes
for securities traded on the OTCBB are not as widely available as are those for
NASDAQ. Therefore, this lack of readily available price information may impair
the ability of holders of common stock to resell their securities. The trading
prices of the common stock could be subject to wide fluctuations in response to
quarterly variations in the Company's operating results, announcements by the
Company or others, developments affecting the Company, or other events or
factors. In addition, the stock market has experienced extreme price and volume
fluctuations in recent years. These fluctuations have had a substantial effect
on the market price for many companies, often unrelated to the operating
performance of such companies, and may adversely affect the market price for the
Company's common stock.


<PAGE>

Potential Effect of Penny Stock Rules on Liquidity of Shares

If the Registrant's securities are not listed on The Nasdaq Stock Market or
certain other national securities exchanges and the price thereof is below
$5.00, then subsequent purchases of such securities will be subject to the
requirements of the penny stock rules, absent the availability of another
exemption. The SEC has adopted rules that regulate broker-dealer practices in
connection with transactions in "penny stocks." Penny stocks generally are
equity securities with a price of less than $5.00 (other than securities
registered on certain national securities exchanges or quoted on The Nasdaq
Stock Market). The penny stock rules require a broker-dealer to deliver a
standardized risk disclosure document required by the SEC, to provide the
customer with current bid and offer quotations for the penny stock, the
compensation of the broker-dealer and its salesperson in the transaction,
monthly account statements showing the market value of each penny stock held in
the customer's account, to make a special written determination that the penny
stock is a suitable investment for the purchaser and receive the purchaser's
written agreement to the transaction. The Registrant is currently subject to the
penny stock rules and, therefore, these disclosure requirements may have the
effect of reducing the level of trading activity in the Registrant's common
stock.

Limitation on Directors' Liabilities under Delaware Law

Pursuant to the Registrant's Certificate of Incorporation, directors of the
Registrant are not liable to the Registrant or its stockholders for monetary
damages for breach of fiduciary duty, except for liability in connection with a
breach of the duty of loyalty, for acts or omissions not in good faith or which
involve intentional misconduct or a knowing violation of law, for dividend
payments or stock repurchases illegal under Delaware law or any transaction in
which a director has derived an improper personal benefit.

Outstanding Options and Warrants

The Company has reserved 71,429 shares of its common stock for issuance upon
exercise of stock options or similar awards which may be granted pursuant to the
Company's 1994 Stock Option Plan (hereinafter the "1994 Plan"), of which options
to purchase an aggregate of 66,235 shares are outstanding. Furthermore, the
Company has reserved 614,286 shares of its common stock for issuance upon
exercise of stock options or similar awards which may be granted pursuant to the
Company's 2000 Stock Option and Restricted Stock Plan (hereinafter the "2000
Plan"), of which options to purchase an aggregate of 500,353 shares are
outstanding. The outstanding options have a weighted average exercise price of
$11.43. The Company has issued warrants exercisable for 82,140 shares of common
stock to financial consultants, investors and other business partners, having a
weighted average exercise price of $5.42 and expiring on various dates from
March 7, 2004 to December 31, 2011.

Exercise of these options and warrants issued by the Registrant in the future
will reduce the percentage of common stock held by the public stockholders.
Furthermore, the terms on which the Company could obtain additional capital
during the life of the options and warrants may be adversely affected, and it
should be expected that the holders of the options and warrants would exercise
them at a time when the Company would be able to obtain equity capital on terms
more favorable than those provided for by such options and warrants.

Issuance of Convertible Preferred Stock with Anti-Dilution Provisions and
Superior Liquidation Preference

In 2002, the Registrant issued 2,346,233 shares of Series A-1 Convertible
Preferred Stock to Summit Energy Ventures for a purchase price of $2,500,000. In
October 2003, the Registrant issued an additional 982,504 shares of Series A-1
Convertible Preferred Stock to Summit Energy Ventures when Summit converted
principal and interest of $1,046,896 that was outstanding under a convertible
note the Registrant issued to Summit in May 2003. The Series A-1 Convertible
Preferred Stock provides the holders of the Series A-1 Convertible Preferred
Stock with protection against dilution. In the event that the Registrant issues
shares at a price less than $1.281 per share, the conversion rights of the
Series A-1 Convertible Preferred Stock will be adjusted so that the Series A-1
Convertible Preferred Stock can convert into such number of shares that Summit
would have received had it bought common stock at such lower price. Currently,
the conversion rights of the Series A-1 Convertible Preferred Stock entitle the
holder of the Series A-1 Convertible Preferred Stock to receive 0.83 shares of
common stock for each share of Series A-1 Convertible Preferred Stock. If all of
the Registrant's outstanding shares of Series A-1 Convertible Preferred Stock
were converted into common stock today, the holder of the Series A-1 Convertible
Preferred Stock would receive 2,768,849 shares of common stock.


<PAGE>

In the event of a Liquidation Event (as defined in the Certificate of
Designation of the Series A-1 Convertible Preferred Stock which includes a
winding up of the Registrant, a sale of substantially all of the Registrant's
assets, and certain mergers and consolidations) the holders of the Series A-1
Convertible Preferred Stock are entitled to two times the price paid by Summit
for such stock. Thereafter, the remaining corporate assets would be distributed
among the holders of common stock and Series A-1 Convertible Preferred Stock on
a pro rata basis. The existence of the Series A-1 Convertible Preferred Stock's
anti-dilution provisions may reduce the percentage of common stock held by the
public stockholders. Furthermore, the terms on which the Registrant could obtain
additional capital may be adversely affected by the Series A-1 Convertible
Preferred Stock's anti-dilution provisions and superior liquidation preference.

Authorization and Discretionary Issuance of Preferred Stock

The Registrant's Certificate of Incorporation authorizes the issuance of "blank
check" preferred stock with such designations, rights and preferences as may be
determined from time to time by the Board of Directors. Accordingly, the
Registrant's Board of Directors is empowered, without stockholder approval, to
issue preferred stock with dividends, liquidation, conversion, voting or other
rights that could adversely affect the relative voting power or other rights of
the holders of the Registrant's common stock. In the event of issuance, the
preferred stock could be used, under certain circumstances, as a method of
discouraging, delaying or preventing a change in control of the Registrant,
which could have the effect of discouraging bids for the Registrant and thereby
prevent stockholders from receiving the maximum value for their shares. Although
the Registrant has no present intention to issue any shares of its preferred
stock, there can be no assurance that the Registrant will not do so in the
future.

Product Liability Risk

The Registrant may be subject to potential product liability claims that could,
in the absence of sufficient insurance coverage, have a material adverse impact
on the Registrant. Presently, the Registrant has general liability coverage that
includes product liability up to $2,000,000. Any large product liability suits
occurring early in the Registrant's growth may significantly and adversely
affect the Registrant's ability to expand the market for its Power Commander(R)
line of products.

No Key Man Insurance

The Registrant presently has no key man life insurance policies. As soon as
practicable following the commencement of profitable operations (of which there
can be no assurance), the Registrant intends to purchase key man life insurance
on the lives of its two principal executive officers, Richard Koch and Nicholas
Anderson. Upon purchase of such insurance, the Registrant intends to pay the
premiums and be the sole beneficiary. The lack of such insurance may have a
material adverse effect upon the Registrant's business.

Line of Credit

At the present time, the Registrant does not have a bank line of credit.

Item 2. Description of Property

The Registrant leases approximately 14,576 square feet of office and warehouse
space located at 35432 Industrial Road, Livonia, MI 48150. The Registrant's
lease began on December 1, 2003 and is due to expire on December 31, 2008. The
base rent is $6,073 per month. The Registrant shares office space located at
75-153 Merle Drive, Suite B, Palm Desert, California 92211 with a major investor
in the Registrant, Summit Energy Ventures, LLC. The Registrant pays $708 per
month and the lease is on a month-to-month basis. The Registrant terminated its
lease at the Ann Arbor location on December 15, 2003. The Registrant terminated
its lease at 40 Nassau Terminal Road, New Hyde Park, New York and abandoned the
property in June 2003. The lease was set to expire on June 30, 2004.


<PAGE>


                                     PART II

Item 5. Market for Common Equity and Related Stockholder Matters

Market for Common Stock

The Registrant's common stock is thinly traded on the National Association of
Securities Dealers' Over the Counter Bulletin Board ("OTCBB") under the symbol
"PEFF".

The following table sets forth the high and low bid information for quarterly
periods in the two twelve month periods ended December 31, 2003 and December 31,
2002, as reported by Pink Sheets LLC. On March 1, 2004, the Company effected a
one for seven reverse stock split. The numbers below and throughout this
Form 10-KSB have been retroactively restated to reflect this reverse split.

Twelve months Ended December 31, 2002                   High      Low
     October 1, 2002-- December 31, 2002               $ 13.30  $  3.85
     July 1, 2002-- September 30, 2002                   22.40    10.15
     April 1, 2002-- June 30, 2002                       22.75    11.20
     January 1, 2002-- March 31, 2002                    26.60     20.3

Twelve months Ended December 31, 2003                   High      Low
     October 1, 2003-- December 31, 2003               $  8.68  $  3.64
     July 1, 2003-- September 30, 2003                    8.96     5.46
     April 1, 2003-- June 30, 2003                        9.31     4.97
     January 1, 2003-- March 31, 2003                     8.82     4.90

As of February 20, 2004, there were 121 shareholders of record of the
Registrant's common stock.

The Registrant has not paid dividends on its common stock since its
incorporation on October 19, 1994. The Registrant does not expect to pay cash
dividends on its common stock in the foreseeable future. The Registrant intends
to invest funds otherwise available for dividends, if any, on improving the
Registrant's capital assets.


                      EQUITY COMPENSATION PLAN INFORMATION
<TABLE>
<CAPTION>

------------------------------------------------------------------------------------------------------------------------------
                                                                                                           Number of
                                                                                                           securities
                                                                                                           remaining
                                                                                                           available for
                                                              Number of                                    future issuance
                                                              securities to be                             under equity
                                                              issued upon         Weighted average         compensation plans
                                                              exercise of         exercise price of        (excluding
                                                              outstanding         outstanding options,     securities
                                                              options, warrants   warrants and rights      reflected in
                                                              and rights (a)      (b)                      column (a))(c)
------------------------------------------------------------------------------------------------------------------------------
<S>                                                           <C>                 <C>                      <C>
Equity compensation plans approved by security holders                0                     -                       0
------------------------------------------------------------------------------------------------------------------------------
Equity compensation plans not approved by security holders          49,999                $4.95                     0
------------------------------------------------------------------------------------------------------------------------------
  Total.......................................................
------------------------------------------------------------------------------------------------------------------------------
</TABLE>

*    49,999 warrants have been issued to non-employee consultants who have
     provided services to the Registrant.

**   The Registrant's Chief Executive Officer, Richard Koch, has entered
     into an employment agreement with the Registrant which provides for the
     payment of $800 per month for an automobile allowance and provides that
     $5,000 per month of Mr. Koch's salary is to be accrued and payable at
     such time that the net cash provided by the operating activities of the
     Registrant is greater than zero for a period of three consecutive
     months. The Registrant and Mr. Koch entered into a subsequent agreement
     whereby Mr. Koch agreed to accept $5,800 worth of common stock (valued
     at the market price) per month in lieu of the automobile allowance and
     deferred salary described above. The number of shares authorized to be
     issued pursuant to this subsequent agreement was not stated. However,
     either the Registrant or Mr. Koch may terminate the agreement at any
     time. This agreement was not approved by the Registrant's stockholders.

<PAGE>

Recent Sales of Unregistered Securities

Sales Made to Summit Energy Ventures

The following details several different sales of unregistered securities the
Registrant made to Summit Energy Ventures, LLC, a private equity firm
specializing in energy related technologies ("Summit"). All of the sales were
exempt from registration under the Securities Act of 1933, as amended (the
"Securities Act"), pursuant to section 4(2) of the Securities Act.

On June 14, 2002, the Registrant sold 2,346,233 shares of Series A-1 Convertible
Preferred Stock, $.001 par value per share, for $2,500,000. The shares were
convertible into common stock at an initial rate of 2 for 1. The conversion
price was subject to anti-dilution provisions and was lowered when the
Registrant issued common stock at less than $3.7296 per share. In connection
with the above described transaction, Summit also received a stock purchase
warrant (the "Summit Warrant") that was exercisable after January 1, 2004 and
prior to June 14, 2012, to purchase such number of shares of Series A-2
Convertible Preferred Stock, $.001 par value per share, or common stock, $.001
par value per share, of the Registrant that would result in Summit owning 51% of
the Registrant's fully diluted equity. By the terms of the Summit Warrant, the
number of shares issuable upon exercise of the Summit Warrant adjusted with the
number of shares of the Registrant outstanding and the number of shares issuable
pursuant to options and warrants. The exercise price of the Summit Warrant was a
function of the Registrant's earnings and was zero when the Summit Warrant was
later exercised.

On May 8, 2003, the Registrant closed on a line of credit from Summit. Pursuant
to the terms of the revolving credit note entered into between the Registrant
and Summit (the "Note"), the Registrant received a $1 million line of credit
from Summit. Summit had the ability at any time to give the Registrant notice of
its desire to convert any portion of the balance of the Note and interest into
Series A-1 Convertible Preferred Stock at the price of $1.0655 per share. At
that time, the Registrant would have seven days to repay Summit the amount
Summit had indicated it desired to convert. In the event that the amount was not
repaid in seven days, Summit would receive Series A-1 Convertible Preferred
Stock. Upon conversion, the warrant the Registrant issued to Summit in June of
2002 would be expanded. According to the original terms of the Summit Warrant,
Summit had the right to purchase such number of shares of stock in the
Registrant that would give Summit a 51% interest in the Registrant. Upon
conversion of the Note, the Summit Warrant would be expanded to give Summit the
right to purchase an approximately 60% interest in the Registrant. As
consideration for the line of credit, the Registrant paid Summit a $50,000 fee
which was paid with the proceeds of the Registrant's first draw under the Note.
The outstanding balance on the Note accrued interest at 15%.

On October 30, 2003, Summit notified the Company that it desired to convert all
of the outstanding principal and interest on the note ($1,046,896) into 982,504
shares of Series A-1 Convertible Preferred Stock. The Company did not have the
ability to pay off the outstanding balance. As a result, the Company issued
982,504 shares of Series A-1 Convertible Preferred Stock to Summit. As a result
of the conversion, the Summit Warrant thereafter gave Summit the right to
purchase such number of shares that, when combined with the 2,346,233 shares of
Series A-1 Preferred Stock purchased by Summit in June of 2002 but excluding the
other shares held by Summit, would give Summit a 60.53% interest in the Company,
on a fully diluted basis. The Summit Warrant became exercisable on January 1,
2004 and had an expiration date of June 14, 2012. The conversion of the note
also caused the conversion price of the 3,328,737 shares of Series A-1
Convertible Preferred Stock to be lowered to $1.281. As a result, the 3,328,737
outstanding shares of Series A-1 Convertible Preferred Stock are currently
convertible into 2,768,849 shares of common stock.

On February 18, 2003, Summit gave notice to exercise the Summit Warrant for
shares of the Company's common stock. The number of shares of common stock the
Summit Warrant was exercisable for on the date of the notice was 3,461,285.
According to the terms of the Summit Warrant, the calculation of the number of
shares outstanding on a fully diluted basis includes all shares authorized under
the Company's stock option plans and all warrants issued by the Company that are
still outstanding. Because not all of the shares authorized under the Company's
stock option plans were issued, and because certain options and warrants issued
by the Company had strike prices that were considerably higher than the current
market price, Summit volunteered to reduce the number of shares it was entitled
to under the Summit Warrant. The Company and Summit believe that because these
options and warrants were significantly "out of the money", they are unlikely to
be exercised. After negotiation between the Company and Summit and an
examination of how many options and warrants were significantly "out of the
money", the Company and Summit executed a Warrant Agreement, dated February 26,
2004 (see Exhibit 10.34) to exercise the Summit Warrant for 3,134,102 shares of
common stock as full performance under the Summit Warrant.

<PAGE>

Sales Made to Purchasers Other than Summit Energy Ventures

On various dates from May 2003 to January 2004, the Company issued 682,156
shares of common stock to Starz Investments Limited, a Belize company. The
Company received $1,261,089 for these shares and paid $88,276 in commissions to
Burnham Securities. Additionally, the Company also issued Burnham Securities
48,303 common stock purchase warrants as compensation related to these
transactions. The warrants had strike prices that varied from approximately
$1.40 to $1.75. These warrants were exercised cashlessly resulting in 32,958
shares being issued at an effective strike price of zero. The sales of stock to
Starz Investments Limited were exempt from registration under the Securities Act
pursuant to Regulation S promulgated under the Securities Act. The ssuance of
the warrants to Burnham Securities was exempt from registration under the
Securities Act pursuant to section 4(2) of the Securities Act. Burnham
Securities cashlessly exercised the warrants on various dates and received
33,673 shares.

On February 26, 2004, the Company issued 174 shares of common stock to Leonard
Bellezza. The shares were issued in exchange for the cancellation of debt owed
to Mr. Bellezza in the amount of $800. The issuance was exempt from registration
under the Securities Act pursuant to Regulation D. Mr. Bellezza is a director of
the Company.

On January 8, 2004, the Company issued 15,397 shares of common stock to Raymond
Skiptunis. The shares were issued in exchange for the cancellation of debt owed
to Mr. Skiptunis in the amount of $71,130. The issuance was exempt from
registration under the Securities Act pursuant to Regulation D. Mr. Skiptunis is
a director of the Company.

On various dates from December 2003 to February 27, 2004, the Company issued
15,103 shares of common stock to Richard Koch. The shares were issued in
exchange for the cancellation of debt owed to Mr. Koch in the amount of $60,866.
The issuances were exempt from registration under the Securities Act pursuant to
Regulation D. Mr. Koch is the Chief Executive Officer and a director of the
Company.

On October 3, 2003, the Company issued 32,145 shares of common stock to its
former Chief Executive Officer, Stephen Shulman. The shares were issued in
connection with the settlement of a claim Mr. Shulman made against the Company
pursuant to a change of control provision in his employment agreement. The
issuance was exempt from registration under the Securities Act pursuant to
Regulation D. Mr. Shulman is an accredited investor.

On September 30, 2003, the Company issued 76,663 shares of common stock to
Nicholas Anderson. The shares were issued in exchange for the cancellation of
debt owed to Mr. Anderson in the amount of $466,875. The issuance was exempt
from registration under the Securities Act pursuant to Regulation D. Mr.
Anderson is the Chief Technology Officer and a director of the Company.

On September 30, 2003, the Company issued 32,143 shares of common stock to
Nicholas Anderson. The shares were issued in connection with the settlement of a
potential claim Mr. Anderson had against the Company pursuant to a change of
control provision in his employment agreement. The issuance was exempt from
registration under the Securities Act pursuant to Regulation D. Mr. Anderson is
the Chief Technology Officer and a director of the Company.

On various dates during the first half of 2003, the Company issued 40,357 shares
of common stock to various accredited investors in connection with a private
placement pursuant to section 4(2) of the Securities Act. The shares were
issued for an aggregate consideration of $158,200. The issuance was exempt from
registration under the Securities Act pursuant to Regulation D. The investors
were all accredited investors.

In early 2003, the Company issued 13,889 shares of common stock to an investment
banker for advisory and consulting services. The issuance was exempt from
registration under the Securities Act pursuant to Regulation D.

On April 15, 2002, the Company issued 7,143 shares of common stock to a
consultant, who subsequently became an officer of the Company and a member of
the Board of Directors of the Company, for services rendered.

On May 14, 2001, the Company issued 16,965 shares of common stock to an
accredited investor. The shares were sold for $400,000. The issuance was exempt
from registration under the Securities Act pursuant to Regulation D.

On June 19, 2001, the Company issued 1,429 shares of common stock to a service
provider. The shares were issued in exchange for the cancellation of fees owed
to the service provider of $30,000. The issuance was exempt from registration
under the Securities Act pursuant to Regulation D.


<PAGE>


Item 6. Management's Discussion and Analysis or Plan of Operation

OVERVIEW

The Registrant generates revenues from a single business segment: the design,
development, marketing and sale of proprietary solid state electrical components
designed to reduce energy consumption in alternating current induction motors.

The Registrant began generating revenues from sales of its patented Power
Commander(R) line of motor controllers in late 1995. As of December 31, 2003,
the Registrant had total stockholders' equity of $2,182,980 primarily due to the
Registrant's sale of 2,346,233 shares of Series A-1 Convertible Preferred stock
to Summit Energy Ventures, LLC in June of 2002 and the conversion of notes
payable of approximately $1,047,000 into 982,504 shares of Series A-1
Convertible Preferred stock in October of 2003. In addition, in August 2000, the
Registrant purchased the assets of Percon, formerly the largest distributor of
the Registrant's products. The transaction was accounted for as a purchase and
the Registrant's Statements of Operations includes Percon's results of
operations since the date of acquisition. The consolidation of the operations of
both entities allowed the Registrant to integrate the administrative, sales,
marketing and manufacturing operations of Percon. Percon had developed sales
contacts with major OEM's in the elevator/escalator industry and transferred
those agreements to the Registrant as part of the asset sale.

RESULTS OF OPERATIONS: FISCAL YEAR 2003 COMPARED TO FISCAL YEAR 2002

REVENUES

Revenues for the twelve months ended December 31, 2003, were $397,673 compared
to $538,819 for the twelve months ended December 31, 2002, a decrease of
$141,146, or 26%. The decrease in revenues was principally attributable to
reorganization issues including funding deficiencies and change in management.

COST OF REVENUES

Cost of revenues for the twelve months ended December 31, 2003 were $360,972
compared to $480,310 for the twelve months ended December 31, 2002, a decrease
of $119,338 or 25%. The decrease in cost of revenues was primarily attributed to
the decrease in revenues and an overall reduction in the cost of materials from
the Registrant's suppliers. These improvements were partially offset by an
increase in the inventory obsolescence expense to $100,000 for the twelve months
ended December 31, 2003 compared to $50,000 for the twelve months ended December
31, 2002, an increase of $50,000 or 100%. This increase in the reserve was
principally attributable to reserves taken for certain inventory components used
exclusively in slow moving products.

GROSS MARGIN

Gross margin for the twelve months ended December 31, 2003 were $36,701 compared
to $58,509 for the twelve months ended December 31, 2002, a decrease of $21,808
or 37%. The decrease was primarily due to the increase in the inventory
obsolescence expense described above.  Excluding the inventory, obsolescence
expense, gross margin as a percentage of revenue for the twelve months ended
December 31, 2003 was 34% compared to 20% for the twelve months ended December
31, 2002. The improvement was primarily attributable to a decrease in the cost
of materials from the Registrant's supplier.


OPERATING EXPENSES

Research and Development Expenses

Research and development expenses were $420,376 for the twelve months ended
December 31, 2003 compared to $426,106 for the twelve months ended December 31,
2002, a decrease of $5,730 or 1%. Costs incurred were for the development of the
low cost, low horsepower Platform A product family, the single-phase controller,
and the fast-reaction integrator board.

Selling, General and Administrative Expenses

Selling, general and administrative expenses were $2,392,754 for the twelve
months ended December 31, 2003 compared to $1,802,491 for the twelve months
ended December 31, 2002, an increase of $590,263 or 33%. The increase in
selling, general and administrative expenses was due primarily to the
recognition of compensation expense associated with settlements of change in
control provisions in employment contracts with current and former officers of
the company.

Financial Condition, Liquidity, and Capital Resources: For the Year Ended
December 31, 2003

Since inception, the Registrant has financed its operations primarily through
the sale of its equity securities. As of December 31, 2003, the Registrant has
received a total of approximately $6,070,000 from public and private offerings
of its equity securities, received approximately $445,386 under a bank line of
credit (which was repaid during 2002), and received $1,000,000 under a line of
credit with a shareholder (which was converted to Series A-1 Preferred
Convertible shares during 2003). As of December 31, 2003, the Registrant had
cash and cash equivalents of $285,508.


<PAGE>

Net cash used for operating activities for the twelve months ended December 31,
2003 was $2,028,798 which primarily consisted of: a net loss of $3,016,717; less
allowances for bad debts and customer returns of $17,000; allowances for
inventory obsolescence of $100,000, and impairment of customer contracts of
$40,948, depreciation and amortization of $120,700, additional paid in capital
related to issuance of stock options of $77,158; common stock issued for
services of $614,991; increase converted to debt of $46,894 and decreases in
accounts receivable of $31,511 and inventory of $43,353. In addition, these
amounts were partially offset by an increase in prepaid expenses of $18,832, and
deposits of $2,646, and decreases in accounts payable and accrued expenses of
$63,866 and accrued salaries and payroll taxes of $19,294.

Net cash used for operating activities for the twelve months ended December 31,
2002 was $1,690,250 which primarily consisted of: a net loss of $2,354,775; less
depreciation and amortization of $132,216, additional paid in capital related to
issuance of stock options of $312,741, Common stock issued for services of
$167,500, and interest accrued on stockholders, officers and former officers'
loans of $28,174; decreases in inventory of $105,522; and an accrued salaries
andpayroll taxes of $94,487. In addition, these amounts were partially offset by
increases in inventory of $76,118 and deposits of $9,628, and a decrease in
accounts payable and accrued expenses of $90,369.

Net cash used in investing activities for fiscal year 2003 was $42,617, compared
to $7,214 in fiscal year 2002. The amounts for both years consisted of the
purchase of fixed assets.

Net cash provided by financing activities for fiscal year 2003 was $2,099,215,
which primarily consisted of proceeds from the issuance of equity securities of
$1,131,965, net of costs, and advances from line of credit of $1,000,000;
off-set by deferred financing costs of $32,750. Net cash provided by financing
activities for fiscal year 2002 was $1,919,927, which primarily consisted of
proceeds from the issuance of equity securities of $2,380,000, and loans from
stockholders, officers,and former officers of $155,438, net of costs; offset by
repayments on a line of credit of $445,386 and payment son loans to
stockholders, officers, and former officers of $170,125.

The Registrant expects to experience growth in its operating expenses,
particularly in research and development and selling, general and administrative
expenses, for the foreseeable future in order to execute its business strategy.
As a result, the Registrant anticipates that operating expenses will constitute
a material use of any cash resources.

Cash Requirements and Need for Additional Funds

The Company anticipates a substantial need for cash to fund its working capital
requirements. In accordance with the Company's prepared expansion plan, it is
the opinion of management that approximately $2.0 million will be required to
cover operating expenses, including, but not limited to, marketing, sales and
operations during the next twelve months.

On October 16, 2003, the Company entered into an agreement with an investment
banker whereby the investment banker would provide the company with investment
banking services. The investment banker was retained with the intention of
attempting to raise $10 million or more through a public sale of stock in the
first quarter of 2004. Since the agreement was executed, the Company has learned
that such a transaction is probably not possible until after the Company has
generated substantially greater sales than it has generated in the past.
Consequently, the Company will continue to explore this possibility but will
probably not conduct a secondary stock offering until at least the third quarter
of 2004, if ever. On February 25, 2004, the Company signed a formal letter of
agreement with the same investment banker. Under this letter the Company
appointed the investment banker, as its exclusive representative for 120 days,
to attempt to raise money for the Company. The investment banker will introduce
the Company to investors and participate in presentations to investors to
purchase the Company's restricted securities, including convertible notes, in a
mehtod not requiring registration with the U.S. Securities and Exchange
Commission or the securities commission of any state. The Company has agreed to
pay the investment banker 10% of the gross proceeds of restricted securities
sold during the agreement and for a period of twelve months after the
termination of the agreement. Also, if the Company is acquired, merged, or
enters into a joint venture with an investor introduced by the investment
banker, the Company agrees to pay a fee of 3% of the gross proceeds (cash stock,
other assets acquired or debt assumed). The Company will pay up to $25,000 in
expenses of the investment banker associated with transactions under the
agreement.

Recent Accounting Pronouncements

See "Note 2 - Summary of Significant Accounting Policies" of the Financial
Statements for an explanation of recent accounting pronouncements.


<PAGE>


Item 7. Financial Statements











<PAGE>

                          POWER EFFICIENCY CORPORATION

                              FINANCIAL STATEMENTS

                           DECEMBER 31, 2003 AND 2002



<PAGE>


POWER EFFICIENCY CORPORATION

DECEMBER 31, 2003 AND 2002




INDEX

<TABLE>
<CAPTION>
                                                                                                           Page
                                                                                                           ----

<S>                                                                                                      <C>
Independent Auditors' Report.............................................................................   F-1

Financial Statements:

    Balance Sheet........................................................................................   F-2

    Statements of Operations.............................................................................   F-3

    Statements of Changes in Stockholders' Equity........................................................   F-4

    Statements of Cash Flows.............................................................................   F-5

Notes to Financial Statements........................................................................... F-6 - F-23
</TABLE>



<PAGE>


INDEPENDENT AUDITORS' REPORT


Board of Directors and Stockholders
Power Efficiency Corporation
Livonia, Michigan


We have audited the accompanying balance sheet of Power Efficiency Corporation,
(a Delaware corporation) (the "Company") as of December 31, 2003, and the
related statements of operations, changes in stockholders' equity, and cash
flows for each of the years ended December 31, 2003 and 2002. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.

We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.

In our opinion, the financial statements present fairly, in all material
respects, the financial position of Power Efficiency Corporation at December 31,
2003 and the results of its operations and its cash flows for the years ended
December 31, 2003 and 2002 in conformity with accounting principles generally
accepted in the United States of America.

The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 3 to the
financial statements, the Company has suffered recurring losses from operations,
the Company continues to experience a deficiency of cash flow from operations
and lacks sufficient liquidity to continue its operations. These matters raise
substantial doubt as to the Company's ability to continue as a going concern.
Management's plans in regard to these matters are also discussed in Note 3. The
financial statements do not include any adjustments that might result from the
outcome of these uncertainties.


                                              /s/Sobel & Co., LLC
                                              Certified Public Accountants

January 30, 2004, except for Note 20,
for which the date is March 1, 2004
Livingston, New Jersey



<PAGE>


POWER EFFICIENCY CORPORATION
BALANCE SHEET
DECEMBER 31, 2003
================================================================================

<TABLE>
<CAPTION>
<S>                                                                                  <C>
ASSETS

CURRENT ASSETS:
  Cash and cash equivalents                                                          $    285,508
  Accounts receivable, net of reserve and allowance of $33,982                             38,727
  Inventories                                                                             360,670
  Prepaid expenses                                                                         28,460
                                                                                     ------------
    Total Current Assets                                                                  713,365
                                                                                     ------------

PROPERTY AND EQUIPMENT, Net                                                                90,423
                                                                                     ------------

OTHER ASSETS:
  Deposits                                                                                 18,146
  Patents, net                                                                             14,004
  Goodwill                                                                              1,929,963
  Customer manuals and sales literature, net                                               27,247
  Website, net                                                                             16,292
  Deferred financing costs                                                                 32,750
                                                                                     ------------
    Total Other Assets                                                                  2,038,402
                                                                                     ------------

                                                                                     $  2,842,190
                                                                                     ============

LIABILITIES AND STOCKHOLDERS' EQUITY

CURRENT LIABILITIES:
  Accounts payable and accrued expenses                                              $    500,584
  Accrued salaries and payroll taxes                                                       43,626
  Note payable - former officer                                                            45,000
                                                                                     ------------
    Total Current Liabilities                                                             589,210
                                                                                     ------------

LONG-TERM LIABILITIES:
  Note payable - former officer                                                            70,000
                                                                                     ------------

    Total Liabilities                                                                     659,210
                                                                                     ------------

COMMITMENTS AND CONTINGENCIES

STOCKHOLDERS' EQUITY:
  Series A-1 convertible preferred stock, $.001 par value,
    10,000,000 shares authorized, 3,328,737 shares issued and outstanding                   3,329
  Common stock, $.001 par value, 7,142,857 shares
    authorized, 1,847,535 shares issued and outstanding                                     1,849
  Additional paid-in capital                                                           15,219,847
  Subscriptions receivable                                                               (181,045)
  Accumulated deficit                                                                 (12,861,000)
                                                                                     ------------
   Total Stockholders' Equity                                                           2,182,980
                                                                                     ------------


                                                                                     $  2,842,190
                                                                                     ============
</TABLE>

================================================================================
See independent auditors' report and notes to financial statements.          F-2
<PAGE>

POWER EFFICIENCY CORPORATION
STATEMENTS OF OPERATIONS
================================================================================


                                                     Year Ended December 31,
                                                     2003               2002
                                                -------------------------------

REVENUES                                        $   397,673        $   538,819
                                                -----------        -----------

COMPONENTS OF COST OF SALES:
  Material, labor and overhead                      260,972            430,310
  Inventory obsolesence                             100,000             50,000
                                                -----------        -----------
     Total Cost of Sales                            360,972            480,310
                                                -----------        -----------

GROSS MARGIN                                         36,701             58,509
                                                -----------        -----------

COSTS AND EXPENSES:
  Research and development                          420,376            426,106
  Selling, general and administrative             2,392,754          1,802,491
  Depreciation and amortization                     120,700            132,216
                                                -----------        -----------
    Total Costs and Expenses                      2,933,830          2,360,813
                                                -----------        -----------

LOSS FROM OPERATIONS                             (2,897,129)        (2,302,304)

OTHER INCOME (EXPENSE):
  Interest income                                       380              7,595
  Interest expense                                 (115,468)           (54,356)
                                                -----------        -----------
    Total Other Expenses, Net                      (115,088)           (46,761)
                                                -----------        -----------

LOSS BEFORE PROVISION FOR TAXES                  (3,012,217)        (2,349,065)

PROVISION FOR TAXES                                  (4,500)            (5,710)
                                                -----------        -----------

NET LOSS                                        $(3,016,717)       $(2,354,775)
                                                ===========        ===========

BASIC LOSS PER COMMON SHARE                     $     (2.48)       $     (2.51)
                                                ===========        ===========


WEIGHTED AVERAGE COMMON
  SHARES OUTSTANDING                              1,215,682            937,429
                                                ===========        ===========



================================================================================
See independent auditors' report and notes to financial statements.          F-3

<PAGE>

POWER EFFICIENCY CORPORATION
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
YEAR ENDED DECEMBER 31, 2003 AND 2002
================================================================================



<TABLE>
<CAPTION>
                                                                                             Additional                   Total
                                           Common Stock      Preferred Stock   Subscriptions  Paid-in    Accumulated  Stockholders'
                                        Shares   Amount    Shares      Amount    Receivable   Capital      Deficit        Equity
                                     ----------------------------------------------------------------------------------------------
<S>                                  <C>        <C>       <C>         <C>     <C>          <C>           <C>          <C>

Balance, January 1, 2002               931,874  $   932          --   $    --  $       --   $ 8,875,504  $ (7,489,508) $  1,386,928
Sale of preferred stock net of costs        --       --   2,346,233     2,346          --     2,377,654            --     2,380,000
Common stock issued for disputed
  accounts payable                       1,071        1          --        --          --        16,310            --        16,311
Common stock issued for disputed
  services rendered                      7,143        7          --        --          --       167,493            --       167,500
Cancellation, reissuance and
  issuance of stock options                 --       --          --        --          --       312,741            --       312,741
Net loss 2002                               --       --          --        --          --            --    (2,354,775)   (2,354,775)
                                     ---------  -------   ---------   -------  ----------   -----------  ------------  ------------
Balance, December 31, 2002             940,088      940   2,346,233     2,346          --    11,749,702    (9,844,283)    1,908,705
Issuance of common stock               684,765      685          --        --    (181,045)    1,228,037            --     1,047,677
Exercise of warrants                    50,100       51          --        --          --        84,237            --        84,288
Conversion of Summit debt to
  preferred stock                           --       --     982,504       983          --     1,045,913            --     1,046,896
Common stock issued for settlement
  of compensation and other accrued
  expenses                             172,582      173          --        --          --     1,034,800            --     1,034,973
Non-qualified stock options issued
  below market                              --       --          --        --          --        77,158            --        77,158
Net loss 2003                               --       --          --        --          --            --    (3,016,717)   (3,016,717)
                                     ---------  -------   ---------   -------  ----------   -----------  ------------  ------------

Balance, December 31, 2003           1,847,535  $ 1,849   3,328,737   $ 3,329  $ (181,045)  $15,219,847  $(12,861,000) $  2,182,980
                                     =========  =======   =========   =======  ==========   ===========  ============  ============
</TABLE>


================================================================================
See independendent auditors' report and notes to financial statements.       F-4



<PAGE>

POWER EFFICIENCY CORPORATION
STATEMENTS OF CASH FLOWS
================================================================================

<TABLE>
<CAPTION>
                                                                                 Year Ended December 31,
                                                                             2003                     2002
                                                                         -----------------------------------
<S>                                                                      <C>                     <C>
CASH FLOWS PROVIDED BY (USED FOR):
  OPERATING ACTIVITIES:
    Net loss                                                             $(3,016,717)            $(2,354,775)
      Adjustments to reconcile net loss to net cash
        used for operating activities:
          Bad debt expense                                                    17,000                     -
          Inventory obsolescence reserve                                     100,000                     -
          Impairment of customer contracts                                    40,948                     -
          Depreciation and amortization                                      120,700                 132,216
          Issuance of stock options below market value                        77,158                 312,741
          Common stock issued for services                                   614,991                 167,500
          Interest converted to debt                                          46,896                     -
          Interest accrued on stockholder, officers and
            former officers' loans                                               -                    28,174
          Changes in certain assets and liabilities:
             (Increase) decrease in:
Accounts receivable                                                           31,511                 (76,118)
Inventory                                                                     43,353                 105,522
Prepaid expenses                                                             (18,832)                 (9,628)
Deposits                                                                      (2,646)                    -
              Increase (decrease) in:
Accounts payable and accrued expenses                                        (63,866)                (90,369)
Accrued salaries and payroll taxes                                           (19,294)                 94,487
                                                                         -----------------------------------
      Net Cash Used for Operating Activities                              (2,028,798)             (1,690,250)
                                                                         -----------------------------------

  INVESTING ACTIVITIES:
    Purchase of property, equipment and other assets                         (42,617)                 (7,214)
                                                                         -----------------------------------

  FINANCING ACTIVITIES:
    Deferred financing costs                                                 (32,750)                    -
    Proceeds from issuance of equity securities, net of costs              1,131,965               2,380,000
    Proceeds (payments) on line of credit agreement                        1,000,000                (445,386)
    Loans from stockholders, officers, and former officers                       -                   155,438
    Payments on loans to stockholders, officers and
      former officers                                                            -                  (170,125)
                                                                         -----------------------------------
      Net Cash Provided by Financing Activities                            2,099,215               1,919,927
                                                                         -----------------------------------

INCREASE IN CASH AND
  CASH EQUIVALENTS                                                            27,800                 222,463

CASH AND CASH EQUIVALENTS:
    Beginning of year                                                        257,708                  35,245
                                                                         -----------------------------------
    End of year                                                          $   285,508             $   257,708
                                                                         ===================================
</TABLE>





================================================================================
    See independent auditors' report and notes to financial statements.      F-5

<PAGE>

POWER EFFICIENCY CORPORATION
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2003 AND 2002
================================================================================

--------------------------------------------------------------------------------
NOTE 1  -  NATURE OF BUSINESS:
--------------------------------------------------------------------------------

Power Efficiency Corporation ("Power Efficiency" and/or the "Company"), was
incorporated in Delaware on October 19, 1994. Power Efficiency designs,
develops, markets and sells proprietary solid state electrical devices designed
to effectively reduce energy consumption in alternating current induction
motors. Alternating current induction motors are commonly found in industrial
and commercial facilities throughout the world. The Company currently has two
principal and proprietary products: the Three Phase Power Commander(R), which is
used in industrial applications, and the Single Phase Power Commander(R), which
is used in consumer applications. The Company also engages in research and
development of new, related energy saving products.

The Company's primary customers have been original equipment manufacturers
(OEM's) and commercial accounts located throughout the United States of America,
Mexico, China, and Canada. Since the third quarter of 2003, the Company began to
actively market to international distributors and directly to large national
accounts.

On September 15, 2003, Power Efficiency formed DesignEfficient Energy Services,
LLC, a Delaware limited liability company. This entity will primarily be used in
the future to obtain energy grants and rebates for customers of the Company from
state governmental bodies. DesignEfficient Energy Services, LLC has been
inactive since inception and as a result there is no consolidation effect.


--------------------------------------------------------------------------------
NOTE 2  -  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
--------------------------------------------------------------------------------

Share Amounts:
In accordance with U.S. Securities and Exchange Commission SAB Topic 4C., the
shares on the financial statements and notes to financial statements, including
per share amounts are presented after applying retroactively a 1 for 7 reverse
stock split effective after the balance sheet date (see Note 20).

Use of Estimates:
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results may differ from those estimates.

Cash Equivalents:
The Company considers all highly liquid investments with an original maturity of
three months or less to be "Cash Equivalents".

Inventories:
Inventories are valued at the lower of cost (first-in, first-out) or market. The
Company reviews inventory for impairments to net realizable value whenever
circumstances warrant.

Accounts Receivable:
The Company carries its accounts receivable at cost less an allowance for
doubtful accounts and returns. On a periodic basis, the Company evaluates its
accounts receivable and establishes an allowance for doubtful accounts, based on
a history of past write-offs and collections and current credit conditions.

Property, Equipment and Depreciation:
Property and equipment are stated at cost. Maintenance and repairs are expensed
as incurred, while betterments are capitalized. Depreciation is computed using
the straight-line method over the estimated useful lives of the assets, which
range from 3 to 7 years.


================================================================================
                                                                             F-6

<PAGE>

POWER EFFICIENCY CORPORATION
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2003 AND 2002
================================================================================

--------------------------------------------------------------------------------
NOTE 2  -  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (Continued)
--------------------------------------------------------------------------------

Patents:
Costs associated with applying for U.S. patents based upon technology developed
by the Company are capitalized. At the time the patent is awarded, the asset
will be amortized over the remaining term of the patent. If no patent is issued,
these costs will be expensed in the period when it is determined that no patent
will be issued.

Goodwill:
The Company previously adopted the provisions of SFAS No. 142, "Goodwill and
Other Intangible Assets". SFAS No. 142 requires that goodwill shall no longer be
amortized. There was no goodwill amortization during 2003 or 2002. Goodwill is
tested periodically for impairment.

Customer Contracts, Manuals and Sales Literature and Amortization:
Customer contracts, manuals and sales literature acquired in connection with a
business acquisition are deferred and amortized on the straight-line method over
five years.

Website, Customer List and Amortization:
Website and customer list are stated at cost. Website costs capitalized include
application and infrastructure development stage costs and graphics.
Amortization is computed based upon the estimated useful life of the website and
customer list, which is three years. Website maintenance and hosting costs are
charged to expense as incurred.

Deferred Financing Costs and Debt Commitment Fees:
Expenditures incurred in conjunction with debt or equity capital issuances are
deferred as other assets. Such costs will be offset against equity proceeds,
amortized over the life of the debt, or expensed if the offering is not
completed.

Commitment fees paid to a lender are deferred and amortized using the interest
method over the life of the debt. The amortization amount is recognized as
interest expense.


Long-Lived Assets and Acquired Intangible Assets:
The Company monitors events and changes in circumstances that could indicate
carrying amounts of long-lived assets, including amortizable intangible assets,
may not be recoverable. When such events or changes in circumstances occur, the
Company assesses the recoverability of long-lived assets by determining whether
the carrying value of such assets will be recovered through undiscounted
expected future cash flows. If the undiscounted cash flows are less than the
carrying amount, an impairment loss is recorded to the extent that the carrying
amount exceeds the fair value.

Revenue Recognition:
Revenue from product sales to OEM's and distributors is recognized at the time
of shipment when all services are complete. Revenue to end users is generally
recognized at the time of shipment, but is deferred if the sale is considered
conditional as of the end of the accounting period based on the terms of the
sales agreement. Returns and other sales adjustments (discounts and shipping
credits) are provided for in the same period the related sales are recorded.

Product Warranties:
The Company warrants its products for eighteen months. During the warranty
period, the Company's policy is to replace the defective product. The Company
has been providing for warranty costs as they are incurred. The Company
periodically reviews warranty claims and will establish a reserve for warranty
claims when such amount is determinable and necessary based on historical
information.

Shipping and Handling Costs:
The Company bills customers for freight. Actual costs for shipping and handling
are included as components of cost of sales.

================================================================================
                                                                             F-7

<PAGE>

POWER EFFICIENCY CORPORATION
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2003 AND 2002
================================================================================

--------------------------------------------------------------------------------
NOTE 2  -  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (Continued)
--------------------------------------------------------------------------------

Accounting for Stock Based Compensation:
The Company has elected to follow Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" (APB25). If the option price under
the Stock Option Plans equals or exceeds the fair market value of the common
shares on the date of grant, no compensation cost is recognized under the
provisions of APB25 for stock options. If the option price under the Stock
Option Plans is less than the fair market value of the common stock on the date
of grant, compensation cost is recognized for the difference.

The Company adopted the disclosure-only provisions of Statement of Financial
Accounting Standards (SFAS) No. 123, "Accounting for Stock-Based Compensation"
for stock options issued. Under SFAS No. 123, compensation cost is measured at
the grant date based on the value of award and is recognized over the service
(or vesting period). SFAS No. 148, "Accounting for Stock-Based Compensation -
Transition and Disclosure", amended the disclosure requirements of SFAS No.123
to require prominent disclosures about the method of accounting for stock-based
employee compensation and the effect of the method used on reporting results.

Research and Development:
Research and development expenditures are charged to expense as incurred.

Advertising:
Advertising costs are expensed as incurred.

Loss Per Common Share:
Loss per common share is determined by dividing net loss available to common
stockholders by the weighted average number of common shares outstanding during
the year. Diluted loss per share is not presented since giving effect to
potential common shares would be anti-dilutive.


Provision for Income Taxes:
The Company utilizes the asset and liability method of accounting for income
taxes pursuant to SFAS No. 109, "Accounting for Income Taxes". SFAS No. 109
requires the recognition of deferred tax assets and liabilities for both the
expected future tax impact of differences between the financial statement and
tax basis of assets and liabilities, and for the expected future tax benefit to
be derived from tax loss and tax credit carryforwards. SFAS No. 109 additionally
requires the establishment of a valuation allowance to reflect the likelihood of
realization of deferred tax assets.

The provision for taxes represents state franchise taxes.

New Accounting Pronouncements:
The Financial Accounting Standards Board ("FASB") has issued several new
standards which have become effective during 2003. SFAS No. 148, "Accounting for
Stock Based Compensation"; SFAS No. 149, "Amendment of SFAS No. 133 on
Derivative Instruments and Hedging Activities"; SFAS No. 150, "Accounting for
Certain Financial Instruments with Characteristics of Both Liabilities and
Equity"; FASB Interpretation No. 45, "Guarantor's Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of
Others"; FASB Interpretation No. 46 (Revised) "Consolidation of Variable
Interest Entities" and SFAS No. 132 (Revised), "Employers Disclosures about
Pensions and Other Postretirement Benefits". Management does not believe that
the provisions and interpretations of these pronouncements, that are applicable
to the Company, have a material impact on the Company's financial statements.

Financial Statement Reclassifications:
Certain reclassifications have been made to the 2002 financial statements to
conform to the 2003 financial statement presentation.


================================================================================
                                                                             F-8

<PAGE>

POWER EFFICIENCY CORPORATION
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2003 AND 2002
================================================================================

--------------------------------------------------------------------------------
NOTE 3  -  GOING CONCERN:
--------------------------------------------------------------------------------

The accompanying financial statements have been prepared assuming the Company is
a going concern, which assumption contemplates the realization of assets and
satisfaction of liabilities in the normal course of business. The Company has
suffered recurring losses from operations, a recurring deficiency of cash from
operations, including an approximate $2,250,000 deficiency for the year ended
December 31, 2003 and lacks sufficient liquidity to continue its operations.

These factors raise substantial doubt about the Company's ability to continue as
a going concern. The financial statements do not include any adjustments
relating to the recoverability and classification of recorded asset amounts or
the amount of liabilities that might be necessary should the Company be unable
to continue in existence.

Continuation of the Company as a going concern is dependent upon achieving
profitable operations. Management's plans to achieve profitability include
developing new products, obtaining new customers and distribution channels, and
increasing sales to existing customers. Management is seeking to raise
additional capital through equity issuance, debt financing or other types of
financing. (see Note 20) However, there are no assurances that sufficient
capital will be raised.


--------------------------------------------------------------------------------
NOTE 4  -  PROPERTY AND EQUIPMENT:
--------------------------------------------------------------------------------

At December 31, 2003, property and equipment is comprised as follows:

     Machinery and equipment                                    $132,993
     Office furniture and equipment                              124,891
                                                              -----------
                                                                 257,884
     Less:  Accumulated depreciation                             167,461
                                                              -----------
               Property and Equipment, Net                      $ 90,423
                                                              ===========

Depreciation for the years ended December 31, 2003 and 2002 amounted to $46,445
and $41,978, respectively.


--------------------------------------------------------------------------------
NOTE 5 - GOODWILL:
--------------------------------------------------------------------------------

In accordance with SFAS No. 142, "Goodwill and Other Intangible Assets",
previously recognized intangible assets deemed to have indefinite useful lives
were tested by management for impairment during fiscal 2003. An annual goodwill
impairment test was performed by management in addition to quarterly goodwill
impairment tests. The impairment tests consisted of a comparison of the fair
value of the intangible asset with its carrying amount. Since the carrying
amount of the intangible asset does not exceed its fair value, management
concluded no impairment loss should be recognized.

================================================================================
                                                                             F-9
<PAGE>

POWER EFFICIENCY CORPORATION
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2003 AND 2002
================================================================================

--------------------------------------------------------------------------------
NOTE 6  -  INTANGIBLE ASSETS:
--------------------------------------------------------------------------------

Intangible assets subject to amortization consists of the following for the year
ended December 31, 2003:

     Patents                                                 $  19,844
     Website                                                    19,550
     Customer lists                                            100,000
     Manual/sales literature                                    68,137
                                                           ------------
                                                               207,531
     Less: Accumulated amortization                            149,988
                                                           ------------
           Intangible Assets, Net                            $  57,543
                                                           ============

Amortization expense in 2003 and 2002 amounted to $74,255 and $90,238,
respectively.

During fiscal year 2003, $19,550 of additions to intangible assets were related
to the development of the Company's website. The Company also determined an
impairment of customer contracts during fiscal year 2003, as the original
contracts expired. The Company continues to realize a majority of its sales from
customers who were originally part of these contracts. Such write-down of
$40,948 is included in selling, general and administrative expenses.

Amortization expense expected in the succeeding five years is as follows:

                   Year
                   ----
                   2004                                        $21,135
                   2005                                         21,130
                   2006                                          4,250
                   2007                                            992
                   2008                                            992
                  Thereafter                                     9,044
                                                           ------------
                                                               $57,543
                                                           ============


--------------------------------------------------------------------------------
NOTE 7  -  CONCENTRATIONS OF CREDIT RISKS:
--------------------------------------------------------------------------------

Financial instruments which potentially subject the Company to concentrations of
credit risk, consist primarily of cash and temporary cash investments and
accounts receivables.

The Company maintains cash balances at a single financial institution. Amounts
at this institution are insured by the Federal Deposit Insurance Corporation up
to $100,000. The Company, from time to time, maintains balances in excess of the
insured limits.

Sales and accounts receivable currently are from a relatively small number of
customers of the Company's products. The Company closely monitors extensions of
credit.


================================================================================
                                                                            F-10

<PAGE>

POWER EFFICIENCY CORPORATION
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2003 AND 2002
================================================================================

--------------------------------------------------------------------------------
NOTE 7  -  CONCENTRATIONS OF CREDIT RISKS: (Continued)
--------------------------------------------------------------------------------

Three customers accounted for approximately 69% of 2003 sales and 36% of
accounts receivable at December 31, 2003.


International sales as a percentage of total revenues for the years ended
December 31, 2003 and 2002 are as follows:


         County                2003            2002
------------------------- --------------- ----------------
Mexico                          -               14%


--------------------------------------------------------------------------------
NOTE 8 - INVENTORIES:
--------------------------------------------------------------------------------

Inventories at December 31, 2003 consist of the following:

               Raw materials                          $257,135
               Finished goods                          103,535
                                                   ------------
                                                      $360,670
                                                   ============


--------------------------------------------------------------------------------
NOTE 9  -  PROVISION FOR TAXES:
--------------------------------------------------------------------------------

As of December 31, 2003 and 2002, the Company has available, on a federal tax
basis, net operating loss carryforwards of approximately $9,000,000 and
$6,200,000, respectively. These net operating losses expire at varying amounts
through 2023. The net operating loss carryforwards result in deferred tax assets
of approximately $3,100,000 and $2,100,000 at December 31, 2003 and 2002;
however, a valuation reserve has been recorded for the full amount due to the
uncertainty of realization of the deferred tax assets.


================================================================================
                                                                            F-11

<PAGE>

POWER EFFICIENCY CORPORATION
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2003 AND 2002
================================================================================

--------------------------------------------------------------------------------
NOTE 10 - WARRANTS:
--------------------------------------------------------------------------------

The Company periodically issues warrants in connection with various business
activities. Each warrant grants the right to the holder to exercise the warrant
for one share of common stock at a predetermined price.

Warrant activity during the years ended December 31, 2003 and 2002 follows:

<TABLE>
<CAPTION>
                                                                      Average
                                                                      Exercise
                                                        Warrants       Price
                                                      --------------------------
<S>                                                   <C>          <C>
    Warrants outstanding at January 1, 2002               115,817      $20.72
    Issued during 2002                                     25,000       11.90
    Expired during 2002                                    (5,246)      14.00
                                                      --------------------------
    Warrants outstanding at December 31, 2002             135,571       19.32
    Issued during 2003                                     32,958        0.00
    Exercised during 2003                                 (50,100)       1.34
    Expired during 2003                                   (54,143)       3.92
                                                      --------------------------
    Warrants outstanding at December 31, 2003              64,286     $  8.14
                                                      ==========================
</TABLE>

Warrants issued to Summit Energy Ventures, LLC ("Summit") in conjunction with
the issuance of Series A-1 Convertible Preferred Stock ("Preferred Stock") (see
Note 18) are not included in the above table. Such warrants, approximating
3,130,000 shares of common stock, were exercised on February 18, 2004 (see Note
20) at an exercise price of $0.00.

During 2003, in connection with the Company's sale of common stock under
Regulation S, the Company issued 32,958 warrants at an effective exercise price
of $0.00 for commissions, all of which were exercised during the current year.
17,143 placement warrants were exercised in connection with the May 16, 2000
Private Placement Memorandum.

During 2002, in connection with the Summit equity transaction (see Note 18), the
Company issued 25,000 warrants for services rendered.

--------------------------------------------------------------------------------
NOTE 11  -  STOCK OPTION PLAN:
--------------------------------------------------------------------------------

Stock Option Plan activity during the years ended December 31, 2003 and 2002
follows:

<TABLE>
<CAPTION>
                                                                                                   Average
                                                                                  Shares        Exercise Price
                                                                             -------------------------------------
<S>                                                                          <C>             <C>
     Options outstanding and exercisable at January 1, 2002                        286,949         $14.00
     Granted during 2002                                                           246,429          13.93
     Cancelled during 2002                                                         (71,429)         11.20
     Expired during 2002                                                           (42,857)         14.00
                                                                             -------------------------------------
     Options outstanding and exercisable at December 31, 2002                      419,092          14.00
     Granted during 2003                                                           336,929           6.37
     Cancelled during 2003                                                         (57,143)         14.00
     Expired during 2003                                                           (75,843)          8.33
                                                                             -------------------------------------
     Options outstanding and exercisable at December 31, 2003                      623,035         $11.69
                                                                             =====================================
</TABLE>

At December 31, 2003, the weighted average remaining contractual life for all
options is 8.4 years.



================================================================================
                                                                            F-12

<PAGE>

POWER EFFICIENCY CORPORATION
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2003 AND 2002
================================================================================

--------------------------------------------------------------------------------
NOTE 11  -  STOCK OPTION PLAN: (Continued)
--------------------------------------------------------------------------------

During 2003, the Company granted 336,929 stock options to officers and employees
at exercise prices approximating fair market value of the stock on the day of
grant. For the option grants where the exercise prices approximated the fair
market value of the stock, the Company did not recognize compensation expense.
In connection with the employment agreements of the President and Chief
Executive Officer and the Vice President of Governmental Operations, the Company
recognized additional compensation expense of approximately $77,000 because the
exercise price was below the fair market value of the stock on the date of
grant. This additional compensation expense is included in selling, general and
administrative expenses.

During 2002, the Company granted 246,429 stock options at exercise prices
approximating fair market value of the stock on the day of grant. The exercise
prices approximated the fair market value of the stock; therefore the Company
was not required to recognize compensation expense. In connection with the
employment agreement of the former President, Chief Executive Officer and Chief
Financial Officer dated November 7, 2002, 71,429 stock options were canceled.
These stock options were originally issued on June 26, 2002 and reissued on
November 7, 2002. In connection with this option cancellation and new option
award, the Company recognized additional compensation expense of approximately
$313,000. This additional compensation expense is included in selling, general
and administrative expenses.

In 2000, the Company adopted the 2000 Stock Option and Restricted Stock Plan
(the "2000 Plan"). On September 8, 2003, the 2000 Plan was amended and restated.
The 2000 Plan, as restated and amended, provides for the granting of options to
purchase up to 714,286 shares of common stock. (see Note 20) No options have
been exercised to date. As of December 31, 2003, there are 556,800 options
outstanding under the 2000 Plan.

In 1994, the Company adopted a Stock Option Plan (the "1994 Plan"). The 1994
Plan provides for the granting of options to purchase up to 71,429 shares of
common stock. No options have been exercised to date. There are 66,235 options
outstanding under the 1994 Plan.

SFAS No. 123 Disclosures:
During the year ended December 31, 2003, the Board of Directors authorized the
issuance of 294,071 options (net of 42,858 options that were both issued and
cancelled during the year) at an average exercise price of $6.23 per share. The
fair value of each option grant was estimated on the date of grant using the
Black-Scholes option-pricing model with the following weighted-average
assumptions used for grants: expected volatility of 25%; risk-free interest rate
of 5.0%; and expected lives of 10.0 years. For years prior to 2003, the same
method to calculate the value of the option was applied, with the following
weighted average assumptions: expected volatility 51%; risk-free interest rate
of 6%; and expected lives of 10.0 years.



================================================================================
                                                                            F-13

<PAGE>

POWER EFFICIENCY CORPORATION
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2003 AND 2002
================================================================================

--------------------------------------------------------------------------------
NOTE 11  -  STOCK OPTION PLAN: (Continued)
--------------------------------------------------------------------------------

Had compensation cost for the Company's stock option plan been recognized based
on the fair value at the grant date for awards consistent with the provisions of
SFAS No. 123, as amended by SFAS No. 148, the Company's net loss and loss per
share for the years ended December 31, 2003 and 2002, would have been as
follows:

<TABLE>
<CAPTION>
                                                                  2003           2002
                                                            ---------------------------------
<S>                                                         <C>                <C>
Net loss - as reported                                          $(3,016,717)    $(2,354,775)
Required adjustment to net loss                                    (129,034)       (460,322)
                                                            ---------------------------------
Net loss - pro forma                                            $(3,145,751)    $(2,815,097)
                                                            =================================

Loss per common share - as reported                               $   (2.48)      $   (2.51)
                                                            =================================
Loss per common share - pro forma                                 $   (2.59)      $   (3.00)
                                                            =================================
</TABLE>


--------------------------------------------------------------------------------
NOTE 12  -  COMMITMENTS AND CONTINGENCIES:
--------------------------------------------------------------------------------

Leases:
The Company leases office, warehouse and research facilities under an operating
lease. The Livonia, Michigan lease was entered into on November 1, 2003 and
extends to December 31, 2008. The Ann Arbor, Michigan lease was terminated
effective December 15, 2003. The New Hyde Park, New York lease was terminated
June 30, 2003.

Minimum future rentals are as follows:

      Year
      ----
      2004                             $  72,880
      2005                                72,880
      2006                                72,880
      2007                                72,880
      2008                                72,880
                                     -------------
                                        $364,400
                                     =============

Rent expense, including base rent and additional charges, for the year ended
December 31, 2003 and 2002 was $123,833 and $117,747, respectively.

During 2003, Company also leased office space in Palm Desert, California on a
month to month basis from Summit. Rent expense for this space for the year ended
December 31, 2003 was $18,680.

Litigation:
The Company is involved with certain claims and other routine litigation matters
in the normal course of business. Management, with the consultation of legal
counsel, does not believe these matters will materially impact the Company's
financial statements.


================================================================================
                                                                            F-14

<PAGE>

POWER EFFICIENCY CORPORATION
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2003 AND 2002
================================================================================

--------------------------------------------------------------------------------
NOTE 12  -  COMMITMENTS AND CONTINGENCIES: (Continued)
--------------------------------------------------------------------------------

Requirements Contracts:
The Company entered into requirements contracts with four customers for the sale
of motor controllers. The quantities are not fixed or guaranteed. For financial
reporting purposes, the Company incurred no liabilities or commitments as a
result of these contracts.

Subcontractors:
Power Efficiency currently utilizes three subcontractors to manufacture the
Company's controller boards. These subcontractors provide facilities, equipment,
supervision and labor required to assemble; wire; check; test; package; and ship
the controller boards. These subcontractors are hired on an as needed basis to
produce a minimum number of units via a purchase order. Power Efficiency does
not incur any liabilities to subcontractors until purchase orders are issued. No
purchase orders were issued or outstanding to subcontractors at December 31,
2003.

Investment Advisory Agreements:
The Company and Northwest Power Management, an affiliate of Summit, entered into
a non-exclusive agreement with an investment advisor to provide the Company and
Northwest Power Management with advisory/consulting services beginning October
15, 2002. Such services include: exploring market opportunities for raising
additional capital; assisting Northwest Power Management in reviewing corporate
financing opportunities for the Company; and reviewing new investment and
acquisition opportunities for Northwest Power Management.

The agreement required a retainer fee of $10,000, monthly in advance, for an
initial period of three months. Half of the monthly retainer fee was paid for in
cash by Northwest Power Management and the balance is paid in common stock of
the Company. The agreement includes a 7% cash placement fee should the Company
raise financing or receive any formal financing commitments from investors
introduced by the investment advisor within one year. The agreement also
provides for the issuance of warrants to the investment advisor equal to 7% of
total shares issued. During 2003, the Company paid or accrued $86,607 in
placement fees and issued 32,958 warrants at an effective exercise price of
$0.00 under the agreement related to Regulation S stock sales. (see Note 19) All
amounts paid were netted against the proceeds of the stock. At December 31,
2002, the Company accrued its share of the retainer fee under this agreement,
with the common shares to be issued in the first quarter of 2003.

The Company entered into an investment consulting agreement with the former
Chief Financial Officer on September 22, 2003. This agreement provides for the
former officer to provide consulting services. The Company will (i) pay $4,000
per month, and (ii) will accrue $7,000 per month payable at the rate of 5% of
all cash raised through the issuance of debt or equity. In addition, the Company
will reimburse all reasonable and necessary expenses incurred by the consultant.
The agreement contains confidentiality and non-competition provisions. This
agreement can be terminated by either party with 30 days written notice. At
December 31, 2003, $22,750 of fees earned under this agreement are accrued and
included in deferred offering costs.

On October 16, 2003, the Company entered into a letter of intent with an
investment banker. (see Note 20) This agreement was entered into with the
intention of attempting to raise $10 million or more through a public sale of
stock. The Company paid the investment banker a $10,000 retainer under this
agreement which is included in deferred offering costs at December 31, 2003.


================================================================================
                                                                            F-15

<PAGE>

POWER EFFICIENCY CORPORATION
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2003 AND 2002
================================================================================

--------------------------------------------------------------------------------
NOTE 13  -  RELATED PARTY TRANSACTIONS:
--------------------------------------------------------------------------------

During the year ended December 31, 2003, the Company incurred fees of $19,550
for the development of its website. The services were performed by a relative of
the Company's President and Chief Executive Officer. Such fees are included in
accounts payable and accrued expenses at December 31, 2003.

During the years ended December 31, 2003 and 2002, consulting fees of $27,456
and $277,500 were paid to officers/directors/stockholders of the Company,
respectively. These amounts are included in research and development and in
selling, general and administrative expenses.

During 2003 and 2002, the Company incurred legal fees of $79,185 and $122,548 to
a law firm, in which a partner in that firm and the firm are currently
stockholders of the Company. At December 31, 2003, the Company owes this law
firm approximately $109,000. Such amount is included on the balance sheet in
accounts payable and accrued expenses.

On May 23, 2001, the Company's board of directors ratified an agreement with a
strategic advisor, owned by a then director of the Company, to provide strategic
direction and operational strategies to the Company. The initial term of this
agreement was for one year (January 1-December 31, 2001) and it was extended on
June 10, 2002 to terminate on January 1, 2006. The Company can terminate the
agreement for cause. The strategic advisor received $500 per month, plus
expenses, until the Company raised $1.0 million or more in investments at which
time the monthly compensation increased to $4,500 per month, plus expenses (see
Note 20). The strategic advisor was paid approximately $70,296 in 2002. The
strategic advisor held warrants to purchase 10,714 shares of common stock at an
exercise price of $11.90 per share. (see Note 20) These warrants are exercisable
at any time during each year the agreement is in effect. The advisor did not
provide services under the agreement during 2003.


--------------------------------------------------------------------------------
NOTE 14  -  SUPPLEMENTAL DISCLOSURE OF CASH FLOWS INFORMATION:
--------------------------------------------------------------------------------

Cash paid during the year ended December 31, for:

<TABLE>
<CAPTION>
                                                                            2003            2002
                                                                       --------------------------

<S>                                                                    <C>                <C>
         Interest                                                      $  3,028           $28,161
                                                                       ==========================

         Income taxes                                                  $      -         $     -
                                                                       ==========================

<CAPTION>
NON-CASH INVESTING AND FINANCING ACTIVITIES:
                                                                       Year Ended December 31,
                                                                            2003            2002
                                                                       --------------------------

<S>                                                                    <C>              <C>
Note payable to settle dispute with former officer                     $   115,000      $     -
                                                                       ==========================
Common stock issued for compensation, other accrued
  liabilities and debt                                                 $ 1,034,973      $ 183,811
                                                                       ==========================
Preferred stock issued for conversion of debt to equity                $ 1,046,896      $     -
                                                                       ==========================
Non-qualified stock options issued below market                        $    77,158      $     -
                                                                       ==========================
</TABLE>


================================================================================
                                                                            F-16

<PAGE>

POWER EFFICIENCY CORPORATION
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2003 AND 2002
================================================================================

--------------------------------------------------------------------------------
NOTE 15  -  NOTE PAYABLE - FORMER OFFICER:
--------------------------------------------------------------------------------

In conjunction with a settlement with a former officer (see Note 17), the
Company issued a promissory note for $115,000 at the prime rate (4.0% at
December 31, 2003), payable over 2 1/2 years. Note payable - former officer at
December 31, 2003 is as follows:

   Total note payable -
    former officer                  $  115,000
   Less: Current maturities            (45,000)
                                    ----------
                                    $  70,000

As of December 31, 2003, note payable-former officer matures as follows:

   Year
   ----
   2004                             $   45,000
   2005                                 60,000
   2006                                 10,000
                                    ----------
                                    $  115,000

--------------------------------------------------------------------------------
NOTE 16  -  EMPLOYMENT AND CONSULTING AGREEMENTS:
--------------------------------------------------------------------------------

On August 7, 2000, the Company agreed to enter into five-year employment and
compensation agreement with the Company's Chief Technology Officer. On May 23,
2001, the Company's board of directors ratified the authorization to enter into
this employment agreement. The agreement provides for first year salary of
$120,000 for the period from September 2000 to August 31, 2001. The salary for
the second through fifth years shall be $120,000 plus annual increases in
$18,000 increments. In order to provide performance-based incentive compensation
to the executive, bonuses tied to the level of the Company's net pre-tax income
will be paid. For bonus purposes, the Company's net pre-tax income will be
multiplied by the applicable percentage which shall equal (a) 4.0% if net
pre-tax income of the Company is at least $500,000 but less than $750,000; (b)
4.25% if net pre-tax income is at least $750,000 but less than $1,000,000; and
(c) 4.5% if net pre-tax income is at least $1,001,000. Net pre-tax income of the
Company shall be determined by the Board of Directors in a consistent manner in
accordance with accounting principles generally accepted in the United States of
America.

In addition to comprehensive health benefits, the agreement includes vacation,
expense reimbursement, confidentiality, non-compete and disability provisions.

The agreement also provides for severance payments equal to the greater of (i)
$468,000 or (ii) the executive's base salary for the preceding three years, in
the event that at any time during the employment term the agreement is
terminated by the Company (a) without cause, (b) for disability, or (c) for
death, or if the executive terminates the agreement for cause. The agreement
also provides for a payment to the executive upon a change in control equal to
the product of the executive's base salary in the year of the change in control
times 2.99. (see Note 17)

================================================================================
                                                                            F-17

<PAGE>

POWER EFFICIENCY CORPORATION
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2003 AND 2002
================================================================================

--------------------------------------------------------------------------------
NOTE 16  -  EMPLOYMENT AND CONSULTING AGREEMENTS: (Continued)
--------------------------------------------------------------------------------

On November 7, 2002, the Company entered into an employment and compensation
agreement with the Company's then President, Chief Executive Officer and Chief
Financial Officer. The agreement was for a base term of three years. In
accordance with the terms of the agreement, the base salary for 2002 is
$240,000. During the first year of the Agreement, an amount equal to $80,000 of
the base salary was accrued and was to be paid at such time as the net cash
provided by operating activities of the Company is greater than zero for a
period of three consecutive months. The Company settled this obligation during
2003 by issuing common shares to the former officer and eliminating the payment
contingencies.

In addition to the former officer's base salary set forth above, the Company
cancelled the 71,429 common stock options previously granted on June 26, 2002
and granted options to purchase up to 100,000 shares of common stock of the
Company. The options were granted pursuant to the Company's 2000 Amended and
Restated Stock Option and Restricted Stock Plan and such options vest in
accordance with the vesting provisions set forth in the Agreement.

The Company entered into an amended employment and compensation agreement dated
November 7, 2002 with this former officer. The agreement was for a base term of
90 days and provides for, among other things, a base salary of $10,000 per
month, immediate vesting of all this individual's 100,000 stock options. During
June 2003, the former officer became the Chief Financial Officer when the Board
of Directors appointed a new Chief Executive Officer. As of September 15, 2003,
the former officer is no longer an employee of the Company and has entered into
a consulting agreement with the Company. (see Note 12) He remains a member of
the Board of Directors.

The new Chief Executive Officer entered into an employment agreement for a base
term of five years, effective June 12, 2003. The agreement is renewable for
additional periods of one year unless the Company gives notice to the contrary
not less than 90 days prior to the expiration of the term or any extension. In
accordance with the terms of the agreement, the base salary for 2003 is
$240,000, with annual increases and bonuses at the discretion of the
compensation committee of the board of directors. During the first year of the
Agreement, an amount equal to $60,000 of the base salary was to be accrued and
paid at such time as the net cash provided by operating activities of the
Company became greater than zero for a period of three consecutive months. The
Company modified this agreement during 2003 so that the deferred compensation
was settled by issuing common shares of the Company's stock and eliminating the
payment contingency requirements. The agreement also provides for, among other
things, reimbursement of certain moving, living and automobile expenses and for
certain payments to be made in the event of a change of control or termination
without cause. This individual also received 142,857 stock options, which will
vest over a five-year period and have exercise prices of $5.67 and $6.65.
Additional compensation expense related to this Agreement of approximately
$33,000 was recognized and is included in selling, general and administrative
expenses. The agreement also provides for certain non-competition and
nondisclosure covenants.


================================================================================
                                                                            F-18

<PAGE>

POWER EFFICIENCY CORPORATION
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2003 AND 2002
================================================================================

--------------------------------------------------------------------------------
NOTE 16  -  EMPLOYMENT AND CONSULTING AGREEMENTS: (Continued)
--------------------------------------------------------------------------------

On October 16, 2003, the Company appointed a new Vice President of Governmental
Operations. The Company entered into an employment and compensation agreement
with the Vice President of Governmental Operations. The agreement is for a base
term of two years. In accordance with the terms of the agreement, the base
salary is $100,000 per year. The executive shall be eligible to receive bonuses
as determined by the Company's Compensation Committee. In addition to health and
medical benefits, the agreement includes vacation, expense reimbursement,
confidentiality and non-compete provisions. The individual also received 57,143
stock options, which will vest over a four-year period and have an exercise
price of $6.09. Additional compensation expense related to this agreement of
approximately $44,000 was recognized and is included in selling, general and
administrative expenses.

On September 15, 2003, the Company appointed a new Chief Financial Officer. The
Company entered into an employment and compensation agreement with the Chief
Financial Officer dated September 15, 2003. The agreement is for a base term of
two years. In accordance with the terms of the agreement, the base salary is
$100,000 per

year. The executive shall be eligible to receive bonuses as determined by the
Company's Compensation Committee. In addition to health and medical benefits,
the agreement includes vacation, expense reimbursement, confidentiality and
non-compete provisions. The individual also received 57,143 stock options, which
will vest over a four-year period and have an exercise price of $6.09. No
compensation expense was required to be recognized in conjunction with this
agreement.

During 2003, the Company created an incentive plan for the Chief Financial
Officer and Vice-President of Governmental Operations. The Vice-President of
Operations, who does not have an employment contract, is also included in the
incentive plan. Under the incentive plan net pre-tax income of the Company is
divided into three divisions using a predetermined allocation method. Each of
the executives will receive a bonus of 20% of the divisions' net pre-tax income
up to and including $1,000,000 and 10% of the divisions' pre-tax income over
$1,000,000 for the division they oversee. This plan is in effect contractually
during the two year employment agreements of the Chief Financial Officer and the
Vice-President of Governmental Operations.


--------------------------------------------------------------------------------
NOTE 17  -  TRANSACTIONS WITH CURRENT AND FORMER OFFICERS:
--------------------------------------------------------------------------------

On September 30, 2003, the Company sold 76,663 shares of common stock to the
Chief Technology Officer of the Company, for $466,875. The purchase price for
the shares was paid for by canceling $466,875 in debt owed by the Company to the
officer. Additionally, the Company issued 32,143 shares of common stock to the
officer as part of a settlement related to a change of control provision in his
employment contract. The individual is an officer of the Company and the
issuance of shares was exempt from registration under the Securities Act of
1933, as amended, pursuant to Regulation D. The common stock issued related to
the change in control provision resulted in a non-recurring selling, general and
administration expense of approximately $196,000.

On October 16, 2003, the Company settled a dispute with its former president and
chief executive officer regarding the early termination of his employment
contract. According to the terms of the settlement, the former officer has
released the Company from any claims he has against the Company in exchange for
(i) an immediate payment of $25,000; (ii) a promissory note for $115,000 that is
to be paid off over a two and one half year period; and (iii) 32,143 shares of
the Company's common stock. The former officer is an accredited investor and the
issuance of


================================================================================
                                                                            F-19

<PAGE>

POWER EFFICIENCY CORPORATION
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2003 AND 2002
================================================================================

--------------------------------------------------------------------------------
NOTE 17  -  TRANSACTIONS WITH CURRENT AND FORMER OFFICERS: (Continued)
--------------------------------------------------------------------------------

shares was exempt from registration under the Securities Act of 1933, as
amended, pursuant to Regulation D. The Company had recorded an estimated
settlement amount of approximately $135,000 for this claim prior to 2003.
Therefore, the settlement resulted in a non-recurring selling, general and
administrative expense of approximately $229,000, which was reflected in the
third quarter of 2003 when the terms of the agreement were finalized.


--------------------------------------------------------------------------------
NOTE 18  -  ISSUANCE OF SERIES A-1 CONVERTIBLE PREFERRED STOCK:
--------------------------------------------------------------------------------

In June 2002, the Company received $2,380,000 (net of issuance costs of
$120,000) from the sale of 2,346,233 shares of Preferred Stock to Summit which
resulted in Summit owning a 28% fully diluted stake in the Company. Summit also
received a stock purchase warrant which is exercisable after January 1, 2004, to
purchase such number of additional shares of Preferred Stock, of the Company
enabling Summit to purchase up to 51% of the Company's fully diluted Common
Stock. The exercise price of the warrant is a function of the Company's future
earnings.

The Company is prohibited from entering into certain transactions as long as the
Preferred Stock is outstanding without the written consent of Summit. Such
transactions, include, but are not limited to, redemption of stock; declaration
of dividends; issuance of debt or equity securities; sale of business; loans or
advances to officers, directors, employees or consultants except in connection
with compensation expenses and incurring of debt in excess of $2,000,000.

On May 8, 2003, the Company entered into a financing transaction whereby Summit
provided a $1,000,000 line of credit. The line accrued interest at 15% per annum
and the balance was due no later than December 31, 2003. The note contained
various financial and other covenants. As consideration for the line, the
Company paid Summit a $50,000 fee out of the proceeds under the first draw. Such
fee is included as a component of interest expense on the statements of
operations for the year ended December 31, 2003. The Company also agreed to pay
Summit's reasonable legal expenses related to the line of credit. Such amount is
included in accounts payable and accrued expenses at December 31, 2003.

As part of this transaction, the limitation on Summit's ability to vote its
shares was removed. As a result, each share of Preferred Stock is entitled to
such number of votes equal to the number of shares of common stock each share of
Preferred Stock is convertible into.

On October 30, 2003, Summit notified the Company that it desired to convert all
of the outstanding principal and accrued interest on the note ($1,046,896) into
982,504 shares of Preferred Stock. The conversion of the note removed $1,046,896
in debt off of the Company's balance sheet and added $1,046,896 to stockholders'
equity. The Company did not have the ability to pay off the outstanding notes
and as a result, the Company issued Preferred Stock to Summit. These shares are
convertible into 817,249 shares of Common Stock. Additionally, the conversion
price of the Preferred Stock was outstanding prior to Summit's conversion of the
note from $1.75 per share to $1.281. The 2,346,233 shares of Preferred Stock
outstanding prior to Summit's conversion of the note are now convertible into
1,951,600 additional shares of Common Stock. The conversion also expanded the
warrant the Company issued to Summit in June of 2002. The warrant provides
Summit the right to purchase such number of shares that, when combined with the
2,346,233 shares of Preferred Stock purchased by Summit in June 2002 but
excluding the other shares held by Summit, would give Summit a 60.53% interest
in the Company, on a fully diluted


================================================================================
                                                                            F-20

<PAGE>

POWER EFFICIENCY CORPORATION
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2003 AND 2002
================================================================================

--------------------------------------------------------------------------------
NOTE 18  -  ISSUANCE OF SERIES A-1 CONVERTIBLE PREFERRED STOCK: (Continued)
--------------------------------------------------------------------------------

basis. Currently, the warrant is exercisable for 2,996,875 shares of Common
Stock, or such number of shares of Preferred Stock that would be convertible
into 2,996,875 shares of Common Stock. As indicated above, the price of such
shares is a function of the Company's earnings and, consequently, the exercise
price is currently $0.00. This warrant becomes exercisable on January 1, 2004
and expires on June 14, 2012. The conversion of the note also removed the
requirement that the Company comply with various financial and other covenants
in the note.

During 2003, the Company entered into a stock purchase agreement whereby the
Company agreed to sell shares to a foreign company. These sales took place at
various times and at various prices. The terms of the Preferred Stock provide
for an adjustment of the conversion price in the event the Company issues stock
at a price less than $3.71 per share. As a result of the sale of stock at
approximately $1.40, each share of Preferred Stock became convertible into
approximately .61 shares of Common Stock. This change in the conversion ratio
also increases the voting power of the Preferred Stock to approximately .61
votes per share. The shares of Preferred Stock vote together with the Common
Stock as a single class. As a result of these events, the voting power of the
original Preferred Stock held by Summit entitled Summit to approximately 58
percent of the votes that may be cast.

The shares of Preferred Stock vote together with the common stock as a single
class. The voting power of the Preferred Stock held by Summit entitles Summit to
approximately 64% percent of the votes that may be cast. Although Summit's
warrant is not exercisable until January 1, 2004, if it were to exercise the
warrant with today's capital structure (outstanding shares), Summit's economic
and voting interest in the Company would be approximately 78%.

See Note 20, Subsequent Events, for additional discussion about the Summit
warrants.


================================================================================
                                                                            F-21

<PAGE>

POWER EFFICIENCY CORPORATION
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2003 AND 2002
================================================================================

--------------------------------------------------------------------------------
NOTE 19  -  STOCKHOLDERS' EQUITY:
--------------------------------------------------------------------------------

During 2003, the Company entered into a Regulation S Stock Purchase Agreement.
In accordance with this transaction, the Company agreed to sell to the purchaser
in an offshore transaction negotiated, consummated, and closed outside the
United States at not less than $1.40 per share. The Company issued 665,121
shares of common stock for $1,151,717. Such shares are exempt from the
registration requirements of United States federal and state securities laws
under Regulation S.

During 2003, the Company issued 50,100 shares of common stock related to the
exercising of warrants for $84,288.

At various dates during 2003, the Company issued 19,644 shares of common stock
related to the sale of the Company's common stock for $77,005.

On December 31, 2003, the Company issued 24,805 shares of common stock for the
settlement related to deferred compensation amounting to $114,597.

On November 6, 2003, the Company issued 982,504 shares of Preferred Stock for
the conversion of $1,046,896 of debt owed to Summit. (see Note 18)

On October 16, 2003, the Company issued 32,143 shares of common stock for
approximately $223,000 related to the settlement requirements of a former
officer's employment contract. (see Note 17)

On September 30, 2003, the Company issued 76,663 shares of common stock to pay
for amounts owed to an officer of the Company amounting to $466,875 for notes
payable, accounts payable and accrued salaries. The Company issued an additional
32,143 shares of common stock for approximately $196,000 to the officer related
to a change of control provision in his employment contract. (see Note 17)

On April 15, 2002, the Company issued 7,143 shares of common stock to a
consultant, who subsequently became an officer of the Company and a member of
the Board of Directors of the Company for services rendered. Since the per share
market price of the common stock on the date of grant was $23.45 per share, the
company recognized additional compensation expense of $167,500. This additional
compensation expense is included in selling, general and administrative
expenses.


--------------------------------------------------------------------------------
NOTE 20  -  SUBSEQUENT EVENTS:
--------------------------------------------------------------------------------

On February 27, 2004, the Company announced a 1 for 7 reverse stock split to be
effective at the start of trading Monday, March 1, 2004. Modifications to
reflect this reverse stock split have been made retroactively to reflect the
effect on number of shares, per share amounts, warrants and options. The
retroactive restatement was accomplished by dividing historic number of shares
by seven and multiplying per share amounts by seven. When actual computations
are finalized, management believes any differences between the retroactive
adjustment and actual amounts will be immaterial.


================================================================================
                                                                            F-22

<PAGE>

POWER EFFICIENCY CORPORATION
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2003 AND 2002
================================================================================

--------------------------------------------------------------------------------
NOTE 20  -  SUBSEQUENT EVENTS: (Continued)
--------------------------------------------------------------------------------

On February 26, 2004, Summit notified the Company of their intention to exercise
all of their outstanding warrants at an exercise price of $0.00. (see Note 18)
As a result of Summit's exercising the warrants, their protection against
dilution contained in the warrants was removed. However, the anti-dilution
protection associated with the outstanding shares of Preferred Stock is still in
effect. Additionally, the exercise of the warrants automatically terminated the
Company's stockholders' agreement, which gave preferential rights to certain
stockholders, including rights of first refusal, co-sale rights, tag along
rights, preemptive rights and the right to name directors. As a result of
Summit's exercising the warrants, Summit's economic and voting interest in the
Company is approximately 76% as of February 26, 2004.

On February 25, 2004, the Company signed a formal letter of agreement with an
investment banker (see Note 12). Under this letter, the Company appointed the
investment banker, as its exclusive representative for 120 days, to attempt to
raise money for the Company. The investment banker will introduce the Company to
investors and participate in presentations to investors to purchase the
Company's restricted securities, including convertible notes, in a method not
requiring registration with the U.S. Securities and Exchange Commission or the
securities commission of any state. The Company has agreed to pay the investment
banker 10% of the gross proceeds of restricted securities sold during the
agreement and for a period of twelve months after the termination of the
agreement. Also, if the Company is acquired, merged, or enters into a joint
venture with an investor introduced by the investment banker, the Company agrees
to pay a fee of 3% of the gross proceeds (cash, stock, other assets acquired, or
debt assumed). The Company will pay up to $25,000 in expenses of the investment
banker associated with transactions under the agreement.

On February 25, 2004, the Company reached a settlement with a strategic advisor
and former board member (see Note 13). This agreement released the advisor and
the Company from any and all actions, causes of action, damages, judgments,
liabilities, obligations and all claims prior to February 25, 2004. The advisor
agreed to forgo payment in 2003 and previously issued warrants were cancelled.
In consideration of the foregoing, the Company issued the advisor a warrant for
35,714 shares of common stock. The warrant will have a strike price of $2.17,
which approximates the closing market price on the date of the agreement. As a
result of the modification, no expense was recognized under the contract during
2003.

On February 23, 2004, the Company amended and restated the 2000 Stock Option and
Restricted Stock Plan. The amendment reduced the number of shares authorized
under the plan from 714,286 shares to 614,286 shares.


================================================================================
                                                                            F-22



<PAGE>

Item 8. Changes in and Disagreements with Accountants on Accounting and
        Financial Disclosure.

         Not Applicable


Item 8A. Controls and Procedures.

(a) Disclosure Controls and Procedures.

Under the supervision and with the participation of its Chief Executive Officer
and Chief Financial Officer, management has evaluated the effectiveness of the
Company's disclosure controls and procedures as of the end of the period covered
by this report pursuant to Rule 13a-15(b) under the Securities Exchange Act of
1934 (the Exchange Act). Based on that evaluation, the Chief Executive Officer
and Chief Financial Officer have concluded that, as of the end of the period
covered by this report, the Company's disclosure controls and procedures are
effective in ensuring that information required to be disclosed in the Company's
Exchange Act reports is (1) recorded, processed, summarized and reported in a
timely manner, and (2) accumulated and communicated to the Company's management,
including its Chief Executive Officer and Chief Financial Officer, as
appropriate to allow timely decisions regarding required disclosure.

(b) Internal Control Over Financial Reporting.

There has been no change in the Company's internal control over financial
reporting that occurred during the last fiscal quarter that has materially
affected, or is reasonably likely to materially affect, the Company's internal
control over financial reporting.


PART III
--------

Item 9. Directors and Executive Officers of the Registrant

Information required in this Item 9 has been omitted as the Registrant intends
to either file (i) a definitive proxy statement pursuant to Regulation 14A, or
(ii) an amendment to this Form 10-KSB with the Securities and Exchange
Commission not later than 120 days after the close of its fiscal year. The
relevant information from such filing is incorporated herein by reference.

Item 10. Executive Compensation

Information required in this Item 10 has been omitted as the Registrant intends
to either file (i) a definitive proxy statement pursuant to Regulation 14A, or
(ii) an amendment to this Form 10-KSB with the Securities and Exchange
Commission not later than 120 days after the close of its fiscal year. The
relevant information from such filing is incorporated herein by reference.

Item 11. Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters

Information required in this Item 11 has been omitted as the Registrant intends
to either file (i) a definitive proxy statement pursuant to Regulation 14A, or
(ii) an amendment to this Form 10-KSB with the Securities and Exchange
Commission not later than 120 days after the close of its fiscal year. The
relevant information from such filing is incorporated herein by reference.

Item 12. Certain Relationships and Related Transactions

Information required in this Item 12 has been omitted as the Registrant intends
to either file (i) a definitive proxy statement pursuant to Regulation 14A, or
(ii) an amendment to this Form 10-KSB with the Securities and Exchange
Commission not later than 120 days after the close of its fiscal year. The
relevant information from such filing is incorporated herein by reference.


<PAGE>

Item 13. Exhibits and Reports on Form 8-K

(a) Exhibits

The following exhibits are filed as part of this report:

<TABLE>
<CAPTION>

Description of Document
Exhibit
Number       Description                                                                                   Location
------       -----------                                                                                   --------
<S>          <C>                                                                                          <C>
3.1          Certificate of Incorporation.                                                                 ii
3.2          Amendment to the Articles of Incorporation dated June 5, 2002.                                i
3.3          Amended and Restated By-laws of the Company dated October 16, 2003.                           vii
4.1          Certificate of Incorporation.                                                                 ii
4.2          Amended and Restated By-laws of the Company dated October 16, 2003.                           vii
4.3          Stock Purchase Agreement dated June 14, 2002.                                                 i
4.4          Registration Rights Agreement dated June 14, 2002.                                            i
4.5          Certificate of Designation dated June 13, 2002.                                               i
10.1         Lease Agreement for Registrant's Ann Arbor, Michigan facility dated February 16, 1996.        ii
10.2         Stock Purchase Warrant dated June 14, 2002.                                                   i
10.3         Amended and Restated Stockholders' Agreement dated June 14, 2002.                             i
10.4         United States Patent #5,821,726.                                                              ii
10.5         1994 Stock Option Plan.                                                                       ii
10.6         Patent License Agreement (DN-858) with NASA.                                                  iii
10.7         Patent License Agreement (DE-256) with NASA.                                                  iii
10.8         Settlement and Release Agreement with NASA.                                                   iii
10.9         Modification No. 1 to Patent License Agreement (DE-256) with NASA.                            iii
10.10        Product Warranty.                                                                             iii
10.11        Test Report from Medsker Electric, Inc.                                                       iii
10.12        Test Report from Oak Ridge National Laboratory.                                               iii
10.13        Test Report from Oregon State University -- The Motor Systems Resource Facility.              iii
10.14        Test Report from Otis Elevator Co.                                                            iii
10.15        Employment Agreement with Stephen Shulman.                                                    iii
10.16        Employment Agreement with Nicholas Anderson.                                                  iii
10.17        Employment Agreement with Raymond J. Skiptunis.                                               iv
10.18        Certificate of Amendment of Certificate of Designation of Series A Convertible Preferred      v
                Stock of Power Efficiency Corporation.
10.19        Revolving Credit Note dated May 8, 2003.                                                      v
10.20        Security Agreement dated May 8, 2003.                                                         v
10.21        Certificate of Amendment of Warrant.                                                          v
10.22        Employment Agreement with Richard Koch dated June 9, 2003.                                    vi
10.23        Settlement and Release Agreement with Raymond J. Skiptunis dated June 9, 2003.                vi
10.24        Employment Agreement with Raymond J. Skiptunis dated June 9, 2003.                            vi
10.25        Employment Agreement with Keith Collin dated November 13, 2003.                               vii
10.26        Employment Agreement with Thomas Mills dated October 6, 2003.                                 vii
10.27        Subscription Agreement with Nicholas Anderson dated September 30, 2003.                       vii
10.28        Settlement Agreement with Nicholas Anderson dated September 30, 2003.                         vii
10.29        Settlement Agreement and Mutual General Release with Stephen L. Shulman and Summit Energy     vii
             Ventures, LLC dated October 3, 2003
10.30        Promissory Note granted to Stephen Shulman dated September 15, 2003.                          vii
10.31        Amendment to the Amended and Restated Stockholders' Agreement among Anthony Caputo,           vii
                Nicholas Anderson, Philip Elkus, Stephen Shulman, Performance Control, LLC, Summit
                Energy Ventures, LLC and Power Efficiency Corporation dated September 22, 2003
10.32        Regulation S Stock Purchase Agreement with Starz Investments Limited dated April 23, 2003.    vii
10.33        Addendum to the Regulation S Stock Purchase Agreement dated June 13, 2003.                    vii
10.34        Warrant Agreement with Summit Energy Ventures, LLC dated February 26, 2004                    viii
10.35        Consulting Agreement with Raymond Skiptunis dated September 22, 2003.                         filed herewith
10.36        Business Property lease with Arens Investment Company dated November 1, 2003.                 filed herewith
10.37        Subscription Agreement with Richard Koch dated December 23, 2003.                             filed herewith
10.38        Subscription Agreement with Raymond Skiptunis dated January 8, 2004.                          filed herewith
10.39        Subscription Agreement with Leonard Bellezza dated February 16, 2004.                         filed herewith
10.40        Letter agreement with Pali Capital, Inc. dated February 25, 2004.                             filed herewith
10.41        Amended and Restated 2000 Stock Option and Restricted Stock Plan dated February 23, 2004.     filed herewith
10.42        Amended and Restated 1994 Stock Option Plan.                                                  filed herewith
31.1         Certification of Richard Koch pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.      filed herewith
31.2         Certification of Keith Collin pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.      filed herewith
32.1         Certification of Richard Koch pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.      filed herewith
32.2         Certification of Keith Collin pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.      filed herewith
</TABLE>

--------------------
i            Incorporated herein by reference from the Company's Form 8-K filed
               on June 18, 2002.
ii           Incorporated herein by reference from the Company's Form 10-SB
               filed on October 20, 2000.
iii          Incorporated herein by reference from the Company's Form 10-SB/A
               filed on October 26, 2001.
iv           Incorporated herein by reference from the Company's Form 10-KSB
               filed on March 31, 2003
v            Incorporated herein by reference from the Company's Form 8-K filed
               on May 25, 2003
vi           Incorporated herein by reference from the Company's Form 8-K filed
               on June 20, 2003
vii          Incorporated herein by reference from the Company's Form 10-QSB
               filed on November 14, 2003.
viii         Incorporated herein by reference from the Company's Form 8-K filed
               on February 27, 2004.


(b) No reports on Form 8-K were filed during the last quarter of the period
covered by this report.


Item 14. Principal Accountant Fees and Services.

Information required in this Item 14 has been omitted as the Registrant intends
to either file (i) a definitive proxy statement pursuant to Regulation 14A, or
(ii) an amendment to this Form 10-KSB with the Securities and Exchange
Commission not later than 120 days after the close of its fiscal year. The
relevant information from such filing is incorporated herein by reference.

<PAGE>


                                   SIGNATURES

In accordance with Section 13 or 15(d) of the Exchange Act, the Registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.



                                             POWER EFFICIENCY CORPORATION

Dated:  March 2, 2004                        By: /s/ RICHARD KOCH
                                                 ----------------
                                                 Richard Koch, President and
                                                 Chief Executive Officer

Dated:  March 2, 2004                        By: /s/ KEITH G. COLLIN
                                                 -------------------
                                                 Keith G. Collin, Chief
                                                 Financial Officer

In accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.

Dated:  March 2, 2004                        By: /s/ ANTHONY ACONE
                                                 -----------------
                                                 Anthony Acone, Director

Dated:  March 2, 2004                        By: /s/ NICHOLAS ANDERSON
                                                 ---------------------
                                                 Nicholas Anderson, Director

Dated:  March 2, 2004                        By: /s/ LEONARD BELLEZZA
                                                 --------------------
                                                 Leonard Bellezza, Director

Dated:  March 2, 2004                        By: /s/ RICHARD KOCH
                                                 ----------------
                                                 Richard Koch, Director

Dated:  March 2, 2004                        By: /s/ JOHN LACKLAND
                                                 -----------------
                                                 John Lackland, Director

Dated:  March 2, 2004                        By: /s/ SCOTT STRAKA
                                                 ----------------
                                                 Scott Straka, Director

Dated:  March 2, 2004                        By: /s/ STEVEN STRASSER
                                                 -------------------
                                                 Steven Strasser, Chairman


<PAGE>


                                  EXHIBIT INDEX
<TABLE>
<CAPTION>

Description of Document
Exhibit
Number       Description                                                                                   Location
------       -----------                                                                                   --------
<S>          <C>                                                                                          <C>
3.1          Certificate of Incorporation.                                                                 ii
3.2          Amendment to the Articles of Incorporation dated June 5, 2002.                                i
3.3          Amended and Restated By-laws of the Company dated October 16, 2003.                           vii
4.1          Certificate of Incorporation.                                                                 ii
4.2          Amended and Restated By-laws of the Company dated October 16, 2003.                           vii
4.3          Stock Purchase Agreement dated June 14, 2002.                                                 i
4.4          Registration Rights Agreement dated June 14, 2002.                                            i
4.5          Certificate of Designation dated June 13, 2002.                                               i
10.1         Lease Agreement for Registrant's Ann Arbor, Michigan facility dated February 16, 1996.        ii
10.2         Stock Purchase Warrant dated June 14, 2002.                                                   i
10.3         Amended and Restated Stockholders' Agreement dated June 14, 2002.                             i
10.4         United States Patent #5,821,726.                                                              ii
10.5         1994 Stock Option Plan.                                                                       ii
10.6         Patent License Agreement (DN-858) with NASA.                                                  iii
10.7         Patent License Agreement (DE-256) with NASA.                                                  iii
10.8         Settlement and Release Agreement with NASA.                                                   iii
10.9         Modification No. 1 to Patent License Agreement (DE-256) with NASA.                            iii
10.10        Product Warranty.                                                                             iii
10.11        Test Report from Medsker Electric, Inc.                                                       iii
10.12        Test Report from Oak Ridge National Laboratory.                                               iii
10.13        Test Report from Oregon State University -- The Motor Systems Resource Facility.              iii
10.14        Test Report from Otis Elevator Co.                                                            iii
10.15        Employment Agreement with Stephen Shulman.                                                    iii
10.16        Employment Agreement with Nicholas Anderson.                                                  iii
10.17        Employment Agreement with Raymond J. Skiptunis.                                               iv
10.18         Certificate of Amendment of Certificate of Designation of Series A Convertible Preferred     v
                Stock of Power Efficiency Corporation.
10.19        Revolving Credit Note dated May 8, 2003.                                                      v
10.20        Security Agreement dated May 8, 2003.                                                         v
10.21        Certificate of Amendment of Warrant.                                                          v
10.22        Employment Agreement with Richard Koch dated June 9, 2003.                                    vi
10.23        Settlement and Release Agreement with Raymond J. Skiptunis dated June 9, 2003.                vi
10.24        Employment Agreement with Raymond J. Skiptunis dated June 9, 2003.                            vi
10.25        Employment Agreement with Keith Collin dated November 13, 2003.                               vii
10.26        Employment Agreement with Thomas Mills dated October 6, 2003.                                 vii
10.27        Subscription Agreement with Nicholas Anderson dated September 30, 2003.                       vii
10.28        Settlement Agreement with Nicholas Anderson dated September 30, 2003.                         vii
10.29        Settlement Agreement and Mutual General Release with Stephen L. Shulman and Summit Energy     vii
             Ventures, LLC dated October 3, 2003
10.30        Promissory Note granted to Stephen Shulman dated September 15, 2003.                          vii
10.31        Amendment to the Amended and Restated Stockholders' Agreement among Anthony Caputo,           vii
                Nicholas Anderson, Philip Elkus, Stephen Shulman, Performance Control, LLC, Summit
                Energy Ventures, LLC and Power Efficiency Corporation dated September 22, 2003
10.32        Regulation S Stock Purchase Agreement with Starz Investments Limited dated April 23, 2003.    vii
10.33        Addendum to the Regulation S Stock Purchase Agreement dated June 13, 2003.                    vii
10.34        Warrant Agreement with Summit Energy Ventures, LLC dated February 26, 2004                    viii
10.35        Consulting Agreement with Raymond Skiptunis dated September 22, 2003.                         filed herewith
10.36        Business Property lease with Arens Investment Company dated November 1, 2003.                 filed herewith
10.37        Subscription Agreement with Richard Koch dated December 23, 2003.                             filed herewith
10.38        Subscription Agreement with Raymond Skiptunis dated January 8, 2004.                          filed herewith
10.39        Subscription Agreement with Leonard Bellezza dated February 16, 2004.                         filed herewith
10.40        Letter agreement with Pali Capital, Inc. dated February 25, 2004.                             filed herewith
10.41        Amended and Restated 2000 Stock Option and Restricted Stock Plan dated February 23, 2004.     filed herewith
10.42        Amended and Restated 1994 Stock Option Plan.                                                  filed herewith
31.1         Certification of Richard Koch pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.      filed herewith
31.2         Certification of Keith Collin pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.      filed herewith
32.1         Certification of Richard Koch pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.      filed herewith
32.2         Certification of Keith Collin pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.      filed herewith
</TABLE>

--------------------
i            Incorporated herein by reference from the Company's Form 8-K filed
                on June 18, 2002.
ii           Incorporated herein by reference from the Company's Form 10-SB
                filed on October 20, 2000.
iii          Incorporated herein by reference from the Company's Form 10-SB/A
                filed on October 26, 2001.
iv           Incorporated herein by reference from the Company's Form 10-KSB
                filed on March 31, 2003
v            Incorporated herein by reference from the Company's Form 8-K filed
                on May 25, 2003
vi           Incorporated herein by reference from the Company's Form 8-K filed
                on June 20, 2003
vii          Incorporated herein by reference from the Company's Form 10-QSB
                filed on November 14, 2003.
viii         Incorporated herein by reference from the Company's Form 8-K filed
               on February 27, 2004.