**Securitiesand Exchange Commission**

**Washington, D.C. 20549**

** **

**FORM10-KSB**

 
| ý | **Annual report under Section 13 or  15(d) of the Securities Exchange Act of 1934**                                                                                                                                                                                                                                                                   |
|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                                                                                                                                                                  |
|   | **For the fiscal year ended  December 31, 2004**                                                                                                                                                                                                                                                                                                      |
|   |                                                                                                                                                                                                                                                                                                                                                  |
| o      | **Transition report under Section 13  or 15(d) of the Securities Exchange Act of 1934**                                                                                                                                                                                                                                                               |
|   |                                                                                                                                                                                                                                                                                                                                                  |
|   | **For the transition period from                             to                          ** |

 

**CommissionFile Number: 000-31805**

 

**Power Efficiency Corporation**

(Nameof Small Business Issuer in its Charter)

 

| **Delaware**                                                    | ** ** | **22-3337365**                        |
|-----------------------------------------------------------------|------------|---------------------------------------|
| (State  or Other Jurisdiction of Incorporation or Organization) |       | (I.R.S.  Employer Identification No.) |
|                                                            |       |                                  |
| **3900 Paradise Road, Suite 283****Las Vegas, NV**              | ** ** | **89109**                             |
| (Address  of Principal Executive Offices)                       |       | (Zip  Code)                           |

 

**(702) 697-0377**

(Issuer’sTelephone Number, Including Area Code)

 

SecuritiesRegistered under Section 12(g) of the Exchange Act:

 

**Common Stock, $.001 Par Value**

(Titleof Class)

 

Check whether the registrant: (1) filed allreports required to be filed by Section 13 or 15(d) of the Exchange Act duringthe past 12 months (or for such shorter period that the registrant was requiredto file such reports), and (2) has been subject to such filing requirements forthe past 90 days.  Yes ý  No o

 

Check if there is no disclosure of delinquentfilers in response to Item 405 of Regulation S-B contained in this form, and nodisclosure will be contained, to the best of registrant’s knowledge, indefinitive proxy or information statements incorporated by reference in PartIII of this Form 10-KSB or any amendment to this Form 10-KSB.   o

 

The issuer’s revenues for the year endedDecember 31, 2004 were $284,373.

 

As of March 11, 2005, the aggregate marketvalue of the common stock held by non-affiliates of the issuer wasapproximately $565,913. This amount is based on the closing price of $0.30 pershare for the registrant’s stock as of such date.

 

On March 11, 2005 there were 5,020,477 shares of theregistrant’s common stock outstanding.

 

 

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**FORWARD-LOOKING STATEMENTS**

 

This report and the documents incorporatedinto this report contain forward-looking statements within the meaning of thePrivate Securities Litigation Reform Act of 1995 (the “PSLRA”), including, butnot limited to, statements relating to the Registrant’s business objectives andstrategy. 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,” “islikely,” “predicts,” “projects,” “judgment,” variations of such words andsimilar expressions are intended to identify such forward-looking statements.These statements are not guarantees of future performance and are subject tocertain risks, uncertainties and assumptions that are difficult to predict withrespect 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 notapply to initial public offerings.

 

Factors that could cause actual events orresults to differ materially include, but are not limited to, the following:continued market acceptance of the Registrant’s line of *Power Commander*® products; the Registrant’sability to expand and/or modify its line of *PowerCommander*® products on an ongoing basis; general demand for theRegistrant’s products, intense competition from other developers, manufacturersand/or marketers of energy reduction and/or power saving products; theRegistrant’s negative net tangible book value; the Registrant’s negative cashflow from operations; delays or errors in the Registrant’s ability to meetcustomer demand and deliver *Power Commander*®products on a timely basis; the Registrant’s lack of working capital; theRegistrant’s need to upgrade its facilities; changes in laws and regulationsaffecting the Registrant and/or its products; the impact of technologicaladvances and issues; the outcomes of pending and future litigation andcontingencies; trends in energy use and consumer behavior; changes in the localand national economies; local and global uncertainties created by the terroristacts of September 11th and the current war against terrorism; andother risks inherent in and associated with doing business in an engineeringand technology intensive industry. See “Management’s Discussion and Analysis orPlan of Operation.” Given these uncertainties, investors are cautioned not toplace undue reliance on any such forward-looking statements.

 

Unless required by law, the Registrantundertakes 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 ordocuments that the Registrant files from time to time with the Securities andExchange Commission (the “SEC”), particularly Annual Reports on Form 10-KSB, QuarterlyReports on Form 10-QSB and any Current Reports on Form 8-K.

 

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**GLOSSARY OF TERMS**

 

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

 
| 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.                                                                                                                                                                                                                                                                                                                       |

 

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| 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. Frominception through 1997, the Registrant was a development stage entity thatsought to become engaged in the design, development, marketing and sale ofproprietary solid state electrical components designed to effectively reduceenergy consumption in alternating current induction motors. Alternating currentinduction motors are commonly found in industrial and commercial facilitiesthroughout the world.

 

(b)   Business of the Registrant

 

**TheRegistrant’s Principal Products**

 

In 1995, the Registrant commenced the sale ofthe *Power Commander*®, itsprincipal and proprietary product that reduces energy consumption inalternating current induction motors in certain industrial applications. Inaddition, the *Power Commander*®extends motor life, minimizes maintenance, results in cooler running, reducesstress and strain on the motor, and reduces stress and strain on accompanyingelectrical and mechanical systems. Technology and circuitry included in theRegistrant’s *Power Commander*® isthe subject of a United States Patent granted in 1998. The Registrant offersthe *Power Commander*® in twoversions, each of which is a distinctly different product having differentapplications. These two products are:

 

•                  the Three-Phase *Power Commander*® used in industrial and commercialapplications; and

 

•                  the Single-Phase *Power Commander*® is also used in industrial and commercialapplications and is currently in research and development for use in consumerapplications such as home appliances and the like.

 

The Registrant’s motor starter product isdesigned to soft start a motor, save energy, and protect and conserve themotor.

 

The Registrant offers the *Power Commander*® in a Three-Phase versionand a Single-Phase version. The Registrant’s marketing efforts have beeninitially focused on the Three-Phase *PowerCommander®.* Both versions of the *PowerCommander*® reduce energy consumption on electrical equipment byelectronically sensing and controlling the amount of energy the motor consumes.A motor with a *Power Commander*®installed only uses the energy it needs to perform its work task, therebyincreasing its efficiency. The result is a reduction of energy consumption ofup to 15% to 35% in certain applications which do not always run at peak loadlevels.

 

The Registrant’s management believes that the*Power Commander*® line offerscertain advantages over competing products for the following reasons:

 

•                  The *PowerCommander*® is the result of field and laboratory engineeringrefinements undertaken since 1994. These refinements enable the *Power Commander*® to offer a control systemwhich measures and monitors key motor operating conditions and adapts motoroperating parameters during rapid changes in motor load, all without excessivevibration, synchronization problems or other material adverse effects to themotor or surrounding electrical and mechanical systems.

 

•                  Energy savings and motor efficiencies wereverified through tests of the *PowerCommander*® performed by three independent laboratories. Oak RidgeNational Laboratory tested the *PowerCommander*® and concluded that “significant energy savings due tolower electrical power demand can clearly be obtained in medium-sized andespecially large-sized motor applications where the motor is frequentlyoperating with no load.” Oak Ridge’s conclusions were based on tests thatexamined energy savings, motor temperature, and soft start impact.

 

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•                  Another independent laboratory at OregonState University determined that the *PowerCommander*® converted electrical energy into mechanical energy at amore efficient rate than a motor without the unit. The test compared energyconsumption and torque on a 15HP motor with and without the unit installed.

 

•                  Finally, Medsker Electric, Inc., anindependent electric motor repair and test laboratory, performed a series ofinrush current and energy savings tests on the *PowerCommander*®. The tests compared the Registrant’s product to theproducts of three competitors. In its conclusions, Medsker stated that theRegistrant’s *Power Commander*®“exhibited twice the energy savings of the next nearest competitor.” Inaddition, Medsker concluded that the *PowerCommander*® “exhibited the best soft-start performance, reducing themotor inrush current by 71%.” Finally, Medsker concluded that the *Power Commander*® “was the simplest toinstall and test, and was the best performer in terms of energy savings andinrush current reduction.”

 

•                  In addition to the tests performed byindependent laboratories, the *PowerCommander*® was subjected to a performance case study by one of theRegistrant’s customers, Otis Elevator Company. In the Otis Elevator case study,the *Power Commander*® resulted inreduced energy consumption and lower operating temperatures. The case studyexamined the effects and energy savings obtained with a *Power Commander*® installed on a 10 horsepowerAC induction motor operating a single width, single level escalator.

 

***Three-Phase Power Commander®***

 

The initial market for the Three-Phase *Power Commander*® is the elevator andescalator industry, although the Registrant is actively marketing this productto other industries such as the plastics manufacturing, crude oil, and forestproducts industries. According to the Freedonia Group, the U.S. elevator andescalator industry is estimated at $11 billion, and growing at a rate of 6.5%annually.   Extrapolating from tradejournals (e.g. Elevator World Source Book 2001-2002), there are approximately854,000 elevators and 45,400 escalators in operation in the U.S. and Canada in2004. 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 the350,000 elevators that have motor-generator sets are potential candidates forthe retrofit of the Three-Phase *PowerCommander*®. The Registrant is currently conducting tests with amajor hotel chain to determine if the Three-Phase *Power Commander*® will save energy on hydraulic elevators,which represent approximately 373,000 of the total installed base of elevatorsand is the largest and fastest growing segment of new elevator installations.

 

Industries that operate other equipment suchas conveyor systems, machine tools, mining equipment, crude oil pumps, metalstamping presses, etc., are believed to be viable target markets for theThree-Phase *Power Commander*® andthe Registrant is seeking to build its base of Original Equipment Manufacturers(“OEM”), distributors, and manufacturer representatives to address thesemarkets.

 

***Single-Phase Power Commander®***

 

Like the Registrant’s Three-Phase *Power Commander®* described above, theRegistrant’s Single-Phase *Power Commander®*reduces energy consumption in electrical equipment by sensing and controllingthe amount of energy the motor consumes. Most motors commonly used in-homeappliances and other consumer goods are single-phase motors.

 

Since the Single-Phase *Power Commander*® is usable in a broadvariety of contexts and can be installed when the motor is assembled withlittle effort and expense, it is a product suitable for installation at the OEMlevel or large volume sales and installation. Consequently, the Registrant’smarketing plan for the Single-Phase *PowerCommander*® is to identify the major OEMs that can best utilize theSingle-Phase *Power Commander*®.

 

The Registrant has an exclusive licensingagreement with one of its shareholders for the single phase technology, whichis the back bone of the Single-Phase *Power Commander*®.  (See Note 13 to the Financial Statements)

 

***Registrant’s Motor Starter Product***

 

The Registrant’s motor starter product isdesigned to soft start a motor, which saves energy and protects the motor, andhas the capacity to act as a remote-switching device. The expected release dateof this product is uncertain at this time as the Registrant’s R&D effortsare currently focusing on the development of its medium voltage and singlephase controllers.

 

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**Marketingand Sales**

 

The Registrant’s marketing efforts for the *Power Commander*® have been concentrated inthe elevator and escalator industry; national electrical supply houses; largereal estate property management companies; the oilfield supply industry; andpublic transportation systems.  Othercustomers and end users of the Registrant’s products include retail chains,hotels, manufacturers and federal government facilities.

 

As the Registrant’s operations are scaled upand revenues from the sale of the *PowerCommander*® grow, the Registrant intends to simultaneously (i) marketthe *Power Commander*® through OEMsto other compatible industries such as conveyor and production line systems,machine tools and other industrial applications,  (ii) expand its direct sales force, develop anetwork of distributors and manufacturer representatives to reach the end userswho receive the most benefit from the Registrants controllers, and (iii) continueto develop and market new products (medium voltage controller, improved singlephase controller, motor starter product) using a direct sales force, distributorsand manufacturer representatives.

 

**Manufacturing**

 

The Registrant has an arrangement with amanufacturer in the electronics industry, Q.C. Corporation d/b/a SystemControls. System Controls manufactures units for the Registrant on an as-neededbasis. Under the arrangement, the Registrant issues a purchase order to SystemControls that outlines, among other things, the number of units to bemanufactured and the price per unit. System Controls is under no obligation toaccept the order and the Registrant is under no obligation to use SystemControls for its manufacturing needs. Management believes the arrangementbetween the Registrant and System Controls has been mutually beneficial to both parties and expects thatthe relationship will continue.   Management also believes that System Controlshas the ability to meet their production needs and the Registrant would besuccessful in finding alternative manufacturers should System Controls not beavailable to manufacture product.

 

Product cost-reduction efforts are, and willremain, an objective of the Registrant. One key element of the program includesan aggressive manufacturing and engineering effort to reduce production cycletimes as well as material and processing costs. A second element of the programis to out-source production operations. The Registrant out sources the assemblyof printed circuit boards to qualified suppliers with automated assembly andtest equipment, which reduces costs and ensures quality. As the product volumesincrease, the Registrant expects to recognize favorable purchasing economies,increased labor efficiencies and improved overhead absorption. In addition, theRegistrant is continuing to evaluate additional sources of contractmanufacturing in order to reduce production costs further.

 

**Competition**

 

The principal competitive factors in theRegistrant’s markets include innovative product design, return on investmentfrom energy savings, product quality, product performance, utility rebateacceptance, established customer relationships, name recognition, distributionand price.

 

The Registrant competes against a number ofcompanies, many of which have longer operating histories, established marketsand far greater financial, advertising, research and development,manufacturing, marketing, personnel and other resources than the Registrantcurrently 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 tocommence and expand its operations or operate in a profitable manner.

 

***Three-Phase Competition*****.**Although the Registrant has not completed any formal market study, theRegistrant believes its Three-Phase *PowerCommander*® has the following competitive advantages:

 

•                  The *PowerCommander*® is the only device management is aware of that combinessoft start features with energy savings features in a single integrated unitthat is CSA and CE certified and achieves energy savings levels of up to 15% to35%;

 

•                  The *PowerCommander*® analog circuitry is proprietary and protected by apatent; and

 

•                  Energy saving motor controllers claimed to becompetitive with the *Power Commander*®(i.e., Fairford, Power Boss and Power Planner) utilize technologies inferior tothe Registrant’s technology because (i) their products achieve lower levels ofenergy savings in comparable applications compared to the *Power Commander*® (see Part I, Item 1“Description of Business,” for a description of the independent tests performedon the Registrant’s products); and (ii)

 

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their digital designproduces extensive harmonic distortion.

 

***Single-Phase Competition****.*  Therehave been several companies that have, with different technologies, attemptedto exploit this market due to the enormous opportunity in single-phase motorapplications. These products include “Green Plug” (voltage clamping), “PowerPlanner” (digital microchip) and “Econelectric” (power factor control).

 

***High Efficiency Motors****.*  Insofar as high efficiency motor replacementis concerned, management believes that the energy savings gain attributable tohigh efficiency motors is materially lower than that of the *Power Commander®*on underloaded motorapplications. In addition, the in-rush amperage needed to start an energyefficient motor is many times higher than that needed to start a conventionalmotor. This factor is made worse because the purchase of a new motor does notprovide a soft starting capability without the purchase of a separate softstart device.

 

***Motor Starter Competition.*** The Registrant believes that expected competition in the motor startermarket will be more intense than that for the *PowerCommander*® because:

 

•                  The potential market for the Registrant’smotor starter product is much larger than that for motor controllers in generaland the *Power Commander*® in particular;

 

•                  Competitors in the motor starter field aremore numerous and generally much larger compared to competitors in the motorcontroller field; and

 

•                  The motor starter is a staple product typeand is currently being sold by nearly all companies in the electrical componentbusiness.

 

However, Management believes it has acompetitive advantage in this market because the *Power Commander*® is the only device management is aware ofthat combines soft start features with energy savings features in a single integratedunit that achieves energy savings levels of up to 15% to 35%.

 

**Source ofSupply and Availability of Raw Materials**

 

The *PowerCommander*® motor controller and the Registrant’s motor starterproduct have both been designed to use standard, off-the-shelf, easily acquiredcomponents. Such components are basic items that are readily availableworldwide at competitive prices. They come in standard and miniature versionsand offer the Registrant large latitude in product design. Both the *Power Commander*® motor controller and themotor starter use a combination of components. Although the Registrant believesthat most of the key components required for the production of its products arecurrently 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 withapproximately 30 customers. Of this number, four, including KONE, Inc., TheGeorge Washington University, The May Department Stores, and Weibermachine,presently account for approximately 60% of the Registrant’s gross revenues. Inlight of the Registrant’s intentions to focus its business on OEMs in theelevator, oil field pump and manufacturing industries, the Registrant is, and maycontinue to be, dependent upon a small number of customers. Accordingly, theloss of one or more of these customers is likely to have a material adverseeffect upon the Registrant’s business.

 

**Patents andProprietary Rights**

 

The Registrant currently relies on acombination of trade secrets, non-disclosure agreements and a patent toestablish and protect its proprietary rights in its products. There can be noassurance that these mechanisms will provide the Registrant with anycompetitive advantages. Furthermore, there can be no assurance that others willnot independently develop similar technologies, or duplicate or “reverseengineer” the proprietary aspects of the Registrant’s technology.

 

The Registrant has one U.S. patent issuedwith respect to its products. The “Balanced and Synchronized Phase Detector foran AC Induction Motor Controller,” No. 5,821,726, was issued on October 13,1998 and expires in 2017. This patent

 

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covers improvements to the technology underthe NASA License Agreement (described below), which were developed by theRegistrant. Management believes this patent protects the Registrant’sintellectual property position beyond the expiration of the NASA LicenseAgreement because:

 

•                  the circuitry covered by the Registrant’spatent more effectively reduces the motor vibration; and

 

•                  the circuitry eliminates most of the balanceand synchronization problems that are created by other energy saving motorcontrollers, including those that would eventually use the licensed NASAtechnology upon the expiration of the underlying NASA patents.

 

The Registrant has additional proprietarytechnology being assessed for patent filing.

 

***NASA License Agreement***

 

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

 

The Registrant believes that its products andother proprietary rights do not infringe any proprietary rights possessed bythird parties. There can be no assurance, however, that third parties will notassert infringement claims in the future, the defense costs of which could besubstantial.

 

The Registrant has obtained U.S. Trademarkregistration of the *Power Commander*®mark.

 

**GovernmentRegulation**

 

The Registrant is not required to becertified by any government agencies. However, the Registrant’s products aremanufactured to comply with specific Underwriters’ Laboratory codes that meetnational safety standards. Presently, the Registrant’s products comply with UL508 Industrial Control Equipment and the Registrant has also receivedcertification 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 requirethe Registrant’s technology to be certified for export. The Registrant’sindustrial code is 421610 and the SIC code is 5063.

 

**Deregulationof Electrical Energy**

 

Sales of the Registrant’s product are notdependant on continued deregulation of the electrical energy market as theRegistrant’s product can be sold in regulated and deregulated markets.

 

**Researchand Development**

 

The Registrant intends to continue its researchand development effort to introduce new products based on the *Power Commander*® solid-state technology.Towards this end, the Registrant spent $338,955 and $420,376 in fiscal years2004 and 2003, respectively, on research and development activities, virtuallynone of which was borne by customers. A major focus of the Registrant’sforeseeable research and development activities will be on digitization andmotor starter and single phase unit commercialization.

 

**Effect ofEnvironmental Regulations**

 

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

 

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**Employees**

 

At the date of this document, the Registrantemploys 5 people on a full time basis.  Ofthis number, one is engaged in accounting and finance, one in operationsmanagement, one in sales and marketing and two in research, development andtechnology support. In addition, the Registrant has a management agreement withNorthwest Power Management that provides additional human resources, includingthe Registrant’s Chief Executive Officer, Interim Chief Financial Officer andan administrator (See Note 14 to the Financial Statements). At such time asbusiness conditions dictate, the Registrant may hire additional personnel for,among other things, increased production, marketing and sales. The Registranthas no collective bargaining agreements and considers its relationship with itsemployees to be good. The Registrant utilizes consultants in the areas ofmanufacturing engineering, marketing and financing and strategy on an ongoingbasis.

 

**RISKFACTORS**

 

***Limited Capitalization***

 

As of the date of this document, theRegistrant continues to have limited working capital and will be dependent uponadditional financing to meet its capital needs. There can be no assurance thatany additional financing will be available on acceptable terms, if at all. TheRegistrant needs additional capital to expand its operations and fullyimplement its business plan.

 

***Limited Operating History, Manufacturing and Distribution Arrangements***

 

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

 

***Registrant’s License From NASA Has Expired***

 

The basic technology upon which theRegistrant’s products are based is derived from a patent license agreement byand between the Registrant and NASA, which expired on December 16, 2002.  The license expired upon expiration of NASA’sunderlying patents, at which time anyone, including the Registrant, became freeto use the underlying NASA technology. The Registrant has also made certainimprovements to the basic technology covered by the NASA license, which mayplace the Registrant in a competitively superior position. No assurance can begiven, however, that others will not seek to improve the basic technology in amanner similar to that of the Registrant.

 

***Supplier Dependence***

 

Although the Registrant believes that most ofthe key components required for the production of its products are currentlyavailable in sufficient production quantities from multiple sources, there canbe no assurance that they will remain so readily available. It is possible thatother components required in the future may necessitate custom fabrication inaccordance with specifications developed or to be developed by the Registrant.Also, in the event that the Registrant, or its contract manufacturer, asapplicable, is unable to develop or acquire components in a timely fashion, theRegistrant’s ability to achieve production yields, revenues and net incomewould be adversely affected.

 

***Sales and Marketing Risks***

 

The Registrant’s products have beendistributed primarily through OEMs. The Registrant’s future growth andprofitability will depend upon the successful development of business relationshipswith additional OEMs, manufacturing representatives and distributors and theirability to penetrate the market with the Registrant’s products.

 

***Competition and Rapid Technological Change***

 

The Registrant competes against a number ofcompanies, many of which have longer operating histories, established marketsand far greater financial, advertising, research and development,manufacturing, marketing, personnel and other resources than the Registrantcurrently 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 toexpand its operations or operate profitably. The motor control industry ishighly competitive and characterized by rapid technological change. TheRegistrant’s future performance will depend in large

 

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part upon its ability to become and remaincompetitive and to develop, manufacture and market acceptable products in thesemarkets. Competitive pressures may necessitate price reductions, which canadversely affect revenues and profits. If the Registrant is not competitive inits ongoing research and development efforts, its products may become obsolete,or be priced above competitive levels. Although management believes that, basedupon their performance and price, the Registrant’s products are attractive tocustomers; there can be no assurance that competitors will not introducecomparable or technologically superior products, which are priced more favorablythan the Registrant’s products.

 

***Retail Price of Electrical Energy***

 

A customer’s decision to purchase the *Power Commander*® is primarily driven bythe payback on the investment resulting from the increased energy savings.Although management believes that current retail energy prices support anattractive return on investment for the Registrant’s products, there can be noassurances that future retail pricing of electrical energy will remain at suchlevels.

 

***No Cash Dividends on Common Stock***

 

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

 

# ***Possible Resalesunder Rule 144***

 

Of the 5,020,477 shares of the Registrant’s commonstock outstanding on March 11, 2005, 1,596,890****shares are freely trading in the market place (the “Free TradingShares”). The Free Trading Shares are comprised mostly of shares that wereoriginally issued in transactions that were exempt from registration under theSecurities Act, which shares were, over time, resold pursuant to Rule 144, asset forth below.

 

The remaining 3,423,587 shares of the Registrant’s commonstock outstanding are restricted securities as defined in Rule 144 under theSecurities Act and under certain circumstances may be resold withoutregistration pursuant to Rule 144.

 

In addition, as of March 1, 2005 theRegistrant has approximately 2,689,355 common stock purchase warrantsoutstanding and has approximately 2,989,731 common stock options outstanding.Neither the granting of options nor the issuance of warrants have beenregistered under the Securities Act, but may, under certain circumstances, beavailable for public sale in the open market pursuant to Rule 144, subject tocertain limitations.

 

In general, under Rule 144, a person (orpersons whose shares are aggregated) who has satisfied a one-year holdingperiod may, under certain circumstances, sell within any three-month period anumber of securities which does not exceed the greater of 1% of the thenoutstanding shares of common stock or the average weekly trading volume of theclass during the four calendar weeks prior to such sale. Rule 144 also permits,under certain circumstances, the sale of securities, without any limitation, bya person who is not an Affiliate, as such term is defined in Rule 144(a)(1), ofthe Registrant and who has satisfied a two-year holding period. Any substantialsale of the Registrant’s common stock pursuant to Rule 144 may have an adverseeffect on the market price of the Registrant’s shares.

 

***Common Stock Price Volatility***

 

The Company’s common stock is traded on theNational Association of Securities Dealers’ Over the Counter Bulletin Board (“OTCBB”),under the symbol “PEFF”.  There can be noassurance that a regular market for the Company’s common stock will besustained.  The OTCBB offers less tradingliquidity than NASDAQ.  Quotes forsecurities traded on the OTCBB are not as widely available as are those forNASDAQ.  Therefore, this lack of readilyavailable price information may impair the ability of holders of common stockto resell their securities.  The tradingprices of the common stock could be subject to wide fluctuations in response toquarterly variations in the Company’s operating results, announcements by theCompany or others, developments affecting the Company, or other events orfactors.  In addition, the stock markethas experienced extreme price and volume fluctuations in recent years.  These fluctuations have had a substantial effecton the market price for many companies, often unrelated to the operatingperformance of such companies, and may adversely affect the market price forthe Company’s common stock.

 

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***Potential Effect of Penny Stock Rules on Liquidity of Shares***

 

If the Registrant’s securities are not listedon The Nasdaq Stock Market or certain other national securities exchanges andthe price thereof is below $5.00, then subsequent purchases of such securitieswill be subject to the requirements of the penny stock rules, absent theavailability of another exemption. The SEC has adopted rules that regulatebroker-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 orquoted on The Nasdaq Stock Market). The penny stock rules require abroker-dealer to deliver a standardized risk disclosure document required by theSEC, to provide the customer with current bid and offer quotations for thepenny stock, the compensation of the broker-dealer and its salesperson in thetransaction, monthly account statements showing the market value of each pennystock held in the customer’s account, to make a special written determinationthat the penny stock is a suitable investment for the purchaser and receive thepurchaser’s written agreement to the transaction. The Registrant is currentlysubject to the penny stock rules and, therefore, these disclosure requirementsmay have the effect of reducing the level of trading activity in the Registrant’scommon stock.

 

***Limitation on Directors’ Liabilities under Delaware Law***

 

Pursuant to the Registrant’s Certificate ofIncorporation, directors of the Registrant are not liable to the Registrant orits stockholders for monetary damages for breach of fiduciary duty, except forliability in connection with a breach of the duty of loyalty, for acts oromissions not in good faith or which involve intentional misconduct or aknowing violation of law, for dividend payments or stock repurchases illegalunder Delaware law or any transaction in which a director has derived animproper personal benefit.

 

***Outstanding Options and Warrants***

 

As of March 1, 2005, the Company has reserved71,429 shares of its common stock for issuance upon exercise of stock optionsor similar awards which may be granted pursuant to the Company’s 1994 StockOption Plan (hereinafter the “1994 Plan”), of which options to purchase anaggregate of 66,232 shares are outstanding.  Furthermore, as of the same date the Companyhas reserved 5,000,000 shares of its common stock for issuance upon exercise ofstock options or similar awards which may be granted pursuant to the Company’s2000 Stock Option and Restricted Stock Plan (hereinafter the “2000 Plan”), ofwhich options to purchase an aggregate of 3,356,500 shares are outstanding.  The outstanding options have a weightedaverage exercise price of $2.00.  As ofMarch 1, 2005, the Company has issued warrants exercisable for 2,689,355 sharesof common stock to financial consultants, investors, former employees and otherbusiness partners, having a weighted average exercise price of $0.77 andexpiring on various dates from August 1, 2005 to December 31, 2011.

 

Exercise of these options and warrants issuedby the Registrant in the future will reduce the percentage of common stock heldby the public stockholders.  Furthermore,the terms on which the Company could obtain additional capital during the lifeof the options and warrants may be adversely affected, and it should beexpected that the holders of the options and warrants would exercise them at atime when the Company would be able to obtain equity capital on terms morefavorable than those provided for by such options and warrants.

 

***Issuance of Convertible Preferred Stock with Anti-Dilution Provisionsand Superior Liquidation Preference***

 

In 2002, the Registrant issued 2,346,233shares of Series A-1 Convertible Preferred Stock to Summit Energy Ventures fora purchase price of $2,500,000. In October 2003, the Registrant issued anadditional 982,504 shares of Series A-1 Convertible Preferred Stock to SummitEnergy Ventures when Summit converted principal and interest of $1,046,896 thatwas outstanding under a convertible note the Registrant issued to Summit in May2003. The Series A-1 Convertible Preferred Stock provides the holders of the SeriesA-1 Convertible Preferred Stock with protection against dilution. In the eventthat the Registrant issues shares at a price less than $1.281 per share, theconversion rights of the Series A-1 Convertible Preferred Stock will beadjusted so that the Series A-1 Convertible Preferred Stock can convert intosuch number of shares that Summit would have received had it bought commonstock at such lower price. Currently, the conversion rights of the Series A-1Convertible Preferred Stock entitle the holder of the Series A-1 ConvertiblePreferred Stock to receive 0.83 shares of common stock for each share of SeriesA-1 Convertible Preferred Stock.  If allof the Registrant’s outstanding shares of Series A-1 Convertible PreferredStock were converted into common stock today, the holder of the Series A-1Convertible Preferred Stock would receive 2,768,849 shares of common stock.

 

In the event of a Liquidation Event (asdefined in the Certificate of Designation of the Series A-1 ConvertiblePreferred Stock which includes a winding up of the Registrant, a sale ofsubstantially all of the Registrant’s assets, and certain mergers andconsolidations) the holders of the Series A-1 Convertible Preferred Stock areentitled to two times the price paid by Summit for such stock.  Thereafter, the remaining corporate assetswould be distributed among the holders of common stock and Series A-1Convertible Preferred Stock on a pro rata basis. The existence of the SeriesA-1 Convertible Preferred Stock’s anti-dilution provisions may reduce thepercentage of common stock held by the public stockholders. Furthermore, theterms

 

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on which the Registrant could obtainadditional capital may be adversely affected by the Series A-1 ConvertiblePreferred Stock’s anti-dilution provisions and superior liquidation preference.

 

***Authorization and Discretionary Issuance of Preferred Stock***

 

The Registrant’s Certificate of Incorporationauthorizes the issuance of “blank check” preferred stock with suchdesignations, rights and preferences as may be determined from time to time bythe Board of Directors. Accordingly, the Registrant’s Board of Directors isempowered, without stockholder approval, to issue preferred stock withdividends, liquidation, conversion, voting or other rights that could adverselyaffect the relative voting power or other rights of the holders of theRegistrant’s common stock. In the event of issuance, the preferred stock couldbe used, under certain circumstances, as a method of discouraging, delaying orpreventing a change in control of the Registrant, which could have the effectof discouraging bids for the Registrant and thereby prevent stockholders fromreceiving the maximum value for their shares. Although the Registrant has nopresent intention to issue any shares of its preferred stock, there can be noassurance that the Registrant will not do so in the future.

 

***Product Liability Risk***

 

The Registrant may be subject to potentialproduct liability claims that could, in the absence of sufficient insurancecoverage, have a material adverse impact on the Registrant. Presently, theRegistrant has general liability coverage that includes product liability up to$2,000,000. Any large product liability suits occurring early in the Registrant’sgrowth may significantly and adversely affect the Registrant’s ability toexpand the market for its *Power Commander*®line of products.

 

***No Key Man Insurance***

 

The Registrant presently has no key man lifeinsurance policies. As soon as practicable following the commencement ofprofitable operations and ongoing positive cash flow (of which there can be noassurance), the Registrant intends to purchase key man life insurance on thelives of its two principal executive officers, Steven Strasser and NicholasAnderson. Upon purchase of such insurance, the Registrant intends to pay thepremiums and be the sole beneficiary. The lack of such insurance may have amaterial adverse effect upon the Registrant’s business.

 

***Line of Credit***

 

At the present time, the Registrant does nothave a bank line of credit.

 

**Item 2.**                                   **Description of Property**

 

The Registrant’s corporate office space is locatedat 3900 Paradise Road, Suite 283, Las Vegas, Nevada 89109 and shared with amajor investor in the Registrant, Summit Energy Ventures, LLC. On October 5,2004 the Company’s board of directors formally approved moving the Company’sheadquarters from Livonia, Michigan to Las Vegas, Nevada. As of November 1,2004, the Company’s facility in Livonia was vacated entirely and alladministrative functions have moved to Las Vegas, the location of the Company’sChief Executive Officer and Interim Chief Financial Officer. The Company’sother functions, including research and development and managing manufacturing,were temporarily moved to Carlstadt, New Jersey, where the company as ofDecember 31, 2004 sublet 3,000 square feet of work space for no cashpayment.  Instead, the Company onNovember 2, 2004 issued 100,000 warrants with an exercise price of $0.65 pershare as payment for subletting its space.  The Company is currently in litigation withthe owners of the Livonia, Michigan property that the Company vacated in2004.  The Company has accrued a reservefor the estimated loss in relation to the settlement of the litigation. TheCompany plans on leasing additional office space and facilities in Las Vegas,Nevada and Floral Park, New York in Early 2005. (See Note 22 to the FinancialStatements)

 

**Item 3.**                                   **Legal Proceedings**

 

The Registrant is currently in litigationwith the owners of property in Livonia, Michigan that the Registrant vacated in2004.  See Item 2 Description of Propertyabove.

 

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**PART II**

 

**Item 5.**                                   **Market for Common Equity andRelated Stockholder Matters**

 

**Market forCommon Stock**

 

The Registrant’s common stock is thinlytraded on the National Association of Securities Dealers’ Over the CounterBulletin Board (“OTCBB”) under the symbol “PEFF”.

 

The following table sets forth the high andlow bid information for quarterly periods in the two twelve month periods endedDecember 31, 2004 and December 31, 2003, as reported by Yahoo.com and PinkSheets LLC, respectively.  On March 1,2004, the Company effected a one for seven reverse stock split.  The numbers below and throughout this Form10-KSB have been retroactively restated to reflect this reverse split.

 
| **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    |       |
|                                           |            |          |            |         |            |  |  |

 

 
| **Twelve months Ended December 31, 2004** | ** ** | **High** | ** ** | **Low** | ** ** |
|-------------------------------------------|------------|----------|------------|---------|------------|
| October 1, 2004 — December 31, 2004  |       | $        | 1.00       |    | $          | 0.21 |   |
| July 1, 2004 — September 30, 2004    |       | 0.67     |       | 0.28    |       |
| April 1, 2004 — June 30, 2004        |       | 1.50     |       | 0.61    |       |
| January 1, 2004 — March 31, 2004     |       | 5.04     |       | 0.90    |       |
|                                           |            |          |            |         |            |  |  |

 

As of March 11, 2005, there were 116 shareholdersof record of the Registrant’s common stock.

 

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

 

EQUITYCOMPENSATION PLAN INFORMATION

 
| ** **                                                  | ** ** | **Number of  securities to be  issued upon  exercise of  outstanding  options, warrants  and rights (a)** | ** ** | **Weighted average  exercise price of  outstanding options,  warrants and rights  (b)** | ** ** | **Number of  securities  remaining  available for  future issuance  under equity  compensation  plans (excluding  securities reflected  in column (a))(c)** | ** ** |
|-------------------------------------------------------------|------------|-----------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------------------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
| Equity compensation plans approved by  security holders     |       | 0                                                                                                         |       | 0                                                                                       |       | 0                                                                                                                                                           |       |
| Equity compensation plans not approved by  security holders |       | 1,322,392                                                                                                 |       | $                                                                                       | 0.77       |                                                                                                                                                        | 0          |   |
| Total                                                       |       | 1,322,392                                                                                                 |       | $                                                                                       | 0.77       |                                                                                                                                                        | 0          |   |

 

1,322,392 warrants and options have beenissued to non-employee consultants who have provided services to theRegistrant.  Of this amount, 750,699warrants were for vendor settlements and 132,693 warrants were for commissionsand services, and 439,000 options issued for vendor settlements.

 

The Registrant maintains a Stock Option EquityCompensation Plan.  (See Note 12 to theFinancial Statements)

 

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**RecentSales of Unregistered Securities**

 

Sales Made to Summit EnergyVentures

 

The following details several different salesof 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 fromregistration under the Securities Act of 1933, as amended (the “Securities Act”),pursuant to section 4(2) of the Securities Act.

 

In June 2002, the Company issued 2,346,233shares of Series A-1 Convertible Preferred Stock to Summit Energy Ventures fora purchase price of $2,380,000 (net of issuance costs of $120,000).  In October 2003, the Company issued anadditional 982,504 shares of Series A-1 Convertible Preferred Stock to SummitEnergy Ventures when Summit converted principal and interest of $1,046,896 thatwas outstanding under a convertible note the Company issued to Summit in May2003.

 

The Series A-1 Convertible Preferred Stockprovides the holders of the Series A-1 Convertible Preferred Stock withprotection against dilution.  In theevent that the Company issues shares at a price less than $1.281 per share, theconversion rights of the Series A-1 Convertible Preferred Stock will beadjusted so that the Series A-1 Convertible Preferred Stock can convert intosuch number of shares that Summit would have received had it bought commonstock at such lower price.  Furthermore,the conversion rights of the Series A-1 Convertible Preferred Stock will alsobe adjusted in the event that any shares, warrants, options or promissory noteis issued with a price or conversion price less than $1.281 per share.  The Company has asked for and received onOctober 11, 2004, a waiver of these anti-dilution rights so that the issuanceof up to a specific number of options and warrants with exercise prices of noless than $0.65 per share will not trigger these anti-dilution rights. Currentlythe conversion rights of the Series A-1 Convertible Preferred Stock entitle theholder to receive 0.83 shares of common stock for each share of Series A-1Convertible Preferred Stock.  If all ofthe Company’s outstanding shares of Series A-1 Convertible Preferred Stock wereconverted into common stock today, the holder would receive 2,768,849 shares ofcommon stock.

 

In the event of aLiquidation Event, the holders of the Series A-1 Convertible Preferred Stockare entitled to two times the price paid by Summit for such stock.  Thereafter, the remaining corporate assetswould be distributed among the holders of common stock and Series A-1Convertible Preferred Stock on a pro rata basis.  The existence of the Series A-1 ConvertiblePreferred Stock’s anti-dilution provisions may reduce the percentage of commonstock held by the public stockholders. Furthermore, the terms on which the Company could obtain additionalcapital may be adversely affected by the Series A-1 Convertible Preferred Stock’santi-dilution provisions and superior liquidation preference.

 

On June 7, 2004, SummitEnergy Ventures notified the Company that it had transferred 1,747,587 of theCompany’s Series A-1 Convertible Preferred Stock and 1,645,404 of the Company’scommon stock to Commonwealth Energy Corporation, a former member of SummitEnergy Ventures LLC.  This transfer makesCommonwealth Energy the Company’s single largest shareholder.

 

Sales Made to PurchasersOther than Summit Energy Ventures

 

On various dates from February 2004 to June 2004,The Company issued 13,580 shares of common stock to Richard Koch, the formerPresident and Chief Executive Officer of the Company. These shares were issuedin conjunction with the settlement of certain accounts payable and accruedexpenses related to his employment agreement.

 

On various dates from May 2003 to February2004, the Company issued 682,156 shares of common stock to Starz InvestmentsLimited, a Belize company.  The Companyreceived $1,423,760 for these shares and paid $88,276 in commissions to BurnhamSecurities.  Additionally, the Companyalso issued Burnham Securities 48,303 common stock purchase warrants ascompensation related to these transactions. The warrants had strike prices that varied from approximately $1.40 to $1.75.  These warrants were exercised cashlesslyresulting in 32,958 shares being issued at an effective strike price of zero.  The sales of stock to Starz InvestmentsLimited were exempt from registration under the Securities Act pursuant toRegulation S promulgated under the Securities Act.  The issuance of the warrants to BurnhamSecurities was exempt from registration under the Securities Act pursuant tosection 4(2) of the Securities Act.  BurnhamSecurities cashlessly exercised the warrants on various dates and received 33,673shares.

 

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

 

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

 

On various dates from December 2003 toFebruary 27, 2004, the Company issued 15,103 shares of common stock to RichardKoch.  The shares were issued in exchangefor the cancellation of debt owed to Mr. Koch in the amount of $60,866.  The issuances were exempt from registrationunder the Securities Act pursuant to Regulation D.  At the time, Mr. Koch was the Chief ExecutiveOfficer and a director of the Company.

 

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

 

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

 

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

 

On various dates during the first half of2003, the Company issued 40,357 shares of common stock to various accreditedinvestors in connection with a private placement pursuant to section 4(2) ofthe Securities Act.  The shares wereissued for an aggregate consideration of $158,200.  The issuance was exempt from registrationunder the Securities Act pursuant to Regulation D.  The investors were all accredited investors.

 

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

 

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**Item 6.**                                   **Management’s Discussion andAnalysis or Plan of Operation**

 

**OVERVIEW**

 

The Registrant generates revenues from asingle business segment: the design, development, marketing and sale of proprietarysolid state electrical components designed to reduce energy consumption inalternating current induction motors.

 

The Registrant began generating revenues fromsales of its patented *Power Commander*®line of motor controllers in late 1995. As of December 31, 2004, the Registranthad total stockholders’ equity of $1,068,330 primarily due to the Registrant’ssale of 2,346,233 shares of Series A-1 Convertible Preferred stock to SummitEnergy Ventures, LLC in June of 2002 and the conversion of notes payable ofapproximately $1,047,000 into 982,504 shares of Series A-1 ConvertiblePreferred stock in October of 2003. In addition, in August 2000, the Registrantpurchased the assets of Percon, formerly the largest distributor of theRegistrant’s products. The transaction was accounted for as a purchase and theRegistrant’s Statements of Operations includes Percon’s results of operationssince the date of acquisition. The consolidation of the operations of bothentities allowed the Registrant to integrate the administrative, sales,marketing and manufacturing operations of Percon. Percon had developed salescontacts with major OEM’s in the elevator/escalator industry and transferredthose agreements to the Registrant as part of the asset sale.

 

**RESULTS OFOPERATIONS: FISCAL YEAR 2004 COMPARED TO FISCAL YEAR 2003**

 

**REVENUES**

 

Revenues for the twelve months ended December31, 2004, were $284,373 compared to $397,673 for the twelve months endedDecember 31, 2003, a decrease of $113,300, or 28%. The decrease in revenues wasprincipally attributable to a lack of funding to pursue the Registrant’s salesstrategy as well as the failure of the Registrant’s former management effortsto improve sales. New management has reassessed the Registrant’s sales efforts andbelieves it is taking steps to improve sales by pursuing tighter relationshipswith important OEM customers, as well as direct and distributor sales to more desirablemarkets and customers.

 

**COST OFREVENUES**

 

Cost of revenues for the twelve months endedDecember 31, 2004 were $258,135 compared to $360,972 for the twelve monthsended December 31, 2003, a decrease of $102,837 or 28%. The decrease in cost ofrevenues was primarily attributed to the decrease in revenues and an overallreduction in the cost of materials from the Registrant’s suppliers.  These improvements were partially off-set byan increase in the inventory obsolescence expense to $100,000 for the twelvemonths ended December 31, 2003 compared to $29,484 for the twelve months endedDecember 31, 2004, a decrease of $70,516 or 71%.  The decrease in the inventory obsolescenceexpense was principally attributable to reserves taken for certain inventorycomponents used exclusively in slow moving products.

 

**GROSS MARGIN**

 

Gross margin for the twelve months endedDecember 31, 2004 was $26,238 compared to $36,701 for the twelve months endedDecember 31, 2003, a decrease of $10,463 or 29%.  This decrease was primarily due to the increasein material, labor, and overhead offset by the inventory obsolescence expense describedabove.  Excluding the inventoryobsolescence expense, gross margin as a percentage of revenue for the twelvemonths ended December 31, 2004 was 20% compared to 34% for the twelve monthsended December 31, 2003.  The decreasewas primarily attributable to a decrease in sales attributable to a lack offunding as described above, as well as the inventory obsolescence expensedescribed above.

 

**OPERATINGEXPENSES**

 

**Researchand Development Expenses**

 

Research and development expenses were $327,202for the twelve months ended December 31, 2004 compared to $420,376 for thetwelve months ended December 31, 2003, a decrease of $93,174 or 22%.  This decrease is primarily attributable toreduced expenses due to the restructuring of the Company’s operations in the 3rdquarter 2004.  Costs incurred were for thedevelopment of the low cost, low horsepower Platform A product family, thesingle-phase controller, and the fast-reaction integrator board.

 

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**Selling,General and Administrative Expenses**

 

Selling, general and administrative expenseswere $1,886,132 for the twelve months ended December 31, 2004 compared to$2,392,754 for the twelve months ended December 31, 2003, a decrease of$506,622 or 21%. The decrease in selling, general and administrative expenseswas due primarily to reduced expenses due to the restructuring of the Company’soperations in the 3rd quarter 2004. These expenses were related forthe most part to reduced payroll and related costs, the closing of the Company’sLivonia, MI headquarters and settlements with former employees, vendors andconsultants.

 

**FinancialCondition, Liquidity, and Capital Resources: For the Year Ended December 31,2004**

 

Since inception, the Registrant has financedits operations primarily through the sale of its equity securities. As ofDecember 31, 2004 the Registrant has received a total of approximately $6,254,800from public and private offerings of its equity securities, receivedapproximately $445,386 under a bank line of credit (which was repaid during2002), and received $1,000,000 under a line of credit with a shareholder (whichwas converted to Series A-1 Preferred Convertible shares during 2003). InOctober 2004, the Company received $1,464,806 in debt financing through a debtoffering arranged by a placement agent, Pali Capital. Of this total, $300,000plus accrued interest was converted from borrowings with the same shareholderas referenced above. As of December 31, 2004 the Registrant had cash and cashequivalents of $392,471. In February 2005, the Registrant received anadditional $125,000 in debt financing under this same debt offering.

 

Net cash used for operating activities forthe twelve months ended December 31, 2004 was $1,446,457 which primarilyconsisted of: a net loss of $2,465,631; less allowances for inventoryobsolescence of $29,484, depreciation and amortization of $64,337, loss ondisposition of fixed assets of $31,036, an increase in restricted cash relatedto a note payable of $219,721, decreases in accounts receivable of $7,194,inventory of $143,396 and prepaid expenses and other of $21,726. In addition,these amounts were partially offset by an increase in accounts payable andaccrued expenses of $162,742 and accrued salaries and payroll taxes of $87,231.

 

Net cash used foroperating activities for the twelve months ended December 31, 2003 was$2,028,798 which primarily consisted of: a net loss of $3,016,717; lessallowances for bad debts and customer returns of $17,000, allowances forinventory 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, interest converted to debt of$46,896 and decreases in accounts receivable of $31,511 and inventory of$43,353. In addition, these amounts were partially offset by an increase inprepaid expenses of $18,832 and deposits of $2,646, and decreases in accountspayable and accrued expenses of $63,866 and accrued salaries and payroll taxesof $19,294.

 

Net cash used in investingactivities for fiscal year 2004 was $15,551, compared to $42,617 in fiscal year2003.  The amounts for both yearsconsisted of the purchase of fixed assets.

 

Net cash provided by financingactivities for fiscal year 2004 was $1,568,972 which primarily consisted ofproceeds from the issuance of debt securities of $300,000, from which a $15,000fee was paid, the issuance of additional debt securities of $1,150,000, fromwhich a fee of $115,000 was paid. Net cash provided by financing activities forfiscal year 2003 was $2,099,215, which primarily consisted of proceeds from theissuance of equity securities of $1,131,965, net of costs, and advances fromline of credit of $1,000,000; off-set by deferred financing costs of $32,750.

 

The Registrant expects toexperience growth in its operating expenses, particularly in research anddevelopment and selling, general and administrative expenses, for theforeseeable future in order to execute its business strategy. As a result, theRegistrant anticipates that operating expenses will constitute a material useof any cash resources.

 

**CashRequirements and Need for Additional Funds**

 

The Company anticipates a substantial needfor cash to fund its working capital requirements. In accordance with theCompany’s prepared expansion plan, it is the opinion of management thatapproximately $1.75 million will be required to cover operating expenses,including, but not limited to, marketing, sales and operations during the nexttwelve months. This amount does not include the funds required to repay thesecured debt issued by the company as described in Note 22 to the FinancialStatements and the Company’s Forms 8-K filed on March 2, 2005 and November 5,2004.

 

14

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On October 16, 2003, the Company entered intoan agreement with an investment banker whereby the investment banker wouldprovide the company with investment banking services.  The investment banker was retained with theintention of attempting to raise $10 million or more through a public sale ofstock in the first quarter of 2004. Since the agreement was executed, the Company has learned that such atransaction is probably not possible until after the Company has generatedsubstantially greater sales than it has generated in the past.  On February 25, 2004, the Company signed aformal letter of agreement with the same investment banker.  Under this letter, the Company appointed theinvestment banker, as its exclusive representative for 120 days, to attempt toraise money for the Company.  Theinvestment banker introduced the Company to investors and participated inpresentations to investors to purchase the Company’s securities.  The investment banker was unable to sell anysecurities during the 120 days, but the Registrant continued to work with theinvestment banker and sold secured notes in October 2004. The Company paid the investment10% of the gross proceeds of restricted securities sold during the agreement (excludingthose sold to an affiliate) as well as issued an amount of warrants equal to10% of the total warrants issued to the investors in the secured notes. (SeeNovember 5, 2004 8K for additional details.) If the Company is acquired,merged, or enters into a joint venture with an investor introduced by theinvestment banker, the Company agrees to pay a fee of 3% of the gross proceeds(cash, stock, other assets acquired, or debt assumed). The Company’s agreementwith the investment banker has now expired and the offering of notes has beenclosed.

 

The Company entered into a consultingagreement with an investment advisor on December 1, 2004.  The agreement calls for the investmentadvisor to assist the Company in devising financial and marketing strategies,and also to assist the Company in raising funds on a non-exclusive basisthrough the offering of debt and/or equity securities.  The company shall pay the investment advisorthe amount of $3,000 per month, plus expenses approved by the Company, andissued 300,000 options.  The sum of$3,000 per month will be adjusted to $5,000 per month once the Board ofDirectors and the Company agree to adjust the salaries of the Chief Executive Officer,Chief Financial Officer and the General Manager.  The agreement contains confidentiality andnon-competition provisions.  The term ofthe agreement is 12 months and can be terminated by either party on 90 daysnotice in writing.  As of December 31,2004, the Company paid the investment advisor $3,000.

 

**RecentAccounting Pronouncements**

 

See “Note 2 – Summary of SignificantAccounting Policies” of the Financial Statements for an explanation of recentaccounting pronouncements impacting the Company.

 

15

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**Item 7.**                                   **Financial Statements**

 

 

**POWEREFFICIENCY CORPORATION**

 

DECEMBER 31,2004 AND 2003

 

INDEX

 
| Report of Independent Registered Public  Accounting Firm |   |
|----------------------------------------------------------|--------|
|                                                     |   |
| Financial  Statements:                                   |   |
|                                                     |   |
| Balance Sheet                                            |   |
|                                                     |   |
| Statements of Operations                                 |   |
|                                                     |   |
| Statements of Changes in Stockholders’  Equity      |   |
|                                                     |   |
| Statements of Cash Flows                                 |   |
|                                                     |   |
| Notes to Financial Statements                            |   |

 

16

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**REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**

 

 

Board ofDirectors and Stockholders

PowerEfficiency Corporation

Las Vegas,Nevada

 

 

We have audited theaccompanying balance sheet of Power Efficiency Corporation, (a Delawarecorporation) (the “Company”) as of December 31, 2004, and the relatedstatements of operations, changes in stockholders’ equity, and cash flows foreach of the years ended December 31, 2004 and 2003.  These financial statements are the responsibilityof the Company’s management.  Ourresponsibility is to express an opinion on these financial statements based onour audits.

 

We conducted our audits inaccordance with the standards of the Public Company Accounting Oversight Board(United States).  Those standards requirethat we plan and perform the audit to obtain reasonable assurance about whetherthe financial statements are free of material misstatement.  The Company is not required to have, nor werewe engaged to perform, an audit of its internal control over financialreporting.  Our audit includedconsideration of internal control over financial reporting as a basis fordesigning audit procedures that are appropriate in the circumstances, but notfor the purpose of expressing an opinion on the effectiveness of the Company’sinternal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supportingthe amounts and estimates made by management, as well as evaluating the overallfinancial statement presentation.  Webelieve that our audits provide a reasonable basis for our opinion.

 

In our opinion, the financialstatements referred to above present fairly, in all material respects, thefinancial position of Power Efficiency Corporation at December 31, 2004 and theresults of its operations and its cash flows for the years ended December 31,2004 and 2003 in conformity with accounting principles generally accepted inthe United States of America.

 

The accompanying financialstatements have been prepared assuming that the Company will continue as agoing concern.  As discussed in Note 3 tothe financial statements, the Company has suffered recurring losses fromoperations, the Company has experienced a deficiency of cash from operationsand lacks sufficient liquidity to continue its operations.  These matters raise substantial doubt as tothe Company’s ability to continue as a going concern.  Management’s plans in regard to these mattersare also discussed in Note 3.  Thefinancial statements do not include any adjustments that might result from theoutcome of these uncertainties.

 

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

 

March 29, 2005

Livingston,New Jersey

 

17

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**POWEREFFICIENCY CORPORATION**

BALANCE SHEET

DECEMBER 31, 2004

 
| **ASSETS**                                                                                                                                               | ** ** | ** **  | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------|------------|
|                                                                                                                                                     |       |        |       |
| CURRENT ASSETS:                                                                                                                                          |       |        |       |
| Cash                                                                                                                                                     |       | $           | 392,471    |   |
| Accounts receivable, net of reserve and  allowance of $21,229                                                                                            |       | 31,533      |       |
| Inventories, net                                                                                                                                         |       | 187,817     |       |
| Prepaid expenses and other current assets                                                                                                                |       | 235,102     |       |
| Total Current Assets                                                                                                                                     |       | 846,923     |       |
|                                                                                                                                                     |       |        |       |
| PROPERTY AND EQUIPMENT, Net                                                                                                                              |       | 26,320      |       |
|                                                                                                                                                     |       |        |       |
| OTHER ASSETS:                                                                                                                                            |       |        |       |
| Patents, net                                                                                                                                             |       | 6,504       |       |
| Goodwill                                                                                                                                                 |       | 1,929,963   |       |
| Website, net                                                                                                                                             |       | 9,775       |       |
| Deferred financing costs, net                                                                                                                            |       | 98,718      |       |
|                                                                                                                                                     |       | 2,044,960   |       |
|                                                                                                                                                     |       |        |       |
|                                                                                                                                                     |       | $           | 2,918,203  |   |
|                                                                                                                                                     |       |        |       |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**                                                                                                            | ** ** | ** **  | ** ** |
|                                                                                                                                                     |       |        |       |
| CURRENT LIABILITIES:                                                                                                                                     |       |        |       |
| Accounts payable and accrued expenses                                                                                                                    |       | $           | 639,266    |   |
| Accrued salaries and payroll taxes                                                                                                                       |       | 128,467     |       |
| Notes payable - Pali Capital, Net                                                                                                                        |       | 981,801     |       |
| Notes payable - former officers                                                                                                                          |       | 73,889      |       |
| Total Current Liabilities                                                                                                                                |       | 1,823,428   |       |
|                                                                                                                                                     |       |        |       |
| LONG-TERM LIABILITIES:                                                                                                                                   |       |        |       |
| Note payable - former officer                                                                                                                            |       | 26,445      |       |
|                                                                                                                                                     |       |        |       |
| Total Liabilities                                                                                                                                        |       | 1,849,873   |       |
|                                                                                                                                                     |       |        |       |
| 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  issued and outstanding |       | 3,329       |       |
| Common stock, $.001 par value, 7,142,857  shares  authorized, 5,020,477 shares issued and oustanding                                                     |       | 5,020       |       |
| Additional paid-in capital                                                                                                                               |       | 16,386,612  |       |
| Accumulated deficit                                                                                                                                      |       | (15,326,631 | )          |
| Total Stockholders’ Equity                                                                                                                          |       | 1,068,330   |       |
|                                                                                                                                                     |       |        |       |
|                                                                                                                                                     |       | $           | 2,918,203  |   |

 

*See report of independent registered public accounting firm and notesto financial statements.*

 

18

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**POWEREFFICIENCY CORPORATION**

STATEMENTS OF OPERATIONS

 
| ** **                                     | ** ** | **Year Ended December 31,** | ** ** |
|------------------------------------------------|------------|-----------------------------|------------|
| ** **                                     | ** ** | **2004**                    | ** ** | **2003** | ** ** |
|                                           |       |                        |       |   |   |
| REVENUES                                       |       | $                           | 284,373    |   | $ | 397,673 |   |
|                                           |       |                        |       |   |   |
| COMPONENTS OF COST OF SALES:                   |       |                        |       |   |   |
| Material, labor and overhead                   |       | 228,651                     |       | 260,972 |   |
| Inventory obsolesence                          |       | 29,484                      |       | 100,000 |   |
| Total Cost of Sales                            |       | 258,135                     |       | 360,972 |   |
|                                           |       |                        |       |   |   |
| GROSS MARGIN                                   |       | 26,238                      |       | 36,701 |   |
|                                           |       |                        |       |   |   |
| COSTS AND EXPENSES:                            |       |                        |       |   |   |
| Research and development                       |       | 327,202                     |       | 420,376 |   |
| Selling, general and administrative            |       | 1,886,132                   |       | 2,392,754 |   |
| Depreciation and amortization                  |       | 84,504                      |       | 120,700 |   |
| Total Costs and Expenses                       |       | 2,297,838                   |       | 2,933,830 |   |
|                                           |       |                        |       |   |   |
| LOSS FROM OPERATIONS                           |       | (2,271,600                  | )          | (2,897,129 | ) |
|                                           |       |                        |       |   |   |
| OTHER INCOME (EXPENSE):                        |       |                        |       |   |   |
| Interest income                                |       | —                      |       | 380 |   |
| Interest expense                               |       | (156,559                    | )          | (115,468 | ) |
| Loss on disposition of fixed assets            |       | (31,036                     | )          | — |   |
| Total Other Expenses, Net                      |       | (187,595                    | )          | (115,088 | ) |
|                                           |       |                        |       |   |   |
| LOSS BEFORE PROVISION FOR TAXES                |       | (2,346,221                  | )          | (3,012,217 | ) |
|                                           |       |                        |       |   |   |
| PROVISION FOR TAXES                            |       | (6,436                      | )          | (4,500 | ) |
|                                           |       |                        |       |   |   |
| NET LOSS                                       |       | $                           | (2,465,631 | ) | $ | (3,016,717 | ) |
|                                           |       |                        |       |   |   |
| BASIC AND FULLY DILUTED LOSS PER COMMON  SHARE |       | $                           | (0.53      | ) | $ | (2.48 | ) |
|                                           |       |                        |       |   |   |
| WEIGHTED AVERAGE COMMON SHARES OUTSTANDING     |       |                        |       |   |   |
| BASIC                                          |       | 4,613,726                   |       | 1,215,682 |   |
|                                           |       |                        |       |   |   |
| FULLY DILUTED                                  |       | 10,362,520                  |       | 3,389,557 |   |

 

*See report of independent registered public accounting firm and notesto financial statements.*

 

19

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**POWEREFFICIENCY CORPORATION**

STATEMENTSOF CHANGES IN STOCKHOLDERS’ EQUITY

YEAR ENDED DECEMBER 31, 2004 AND 2003

 
| ** **                                                                                                                                                       | ** ** | **Common  Stock** | ** ** | **Preferred  Stock** | ** ** | **Subscription** | ** ** | **Additional  Paid-in** | ** ** | **Accumulated** | ** ** | **Total  Stockholders’** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------|------------|----------------------|------------|------------------|------------|-------------------------|------------|-----------------|------------|-------------------------------|------------|
| ** **                                                                                                                                                       | ** ** | **Shares**        | ** ** | **Amount**           | ** ** | **Shares**       | ** ** | **Amount**              | ** ** | **Receivable**  | ** ** | **Capital**                   | ** ** | **Deficit** | ** ** | **Equity** | ** ** |
| Balance, January  1, 2003                                                                                                                                        |       | 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 |   |
| Summit exercising  all outstanding warrants                                                                                                                      |       | 3,134,102         |       | 3,134                |       | —           |       | —                  |       | —          |       | —                        |       | — |   | 3,134 |   |
| Fractional shares  one-for-seven reverse split                                                                                                                   |       | 25,260            |       | 24                   |       | —           |       | —                  |       | —          |       | —                        |       | — |   | 24 |   |
| Common stock  issued for services rendered                                                                                                                       |       | 13,580            |       | 13                   |       | —           |       | —                  |       | —          |       | 35,796                        |       | — |   | 35,809 |   |
| Common stock  issued in exchange for subscriptions receivable                                                                                                    |       | —            |       | —               |       | —           |       | —                  |       | 181,045         |       | —                        |       | — |   | 181,045 |   |
| Warrants issued  in connection with issuance of Notes Payable - Pali Capital                                                                                     |       |              |       |                 |       |             |       |                    |       |            |       | 580,000                       |       |   |   | 580,000 |   |
| Options and Warrants  issued in connection with settlements and services from consultants and  vendors, the forgiveness of indebtedness and the issuance of debt |       | —            |       | —               |       | —           |       | —                  |       | —          |       | 550,969                       |       | — |   | 550,969 |   |
| Net loss 2004                                                                                                                                                    |       | —            |       | —               |       | —           |       | —                  |       | —          |       | —                        |       | (2,465,631 | ) | (2,465,631 | ) |
| Balance, December  31, 2004                                                                                                                                      |       | 5,020,477         |       | $                    | 5,020      |             | 3,328,737  |                    | $          | 3,329           |       | $                             | —     |   | $ | 16,386,612 |   | $ | (15,326,631 | ) | $ | 1,068,330 |   |

 

*See report of independednt registered public accouning firm and notesto financial statements.*

 

20

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**POWEREFFICIENCY CORPORATION**

STATEMENTS OF CASH FLOWS

 
| ** **                                                                                                                                                                      | ** ** | **Year Ended December 31,** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                                                                                                                                      | ** ** | **2004**                         | ** ** | **2003** | ** ** |
| CASH FLOWS PROVIDED BY (USED FOR):                                                                                                                                              |       |                             |       |   |   |
| OPERATING ACTIVITIES:                                                                                                                                                           |       |                             |       |   |   |
| Net loss                                                                                                                                                                        |       | (2,465,631                       | )          | (3,016,717 | ) |
| Adjustments to reconcile net loss to net  cash used for operating activities:                                                                                                   |       |                             |       |   |   |
| Bad debt expense                                                                                                                                                                |       | 5,493                            |       | 17,000 |   |
| Inventory obsolescence reserve                                                                                                                                                  |       | 29,484                           |       | 100,000 |   |
| Impairment of customer contracts                                                                                                                                                |       | 20,126                           |       | 40,948 |   |
| Depreciation and amortization                                                                                                                                                   |       | 64,377                           |       | 120,700 |   |
| Loss on disposition of fixed assets                                                                                                                                             |       | 31,036                           |       | — |   |
| Debt discount related to issuance of debt  securities                                                                                                                           |       | 97,000                           |       | — |   |
| Warrants and options issued in connection  with settlements, services from former employees, consultants and vendors,  the forgiveness of indebtedness and the issuance of debt |       | 550,969                          |       | — |   |
| Issuance of stock options below market  value                                                                                                                                   |       | —                           |       | 77,158 |   |
| Common stock issued for services                                                                                                                                                |       | —                           |       | 614,991 |   |
| Accrued interest on converted debt                                                                                                                                              |       | —                           |       | 46,896 |   |
| Changes in certain assets and liabilities:                                                                                                                                      |       |                             |       |   |   |
| (Increase) decrease in:                                                                                                                                                         |       |                             |       |   |   |
| Accounts receivable                                                                                                                                                             |       | 7,194                            |       | 31,511 |   |
| Inventory                                                                                                                                                                       |       | 143,369                          |       | 43,353 |   |
| Prepaid expenses and other                                                                                                                                                      |       | 21,726                           |       | (18,832 | ) |
| Restricted cash related to payment of  indebtedness                                                                                                                             |       | (219,721                         | )          | — |   |
| Deposits                                                                                                                                                                        |       | 18,147                           |       | (2,646 | ) |
| Increase (decrease) in:                                                                                                                                                         |       |                             |       |   |   |
| Accounts payable and accrued expenses                                                                                                                                           |       | 162,742                          |       | (63,866 | ) |
| Accrued salaries and payroll taxes                                                                                                                                              |       | 87,231                           |       | (19,294 | ) |
| Net Cash Used for Operating Activities                                                                                                                                          |       | (1,446,457                       | )          | (2,028,798 | ) |
|                                                                                                                                                                            |       |                             |       |   |   |
| INVESTING ACTIVITIES:                                                                                                                                                           |       |                             |       |   |   |
| Purchase of property, equipment and other  assets                                                                                                                               |       | (15,551                          | )          | (42,617 | ) |
|                                                                                                                                                                            |       |                             |       |   |   |
| FINANCING ACTIVITIES:                                                                                                                                                           |       |                             |       |   |   |
| Deferred financing costs                                                                                                                                                        |       | (65,968                          | )          | (32,750 | ) |
| Proceeds from issuance of equity  securities, net of costs                                                                                                                      |       | 184,800                          |       | 1,131,965 |   |
| Proceeds from issuance of debt securities,  net of costs                                                                                                                        |       | 1,464,806                        |       | — |   |
| Advances from line of credit agreement                                                                                                                                          |       | —                           |       | 1,000,000 |   |
| Loans from stockholders, officers, and  former officers                                                                                                                         |       | 25,334                           |       | — |   |
| Payments on loans to stockholders, officers  and former officers                                                                                                                |       | (40,000                          | )          | — |   |
| Net Cash Provided by Financing Activities                                                                                                                                       |       | 1,568,972                        |       | 2,099,215 |   |
|                                                                                                                                                                            |       |                             |       |   |   |
| INCREASE IN CASH                                                                                                                                                                |       | 106,963                          |       | 27,800 |   |
|                                                                                                                                                                            |       |                             |       |   |   |
| CASH                                                                                                                                                                            |       |                             |       |   |   |
| Beginning of year                                                                                                                                                               |       | 285,508                          |       | 257,708 |   |
|                                                                                                                                                                            |       |                             |       |   |   |
| End of year                                                                                                                                                                     |       | 392,471                          |       | 285,508 |   |

 

*See report of independent registered public accounting firm and notesto financial statements.*

 

21

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**POWER EFFICIENCY CORPORATION**

NOTES TO FINANCIAL STATEMENTS

DECEMBER 31, 2004 AND 2003

 

NOTE 1  -  NATURE OF BUSINESS:

 

Power Efficiency Corporation (“PowerEfficiency” and/or the “Company”), was incorporated in Delaware on October 19,1994.  Power Efficiency designs,develops, markets and sells proprietary solid state electrical devices designedto effectively reduce energy consumption in alternating current inductionmotors.  Alternating current inductionmotors are commonly found in industrial and commercial facilities throughoutthe world.  The Company currently has twoprincipal and proprietary products: the Three Phase *PowerCommander®*, which is used in industrial applications, and the SinglePhase*Power Commander®*, which is used inconsumer applications.  The Company alsoengages in research and development of new, related energy saving products.

 

The Company’s primary customers have beenoriginal equipment manufacturers (OEM’s) and commercial accounts locatedthroughout the United States of America, Mexico, China, and Canada.  Since the third quarter of 2003, the Companybegan to actively market to international distributors and directly to largenational accounts.

 

On September 15, 2003, Power Efficiencyformed Design Efficient Energy Services, LLC, a Delaware limited liabilitycompany.  This entity will primarily beused in the future to obtain energy grants and rebates for customers of theCompany from state governmental bodies. Design Efficient Energy Services, LLC has been inactive since inception.

 

NOTE 2  -  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

 

**Use of Estimates:**

The preparation of financial statements in conformity with accountingprinciples generally accepted in the United States of America requiresmanagement to make estimates and assumptions that affect the reported amountsof assets and liabilities and disclosure of contingent assets and liabilitiesat the date of the financial statements and the reported amounts of revenuesand expenses during the reporting period. Actual results may differ from those estimates.

 

Significant estimates have been made bymanagement in several areas, including the allowance for bad debts, inventoriesand the valuation of goodwill.  Actualresults could differ materially from these estimates, making it reasonablypossible that a change in these estimates could occur in the near term.

 

**Inventories:**

Inventories are valued at the lower of cost (first-in, first-out) ormarket.  The Company reviews inventoryfor impairments to net realizable value whenever circumstances arise.

 

**Accounts Receivable:**

The Company carries its accounts receivable at cost less an allowancefor doubtful accounts and returns.  On aperiodic basis, the Company evaluates its accounts receivable and establishesan allowance for doubtful accounts, based on a history of past write-offs andcollections and current credit conditions.

 

**Research and Development:**

Research and development expenditures are charged to expense asincurred.

 

**Property, Equipment andDepreciation:**

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

 

22

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**Website and Amortization:**

Website is stated at cost. Website costs capitalized include application and infrastructuredevelopment stage costs and graphics. Amortization is computed on a straight line basis, based upon theestimated useful life of the website which is three years.  Website maintenance and hosting costs arecharged to expense as incurred.

 

**Shipping and Handling Costs:**

The Company bills customers for freight.  Actual costs for shipping and handling areincluded as a component of cost of sales.

 

**Deferred Financing Costs:**

Expenditures incurred in conjunction with debt or equity capitalissuances are deferred as other assets. Such costs will be offset against equity proceeds, amortized on astraight line basis, over the life of the debt, or expensed if the offering isnot completed.

 

**Patents:**

Costs associated with applying for U.S. patents based upon technologydeveloped by the Company are capitalized. At the time the patent is awarded, the asset will be amortized on astraight line basis, over the remaining term of the patent.  If no patent is issued, these costs will beexpensed in the period when it is determined that no patent will be issued.

 

**Revenue Recognition:**

Revenue from product sales to OEM’s and distributors is recognized atthe time of shipment to the OEM’s and distributors when all services arecomplete.  Returns and other salesadjustments (discounts and shipping credits) are provided for in the sameperiod the related sales are recorded.

 

**Loss Per Common Share:**

Loss per common share is determined by dividing net loss available tocommon stockholders by the weighted average number of common shares outstandingduring the year.  Diluted loss per shareis not presented since giving effect to potential common shares would beanti-dilutive.

 

**Accounting for Stock BasedCompensation:**

The Company has elected to follow Accounting Principles Board OpinionNo. 25, “Accounting for Stock Issued to Employees” (APB25).  If the option price under the Stock OptionPlans equals or exceeds the fair market value of the common shares on the dateof grant, no compensation cost is recognized under the provisions of APB25 forstock options.  If the option price underthe Stock Option Plans is less than the fair market value of the common stockon the date of grant, compensation cost is recognized for the difference.

 

The Company adopted the disclosure-only provisions of Statement ofFinancial Accounting Standards (SFAS) No. 123, “Accounting for Stock-BasedCompensation,” for stock options issued. Under SFAS No. 123, compensation cost is measured at the grant datebased on the value of award and is recognized over the service (or vestingperiod).  SFAS No. 148, “Accounting forStock-Based Compensation – Transition and Disclosure”, amended the disclosurerequirements of SFAS No.123 to require prominent disclosures about the methodof accounting for stock-based employee compensation and the effect of themethod used on reporting results.

 

The Company utilizes SFAS 123 for accountingfor nonemployee stock based compensation. The Company recognized expense based on fair value on the date of grantof awards consistent with the provisions on SFAS 123 as amended by SFAS 148.

 

**Product Warranties:**

The Company warrants its products for eighteen months.  During the warranty period, the Company’spolicy is to replace the defective product. The Company has been providing for warranty costs as they areincurred.  The Company periodicallyreviews warranty claims and will establish a reserve for warranty claims whensuch amount is determinable and necessary based on historical information.

 

23

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**Provision for Income Taxes:**

The Company utilizes the asset and liability method of accounting forincome taxes pursuant to SFAS No. 109, Accounting for Income Taxes”.  SFAS No. 109 requires the recognition ofdeferred tax assets and liabilities for both the expected future tax impact ofdifferences between the financial statement and tax basis of assets andliabilities, and for the expected future tax benefit to be derived from taxloss and tax credit carryforwards.  SFASNo. 109 additionally requires the establishment of a valuation allowance toreflect the likelihood of realization of deferred tax assets.

 

The provision for taxes represents state franchise taxes.

 

**Goodwill:**

The Company previously adopted the provisions of SFAS No. 142, “Goodwilland Other Intangible Assets”.  SFAS No.142 requires that goodwill shall no longer be amortized.  There was no goodwill amortization during 2004or 2003.  Goodwill shall be tested forimpairment on an annual basis and between annual tests in certaincircumstances.

 

**Advertising:**

Advertising costs are expensed as incurred.  Advertising expenses were $21,202 and $4,463for the years ended December 31, 2004 and 2003, respectively.

 

**New Accounting Pronouncements:**

The Financial Accounting Standards Board (FASB) has issued several newstandards during 2004.  In November 2004,the FASB issued SFAS No. 151, “Inventory Costs –an amendment of ARB No. 43.”  SFAS No. 151 requires idle facility expenses,freight, handling costs, and wasted material (spoilage) costs to be recognizedas current period charges.  It alsorequires that allocation of fixed production overheads to the costs ofconversion be based on the normal capacity of the production facilities.  SFAS No. 151 will be effective for inventorycosts incurred during the fiscal years beginning after June 15, 2005.  The Company is evaluating the impact of thispronouncement on its financial statements.

 

In December 2004, FASB issued SFAS 123(R), “Share-Based Payment,” whichrevises SFAS 123, “Accounting for Stock-Based Compensation,” and supersedes APBOpinion No. 25, “Accounting for Stock Issued to Employees.”  SFAS 123(R) requires fair value recognitionof stock option grants in the income statement as an expense and is effectivefor the first annual reporting period that begins after December 15, 2005.  This pronouncement may have a material impacton the Company’s operating results.  TheCompany is in the process of evaluating the impact of this pronouncement on itsfinancial statements.

 

**Financial StatementReclassifications:**

Certain reclassifications have been made to the 2003 financialstatements in order for them to conform to the 2004 financial statementpresentation.

 

24

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NOTE 3  - GOING CONCERN:

 

The accompanying financial statements havebeen prepared assuming the Company is a going concern, which assumption contemplatesthe realization of assets and satisfaction of liabilities in the normal courseof business.  The Company has sufferedrecurring losses from operations, the Company experienced a $1,400,000deficiency of cash from operations in 2004 and lacks sufficient liquidity tocontinue its operations.

 

These factors raise substantial doubt aboutthe Company’s ability to continue as a going concern.  The financial statements do not include anyadjustments relating to the recoverability and classification of recorded assetamounts or the amount of liabilities that might be necessary should the Companybe unable to continue in existence.

 

Continuation of the Company as a goingconcern is dependent upon achieving profitable operations.  Management’s plans to achieve profitabilityinclude developing new products, obtaining new customers and increasing salesto existing customers.  Management isseeking to raise additional capital through equity issuance, debt financing orother types of financing.  (See Note 22).  However, there are no assurances that sufficientcapital will be raised.

 

NOTE 4  - PREPAID EXPENSES ANDOTHER CURRENT ASSETS:

 

At December 31, 2004, prepaid expenses andother current assets is comprised as follows:

 
| Restricted cash                            |   | $      | 219,721 |   |
|--------------------------------------------|--------|--------|---------|--------|
| Prepaid expenses                           |   | 15,381 |    |
| Prepaid expenses  and other current assets |   | $      | 235,102 |   |

 

In connection with the issuance of certainsenior, secured notes (See Note 13), the Company is required by the placementagent, to restrict an amount of cash, in an escrow account, equal to the annualinterest payments on those senior, secured notes.  The annual interest rate is 15%, and as ofDecember 31, 2004, the Company had $219,720 in restricted cash, which wastransferred to as separate bank account in March 2005.

 

NOTE 5  - PROPERTY AND EQUIPMENT:

 

At December 31, 2004, property and equipmentis comprised as follows:

 
| Machinery and  equipment        |   | $      | 14,819 |   |
|---------------------------------|--------|--------|--------|--------|
| Office furniture  and equipment |   | 42,089 |   |
|                            |   | 56,908 |   |
| Less:  Accumulated depreciation |   | 30,588 |   |
| Property and  Equipment, Net    |   | $      | 26,320 |   |

 

Depreciation for the years ended December 31, 2004 and 2003 amounted to$43,254 and $46,445, respectively.

 

25

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NOTE 5 – PROPERTY AND EQUIPMENT: (Continued)

 

On November 1, 2004, the Company formallymoved the Company’s headquarters to Las Vegas, Nevada from Livonia, Michiganand its research and development facilities to Carlstadt, New Jersey.  (See Note 20).  In connection with this move, the Companyincurred losses on disposition of fixed assets of $31,036.

 

NOTE 6 - GOODWILL:

** **

In accordance with SFAS No. 142, “Goodwill and Other Intangible Assets”,previously recognized intangible assets deemed to have indefinite useful liveswere tested by management for impairment during fiscal 2004.  An annual goodwill impairment test wasperformed by management in addition to quarterly goodwill impairment tests.  The impairment tests consisted of acomparison of the fair value of the intangible asset with its carryingamount.  Since the carrying amount of theintangible asset did not exceed its fair value, management concluded noimpairment loss was required to be recognized.

 

26

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NOTE 7 - INTANGIBLE ASSETS:

 

Intangible assets subject to amortizationconsists of the following for the year ended December 31, 2004:

 
| Patents                         |   | $      | 19,844 |   |
|---------------------------------|--------|--------|--------|--------|
| Website                         |   | 19,550 |   |
|                            |   | 39,394 |   |
| Less:  Accumulated amortization |   | 23,115 |   |
| Intangible  Assets, Net         |   | $      | 16,279 |   |

 

Amortization expense in 2004 and 2003amounted to $41,250 and $74,255, respectively.

 

Amortization expense expected in thesucceeding five years is as follows:

 
| 2005       |   | $     | 7,014  |   |
|------------|--------|-------|--------|--------|
| 2006       |   | 3,757 |   |
| 2007       |   | 498   |   |
| 2008       |   | 498   |   |
| 2009       |   | 498   |   |
| Thereafter |   | 4,014 |   |
|       |   | $     | 16,279 |   |

 

NOTE 8  - CONCENTRATIONS OFCREDIT RISKS:

 

Financial instruments which potentially subject the Company toconcentrations of credit risk, consist primarily of cash and temporary cashinvestments and accounts receivables.

 

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

 

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

 

Four customers accounted for approximately 60% of 2004 sales and 30% ofaccounts receivable at December 31, 2004. Three customers accounted for approximately 69% of 2003 sales.

 

International sales as a percentage of total revenues for the yearsended December 31, 2004 and 2003 are as follows:

 
| **County** | ** ** | **2004** | ** ** | **2003** | ** ** |
|------------|------------|----------|------------|----------|------------|
| Canada     |       | 12       | %          | —   |       |
| Sweden     |       | 12       | %          | —   |       |

 

27

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NOTE 9  - INVENTORIES:

 

Inventories at December 31, 2004 consist of the following:

 
| Finished goods |   | $       | 59,397  |   |
|----------------|--------|---------|---------|--------|
| Raw materials  |   | 128,420 |    |
|           |   | $       | 187,817 |   |

 

NOTE 10  - PROVISION FOR TAXES:

 

As of December 31, 2004 and 2003, the Company has available, on afederal tax basis, net operating loss carryforwards of approximately $8,300,000and $6,200,000, respectively.  These netoperating losses expire at varying amounts through 2024.  The net operating loss carryforwards resultin deferred tax assets of approximately $2,800,000 and $2,100,000 at December31, 2004 and 2003; however, a valuation reserve has been recorded for the fullamount due to the uncertainty of realization of the deferred tax assets.

 

A reconcilaiton of the statutory tax rates for the years ended December31, 2004 and 2003 is as follows:

 

| ** **                          | ** ** | **2004** | ** ** | **2003** | ** ** |
|-------------------------------------|------------|----------|------------|----------|------------|
| Statutory rate                      |       | (34      | )%         | (34      | )%         |
| State income tax  – all states |       | (6       | )%         | (6       | )%         |
| Change in  valuation                |       | (40      | )%         | (40      | )%         |
| Valuation  allowance                |       | 40       | %          | 40       | %          |
|                                |       |     |       |     |       |
| Benefit for  income taxes           |       | 0        | %          | 0        | %          |

 

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NOTE 11  - WARRANTS:

 

Warrant activity during the years endedDecember 31, 2004 and 2003 follows:

 
| ** **                                 | ** ** | **Warrants** | ** ** | **Average  Exercise  Price** | ** ** |
|--------------------------------------------|------------|--------------|------------|------------------------------|------------|
| Warrants  outstanding at January 1, 2003   |       | 135,571      |       | $                            | 19.32      |   |
| Issued during  2003                        |       | 43,669       |       | 0.00                         |       |
| Exercised during  2003                     |       | (50,100      | )          | 1.34                         |       |
| Expired during  2003                       |       | (54,143      | )          | 3.92                         |       |
| Warrants  outstanding at December 31, 2003 |       | 74,997       |       | 25.30                        |       |
| Issued during  2004                        |       | 2,559,275    |       | 0.67                         |       |
| Expired during  2004                       |       | (53,570      | )          | 30.38                        |       |
| Warrants  outstanding at December 31, 2004 |       | 2,580,702    |       | $                            | 0.77       |   |

 

During 2004, in connection with the Company’ssettlement agreements with former employees, consultants and vendors, theCompany issued 700,700 warrants to settle these outstanding liabilities.  During 2004, in connection with the Company’sissuance of debt, the Company issued 132,693 warrants for commissions, and 1,725,882warrants to noteholders.  Such warrantsto noteholders were valued at $580,000 which was recorded as note discount onthe Company’s balance sheet.  Suchwarrants issued in connection with the issuance of debt, commissions andsettlements were valued at $230,000 and expensed and included in selling,general and administrative expenses.

 

During 2003, in connection with the Company’ssale of common stock under Regulation S, the Company issued 32,958 warrants forcommissions.  During 2003, 32,958warrants were exercised in conjunction with the sale of common stock underRegulation S.  17,143 placement warrantswere exercised in connection with the May 16, 2000 Private Placement Memorandumpursuant to Rule 506.

 

NOTE 12 - STOCK OPTION PLAN:

 

Stock Option Plan activity during the years ended December 31, 2004 and2003 follows:

 
| ** **                                                | ** ** | **Shares** | ** ** | **Average  Exercise Price** | ** ** |
|-----------------------------------------------------------|------------|------------|------------|-----------------------------|------------|
| Options  outstanding and exercisable at January 1, 2003   |       | 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      |   |
| Granted during  2004                                      |       | 2,900,500  |       | 0.65                        |       |
| Cancelled during  2004                                    |       | (109,155   | )          | 9.76                        |       |
| Expired during  2004                                      |       | (241,648   | )          | 7.28                        |       |
| Options  outstanding and exercisable at December 31, 2004 |       | 3,172,732  |       | $                           | 2.00       |   |

 

Weighted average remaining contractual lifeat December 31, 2004, for all options is 9.2 years.

 

In 2000, the Company adopted the 2000 Stock Option and Restricted StockPlan (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 ofoptions to purchase up to 5,000,000 shares of common stock.  This was conditional upon consent of themajority of the Series A Preferred stock. This consent was attained on October 11, 2004.  No options have been exercised to date.

 

29

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During 2004, the Company granted 2,461,500 stock options to officersand employees at exercise prices approximating fair market value of the stockon that day.  The Company issued 439,000options during 2004 to consultants for services rendered.  Such issuances to consultants were valued atapproximately $110,000, utilizing similar factors as described below, which wasexpensed and is included in selling, general and administrative expenses.

 

During 2003, the Company granted 336,929 stock options to officers andemployees at exercise prices approximating fair market value of the stock onthat day.  Where the exercise pricesapproximated the fair market value of the stock; the Company was not requiredto recognize compensation expense.  Inconnection with the employment agreements of the President and Chief ExecutiveOfficer and the Vice President of Governmental Operations, the Companyrecongnized additional compensation expense of approximately $77,000.  This additional compensation expense isincluded in selling, general and administrative expenses.

 

In 1994, the Company adopted a Stock Option Plan (the “1994 Plan”).  The 1994 Plan provides for the granting of optionsto purchase up to 71,429 shares of common stock.  No options have been exercised to date.  There are 66,232 options outstanding underthe 1994 Plan.

 

There are 3,106,500 options outstanding under the 2000 Plan.

 

**SFAS No. 123 Disclosures:**

During the year ended December 31, 2004, theBoard of Directors authorized the net issuance of 2,461,500 to officers andemployees.  During the year endedDecember 31, 2003, the Board of Directors authorized the net issuance of294,071 (net of 42,858 options that were both issued and cancelled during theyear).  The fair value of each optiongrant was estimated on the date of grant using the Black-Scholes option-pricingmodel with the following weighted-average assumptions used for grants: expectedvolatility of 100%; risk-free interest rate of 4%; and expected lives of approximately10.0 years.

 

Had compensation cost for the Company’s stockoption plan been recognized based on the fair value at the grant date forawards 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 31,2004 and 2003, would have been as follows.

 
| ** **                           | ** ** | **2004**   | ** ** | **2003**   | ** ** |
|--------------------------------------|------------|------------|------------|------------|------------|
| Net loss — as  reported         |       | $          | (2,465,631 | )          | $          | (3,016,717 | ) |
| Required  adjustment to net loss     |       | (359,256   | )          | (451,467   | )          |
| Net loss — pro  forma           |       | (2,824,887 | )          | (3,468,184 | )          |
| Loss per common  share - as reported |       | (0.53      | )          | (2.48      | )          |
| Loss per common  share - pro forma   |       | (0.61      | )          | (2.85      | )          |
|                                      |            |            |            |            |            |  |  |

 

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NOTE 13  - COMMITMENTS ANDCONTINGENCIES:

** **

**Leases:**

The Company leases office, warehouse and research facilities under anoperating lease.  On October 5, 2004, theCompany’s board of directors formally approved moving the Company’sheadquarters from Livonia, Michigan to Las Vegas, Nevada and as of November 1,2004, the Company’s facility in Livonia was vacated entirely and all administrativefunctions have moved to Las Vegas.  TheLas Vegas, Nevada lease was entered into on July 1, 2004 and extends to June30, 2007 (see Note 14).  The Livonia,Michigan lease was entered into on November 1, 2003 and extends to December 31,2008.  The Ann Arbor, Michigan lease was terminatedeffective December 15, 2003.  The NewHyde Park, New York lease was terminated June 30, 2003.  The Company plans on leasing additionaloffice space and facilities in Las Vegas, Nevada and Floral Park, New York in early2005. (See Note 22).

 

Minimum future rentals are as follows:

 

| **Year** |   |   |    |
|----------|--------|--------|---------|
| 2005     |   | $      | 72,731  |   |
| 2006     |   | 69,419 |    |
| 2007     |   | 25,091 |    |
|     |   | $      | 167,241 |   |

 

Rent expense, including base rent and additional charges, for the yearended December 31, 2004 and 2003 was $81,943 and $123,833, respectively.

 

During 2004, the Company temporarily occupied facilities in Carlstadt,New Jersey, for which the Company issued 100,000 stock warrants for payment.  (See Note 11).  The Company occupied the space on October 15,2004 and plans to vacate the space in early 2005.

 

During 2003, the Company also leased office space in Palm Desert,California on a month to month basis from one of the Company’s shareholders.  Rent expense for this space for the yearended December 31, 2003 was $18,680.

 

**Patent License Agreements:**

During 2004, the Company transferred a patent for single phasetechnology to one of its shareholders, in exchange for an exclusive licensingagreement and for exchanging a $300,000 short term note for a one yearnote.  The licensing agreement is for tenyears with a three year extension, provides the Company an opportunity tobuyout the license in the future for the amount of funds invested by theshareholder if the shareholder has not successfully marketed the product utilizingthe patented technology, and provides the Company a royalty equivalent to 5% ofthe net profits from the shareholder’s sales of products utilizing thetransferred patented technology.

 

During 2004, the Company wrote off the costs associated with obtainingthe patent originally transferred.

 

**Litigation:**

The Company is currently in litigation with the owners of the Livonia,Michigan property that the Company vacated in 2004.  The Company’s legal counsel has advised thatit is premature to determine the likelihood and extent of any damages.  The Company has accrued a reserve for theestimated loss in relation to the settlement of the litigation.

 

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**Subcontractors:**

Power Efficiency currently utilizes three subcontractors to manufacturethe Company’s controller boards.  Thesesubcontractors provide facilities, equipment, supervision and labor required toassemble; wire; check; test; package; and ship the controller boards.  These subcontractors are hired on an asneeded basis to produce a minimum number of units via a purchase order.  Power Efficiency does not incur anyliabilities to subcontractors until purchase orders are issued.  No purchase orders were issued or outstandingto subcontractors at December 31, 2004. The Company plans to have manufacturing done by turn-key providers andas of December 31, 2004 was in the process of qualifying vendors.

 

**Investment Advisory Agreements:**

The Company entered into an investment consulting agreement with theformer Chief Financial Officer on September 22, 2003.  This agreement provides for the formerofficer to provide consulting services. The Company shall pay (i) the amount of $4,000 per month, half payableon the 15 day and half payable on the last day of each month, (ii) $7,000 permonth accrued and payable at the rate of 5% of all cash raised through theissuance of debt or equity, and (iii) $2,000 per month to assist innegotiations with creditors.  Inaddition, the Company will reimburse all reasonable and necessary expensesincurred by the consultant.  Theagreement contains confidentiality and non-competition provisions.  This agreement can be terminated in 30 daysby either party by written notices. At December 31, 2004, the Company paid$25,000 and issued 36,000 warrants, valued at approximately $9,000, to satisfythis agreement in full.

 

The Company entered into an agreement with a registered securitiesbroker dealer in February, 2004.  Inaccordance with this agreement, the registered securities broker dealer servesas the Company’s placement agent for the issuance of $1,464,806 in senior,secured notes.  The notes bear interestat 15% per annum and mature on October 27, 2005, and are presented net ofunamortized discount of $483,000 at December 31, 2004.  The Company paid $115,000 and issued 132,693warrants as commissions to the registered securities broker dealer.  Should the Company issue more notes under thesame offering, the registered securities broker dealer has a right to receive10% of the gross proceeds of the notes issued and an amount of warrants equalto 10% of the warrants issued to investors in the notes.  However, there will be no fees on notes andwarrants issued to any persons or entities that are the Company’s directors,affiliates, officers or employees.

 

The Company entered into a consulting agreement with an investmentadvisor on December 1, 2004.  Theagreement calls for the investment advisor to assist the Company in devisingfinancial and marketing strategies, and also to assist the Company in raisingfunds on a non-exclusive basis through the offering of debt and/or equitysecurities.  The company shall pay theinvestment advisor the amount of $3,000 per month, plus expenses approved bythe Company, and issued 300,000 options, which resulted in an expense ofapproximately $75,000.  The sum of $3,000per month will be adjusted to $5,000 per month once the Board of Directors andthe Company agree to adjust the salaries of the Chief Executive Officer, ChiefFinancial Officer and the General Manager. The agreement contains confidentiality and non-competitionprovisions.  The term of the agreement is12 months and can be terminated by either party on a 90 day notice in writing.

 

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NOTE 14  -  RELATED PARTY TRANSACTIONS:

 

During the years ended December 31, 2004 and 2003, consulting fees of$31,000 and $27,456 were paid to officers/directors/stockholders of theCompany, respectively.  These amounts areincluded in research and development and in selling, general and administrativeexpenses.

 

On February 25, 2004, the Company released a strategic advisor from anagreement the Company’s board of directors ratified on May 23, 2003.  In connection with the release agreement, thestrategic advisor was issued 35,714 warrants, valued at approximately $9,000, tosatisfy all remaining obligations in full.

 

In 2003, the Company incurred costs of $19,550 for the development oftheir website.  This work was performedby a relative of the Company’s former President and Chief ExecutiveOfficer.  On December 22, 2004, theCompany entered into a settlement agreement with the relative of the Company’sformer President and Chief Executive Officer to pay $375 and issue 39,000,valued at approximately $10,000, options as payment for the costsincurred.  As of December 31, 2004, thisagreement was satisfied in full.

 

During 2003, the Company incurred legal fees of $79,185 to a law firm,in which a partner in that firm and the firm are currently stockholders of theCompany.

 

At December 31, 2004, the Company owes this law firm approximately$40,000.  Of this $40,000, $15,000 is tobe paid shortly after December 31, 2004, and the remaining $25,000 is to bepaid when the Company raises financing of over $1,000,000.  Such amount is included on the balance sheetin accounts payable and accrued expenses.

 

On November 18, 2004, the Company’s board of directors ratified anagreement with a management company, wholly owned by the current ChiefExecutive Officer of the company.  Theagreement is cancelable upon 30 days written notice by either party and callsfor the Company to pay the management company a fee of $20,000 per month.   The Company also subleases office space inLas Vegas, Nevada from the management company under this agreement.  The Company pays for 80% of the rent, generaloffice expenses and utilities for the space, all of which is included in themonthly fee.  Also included in the monthlyfee are the salaries and benefits for the Chief Executive Officer, Chief FinancialOfficer and Administrator of the Company. As of December 31, 2004, management fees of $40,000 was paid by thecompany.

 

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NOTE 15  -  SUPPLEMENTAL DISCLOSURE OF CASH FLOWSINFORMATION:

 

Cash paid during the year ended December 31,for:

 
| ** **                                                                                                                                     | ** ** | **2004** | ** ** | **2003** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|
|                                                                                                                                           |       |     |       |     |       |
| Interest                                                                                                                                       |       | $        | 2,237      |     | $          | 3,028 |   |
|                                                                                                                                           |       |     |       |     |       |
| Income Taxes                                                                                                                                   |       | $        | —     |     | $          | — |   |
|                                                                                                                                           |       |     |       |     |       |
| NON-CASH  INVESTING AND FINANCING ACTIVITIES:                                                                                                  |       |     |       |     |       |
|                                                                                                                                           |       |     |       |     |       |
| Common stock  issued in conjunction with the settlement of accounts payable, accrued  expenses and the conversion of stockholders note payable |       | $        | 37,400     |     | $          | 466,875 |   |
|                                                                                                                                           |       |     |       |     |       |
| Warrants issued  in connection with issuance of debt securities                                                                                |       | $        | 580,000    |     | $          | — |   |
|                                                                                                                                           |       |     |       |     |       |
| Common stock  issued for services rendered, deferred compensation and options issued below  market value                                       |       | $        | —     |     | $          | 206,756 |   |
|                                                                                                                                           |       |     |       |     |       |
| Common stock  issued related to an officer’s employment contract                                                                          |       | $        | —     |     | $          | 418,500 |   |
|                                                                                                                                           |       |     |       |     |       |
| Preferred stock  issued for conversion of debt to equity                                                                                       |       | $        | —     |     | $          | 1,046,896 |   |

 

NOTE 16  -  NOTES PAYABLE – FORMER OFFICERS:

 

On September 15, 2003, the Company issued a $115,000promissory note payable to a former officer at the prime rate (5.25% at December31, 2004).  The note calls for monthlypayments of $5,000, principal and interest, which began on April 15, 2004 andmatures on February 15, 2006.  During theyear ended December 31, 2004, the Company paid $40,000 in principal.

 

On December 15, 2004, the Company issued a $25,334promissory note payable to a former officer, in connection with a settlementagreement (See Note 17),  at 15%. Thenote calls for monthly payments of $1,580, principal and interest, beginningJanuary 2005 and matures on June 15, 2006.

 

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NOTE 17  -  EMPLOYMENT AND CONSULTING AGREEMENTS:

 

On October 20, 2004, the Company’s Chief TechnologyOfficer signed a salary reduction agreement, which superscedes an employmentagreement the Company’s board of directors ratified on May 23, 2001.  The agreement provides for a salary of$60,000 per year until such time that the company can reasonably afford to fundits business plan and pay executives higher salaries.

 

The agreement also provides for severance paymentsequal to the greater of (i) $468,000 or (ii) the executive’s base salary forthe preceding three years, in the event that at any time during the employmentterm the agreement is terminated by the Company (a) without cause, (b) fordisability, or (c) for death, or if the executive terminates the agreement forcause.  The agreement also provides for apayment to the executive upon a change in control equal to the product of theexecutive’s base salary in the year of the change in control times 2.99.

 

On November 7, 2002, theCompany entered into an employment and compensation agreement with the Company’sChief Executive Officer and Chief Financial Officer at the time.  Thisagreement was terminated through a settlement and release agreement dated June7, 2003.  On January 8th 2004, theCompany settled this obligation in full by issuing 15,397 shares of commonstock to the former officer. This number of shares equaled the amount ofdeferred compensation divided by the Company’s stock price on January 8th,2004.

 

OnJune 12, 2003, the Company entered into an employment agreement with a newChief Executive Officer.  In addition toa base salary, this individual also received 142,857 stock options, which willvest over a five-year period.

 

On August 27, 2004 thisChief Executive Officer resigned from the Company and the Company reached asettlement agreement that included the payment of some accrued wages andvacation in cash, some payment over time through an unsecured note with aprincipal balance of $25,334, and the issuance of 85,000 warrants, valued at approximately$22,000, for the purchase of the Company’s common stock in lieu of cashpayment. The warrants expire five years from the date of issuance.

 

On September 15, 2003,the Company entered into an employment agreement with a new Chief FinancialOfficer.

 

In September 2004 thisChief Financial Officer resigned from the Company.  The Company reached a settlement andconsulting agreement with this then former officer that included payment of aback salary in cash over several months as well as payments of cash and 35,000warrants, which were valued at approximately $9,000, for consulting services.In October the former officer also agreed to accept 15,000 warrants in lieu ofsome of the accrued wages. All warrants issued to this former officer expirefive years after issuance.

 

In September 2004 the Company hired itscurrent Chief Executive Officer and Interim Chief Financial Officer. Theircompensation and certain expenses are reimbursed pursuant to an agreement witha management company wholly owned by the Chief Executive Officer. (See Note14).

 

35

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NOTE 18  -  TRANSACTIONS WITH CURRENT AND FORMER OFFICERS:

 

On September 30, 2003, the Company sold 76,663shares of common stock to the chief technology officer of the Company, for $466,875.  The purchase price for the shares was paidfor by canceling $466,875 in debt owed by the Company to the officer.  Additionally, the Company issued 32,143shares of common stock to the officer as part of a settlement related to a changeof control provision in his employment contract.  The individual is an officer of the Companyand the issuance of shares was exempt from registration under the SecuritiesAct of 1933, as amended, pursuant to Regulation D.  The common stock issued related to the changein control provision resulted in a non-recurring selling, general andadministration expense of approximately $196,000.

 

On October 16, 2003, the Company settled adispute with its former president and chief executive officer regarding theearly termination of his employment contract. According to the terms of the settlement, the former officer hasreleased 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 thatis 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 investorand the issuance of shares was exempt from registration under the SecuritiesAct of 1933, as amended, pursuant to Regulation D.  The Company had recorded an estimatedsettlement amount of approximately $135,000 for this claim.  Therefore, the settlement resulted in anon-recurring selling, general and administrative expense of approximately$229,000.

 

36

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NOTE 19  -  ISSUANCE OF SERIES A-1 CONVERTIBLE PREFERREDSTOCK:

 

Pursuant to the original issuance of SeriesA-1 Convertible Preferred Stock in June 2002, the Company has asked for andreceived on October 11, 2004, a waiver of certain anti-dilution rights so thatthe issuance of up to a specific number of options and warrants with exerciseprices of no less than $0.65 per share will not trigger these anti-dilutionrights.  Had the waiver not beenreceived,  in the event that the Companyissues shares at a price less than $1.281 per share, the conversion rights ofthe Series A-1 Convertible Preferred Stock would have been adjusted so that theSeries A-1 Convertible Preferred Stock can convert into such number of sharesthat Summit would have received had it bought common stock at such lowerprice.  Furtermore, the conversion rightsof the Series A-1 Convertible Preferred Stock would also have been adjusted inthe event that any shares, warrants, options or promissory note is issued witha price or conversion price less than $1.281 per share.

 

In the event of a Liquidation Event, theholders of the Series A-1 Convertible Preferred Stock are entitled to two timesthe price paid by Summit for such stock. Thereafter, the remaining corporate assets would be distributed amongthe holders of common stock and Series A-1 Convertible Preferred Stock on a prorata basis.  The existence of the SeriesA-1 Convertible Preferred Stock’s anti-dilution provisions may reduce thepercentage of common stock held by the public stockholders.  Furthermore, the terms on which the Companycould obtain additional capital may be adversely affected by the Series A-1Convertible Preferred Stock’s anti-dilution provisions and superior liquidationpreference.

 

On June 7, 2004, Summit Energy Venturesnotified the Company that it had transferred 1,747,587 of the Company’s SeriesA-1 Convertible Preferred Stock and 1,645,404 of the Company’s common stock toCommonwealth Energy Corporation, a former member of Summit Energy VenturesLLC.  This transfer makes CommonwealthEnergy the Company’s single largest shareholder.

 

NOTE 20  -  STOCKHOLDERS’ EQUITY:

 

During 2004, the Company issued 700,700 warrants to settle outstandingliabilities with former employees, consultants and vendors, 132,693 warrantsfor commissions related to the issuance of debt, and 1,752,882 warrants tonoteholders.   (See Note 11).

 

On February 26, 2004, the Company announced a 1 to 7 reverse stocksplit to be effective to stockholders of record as of March 1, 2004.  All common stock share amounts andinformation related to the issuance of warrants and options and Per Shareamounts have been restated to reflect this reverse stock split.

 

On December 31, 2003, the Company issued 24,805 shares of common stockfor the settlement related to deferred compensation.

 

On November 6, 2003, the Company issued 982,504 shares of Series A-1Convertible Preferred Stock for the conversion of $1,046,896 of debt owed toSummit.

 

On October 16, 2003, the Company issued 64,286 shares of common stockrelated to the settlement requirements of a former officer’s employmentcontract.

 

On September 30, 2003, the Company issued 76,663 shares of common stockto pay for amounts owed to an officer of the Company for notes payable,accounts payable and accrued salaries.

 

During 2003, the Company issued 40,357 shares of common stock relatedto the exercising of warrants.

 

At various dates during 2003, the Company issued 665,803 shares ofcommon stock related to the sale of the Company’s common stock.

 

37

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NOTE 21  -  FAIR VALUE OF FINANCIAL INSTRUMENTS:

 

SFAS No. 107 “Disclosure About the Fair Value ofFinancial Instruments”, requires disclosure of fair value information aboutfinancial instruments.  The carryingamounts reported in the balance sheet for cash, accounts receivable, accountspayable and accrued expenses approximate fair value because of their short termnature.  The carrying amounts of notespayable and longer term debt approximates fair value because those financialinstruments bear interest at rates that approximate current market rates forloans with similar maturities and credit quality.  None of these financial instruments are heldfor trading purposes.

 

NOTE 22  -  SUBSEQUENT EVENTS (UNAUDITED):

 

In February 2005, the Company began movingout of its temporary office space located in Carlstadt, New Jersey. The itemsin this office, including inventory, tools and standard office equipment andfurniture, is being sent to three different places. These places include a newoffice space in Las Vegas, Nevada, a new office space in Floral Park, New York,and a contract manufacturer engaged by the Company to store and produce theCompany’s product.

 

In March 2005, the Company will beginsubleasing space from Famair, Inc. in Floral Park, New York. The sublease givesthe Company space primarily for research, development and technical supportactivities. The sublease costs the Company $1,000 per month, which includes allutilities, cleaning, phone and interenet, and the term is month-to-month.

 

On April 11, 2005, the Company will beginleasing roughly 1,500 square feet of office space Las Vegas, Nevada. The leaseis between Glenborough IX LLC and a management company owned by the current ChiefExecutive Officer and was signed on February 7, 2005. On February 10, 2005, theCompany’s board of directors voted to assume all payments under this lease andindemnify the Chief Executive Officer’s management company for all payments andobligations for the lease. The lease includes a payment of $2,728 per month,which includes all cleaning and utilities, except phone and interenet service.The term of the lease is one year.

 

On February 24, 2005, the Company enteredinto a financing transaction in which the Company issued $125,000 in senior,secured notes under the same offering through which the Company issued$1,464,806 in notes as described in Note 13. This offering was originallyintended to close on December 31, 2004 but the placement agent and the Companyagreed to keep the offering open past the original closing date. After theFebruary 24 closing the offering was terminated.

 

The holders of the Notes will promptly beissued 115,385 warrants for every $100,000 Note. With its issuance of $125,000in Notes, the Company will issue, in aggregate, 144,232 warrants.  TheCompany paid a placement agent a commission of $12,500 and 14,423 warrants withthe same rights and provisions as the Warrants issued to the holders of theNotes.

 

On March 28, 2005 the Company extended by one year the maturity datesof secured debts that were issued on October 27, 2004 and February 24, 2005.The extended notes have a total principal value of $1,514,806. $1,414,806 inprincipal value will now mature on October 26, 2006, and $100,000 in principalvalue will now mature on February 23, 2007. No other provisions of the securednotes have changed. Interest on the notes of 15% per year will be paidquarterly until maturity.

 

38

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**Item8.**            **Changes in and Disagreements with Accountants onAccounting and Financial Disclosure.**

 

**NotApplicable**

 

**Item8A.**         **Controls and Procedures.**

 

(a) Disclosure Controls and Procedures.

 

Under the supervision and with the participation of its Chief ExecutiveOfficer and Interim Chief Financial Officer, management has evaluated theeffectiveness of the Company’s disclosure controls and procedures as of the endof the period covered by this report pursuant to Rule 13a-15(b) under theSecurities Exchange Act of 1934 (the Exchange Act).  Based on that evaluation, the Chief ExecutiveOfficer and Interim Chief Financial Officer have concluded that, as of the endof the period covered by this report, the Company’s disclosure controls andprocedures are effective in ensuring that information required to be disclosedin the Company’s Exchange Act reports is (1) recorded, processed, summarizedand reported in a timely manner, and (2) accumulated and communicated to theCompany’s management, including its Chief Executive Officer and Interim ChiefFinancial Officer, as appropriate to allow timely decisions regarding requireddisclosure.

 

(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**

 

**Item9.**                                   **Directors and Executive Officers of the Registrant**

 

**INFORMATION ABOUT THE REGISTRANT’SEXECUTIVE OFFICERS AND DIRECTORS**

 

The following table lists the current executiveofficers and directors and, in the case of directors, their length of serviceon the board. Each director is elected to hold office for a term expiring atthe first annual meeting of stockholders held following such director’selection and until his successor has been elected and qualified, or until hisprior resignation or removal. All of the Registrant’s current directors wereappointed by written consent of the Registrant’s majority shareholder inDecember of 2004.

 
| **Name**             | ** ** | **Age** | ** ** | **Positions with the Company**                  | ** ** | **Director Since** |
|----------------------|------------|---------|------------|-------------------------------------------------|------------|--------------------|
| Steven Strasser      |       | 56      |       | Chief Executive Officer,  Chairman of the Board |       | 2002               |
| John (BJ) Lackland   |       | 34      |       | Interim Chief Financial  Officer, Director      |       | 2002               |
| Nicholas Anderson    |       | 70      |       | Chief Technology Officer,  Director             |       | 1994               |
|                 |       |    |       |                                            |       |               |
| Leonard Bellezza     |       | 56      |       | Director                                        |       | 2001               |
| Richard Pulford      |       | 58      |       | Director                                        |       | 2003               |
| Raymond J. Skiptunis |       | 62      |       | Director                                        |       | 2002               |

 

**Officers:**

Steven Strasser – Chief Executive Officer &Chairman of the Board. Mr. Strasser is presently the managing director ofSummit Energy Ventures and the president of Northwest Power Management.Northwest Power Management is an investment management company that acts as theinvestment manager for Summit Energy Ventures LLC, a private equity fundfocused on investments in energy technology companies. In the past five yearsMr. Strasser was the CEO of Northwest

 

39

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Power Enterprises and president of Northwest Power Management.Northwest Power Enterprises and its predecessor companies were involved inmultiple aspects of the energy development business. Mr. Strasser is a memberof Washington State Bar Association, as well as the American Bar Associationand the Canadian Bar Association.

 

John (“BJ”) Lackland – Interim Chief Financial Officer& Director. Mr. Lackland is a director and vice president at Summit EnergyVentures and a vice president of Northwest Power Management. Northwest PowerManagement is an investment management company that acts as the investmentmanager for Summit Energy Ventures LLC, a private equity fund focused oninvestments in energy technology companies. Prior to joining Summit, Mr.Lackland was the Director of Strategic Relations at Encompass Globalization,where he was in charge of strategic alliances and mergers and acquisitions.Prior to Encompass he was the Director of Strategic Planning and CorporateDevelopment at WebStrategic, an Internet business development consultingcompany, where he was in charge of finance, strategic planning and investorrelations. In 1999, BJ earned an MBA from the University of Washington BusinessSchool, and an MA in Asian Studies from the University of Washington’s JacksonSchool of International Studies.

 

Nicholas Anderson - Chief Technology Officer andDirector. Mr. Anderson is a founder of the Company. From 1992 to the present,Mr. Anderson has been a Director of Energy Services of Coyne ElectricalContracting, Inc., a major electrical service organization based in New York,New York. From 1988 to 1992, Mr. Anderson was the founder and CEO of PowerReducing Equipment, Inc., a Company formed to develop products to reduce energyconsumption in AC motors. During this period, Mr. Anderson obtained a patentfor the Company’s technology, which patent was issued in April 1994 andtransferred to the Company. Mr. Anderson attended the City College School ofEngineering, and received a certification in Electronics Design from ManhattanTechnical Institute in 1957.

 

Leonard S. Bellezza - Director. Mr. Bellezza has beenemployed as a retail consulting executive by Abacus Solutions, LLC, of New YorkCity since 2003 and is currently assigned as the General Merchandise Managerfor Franks Nursery of Troy, Michigan. He was a senior manager with the New Yorkoffice of Deloitte & Touche, a national public accounting firm from 2001 to2003. From November 1999 to December 2000, he was a contract consultant forsmartcasual.com, an internet clothing manufacturer. From June 1997 to November1999, Mr. Bellezza was employed as a vice president and a member of theoperations committee of Frederick Atkins, a wholesale apparel company. FromNovember 1993 to June 1997, Mr. Bellezza served as a consultant in variousaspects of the retail management, logistics and information technologyindustries. Mr. Bellezza earned a Bachelor of Arts in Economics and a Mastersof Business Administration from Rutgers University.

 

Richard D. Pulford - Director. Mr. Pulford has beenPresident of Corporate Strategies, Inc. since 1981. The company providesinvestment banking services in the Great Lakes region.

 

Raymond J. Skiptunis - Director. Mr. Skiptunis hasbeen a self employed business consultant since October of 2003. During theperiod, November of 2001 through October of 2003, Mr. Skiptunis worked withPower Efficiency Corporation in various capacities, including consultant, CFOand interim CEO. From January of 1997 through November of 2001, Mr. Skiptunis wasa self employed business consultant. Mr. Skiptunis earned a Bachelor of Sciencein Accounting from Rutgers University.

 

**Committees of the Board of Directors**

 

The Board of Directors had, as of December 31, 2004,an audit committee and a compensation committee to assist the full Board inadministering its duties.

 

**Audit Committee**

 

As of December 31, 2004, the Registrant had aseparately-designated standing audit committee established in accordance withsection 3(a)(58)(A) of the Exchange Act. Until recently, John (B.J.) Lackland(Chairman) was the sole member of the committee. In September 2004, Mr.Lackland became the Company’s Interim Chief Financial Officer and therefore hadto resign from the Audit Committee. At that time Mr. Rick Pulford, a director, becamethe sole member of the Audit Committee on a temporary basis. As of December 31,2004, Mr. Pulford was the sole member of the Audit Committee. As Mr. Pulfordagreed only to serve on the Audit Committee on a temporary basis, on February10, 2005, the board of directors dissolved the Audit Committee because therewere no independent directors willing to serve on it. The board desires tolocate and form an Audit Committee as soon as willing and qualified directorscan be located. Until that time, the board as a whole will take on the AuditCommittee functions, such as, engaging the Company’s auditors, approving auditservices and fees, etc.

 

SECTION 16(a) BENEFICIAL OWNERSHIP REPORTINGCOMPLIANCE

 

Section 16 of the Securities Exchange Act of 1934, asamended, requires that all executive officers and directors of the Company andall persons who beneficially own more than ten percent of the Company’s CommonStock file an initial report

 

40

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of their ownership of the Company’s securities on Form3 and report changes in their ownership of the Company’s securities on Form 4or Form 5. These filings must be made with the Securities and ExchangeCommission and the National Association of Securities Dealers with a copy sentto the Company.

 

Based solely on the review of copies of the formsprovided to the Company and the representations by the executive officers,directors and ten percent shareholders during fiscal year 2004, the followingfailed to file on a timely basis, as disclosed in the above forms, reportsrequired by Section 16(a) of the Exchange Act.

 

Steven Strasser inadvertently missed a filing deadlinefor reporting one transaction. Mr. Strasser has since filed a Form 4 to reportthe transaction.

 

John Lackland inadvertently missed a filing deadlinefor reporting one transaction. Mr. Strasser has since filed a Form 4 to reportthe transaction.

 

Raymond Skiptunis inadvertently missed a filingdeadline for reporting one transaction. Mr. Skiptunis has since filed a Form 4to report the transaction.

 

Nick Anderson inadvertently missed a filing deadlinefor reporting one transaction.

 

Len Bellezza inadvertently missed a filing deadlinefor reporting one transaction.

 

**CODE OF ETHICS**

 

The Registrant has not adopted a code of ethics. TheRegistrant has been focused on raising money and generating sales to supportoperations and consequently has not focused on adopting a code of ethics.

 

**Item10.**                            **Executive Compensation**

 

**STOCK OPTION GRANTS DURING 2004**

 

The following table shows information as to optionsgranted during the year ended December 31, 2004 for the executive officersstill in their positions as of March 11, 2005..

 
| ** **          | ** ** | **Individual Grants**                                  | ** ** | ** **                                                              | ** ** |
|---------------------|------------|--------------------------------------------------------|------------|-------------------------------------------------------------------------|------------|
| ** **          | ** ** | **Number of  securities  underlying  Options Granted** | ** ** | **Percentage of  Total Options  Granted to  Employees in  Fiscal Year** | ** ** | **Exercise  Price in  Dollars  per Share** | ** ** | **Market  Price on  Date of  Grant** | ** ** | **Expiration  Date** | ** ** | **Potential  Realizable Value at  Assumed Annual Rates of Stock  Price Appreciation For Option  Term (1)** | ** ** |
| ** **          | ** ** | ** **                                             | ** ** | ** **                                                              | ** ** | ** ** | ** ** |
| ** **          | ** ** | ** **                                             | ** ** | ** **                                                              | ** ** | ** ** | ** ** |
| ** **          | ** ** | ** **                                             | ** ** | ** **                                                              | ** ** | ** ** | ** ** |
| **Name**            | ** ** | ** **                                             | ** ** | ** **                                                              | ** ** | ** ** | **5%** | ** ** | **10%** | ** ** |
| Steven Strasser     |       | 146,154                                                |       | 5.04                                                                    | %          | $ | 0.65 |   | $ | 0.28 |   | 10/10/14 |   | $ | (28,341 | ) | $ | 11,144 |   |
| Steven Strasser     |       | 453,846                                                |       | 15.65                                                                   | %          | $ | 0.65 |   | $ | 0.28 |   | 10/10/14 |   | $ | (88,005 | ) | $ | 34,605 |   |
| Nicholas  Anderson  |       | 96,154                                                 |       | 3.32                                                                    | %          | $ | 0.65 |   | $ | 0.28 |   | 10/10/14 |   | $ | (186,959 | ) | $ | 73,515 |   |
| Nicholas  Anderson  |       | 403,846                                                |       | 13.92                                                                   | %          | $ | 0.65 |   | $ | 0.28 |   | 10/10/14 |   | $ | (78,310 | ) | $ | 30,792 |   |
| John (BJ)  Lackland |       | 46,154                                                 |       | 1.59                                                                    | %          | $ | 0.65 |   | $ | 0.28 |   | 10/10/14 |   | $ | (8,950 | ) | $ | 3,519 |   |
| John (BJ)  Lackland |       | 328,846                                                |       | 13.92                                                                   | %          | $ | 0.65 |   | $ | 0.28 |   | 10/10/14 |   | $ | (63,766 | ) | $ | 25,074 |   |

 

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1. The potential realizable value of the optionsgranted is calculated by multiplying the difference between the exercise priceof the option and the market value per share of the underlying stock (assuminga 5% or 10%, as the case may be, compounded annual increase of the stock pricefrom the date of grant to the final expiration of the option) by the number ofshares underlying the options granted. The price appreciation assumptions arerequired disclosures under the rules of the Securities and Exchange Commissionand are not to be viewed as any expectation or prediction by the Company offuture value of the underlying common stock

 

As of March 11, 2005, the Company has only oneemployee with an employment contract. Nicholas Anderson, the Company’s founder,Chief Technology Officer and director. (See Note 16 to the FinancialStatements).

 

**Item11.**                            **Security Ownership of Certain Beneficial Owners andManagement and Related Stockholder Matters**

 

**STOCK OWNERSHIP**

 

The following table sets forth information regardingthe beneficial ownership of each director, each executive officer, allexecutive officers and directors as a group, and persons, according toinformation received by the Board of Directors, holding more than five percentof the outstanding Common Stock of the Company as of March 8, 2005.

 
| **Title of Class**           | ** ** | **Beneficial Owner**                                         | ** ** | **Shares Owned** | ** ** | **Percent of  Shares Owned (9)** | ** ** |
|------------------------------|------------|--------------------------------------------------------------|------------|------------------|------------|----------------------------------|------------|
| Common Stock                 |       | Nicholas Anderson, CTO, Director                             |       | 689,565          | (1)        | 5.6                              | %          |
| Common Stock                 |       | Steven Strasser, Chairman of the Board                       |       | 3,103,901        | (2)        | 25.4                             | %          |
| Common Stock                 |       | Leonard Bellezza, Director                                   |       | 97,069           | (3)        | Less than 1                      | %          |
| Common Stock                 |       | John (BJ) Lackland, Interim CFO, Director                    |       | 200,000          | (4)        | 1.6                              | %          |
| Common Stock                 |       | Richard Pulford, Director                                    |       | 156,051          | (5)        | 1.3                              | %          |
| Common Stock                 |       | Raymond J. Skiptunis, Director                               |       | 206,869          | (6)        | 1.7                              | %          |
| Common Stock                 |       | Summit Energy Ventures, LLC                                  |       | 2,803,901        | (7)        | 22.9                             | %          |
| Series A-1                   |       | Summit Energy Ventures, LLC                                  |       | 1,581,150        |       | 47.5                             | %          |
| Convertible  Preferred Stock |       |                                                         |       |             |       |                             |       |
| Common Stock                 |       | Commonwealth Energy Corporation                              |       | 3,099,049        | (8)        | 25.3                             | %          |
| Series A-1                   |       |                                                         |       |             |       |                             |       |
| Convertible  Preferred Stock |       | Commonwealth Energy Corporation                              |       | 1,747,587        |       | 52.5                             | %          |
| Common Stock                 |       | All Executive Officers and Directors as a Group (6  persons) |       | 4,455,455        |       | 36.4                             | %          |

 

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(1) Includes 316,000 common shares subject to optionsand warrants exercisable within 60 days of March 8, 2005.  Mr. Anderson was also granted an additional400,000 common shares subject to options exercisable after 60 days of March 8,2005.

 

(2) Includes 2,803,901 common shares held by SummitEnergy Ventures, LLC (on a converted basis), in which Steven Strasser is one oftwo members, and 300,000 common shares subject to options exercisable within 60days of March 8, 2005.  Mr. Strasser wasalso granted an additional 300,000 common shares subject to options exercisableafter 60 days of March 8, 2005.

 

(3) Includes 67,000 common shares subject to optionsexercisable within 60 days of March 8, 2005. Mr. Bellazza was originally granted 500,000 options, but 433,000 optionswere subsequently cancelled in early 2005.

 

(4) Includes 200,000 common shares subject to optionsexercisable within 60 days of March 8, 2005. Mr. Lackland was also granted an additional 175,000 common sharessubject to options exercisable after 60 days of March 8, 2005.

 

(5) Mr. Pulford owns no shares of the Registrantdirectly. Mr. Pulford has a 7% profit interest in Percon, LLC which owns156,051 common shares.  This total amountfor Mr. Pulford includes 12,500 common shares subject to options exercisablewithin 60 days of March 8, 2005.  Mr.Pulford was also granted an additional 12,500 common shares subject to optionsexercisable after 60 says of March 8, 2005.

 

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(6) Includes 48,500 common shares subject to optionsand warrants exercisable within 60 days of March 8, 2005.  Mr. Skiptunis was also granted an additional12,500 common shares subject to options exercisable after 60 days of March 8,2005.

 

(7) Includes 1,581,150 shares of Series A-1 PreferredStock which is currently convertible into 1,315,203 shares of Common Stock.

 

(8) Includes 1,747,587 shares of Series A-1 PreferredStock which is currently convertible into 1,453,645 shares of Common Stock.

 

(9) The percentages for Common Stock assume that the3,328,737 shares of Series A-1 Preferred Stock were converted into 2,768,848shares of Common Stock and include all common shares subject to options andwarrants exercisable within 60 days of March 8, 2005.

 

**Item12.**                            **Certain Relationships and Related Transactions**

 

As of December 31, 2004, the Registrant had no related transactions andcertain relationships exceeding $60,000. As of the filing date, the Registrant has paid management fees of$60,000 to a management company, wholly owned by the Chief Executive Officer ofthe Registrant.  See Note 14 in the Notesto Financial Statements in Part II.

 

**Item13.**                            **Exhibits and Reports on Form 8-K**

 

(a)            Exhibits

 

The following exhibits are filed as part of this report:

 

**Description of Document**

** **
| **Exhibit  Number** | ** ** | **Description**                                                                                                                   | ** ** | **Location** |
|---------------------|------------|-----------------------------------------------------------------------------------------------------------------------------------|------------|--------------|
| 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  Stock of Power Efficiency Corporation. |       | v            |
| 10.19               |       | Revolving Credit Note  dated May 8, 2003.                                                                                         |       | v            |
| 10.20               |       | Security Agreement  dated May 8, 2003.                                                                                            |       | v            |

 

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| 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  Ventures, LLC dated October 3, 2003                                                                                                                                |   | vii            |
| 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, Nicholas  Anderson, Philip Elkus, Stephen Shulman, Performance Control, LLC, Summit  Energy Ventures, LLC and Power Efficiency Corporation dated September 22,  2003 |   | vii            |
| 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.                                                                                                                                                                                         |   | ix             |
| 10.36 |   | Business Property lease  with Arens Investment Company dated November 1, 2003.                                                                                                                                                                                 |   | ix             |
| 10.37 |   | Subscription Agreement  with Richard Koch dated December 23, 2003.                                                                                                                                                                                             |   | ix             |
| 10.38 |   | Subscription Agreement  with Raymond Skiptunis dated January 8, 2004.                                                                                                                                                                                          |   | ix             |
| 10.39 |   | Subscription Agreement  with Leonard Bellezza dated February 16, 2004.                                                                                                                                                                                         |   | ix             |
| 10.40 |   | Letter agreement with  Pali Capital, Inc. dated February 25, 2004.                                                                                                                                                                                             |   | ix             |
| 10.41 |   | Amended and Restated  2000 Stock Option and Restricted Stock Plan dated February 23, 2004.                                                                                                                                                                     |   | ix             |
| 10.42 |   | Amended and Restated  1994 Stock Option Plan.                                                                                                                                                                                                                  |   | ix             |
| 10.43 |   | $300,000 Line of Credit  Agreement with Summit Energy Ventures LLC                                                                                                                                                                                             |   | x              |
| 10.44 |   | Single Phase Licensing  Agreement with Commerce Energy Group                                                                                                                                                                                                   |   | xi             |
| 10.45 |   | Settlement and  Consulting Agreement with Ray Skiptunis dated September 27, 20004                                                                                                                                                                              |   | filed herewith |
| 10.46 |   | Settlement Agreement  with Richard Koch dated December 15, 2004                                                                                                                                                                                                |   | filed herewith |
| 10.47 |   | Management Agreement  with Northwest Power Management, Inc. dated November 18, 2004                                                                                                                                                                            |   | filed herewith |
| 10.48 |   | Business Property Lease  involving Glenborough LLC and Northwest Power Management, Inc. dated February  7, 2005.                                                                                                                                               |   | filed herewith |
| 10.49 |   | Settlement and  Consulting Agreement with Keith Collin dated September 27, 2004                                                                                                                                                                                |   | filed herewith |
| 10.50 |   | Settlement Agreement  with Tom Mills dated December 21, 2004                                                                                                                                                                                                   |   | filed herewith |
| 10.51 |   | Business Property  Sublease with Famair, Inc. dated February 11, 2005                                                                                                                                                                                          |   | filed herewith |
| 31.1  |   | Certification of Steven  Strasser pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                   |   | filed herewith |
| 31.2  |   | Certification of John  Lackland pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                     |   | filed herewith |
| 32.1  |   | Certification of Steven  Strasser pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                   |   | filed herewith |
| 32.2  |   | Certification of John  Lackland pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                     |   | filed herewith |

 

----

| 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.    |   |   |
| ix   |   | Incorporated herein by reference from the Company’s  Form 10-KSB filed on  March 10, 2004     |   |   |
| x    |   | Incorporated herein by reference from the Company’s Form 8-K filed on May 5, 2004             |   |   |
| xi   |   | Incorporated herein by reference from the Company’s  Form 10-QSB filed on  November 15, 2004  |   |   |

 

44

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(b) Reports on Form 8-K filed during the forth quarter:

 

On November 5, 2004 the Company filed a current report on Form 8-K announcing the creation of a direct financial obligation. That report is incorporated herein by reference.

 

On March 2, 2005 the Company filed a currentreport on Form 8-K announcing the creation of a direct financial obligation.That report is incorporated herein by reference.

 

**Item14.**                            **Principal Accountant Fees and Services.**

 

(1) Audit Fees.

 

The aggregate fees billed in fiscal years 2004 and2003 for professional services rendered by the principal accountant for theaudit of the Registrant’s annual financial statements and review of financialstatements included in the Registrants Form 10-QSB or services that arenormally provided by the accountant in connection with statutory and regulatoryfilings or engagements for those fiscal years were $51,900 and $44,100,respectively.

 

(2) Audit-Related Fees.

 

The aggregate fees billed in fiscal years 2004 and2003 for assurance and related services by the principal accountant that arereasonably related to the performance of the audit or review of theRegistrant’s financial statements and are not reported under Item 14(1) abovewere $0 and $0, respectively.

 

(3) Tax Fees.

 

The aggregate fees billed in fiscal years 2004 and2003 for professional services rendered by the principal accountant for taxcompliance, tax advice, and tax planning were $2,150 and $3,275, respectively.

 

(4) All Other Fees

 

The aggregate fees billed in fiscal years 2004 and2003 for products and services provided by the principal accountant, other thanthe services reported in Items 14(1) through 15(3) above were $4,500 and $0,respectively.

 

(5) Audit Committee Approval

 

During fiscal year 2004 and 2003, the Audit Committeeadopted the policy of pre-approving all engagements and fees for audit and taxrelated services.

 

45

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**SIGNATURES**

 

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

 
|                  | POWER EFFICIENCY  CORPORATION |
|-----------------------|-------------------------------|
|                  |                          |   |
| Dated: March 29, 2005 | By:                           | /s/ STEVEN STRASSER |   |
|                  |                          | Steven Strasser, President and Chief Executive  Officer and Chairman of the Board |
|                  |                          |   |
| Dated: March 29, 2005 | By:                           | /s/ JOHN LACKLAND |   |
|                  |                          | John Lackland, Interim Chief Financial Officer and  Director |
|                       |                               |  |  |  |

 

 

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

 

 
| Dated: March 29, 2005 | By:    | /s/ NICHOLAS ANDERSON          |   |
|-----------------------|--------|--------------------------------|--------|
|                  |   | Nicholas Anderson, Director    |
|                  |   |                           |
| Dated: March 29, 2005 | By:    | /s/ LEONARD BELLEZZA           |   |
|                  |   | Leonard Bellezza, Director     |
|                  |   |                           |
| Dated: March 29, 2005 | By:    | /s/ RICHARD PULFORD            |   |
|                  |   | Richard Pulford, Director      |
|                  |   |                           |
| Dated: March 29, 2005 | By:    | /s/ RAYMOND J. SKIPTUNIS       |   |
|                  |   | Raymond J. Skiptunis, Director |
|                       |        |                                |        |  |  |  |

 

46

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** **

**EXHIBITINDEX**

 

**Description of Document**

** **
| **Exhibit  Number** | ** ** | **Description**                                                                                                                                                                                                                                               | ** ** | **Location** |
|---------------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------|
| 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 Stock of Power Efficiency  Corporation.                                                                                                                             |       | v            |
| 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 Ventures, LLC dated October 3, 2003                                                                                                                                |       | vii          |
| 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, Nicholas Anderson, Philip Elkus, Stephen  Shulman, Performance Control, LLC, Summit Energy Ventures, LLC and Power  Efficiency Corporation dated September 22, 2003 |       | vii          |
| 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.                                                                                                                                                                                        |       | ix           |
| 10.36               |       | Business Property lease with Arens Investment  Company dated November 1, 2003.                                                                                                                                                                                |       | ix           |
| 10.37               |       | Subscription Agreement with Richard Koch dated  December 23, 2003.                                                                                                                                                                                            |       | ix           |
| 10.38               |       | Subscription Agreement with Raymond Skiptunis dated  January 8, 2004.                                                                                                                                                                                         |       | ix           |
| 10.39               |       | Subscription Agreement with Leonard Bellezza dated  February 16, 2004.                                                                                                                                                                                        |       | ix           |
| 10.40               |       | Letter agreement with Pali Capital, Inc. dated  February 25, 2004.                                                                                                                                                                                            |       | ix           |
| 10.41               |       | Amended and Restated 2000 Stock Option and  Restricted Stock Plan dated February 23, 2004.                                                                                                                                                                    |       | ix           |

 

47

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| 10.42 |   | Amended and Restated 1994 Stock Option Plan.                                                                              |   | ix             |
|-------|--------|---------------------------------------------------------------------------------------------------------------------------|--------|----------------|
| 10.43 |   | Line of Credit Agreement with Summit Energy Ventures  LLC                                                                 |   | x              |
| 10.44 |   | Single Phase Licensing Agreement with Commerce  Energy Group                                                              |   | xi             |
| 10.45 |   | Settlement and Consulting Agreement with Ray  Skiptunis dated September 27, 20004                                         |   | filed herewith |
| 10.46 |   | Settlement Agreement with Richard Koch dated  December 15, 2004                                                           |   | filed herewith |
| 10.47 |   | Management Agreement with Northwest Power  Management, Inc. dated November 18, 2004                                       |   | filed herewith |
| 10.48 |   | Business Property Lease Amendment involving  Glenborough LLC and Northwest Power Management, Inc. dated February 7, 2005. |   | filed herewith |
| 10.49 |   | Settlement and Consulting Agreement with Keith  Collin dated September 27, 2004                                           |   | filed herewith |
| 10.50 |   | Settlement Agreement with Tom Mills dated December  21, 2004                                                              |   | filed herewith |
| 10.51 |   | Business Property Sublease with Famair, Inc. dated  February 11, 2005                                                     |   | filed herewith |
| 31.1  |   | Certification of Steven Strasser pursuant to Section  302 of the Sarbanes-Oxley Act of 2002.                              |   | filed herewith |
| 31.2  |   | Certification of John Lackland pursuant to Section  302 of the Sarbanes-Oxley Act of 2002.                                |   | filed herewith |
| 32.1  |   | Certification of Steven Strasser pursuant to Section  906 of the Sarbanes-Oxley Act of 2002.                              |   | filed herewith |
| 32.2  |   | Certification of John Lackland pursuant to Section  906 of the Sarbanes-Oxley Act of 2002.                                |   | filed herewith |

 

----

| 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    |   |   |
| ix   |   | Incorporated herein by reference from the Company’s  Form 10-KSB filed on  March 10, 2004    |   |   |
| x    |   | Incorporated herein by reference from the Company’s  Form 8-K filed on May 5,  2004          |   |   |
| xi   |   | Incorporated herein by reference from the Company’s  Form 10-QSB filed on  November 15, 2004 |   |   |

 

48

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