<PAGE>



                       Securities and Exchange Commission
                             Washington, D.C. 20549
                                  FORM 10-KSB/A
                         Amendment No. 2 to Form 10-KSB

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

        For the fiscal year ended December 31, 2001

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

        For the transition period from ___________________ to _________________

                        Commission File Number: 000-31805

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

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

        4220 Varsity Drive, Suite E
            Ann Arbor, Michigan                                    48108
     (Address of Principal Executive Offices)                    (Zip Code)

                                 (734) 975-9111
                (Issuer's Telephone Number, Including Area Code)

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

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

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

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

The issuer's revenues for the year ended December 31, 2001, were $633,563.

As of February 8, 2002, the aggregate market value of the common stock held by
non-affiliates of the issuer was approximately $10,015,844. This amount is based
on the average of the bid and asked price of $4.00 per share for the
registrant's stock as of such date.

As of February 8, 2002, the issuer had outstanding 6,523,120 shares of common
stock.

Transitional Small Business Disclosure Format (check one) : Yes _____ No X


<PAGE>


                            AMENDMENT TO FORM 10-KSB

This Amendment No. 2 to the Registrant's Form 10-KSB for the fiscal year ended
December 31, 2001 (the "Amendment") is filed to amend the information contained
in certain Items listed in that report.

                           FORWARD-LOOKING STATEMENTS

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

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

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


                                      -2-
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                                GLOSSARY OF TERMS

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

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

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

Apparent Power (KVA)            The product of volts times amperes in an
                                electric current.

Audit (Energy)                  The process of determining energy consumption,
                                by various techniques, of a building or
                                facility.

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.

Hertz                           A measure of the number of cycles or
                                wavelengths of electrical energy per second;
                                U.S. electricity supply has a standard frequency
                                of 60 hertz.

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 starter 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 (starter). The power supply is connected
                                only to the starter. 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.


                                      -3-
<PAGE>


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.

Losses (Energy)                 A general term applied to the energy that is
                                converted to a form that cannot be effectively
                                used (lost) during the operation of an energy
                                producing, conducting, or consuming system.

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

Motor Speed                     The number of revolutions that the motor turns
                                in a given time period (i.e. revolutions per
                                minute, or rpm).

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.

Staring Torque                  The torque produced by a motor at rest when
                                power is applied. For an AC machine, this is the
                                locked-rotor torque.

Three-phase Current             Alternating current in which three separate
                                pulses are present, identical in frequency and
                                voltage, but separated 120 degrees in phase.

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.

Total Harmonic Distortion       The measure of closeness in shape between a
                                waveform and its fundamental component.

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 to maintain 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.

Wattmeter                       A device for measuring power consumption.


                                      -4-
<PAGE>

                                     PART I
                                     ------

Item 1. Description of Business

         (a) Business Development

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

         Recent Acquisition/Private Placement. On August 7, 2000, the Registrant
executed an Asset Purchase Agreement (the "Asset Agreement") with Performance
Control, L.L.C., a Michigan limited liability company and formerly the largest
distributor of the Registrant's products ("Percon"). Percon was formed on
February 15, 1996. Pursuant to the terms and conditions of the Asset Agreement,
the Registrant acquired Percon's (i) contracts; (ii) inventory; (iii) state and
municipal permits, certificates, registrations, licenses and authorizations;
(iv) intellectual property, including the name "Performance Control"; (v)
goodwill; (vi) accounts receivable; (vii) prepaid expenses; (viii) furniture,
fixtures and equipment; (ix) customer lists; and (x) Internet web site located
at www.performancecontrol.com (collectively the "Assets") in consideration for
an aggregate of 1,112,245 newly issued shares of the Registrant's common stock,
$.001 par value per share. The Registrant also assumed $438,888 of Percon's
liabilities. After the purchase was completed, Percon amended its Articles of
Organization and changed its name to Percon, LLC. As of the date of this filing,
Percon had no operations and its sole asset was the Registrant's stock received
pursuant to the Asset Agreement.

         The closing of the Registrant's purchase of the Assets was conditioned
upon the sale of a minimum of 12 units in the Registrant's May 16, 2000 private
offering of a minimum of 12 ($300,000) units and a maximum of 40 ($1,000,000)
units pursuant to the provisions of Rule 506 of Regulation D under the
Securities Act of 1933, as amended (the "Securities Act"). Each unit consisted
of 25,000 shares of the Registrant's common stock, $.001 par value per share,
offered at $1.00 per share; and a five year warrant to purchase 25,000
additional shares of the Registrant's common stock at an exercise price of $3.00
per share during the first year, $4.00 per share during the second year and
$5.00 per share during the third year. For additional information regarding the
Registrant's May 16, 2000 private offering, see Part II, Item 5, "Recent Sales
of Unregistered Securities."

         Stockholders' Agreement. As part of the transaction with Percon, the
Registrant, Nicholas Anderson and Anthony Caputo, the Registrant's two principal
stockholders, and Percon, Philip Elkus and Stephen L. Shulman, Percon's two
principal members, entered into a Stockholders' Agreement dated August 7, 2000
(the "Stockholders' Agreement"). The Stockholders' Agreement establishes two
groups of stockholders: Messrs. Anderson and Caputo, on the one hand (the
"Founders"), and Percon and Messrs. Elkus and Shulman, on the other hand (the
"Percon Group").

         The Stockholders' Agreement establishes two directors nominated by the
Founders (the "Founders Directors") and one director nominated by the Percon
Group (the "Percon Director"). The Stockholders' Agreement requires each
stockholder group to elect the director nominee(s) of the other stockholder
group and also provides certain rights of first refusal for one stockholder
group to purchase the shares held by the other stockholder group before such
shares may be sold to third parties.

         There are certain actions of the Registrant that, under the
Stockholders' Agreement, require supermajority approval. These actions include:


                                      -5-
<PAGE>

         o        The purchase of any business or assets other than in the
                  ordinary course of the Registrant's business;

         o        Any sale, lease, assignment, transfer or disposition of all or
                  substantially all of the Registrant's assets;

         o        Any modification of the Certificate of Incorporation or
                  By-laws; and

         o        An initial public offering of the securities of the
                  Registrant.

The Stockholders' Agreement terminates on the date of the first to occur of the
following events: (i) the closing of the sale by one or more of the stockholders
pursuant to one or more offerings registered under the Securities Act to any
person or group of persons who are not, and who do not become, at the time of
sale, parties to the Stockholders' Agreement of a number of shares equal to at
least 50% of the maximum total number of shares beneficially owned by all of the
stockholders at any time; (ii) bankruptcy, receivership, or dissolution of the
Registrant; (iii) the voluntary agreement of all the parties who are then bound
by the terms of the Stockholders' Agreement; (iv) the acquisition of all the
shares by one of the stockholders; or (v) five years from the date of the
Stockholders' Agreement.

         (b) Business of the Registrant

The Registrant's Principal Products

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

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

         o        the Single-Phase Power Commander(R) used in consumer
                  applications such as home appliances and the like.

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

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

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


                                      -6-
<PAGE>

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

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

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

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

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

         Three-Phase Power Commander(R). The initial market for the Three-Phase
Power Commander(R) is the elevator and escalator industry, although the
Registrant is marketing this product to other industries such as the plastics
manufacturing, petroleum and automotive industries. Domestic sales in the
elevator and escalator market were $6.5 billion in 2000. Based upon trade
journals (e.g. Elevator World Source Book 2001-2002), there are approximately
699,725 elevators and 36,400 escalators currently in operation in North America
alone. Additionally, approximately 24,725 new elevators and 1,400 new
escalators, respectively, are installed annually in the domestic market. Each
existing installation is a potential candidate for the retrofit of the
Three-Phase Power Commander(R) and each new installation is a potential
candidate for initial installation.

         Various other markets such as conveyor systems, machine tools, mining
equipment, crude oil pumps, weaving machines, etc., are believed to be viable
target markets for the Three-Phase Power Commander(R) and the Registrant is
seeking to build an Original Equipment Manufacturer ("OEM") and distributor base
to address these markets.


                                      -7-
<PAGE>

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

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

         Registrant's Motor Starter Product. The Registrant's motor starter
product is designed to soft start a motor, which saves energy and protects the
motor, and has the capacity to act as a remote-switching device. The motor
starter product is still under development and management expects to complete
the development and release of this product in fiscal 2002.

Research and Development

         The Registrant intends to continue its research and development effort
to introduce new products based on the Power Commander(R) solid-state
technology. Towards this end, the Registrant spent $242,243 in fiscal 2001 and
$120,429 in fiscal 2000 on research and development activities, virtually none
of which was borne by customers. In addition, and for the foreseeable future,
the Registrant intends to limit its research and development activities to
secondary products for Three-Phase industrial and commercial AC induction
motors. Two of these products are (i) a soft starting motor starter (without
energy saving features) to compete with existing transformer and other
electro-mechanical type motor starters; and (ii) a high voltage energy saving
motor controller for motors ranging in sizes from 2000 to 6000 volts.

Marketing and Sales

         The Registrant's marketing efforts for the Power Commander(R) have been
concentrated in several industries in which the Registrant's principal
stockholders have significant experience. These areas include the elevator and
escalator industry; national electrical supply houses; large real estate
property management companies; the oilfield supply industry; and to a lesser
extent, public transportation systems. From inception through December 31, 2001,
a total of 3,951 of the Registrant's motor controllers were sold to more than
120 of the OEM's customers located throughout the United States and Asia under
the following brands: Performance Controller(TM), Power Commander(R), Energy
Master, Current Control, and Ecostart. Customer industry profiles include retail
outlets, public transportation, hotels, manufacturers and federal government
facilities. This unit total includes sales made by Percon's OEM's and
distributors prior to selling its assets to the Registrant.

         As the Registrant's operations are scaled up and revenues from the sale
of the Power Commander(R) grow, the Registrant intends to simultaneously (i)
market the Power Commander(R) through OEMs to other compatible industries such
as conveyor and line production systems, machine tools and other industrial
applications, and (ii) develop and market its motor starter product line.

         The Registrant is a party to four material contracts for the sale of
Power Commander(R) products. The first contract is an annual contract with
Montgomery KONE, Inc., the world leader in escalator sales. The contract was
executed on December 1, 1998, and was renewed on August 21, 2001, extending the
contract until December 1, 2002. It is a requirements contract and covers the
sale of motor controllers manufactured under the brand name Ecostart. The
Ecostart brand name is exclusive to KONE and also contains a safety circuit
designed specially for KONE.


                                      -8-
<PAGE>

         The second contract is a contract for the sale of Performance
Controller(TM) brand products to the Defense Logistics Agency of the federal
government of the United States of America. The original contract was executed
on January 12, 2000, and expired on January 11, 2002. An extension of the
contract has been negotiated and the Registrant is awaiting final confirmation
of the terms. It is a requirements contract that enables the Defense Logistics
Agency to purchase up to $398,000 worth of products annually without having to
utilize the government bidding procedures.

         The third contract is an open purchase order from Otis Elevator Company
for the sale of Performance Controller(TM) brand devices developed for
elevators. The purchase order was executed on August 8, 2000, and expires on
October 31, 2002. The open purchase order is for purchases up to $100,000, and
is expected to be renegotiated upon reaching the purchase limit.

         The fourth contract is with Millar Elevator Corporation, the service
arm of Schindler Elevator Corporation. The contract was executed on August 17,
2000, whereby Millar agreed to purchase Power Commander(R) motor controllers
under the brand name "Current Control." The contract was renewed on October 5,
2001, extending the contract until September 1, 2002.

Manufacturing

         The Registrant has an arrangement with a leading manufacturer in the
electronics industry, Q.C. Corporation d/b/a System Controls. System Controls
manufactures units for the Registrant on an as-needed basis. Under the
arrangement, the Registrant issues a purchase order to System Controls that
outlines, among other things, the number of units to be manufactured and the
price per unit. System Controls is under no obligation to accept the order and
the Registrant is under no obligation to use System Controls for its
manufacturing needs.

         The Registrant leases space in Ann Arbor, Michigan, where it performs
activities such as component assembly, quality assurance, quality control and
packaging. Management believes the arrangement between the Registrant and System
Controls has been mutually beneficial to both and expects that the relationship
will continue. System Controls' production capacity is approximately 1,000 units
per month. The Registrant believes, however, that leasing new or additional
space to increase the manufacturing capacity in the Detroit area can be done
cost-effectively, as production of the Registrant's product does not require
expensive, capital-intensive equipment.

         The Registrant is in the final pre-production testing of electronic
modules incorporating the latest gating switches. Switching to these modules
would replace other more costly components used in the manufacture of the Power
Commander(R) and would also eliminate several labor intensive assembly steps.
Total per unit cost savings (component cost savings and labor cost savings) are
estimated to be approximately 30% compared to current production methods.

         Product cost-reduction efforts are, and will remain, a focal point of
the Registrant. One key element of the program includes an aggressive
manufacturing and engineering effort to reduce production cycle times as well as
material and processing costs. A second element of the program is to out-source
production operations. Management believes the assembly of printed circuit
boards by outside suppliers, with automated assembly and test equipment, should
reduce costs and ensure quality. As the product volumes increase, the Registrant
expects to recognize favorable purchasing economies, increased labor
efficiencies and improved overhead absorption. Also, the Registrant is
evaluating offshore manufacturing in order to help reduce production costs.

Source of Supply and Availability of Raw Materials

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


                                      -9-
<PAGE>

Competition

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

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

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

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

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

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

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

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

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

          o  Energy saving motor controllers claimed to be competitive with the
             Power Commander(R) (i.e., Fairford, Power Boss and Power Planner)
             utilize technologies inferior to the Registrant's technology
             because:

          o  Their products achieve lower levels of energy savings in comparable
             applications compared to the Power Commander(R) (see Part I, Item 1
             "Description of Business," pages 6-7 for a description of the
             independent tests performed on the Registrant's products); and

          o  Their digital design produces extensive harmonic distortion.

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


                                      -10-
<PAGE>

         Single-Phase Competition. Because of the enormous opportunity in
single-phase motor applications, there have been several companies that have,
with different technologies, tried to exploit this market. The "Green Plug"
(voltage clamping), "Power Planner" (digital microchip) and "Econelectric"
(power factor control) are products that have created industry awareness. To the
best of Registrant's belief, however, none of these products have remained on
the market.

Patents and Proprietary Rights

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

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

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

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

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

         NASA License Agreement. The Registrant is the exclusive United States
licensee of certain Power Factor Controller Technology owned by the United
States of America, as represented by NASA. This license agreement covers the USA
and its territories and possessions and does not require the Registrant to pay
royalties to NASA in connection with the Registrant's sale of products employing
technology utilizing the licensed patents. The Registrant's rights under the
license agreement are non-transferable and may not be sublicensed without NASA's
consent. The license agreement terminates upon the expiration of all of the
licensed patents, currently December 16, 2002. The Registrant is only aware of
one additional non-USA based non-exclusive licensee in Japan. This licensee has
limited its product development to large motors that range in size from 100 HP
and up and also has focused its sales effort solely within the Japanese market.

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

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

Employees

         At the date of this document, the Registrant employs 10 persons on a
full time basis. Of this number, one person is engaged in
administration/international sales, one in operations management, two in sales
and marketing, one in engineering/administration, two in engineering/production,
one in accounting and finance, one in technical support and one in clerical,
stenographic and reception. At such time as business conditions dictate, the
Registrant expects to hire additional personnel for, among other things,
increased production, marketing and sales. The Registrant has no collective
bargaining agreements and considers its relationship with its employees to be
good. The Registrant utilizes consultants in the areas of electrical and
mechanical engineering, manufacturing engineering, and financing and strategy on
an ongoing basis.


                                      -11-
<PAGE>

Customers

         The Registrant currently does business with approximately 25 customers.
Of this number, four, including Otis Elevator Company (Division of United
Technologies), KONE, Inc., Millar Elevator Service Co. (the service arm of
Schindler Elevator), and the Defense Logistics Agency of the federal government
of the United States of America, presently account for approximately 80% of the
Registrant's gross revenues. In light of the Registrant's intentions to focus
its business on OEMs in the elevator, oil field pump and manufacturing
industries, the Registrant may be deemed to be and continue to be dependent upon
a small number of customers. Accordingly, the loss of one or more of these
customers is likely to have a material adverse effect upon the Registrant's
business.

Government Regulation

         The Registrant is not required to be certified by any government
agencies. However, the Registrant's products are manufactured to comply with
specific Underwriters' Laboratory codes that meet national safety standards.
Presently, the Registrant's products comply with UL 508 standards and the
Registrant has also begun the certification to meet CSA (Canadian electrical
standards). The Department of Commerce does not require the Registrant's
technology to be certified for export. The Registrant's industrial code is
421610 and the SIC code is 5063.

Deregulation of Electrical Energy

         Deregulation of the electrical energy markets is widely expected to
create increased competition and increased demand for all products that reduce
energy consumption.

Effect of Environmental Regulations

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

Risk Factors

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

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


                                      -12-
<PAGE>

         Registrant's License From NASA About to Expire. The basic technology
upon which the Registrant's products are based is derived from a patent license
agreement by and between the Registrant and NASA, which expires December 16,
2002. The Registrant's license from NASA is exclusive for the USA and
non-exclusive worldwide, although the Registrant is one of only two licensees of
NASA's Power Factor Controller Technology worldwide. NASA has waived any and all
future payments by the Registrant for use of the NASA patents. The license
expires upon expiration of NASA's underlying patents, at which time anyone,
including the Registrant, will be free to use the underlying NASA technology.
The Registrant has also made certain improvements to the basic technology
covered by the NASA license, which may place the Registrant in a competitively
superior position to the other licensee. No assurance can be given, however,
that the other licensee (a Japan based company) will not seek to improve the
basic technology in a manner similar to that of the Registrant.

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

         Sales and Marketing Risks. The Registrant's products are currently
distributed through OEMs. The Registrant's future growth and profitability will
depend upon the successful development of business relationships with additional
OEMs and upon their ability to penetrate the market with the Registrant's
products.

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

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

         No Cash Dividends on Common Stock. The Registrant has not paid or
declared any dividends on its common stock and does not anticipate paying or
declaring any cash dividends on its common stock in the foreseeable future.

         Possible Resales Under Rule 144.

         Of the approximately 6,523,120 shares of the Registrants common stock
outstanding on February 8, 2002, 1,928,100 shares are freely trading in the
market place (the "Free Trading Shares"). The Free Trading Shares are comprised
mostly of shares that were originally issued to officers, directors and 10%
shareholders (the "Affiliates") of the Registrant, which shares were, over time,
resold pursuant to Rule 144, as set forth below.


                                      -13-
<PAGE>

         The remaining 4,595,020 shares of the Registrant's common stock
outstanding are restricted securities as defined in Rule 144 under the
Securities and under certain circumstances may be resold without registration
pursuant to Rule 144. Approximately 950,424 shares of the restricted securities
are held by non-Affiliates.

         In addition, the Registrant has issued approximately 810,720 common
stock purchase warrants and has granted approximately 1,958,640 stock options.
Neither the granting of options nor the issuance of warrants have been
registered under the Securities Act, but may, under certain circumstances, be
available for public sale in the open market pursuant to Rule 144, subject to
certain limitations.

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

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

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

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


                                      -14-
<PAGE>

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

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

         Line of Credit with Bank One. In December 2000, the Registrant obtained
an asset-based bank line of credit of up to $750,000, with borrowings secured by
all of the Registrant's assets. Borrowings under the line are based on a formula
derived from the levels of the Registrant's eligible accounts receivable and
inventory. The line of credit agreement was extended effective February 1, 2002
until April 30, 2002. This extension was retroactive and occurred after the date
of the Auditor's Report included in this filing. At the time of this filing, the
Company was in default under the terms of the line of credit agreement. Under
the agreement, the Company's borrowings may not exceed the amount calculated
pursuant to a borrowing formula (see Note 8 to the Financial Statements). Based
on the formula, the Company exceeded its borrowing capacity by approximately
$132,000 on December 31, 2001. On May 31, 2002, the Company received a letter
from Bank One, a copy of which is attached hereto as Exhibit 10.22, in which
Bank One agreed to forebear from taking any collection activity concerning the
expired line of credit until June 17, 2002. If an extension of the line of
credit is not received by June 17, 2002, the bank has the right under the line
of credit agreement to demand immediate payment of all amounts owed. In such an
event, it is unlikely the Company would have sufficient available funds to pay
Bank One all amounts owed and could be forced to transfer other assets,
including inventory and accounts receivable, to Bank One in satisfaction of the
debt, which would have a material adverse effect on the future operations, cash
flow and liquidity of the Company. Management is currently negotiating an
extension of the line of credit agreement and is hopeful that the default will
be waived or cured.

         Potential Violation of Section 5 of the Securities Act. In its original
Form 10-SB, filed on October 20, 2000, the Company inadvertently filed its
Private Placement Memorandum as an Exhibit. This may constitute general
solicitation under Rule 502(c) of Regulation D and the Registrant may be in
violation of Section 5 of the Securities Act of 1933 and be unable to avail
itself of the exemption found in Rule 506 of Regulation D as to that offering.
The Company believes it can establish pre-existing connections with all
purchasers under the Private Placement Memorandum. If proceedings based on this
inadvertent filing were commenced against the Registrant, purchasers under the
Private Placement Memorandum, possibly together with other purchasers of the
Company's securities, may make claim for rescission of their investments, which
if successful may exceed $725,000. Such claims would be subject to any
applicable defenses that the Registrant may assert, including statute of
limitations. The last sales under the Private Placement Memorandum were made in
March 2001. Therefore, the Registrant believes that the statute of limitations
for such claims under the Securities Act has expired.


                                      -15-
<PAGE>


                                     PART II

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

Overview

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

         The Registrant began generating revenues from sales of its patented
Power Commander(R) line of motor controllers in late 1995. As of December 31,
2001, the Registrant had total stockholders' equity of $1,386,929 primarily as a
result of the Registrant's August 7, 2000, purchase of the assets of Percon,
formerly the largest distributor of the Registrant's products. The transaction
was accounted for as a purchase and the Registrant's Statement of Operations
includes Percon's results of operations since the date of acquisition.

         The consolidation of both the operations of entities allowed the
Registrant to integrate the administrative, sales, marketing and manufacturing
operations of Percon. Percon had developed sales contacts with major OEM's in
the elevator/escalator industry and transferred those agreements to the
Registrant as part of the Asset Agreement. The fully integrated organization
allowed the Registrant to obtain an asset-based bank line of credit of up to
$750,000 for the build up in inventory collateralized by the current inventory
and accounts receivable. Also, capital raised in the May 2000 Private Placement
(see PART II, Item 5) enabled the Registrant to address the consolidated
accounts payable.

Results of Operations: Fiscal 2001 Compared to Fiscal 2000

         Revenues. Revenues for the twelve months ended December 31, 2001, were
$633,563 compared to $179,524 for the twelve months ended December 31, 2000, an
increase of $454,039, or 253%. The increase in revenues was principally
attributable to the increase in sales by the Company's OEM's and major accounts
expanding their use of the Company's products.

         The Company had negative sales in the 4th quarter of fiscal year 2001
because of a sales return during that quarter which was due to a customer
overstocking the Company's products. In connection with this sales return, the
Company expensed $219,881 in cost of sales in the operating results for this
quarter which is reflected in the "fixed manufacturing overhead expenses," (e.g.
salaries, payroll taxes, employee benefits, insurance, travel, tools and
supplies, etc.) incurred during the 4th quarter. As these costs could not be
booked to inventory or be capitalized, the Company expensed these costs as "cost
of sales," in the 4th quarter.

         Cost of revenues. Cost of revenues for the twelve months ended December
31, 2001, increased to $597,018, or 94.2% of revenues, from $157,035, or 87.4%
of revenues, for the twelve months ended December 31, 2000. The increase in cost
of revenues was primarily due to the increase in revenues and the cost of
materials attributable to the acquisition of Percon inventory.

         Research and development. Research and development expenses were
$242,243, or 38% of revenues, for the twelve months ended December 31, 2001, as
compared to $120,429, or 67% of revenues, for the twelve months ended December
31, 2000. The development of automatic safety systems for products with public
applications increased research and development costs.

         Selling, general and administrative. Selling, general and
administrative expenses decreased to $1,652,404, or 261% of revenues, for the
twelve months ended December 31, 2001, from $4,255,940, or 2,371% of revenues,
for the twelve months ended December 31, 2000. The significant decrease in
selling, general and administrative expenses was due primarily to the prior
year's recognition of compensation expense attributable to the issuance and
repricing of options. The options were issued with an exercise price of $2.00
per share, which was below the fair market value of the stock at the time of
issuance. The difference between the exercise price and the fair market value
was recorded as compensation expense in the amount of $3,649,776. There was an
increase in 2001 general expenses due to increases in sales, marketing and
administrative personnel from eight to ten.


                                      -16-
<PAGE>

Financial Condition, Liquidity, and Capital Resources: For the Year Ended
December 31, 2001

         Since inception, the Registrant has financed its operations primarily
through the sale of its equity securities and using bank borrowings. As of
December 31, 2001, the Registrant has received a total of approximately
$2,257,261 from public and private offerings of its equity securities and
received approximately $445,386 under a bank line of credit. As of December 31,
2001, the Registrant had cash and cash equivalents of $35,245.

         Cash used for operating activities for the twelve months ended December
31, 2001, was $1,107,265 and was $669,184 in 2000. Of the $1,107,265 of cash
used for operating activities in 2001, the largest contributing factors were a
net loss of $1,863,802, depreciation and amortization of $281,587, additional
paid in capital related to write-off of deferred financing costs of $38,502,
debt restructuring of $130,000, issuance of stock options of $47,300, decreases
in accounts receivable of approximately $103,048, increases in inventory of
approximately $83,091 and increases in prepaid expenses and deposits of $9,057.
In addition, operating activities reflected a $216,426 increase in accounts
payable and accrued expenses and an increase in accrued salaries and payroll
taxes of $31,822. Of the $669,184 of net cash used for operating activities in
fiscal 2000, the largest contributing factors were a net loss of $4,354,080 and
repricing and issuance of stock options of $3,649,776, which were offset by
approximately $138,154 in depreciation and amortization and an increase in
accounts receivable of approximately $43,916. In addition, there was a decrease
in accounts payable and accrued expenses of approximately $106,727 and an
increase in accrued salaries and payroll taxes of approximately $14,930.

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

         Since capital resources are insufficient to satisfy the Registrant's
liquidity requirements, management intends to seek to sell additional equity
securities or debt securities or obtain debt financing. In December 2000, the
Registrant obtained an asset-based bank line of credit of up to $750,000, with
borrowings secured by all of the Registrant's assets. Borrowings under the line
are based on a formula derived from the levels of the Registrant's eligible
accounts receivable and inventory. The line of credit agreement was extended
effective February 1, 2002 until April 30, 2002. This extension was retroactive
and occurred after the date of the Auditor's Report included in this filing. At
the time of this filing, the Company was in default under the terms of the line
of credit agreement. Under the agreement, the Company's borrowings may not
exceed the amount calculated pursuant to a borrowing formula (see Note 8 to the
Financial Statements). Based on the formula, the Company exceeded its borrowing
capacity by approximately $132,000 on December 31, 2001. On May 31, 2002, the
Company received a letter from Bank One in which Bank One agreed to forebear
from taking any collection activity concerning the expired line of credit until
June 17, 2002. If an extension of the line of credit is not received by June 17,
2002, the bank has the right under the line of credit agreement to demand
immediate payment of all amounts owed. In such an event, it is unlikely the
Company would have sufficient available funds to pay Bank One all amounts owed
and could be forced to transfer other assets, including inventory and accounts
receivable, to Bank One in satisfaction of the debt, which would have a material
adverse effect on the future operations, cash flow and liquidity of the Company.
Management is currently negotiating an extension of the line of credit agreement
and is hopeful that the default will be waived or cured.


                                      -17-
<PAGE>

         In its original Form 10-SB, filed on October 20, 2000, the Company
inadvertently filed its Private Placement Memorandum as an Exhibit. This may
constitute general solicitation under Rule 502(c) of Regulation D and the
Registrant may be in violation of Section 5 of the Securities Act of 1933 and be
unable to avail itself of the exemption found in Rule 506 of Regulation D as to
that offering. The Company believes it can establish pre-existing connections
with all purchasers under the Private Placement Memorandum. If proceedings based
on this inadvertent filing were commenced against the Registrant, purchasers
under the Private Placement Memorandum, possibly together with other purchasers
of the Company's securities, may make claim for rescission of their investments,
which if successful may exceed $725,000. Such claims would be subject to any
applicable defenses that the Registrant may assert, including statute of
limitations. The last sales under the Private Placement Memorandum were made in
March 2001. Therefore, the Registrant believes that the statute of limitations
for such claims under the Securities Act has expired.

Cash Requirements and Need for Additional Funds

         The Registrant anticipates a substantial need for cash to fund its
working capital requirements for the next twelve months. During the next 12
months in accordance with the Registrant's prepared expansion plan, it is the
opinion of management that approximately $3,000,000 would be required to fill
existing orders and to expand the Registrant's marketing, sales and operations
during the next twelve months.

Recent Accounting Pronouncements

         In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for
Derivative Instruments and Hedging Activities," as amended by SFAS No. 137,
"Accounting for Derivative Instruments and Hedging Activities -- Deferral of the
Effective Date of FASB No. 133," and SFAS No. 138, "Accounting for Certain
Derivative Instruments and Hedging Activities." SFAS 133 requires that all
derivative financial instruments be recorded on the balance sheet at their fair
market value. Changes in the fair market value of derivatives are recorded each
period in current earnings (loss) or comprehensive income (loss), depending on
whether a derivative is designed as part of a hedge transaction, and if so, the
type of hedge transaction. Virtually all of the Registrant's revenues and the
majority of its costs are denominated in U.S. dollars, and to date, the
Registrant has not entered into any derivative contracts. The effective date of
SFAS 133, as amended by SFAS 137 and SFAS 138, is for fiscal years beginning
after June 15, 2000.

         In December 1999, the Securities and Exchange Commission released Staff
Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements" ("SAB
101"), which provides guidance on the recognition, presentation and disclosure
of revenue in financial statements. The Registrant has complied with the
provisions of SAB 101 for all periods presented.

         In March 2000, the FASB issued Interpretation No. 44, "Accounting for
Certain Transactions Involving Stock Compensation -- an Interpretation of APB
25" ("FIN 44"). This interpretation clarifies the definition of an employee for
purposes of applying Opinion 25; the criteria for determining whether a plan
qualifies as a noncompensatory plan; the accounting consequence of various
modifications to the terms of a previously fixed stock option plan or award; and
the accounting for an exchange of stock compensation awards in business
combinations. FIN 44 is generally effective July 1, 2000. The adoption of
certain of the provisions of FIN 44 prior to December 31, 2000, did not have a
material effect on the financial statements. The Registrant does not expect that
the adoption of the remaining provisions will have a material effect on the
financial statements.

         The Registrant will adopt the provisions of Statement of Financial
Accounting Standards (SFAS) No. 142, "Goodwill and Other Intangible Assets," for
the year ended December 31, 2002. SFAS No. 142 requires that goodwill shall no
longer be amortized. Goodwill amortization for the year ended December 31, 2001
was $142,080. Goodwill shall be tested for impairment on an annual basis and
between annual tests in certain circumstances. SFAS No. 142 shall initially be
applied at the beginning of the fiscal year. Previously recognized intangible
assets deemed to have indefinite useful lives will be tested for impairment as
of the beginning of fiscal 2002 and transitional intangible impairment tests
will be completed in the first interim period. Any resulting impairment loss
shall be recognized as a change in accounting principle. An annual goodwill
impairment test will be performed in addition to the transitional goodwill
impairment test. The impairment test shall consist of a comparison of the fair
value of an intangible asset with its carrying amount. If the carrying amount of
an intangible asset exceeds its fair value, an impairment loss shall be
recognized in an amount equal to that excess. The loss recognized cannot exceed
the carrying amount of goodwill. After an impairment loss is recognized, the
adjusted carrying amount of the intangible asset shall be its new accounting
basis. Subsequent reversal of a previously recognized impairment loss is
prohibited. The Registrant does not expect this new reporting standard to have
any immediate, significant impact on operations because the quoted market price
of the Registrant's common stock on the balance sheet date and the date of this
report exceeds the stock valuation at the August 7, 2000 acquisition date.



                                      -18-
<PAGE>

Item 7. Financial Statements

POWER EFFICIENCY CORPORATION
----------------------------

DECEMBER 31, 2001 AND 2000
--------------------------


INDEX

                                                                      Page
                                                                      ----

Independent Auditors' Report...................................        20

Financial Statements:
         Balance Sheet.........................................        21
         Statements of Operations..............................        22
         Statements of Changes in Stockholders' Equity.........        23
         Statements of Cash Flows..............................        24
Notes to Financial Statements..................................     25-39



                                      -19-
<PAGE>


INDEPENDENT AUDITORS' REPORT
----------------------------


Board of Directors and Stockholders
Power Efficiency Corporation
Ann Arbor, Michigan

We have audited the accompanying balance sheet of Power Efficiency Corporation,
(a Delaware corporation) (the "Company") as of December 31, 2001, and the
related statements of operations, changes in stockholders' equity, and cash
flows for each of the years ended December 31, 2001 and 2000. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.

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

In our opinion, the financial statements present fairly, in all material
respects, the financial position of Power Efficiency Corporation at December 31,
2001 and the results of its operations and its cash flows for the years ended
December 31, 2001 and 2000 in conformity with accounting principles generally
accepted in the United States of America.

The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 3 to the
financial statements, the Company has suffered recurring losses from operations,
current liabilities exceed current assets by $650,533, the balance sheet
reflects a negative tangible net worth, and the line of credit agreement expired
January 31, 2002 and is subject to call. These matters raise substantial doubt
as to the Company's ability to continue as a going concern. Management's plans
in regard to these matters are also discussed in Note 3. The financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.

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

March 5, 2002, except for the last paragraphs
of Notes 8 and 17, as to which the dates are
May 31, 2002 and May 5, 2002, respectively.
Livingston, New Jersey



                                      -20-
<PAGE>




POWER EFFICIENCY CORPORATION
BALANCE SHEET
DECEMBER 31, 2001

<TABLE>
<CAPTION>

<S>                                                                             <C>
ASSETS
CURRENT ASSETS:
   Cash and cash equivalents                                                    $    35,245
   Accounts receivable, net of reserve of $5,000                                     11,118
   Inventory                                                                        609,545
                                                                                -----------
         Total Current Assets                                                       655,908
                                                                                -----------

PROPERTY AND EQUIPMENT, Net                                                         148,565
                                                                                -----------

OTHER ASSETS:
   Deposits                                                                          15,500
   Patent application costs, net                                                     15,987
   Goodwill, net                                                                  1,929,963
   Customer contracts, manuals and sales literature, net                            154,352
   Website and customer list, net                                                    73,095
                                                                                -----------
         Total Other Assets                                                     $ 2,188,897
                                                                                -----------

                                                                                $ 2,993,370
                                                                                ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
   Line of credit agreement                                                     $   445,386
   Accounts payable and accrued expenses                                            672,122
   Accrued salaries and payroll taxes                                                83,433
   Stockholder and officers' loans payable                                          105,500
                                                                                -----------
         Total Current Liabilities                                                1,306,441
                                                                                -----------
LONG-TERM LIABILITIES
   Stockholder note payable                                                         300,000
                                                                                -----------
         Total Liabilities                                                        1,606,441
                                                                                -----------

COMMITMENTS AND CONTINGENCIES

STOCKHOLDERS' EQUITY:
   Preferred stock, $.001 par value,
         10,000,000 shares authorized, none outstanding                                  --
   Common stock, $.001 par value, 50,000,000 shares
   Additional paid-in capital                                                     8,869,914
   Accumulated deficit                                                           (7,489,508)
                                                                                -----------
         Total Stockholders' Equity                                               1,386,929
                                                                                -----------
                                                                                $ 2,993,370
                                                                                ===========

</TABLE>

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


                                      -21-
<PAGE>



POWER EFFICIENCY CORPORATION
STATEMENTS OF OPERATIONS


                                                  Year Ended December 31,
                                               -----------------------------
                                                                    2000
                                                   2001          (Restated)
                                               -----------       -----------
REVENUES                                       $   633,563       $   179,524
                                               -----------       -----------
COSTS AND EXPENSES:
   Cost of sales                                   597,018           157,035
   Research and development                        242,243           120,429
   Selling, general and administrative           1,652,404         4,255,940
                                               -----------       -----------
         Total Costs and Expenses                2,491,665         4,533,404
                                               -----------       -----------

LOSS BEFORE PROVISION FOR INCOME TAXES          (1,858,102)       (4,353,880)

PROVISION FOR INCOME TAXES                          (5,700)             (200)
                                               -----------       -----------

NET LOSS                                       $(1,863,802)      $(4,354,080)
                                               ===========       ===========

BASIC LOSS PER COMMON SHARE                    $     (0.29)      $     (0.86)
                                               ===========       ===========

WEIGHTED AVERAGE COMMON SHARES OUTSTANDING       6,409,000         5,034,000
                                               ===========       ===========


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



                                       -22-
<PAGE>



POWER EFFICIENCY CORPORATION
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 2002 AND 2000

<TABLE>
<CAPTION>


                                                 Common Stock              Additional
                                         --------------------------          Paid-in         Accumulated       Stockholders'
                                           Shares            Amount          Capital           Deficit            Equity
                                         -----------------------------------------------------------------------------------
<S>                                      <C>               <C>             <C>               <C>                <C>
BALANCE,
January 1, 2000                          4,383,600         $   4,384       $ 1,123,718       $(1,271,626)       $  (143,524)

Common stock sold at
various times during the
year, net of costs                         500,000               500           434,559                --            435,059

Common stock issued for
services rendered                           47,525                47            73,765                --             73,812

Repricing and issuance
of stock options                                --                --         3,649,776                --          3,649,776

Common stock issued in
conjunction with acquisition
of assets of Performance
Control, LLC                             1,112,245             1,112         2,668,276                --          2,669,388


Net loss, 2000                                  --                --                --        (4,354,080)        (4,354,080)
                                         -----------------------------------------------------------------------------------

BALANCE,
December 31, 2000
(restated)                               6,043,370             6,043         7,950,094        (5,625,706)         2,330,431

Common Stock sold at
various times during the
year, net of costs                         343,750               344           609,656                --            610,000

Issuance of stock options                       --                --            47,300                --             47,300

Shares issued in conjunction
with extinguishment of debt
for common stock                           125,000               125           229,875                --            230,000

Common stock issued for
services rendered                           10,000                10            29,990                --             30,000

Exercise of warrants for
common stock                                 1,000                 1             2,999                --              3,000

Net loss, 2001                                  --                --                --        (1,863,802)        (1,863,802)
                                         -----------------------------------------------------------------------------------


BALANCE,
December 31, 2001                        6,523,120         $   6,523       $ 8,869,914       $ (7,489,508)      $ 1,386,929
                                         ===================================================================================

</TABLE>

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


                                      -23-
<PAGE>


POWER EFFICIENCY CORPORATION
STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>

                                                                       Year Ended December 31, 2000
                                                                     --------------------------------
<S>                                                                  <C>                  <C>
CASH FLOWS PROVIDED BY (USED FOR):
OPERATING ACTIVITIES:
--------------------
Net loss                                                             $(1,863,802)         $(4,354,080)
Adjustments to reconcile net loss to net cash
used for operating activities:
Depreciation and amortization                                            281,587              138,154
Write-off of deferred financing costs                                     38,502                   --
Debt restructuring                                                       130,000                   --
Additional paid-in capital related to repricing
and issuance of stock options                                             47,300            3,649,776
Changes in certain assets and liabilities:
(Increase) decrease in:
Accounts receivable                                                      103,048              (43,916)
Inventory                                                                (83,091)              28,679
Prepaid expenses                                                             443                   --
Deposits                                                                  (9,500)               4,000
Increase (decrease) in:
Accounts payable and accrued expenses                                    216,426             (106,727)
Accrued salaries and payroll taxes                                        31,822               14,930
                                                                     --------------------------------
Net Cash Used for Operating Activities                                (1,107,265)            (669,184)
                                                                     --------------------------------

INVESTING ACTIVITIES:
---------------------
Purchase of fixed assets                                                 (51,981)                  --
                                                                     --------------------------------

FINANCING ACTIVITIES:
---------------------
Proceeds from issuance of equity securities, net of costs                613,000              435,059
Costs associated with obtaining credit agreement                              --              (34,920)
Advances on line of credit agreement                                     167,499              277,887
Loans from stockholders and officers                                     405,500                   --
                                                                     --------------------------------
Net Cash Provided by Financing Activities                              1,185,999              678,026
                                                                     --------------------------------

INCREASE IN CASH AND CASH EQUIVALENTS                                     26,753                8,842

CASH AND CASH EQUIVALENTS:

Beginning of year                                                          8,492                 (350)
                                                                     --------------------------------

End of year                                                          $    35,245          $     8,492
                                                                     ================================
</TABLE>

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



                                      -24-
<PAGE>


POWER EFFICIENCY CORPORATION
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2001 AND 2000

NOTE 1 -- NATURE OF BUSINESS:

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

The Company's primary customers are original equipment manufacturers (OEM's) and
commercial accounts located throughout the United States of America, Mexico,
China, and Canada.

NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

Use of Estimates:

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

Cash Equivalents:

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

Inventories:

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

Research and Development:

Research and development expenditures are charged to expense as incurred.

Property, Equipment and Depreciation:

Property and equipment are stated at cost. Maintenance and repairs are expensed
as incurred, while betterments are capitalized. Depreciation is computed using
the straight-line method over the estimated useful lives of the assets, which
range from 5 to 7 years.

Website, Customer List and Amortization:

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

Shipping and Handling Costs:

The Company bills customers for freight. Actual costs for shipping and handling
are included as components of costs of sales.

Patent Application Costs:

Patent application costs consist of costs incurred in applying for U.S. patents
based upon technology developed by the Company. These costs are capitalized
until the patent is awarded. At that time, the asset will be amortized over the
estimated useful life of the patent. If no patent is issued, these costs will be
expensed in the period when it is determined that no patent will be issued.


                                      -25-
<PAGE>

POWER EFFICIENCY CORPORATION
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2001 AND 2000


Revenue Recognition:

Revenue from product sales to OEM's and distributors is recognized at the time
of shipment to the OEM's and distributors when all services are complete.
Returns and other sales adjustments (discounts and shipping credits) are
provided for in the same period the related sales are recorded.

Loss Per Common Share:

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

Accounting for Stock Based Compensation:

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

The Company adopted the disclosure-only provisions of Statement of Financial
Accounting Standards (SFAS) No. 123, "Accounting for Stock-Based Compensation,"
for stock options issued. Under SFAS No. 123, compensation cost is measured at
the grant date based on the value of award and is recognized over the service
(or vesting period.

Product Warranties:

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

Goodwill and Amortization:

Goodwill (costs in excess of net assets of an acquired business) is amortized on
the straight-line method over 15 years. Goodwill is reviewed for recoverability
based on the undiscounted cash flows of the business acquired over the remaining
amortization period. Should such review indicate that goodwill is not
recoverable, the carrying value of the goodwill would be reduced by the
estimated shortfall of the cash flows.

The Company will adopt the provisions of Statement of Financial Accounting
Standards (SFAS) No. 142, "Goodwill and Other Intangible Assets," for the year
ended December 31, 2002. SFAS No. 142 requires that goodwill shall no longer be
amortized. Goodwill amortization for the year ended December 31, 2001 was
$142,080. Goodwill shall be tested for impairment on an annual basis and between
annual tests in certain circumstances. SFAS No. 142 shall initially be applied
at the beginning of the fiscal year.

Previously recognized intangible assets deemed to have indefinite useful lives
will be tested for impairment as of the beginning of fiscal 2002 and
transitional intangible impairment tests will be completed in the first interim
period. Any resulting impairment loss shall be recognized as a change in
accounting principle. An annual goodwill impairment test will be performed in
addition to the transitional goodwill impairment test. The impairment test shall
consist of a comparison of the fair value of an intangible asset with its
carrying amount. If the carrying amount of an intangible asset exceeds its fair
value, an impairment loss shall be recognized in an amount equal to that excess.
The loss recognized cannot exceed the carrying amount of goodwill. After an
impairment loss is recognized, the adjusted carrying amount of the intangible
asset shall be its new accounting basis. Subsequent reversal of a previously
recognized impairment loss is prohibited. The Company does not expect this new
reporting standard to have any immediate, significant impact on operations
because the quoted market price of the Company's common stock on the balance
sheet date and the date of this report exceeds the stock valuation at the August
7, 2000 acquisition date.


                                      -26-
<PAGE>

POWER EFFICIENCY CORPORATION
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2001 AND 2000

Customer Contracts, Manuals and Sales Literature and Amortization:

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

Advertising:

Advertising costs are expensed as incurred.

NOTE 3 -- GOING CONCERN:

The accompanying financial statements have been prepared assuming the Company is
a going concern, which assumption contemplates the realization of assets and
satisfaction of liabilities in the normal course of business. The Company has
suffered recurring losses from operations, current liabilities exceed current
assets by $650,533, tangible net worth is approximately $(786,000), and the line
of credit agreement expired January 31, 2002, and is subject to call. These
factors raise substantial doubt about the Company's ability to continue as a
going concern. The financial statements do not include any adjustments relating
to the recoverability and classification of recorded asset amounts or the amount
of liabilities that might be necessary should the Company be unable to continue
in existence. Continuation of the Company as a going concern is dependent upon
achieving profitable operations. Management's plans to achieve profitability
include developing new products, obtaining new customers and increasing sales to
existing customers. Management also plans to raise additional capital through
equity issuance or other types of financing.

NOTE 4 -- ACQUISITION OF CERTAIN ASSETS AND LIABILITIES OF PERFORMANCE CONTROL,
LLC:

On August 7, 2000, the Company purchased certain assets and assumed certain
liabilities of Performance Control, LLC ("Performance Control"), its then major
customer, for an aggregate of 1,112,245 newly issued shares of the Company's
common stock. This acquisition was accounted for as a purchase in accordance
with APB16. The statement of operations includes Performance Control's results
of operations since August 7, 2000, the date of purchase. The newly issued stock
was valued at $2.40 per share. The purchase price of $2,669,388 was allocated as
follows:



                                      -27-
<PAGE>

POWER EFFICIENCY CORPORATION
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2001 AND 2000


               Accounts receivable                $      9,120
               Inventory                               488,725
               Prepaid expenses                            443
               Security deposit                          6,000
               Fixed assets                            118,875
               Manuals/sales literature                 68,137
               Contracts/customer lists                247,237
               Website                                  38,495
               Goodwill                              2,131,244
               Accounts payable                       (314,707)
               Notes payable                          (124,181)
                                                  -------------
                                                  $  2,669,388
                                                  =============

In accordance with APB16, the Company identified and assigned a value to
intangible assets acquired which included (a) manuals/sales literature, (b)
contracts/customer lists and (c) website. Such intangible assets were separately
identified and assigned fair values based on management's judgement and present
value computations and are not included in goodwill. The contracts and customer
lists acquired from Performance Control included different contacts than the
Company maintained. The Company acquired six significant cancelable contracts
with total value of approximately $13,000,000 over the next three years and a
customer list of approximately one hundred possible customers. The Company is
not currently able to determine if the acquired cancelable contracts or
potential sales volume will ever be realized.

Performance Control's website was capitalized since it is a viable working site
and continues to function. Such site continues to generate sales, leads,
contacts and inquiries about the Company's products. The Company's primary
website is www.powerefficiencycorp.com with an automatic re-routing from
www.performancecontrol.com.

NOTE 5 -- PROPERTY AND EQUIPMENT:

At December 31, 2001, property and equipment is comprised as follows:

                                                       2001
                                                   ------------
        Machinery and equipment                    $    146,192
        Office furniture and equipment                   81,411
                                                   ------------
                                                        227,603
        Less: accumulated depreciation                   79,038
                                                   ------------
        Property and Equipment, Net                $    148,565
                                                   ============


Depreciation for the years ended December 31, 2001 and 2000 amounted to $35,171
and $20,351, respectively.

NOTE 6 -- CONCENTRATIONS OF RISKS:

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


                                      -28-
<PAGE>

POWER EFFICIENCY CORPORATION
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2001 AND 2000

The Company maintains cash balances at several financial institutions. Amounts
at each of these institutions are insured by the Federal Deposit Insurance
Corporation up to $100,000. The Company may from time to time maintain balances
in excess of the insured limits.

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

Four customers accounted for approximately 84% of 2001 sales and 49% of accounts
receivable at December 31, 2001. Two customers accounted for approximately 72%
of 2000 sales and 83% of accounts receivable at December 31, 2000.

International sales as a percentage of total revenues for the years ended
December 31, 2001 and 2000 are as follows:

      Country              2001              2000
---------------------------------------------------------
Mexico                         9%                -
China                          3%              12%
Canada                        15%              15%

NOTE 7 -- INVENTORIES:

Inventories consist of the following:

                                             December 31,
                                                2001
                                         -----------------
             Raw materials               $        269,880
             Finished goods                       339,665
                                         -----------------
                                         $        609,545
                                         =================

NOTE 8 -- LINE OF CREDIT AGREEMENT:

On December 6, 2000, the Company entered into a line of credit agreement with a
bank in the sum of $750,000. The aggregate principal amount outstanding at any
one time shall not exceed the lesser of the bank's "borrowing formula" or
$750,000. The bank's borrowing formula means: (a) 80% of the Company's trade
accounts receivable in which the bank has a perfected, first priority security
interest, excluding amounts more than 90 days past due from the date of invoice,
and accounts otherwise unacceptable to the bank, plus (b) inventory of the
Company in which the bank has a perfected first priority security interest,
revalued at the lower of cost or market, but not exceeding $500,000, reducing to
$450,000 at February 28, 2001, $400,000 at March 31, 2001, and $350,000 at April
30, 2001, in the aggregate, as follows: (1) 50% of raw material inventory, and
(2) 50% of finished goods inventory.

The line of credit agreement bears interest at 2.5% per annum above the prime
rate (7.25% at December 31, 2001). The line of credit expired January 31, 2002,
and the Company is working toward negotiating, extending or modifying the
agreement. The line of credit agreement is collateralized by all inventory,
accounts receivable, equipment and instruments. The bank has a general lien on
all corporate assets.

In addition, the line of credit agreement contains restrictive covenants. These
include, among other things, certain requirements for financial reporting, and
restrictions on dividends (no declaration or payment of dividends), sales of
shares (unable to issue, sell or otherwise dispose of capital stock),
guarantees, advances and investments.


                                      -29-
<PAGE>

POWER EFFICIENCY CORPORATION
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2001 AND 2000


The Company's outstanding borrowings of $445,386 at December 31, 2001, exceeded
its total availability under the line of credit agreement by approximately
$132,000. No waiver has been received from the bank authorizing such excess
borrowings or waiving the default.

At December 31, 2001, the Company wrote-off approximately $38,500 of deferred
financing costs. Such costs were expensed since renewal of the line of credit is
not assured.

On May 31, 2002, the Company received a letter from the bank, whereby the bank
advised the Company that it will forbear from taking any collection activity
concerning the expired line of credit agreement until June 17, 2002. The bank
did not waive any of the existing defaults. Upon the occurrence of a further
default, or an action that threatens the bank's collateral, the bank reserved
its right, in its sole discretion, to immediately demand payment of all amounts
owed and take those actions it deems appropriate to protect the bank's
interests.

NOTE 9 -- INCOME TAXES:

As of December 31, 2001, the Company has available, on a federal tax basis, net
operating loss carryforwards of approximately $3,800,000 which expire at varying
amounts through 2021. The net operating loss carryforwards result in deferred
tax assets of approximately $1,300,000 at December 31, 2001; however, a
valuation reserve has been recorded for the full amount due to the uncertainty
of realization of the deferred tax assets.

The provision for income taxes represents state franchise taxes.

NOTE 10 -- WARRANTS AND STOCK OPTION PLAN:

Warrants:

In connection with a limited public offering of its common stock pursuant to a
Rule 504 offering memorandum dated July 15, 1996, the investment banker
received, for nominal consideration, five-year warrants to purchase 36,720
shares of common stock. These warrants are exercisable at any time during the
five-year period commencing October 17, 1997, for $5.50 per share of common
stock. In addition to permitting the payment of the exercise price in cash, the
holder of the warrant may surrender the warrant to the Company for cancellation
in lieu of cash for the exercise price. Under this alternative, the Company
would issue a lesser number of shares of common stock (determined in accordance
with a formula), retire the warrants, and receive no cash. The exercise price
was amended to $2.00 per share on September 7, 2000. The Company has extended
the date of expiration of the warrants to October 15, 2002.

In connection with the May 16, 2000, Private Placement Memorandum, the Company
issued 725,000 placement warrants pursuant to a Rule 506 Private Placement. The
placement warrants are five-year warrants to purchase additional shares of the
Company's common stock at $3.00 per warrant share during the first year; $4.00
per warrant share the second year; and $5.00 per warrant share during the third
year. During 2001, 1,000 placement warrants were exercised at $3.00 per warrant
share.


                                      -30-
<PAGE>

POWER EFFICIENCY CORPORATION
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2001 AND 2000


In connection with the Performance Control acquisition, a financial consultant
received five-year warrants to purchase 50,000 shares of common stock. These
warrants are exercisable at any time during the five-year period commencing
August 1, 2000, for $2.00 per share of common stock.

Warrant activity during the years ended December 31, 2001 and 2000 follows:

<TABLE>
<CAPTION>


                                                                                 Average
                                                                                 Exercise
                                                                 Warrants         Price
                                                                 -------------------------
<S>                                                              <C>             <C>
           Outstanding at January 1, 2000                          36,720        $  2.00
           Issued during 2000                                     550,000           3.00
                                                                 -------------------------
           Warrants outstanding at December 31, 2000              586,720           2.94
           Issued during 2001                                     225,000           3.00
           Exercised during 2001                                   (1,000)          3.00
                                                                 -------------------------

           Warrants outstanding at December 31, 2001              810,720        $  2.96
                                                                 =========================

</TABLE>


Stock Option Plan:

In 1994, the Company adopted a Stock Option Plan (the "1994 Plan"). The 1994
Plan provides for the granting of options to purchase up to 500,000 shares of
common stock at an exercise price equal to the fair market value of the common
stock (110% of fair market value for a holder in excess of 10%) on the date of
the grant. These options were repriced by the Board of Directors on September 7,
2000, to $2.00 per share. No options have been exercised to date. Because the
exercise price is less than the average market price per share, the Company
recognized $973,276 as additional compensation expense in 2000. Options for
38,180 shares issued under the 1994 Plan expired on October 31, 2001. At
December 31, 2001, there are 443,640 options outstanding under the 1994 Plan.

In 2000, the Company adopted the 2000 Stock Option and Restricted Stock Plan
(the "2000 Plan"). Under the 2000 Plan, options to purchase 1,325,000 shares of
common stock at an exercise price of $2.00 were granted. No options have been
exercised to date. Because the exercise price is less than the average market
price per share, the Company recognized $2,676,500 as additional compensation
expense in 2000.

Plan activity during the years ended December 31, 2001 and 2000 follows:


                                      -31-
<PAGE>

POWER EFFICIENCY CORPORATION
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2001 AND 2000

<TABLE>
<CAPTION>

                                                                                        Exercise
                                                                     Options             Price
                                                                   -------------------------------
<S>                                                                <C>                  <C>
           Outstanding at January 1, 2000                               500,000         $    2.00
           Granted during 2000                                        1,325,000              2.00
           Exercised during 2000                                             --               --
           Expired during 2000                                          (18,180)             2.00

                                                                   -------------------------------
           Options outstanding and exercisable
           at December 31, 2000                                       1,806,820              2.00
           Granted during 2001                                          190,000              2.00
           Exercised during 2001                                             --               --
           Expired during 2001                                          (38,180)             2.00
                                                                   ------------------------------
           Options outstanding and exercisable at
           December 31, 2001                                          1,958,640         $    2.00
                                                                   ===============================

</TABLE>

Weighted average remaining contractual life at December 31, 2001, for all
options is 7.6 years.

The Board of Directors authorized the issuance of 1,325,000 options at an
exercise price of $2.00 per share. The fair value of each option grant was
estimated on the date of grant using the Black-Scholes option-pricing model with
the following weighted-average assumptions used for grants: expected volatility
of 51%; risk-free interest rate of 6.0%; and expected lives of 9.8 years.

Had compensation cost for the Company's stock option plan been recognized based
on the fair value at the grant date for awards consistent with the provisions of
SFAS No. 123, the Company's net loss and loss per share for the years ended
December 31, 2001 and 2000, would have been as follows:

                                                       2001              2000
                                                       ----              ----
           Net loss -- as reported                $ (1,863,802)    $ (4,354,080)
           Net loss -- pro forma                  $ (2,287,141)    $ (5,255,080)
           Loss per common share - as reported    $      (0.29)    $      (0.86)
           Loss per common share - pro forma      $      (0.36)    $      (1.04)

On March 23, 2001, the Company granted 180,000 stock options at an exercise
price of $2.00. Because the weighted average price per share was $1.83, the
Company is not required to recognize compensation expense.

On May 23, 2001, the Company granted 10,000 stock options at an exercise price
of $2.00. Because the weighted average price per share was $6.73, the Company
recognized additional compensation expense of $47,300. This additional
compensation expense is included in selling, general and administrative
expenses.

On May 23, 2001, the Company's board of directors ratified an agreement with a
strategic advisor, owned by a director of the Company, to provide strategic
direction and operational strategies to the Company. The initial term of this
agreement is one year (January 1 to December 31, 2001) and it shall
automatically renew for successive thirty-six month periods. The agreement may
be terminated by either party giving notice of termination at least 180 days
prior to its conclusion. The strategic advisor receives $500 per month, plus
expenses, until the Company raises $1.0 million or more in investments at which
time the monthly compensation shall increase to $4,500 per month, plus expenses.
The strategic advisor was paid approximately $5,700 in 2001. The agreement also
provides for the strategic advisor to receive non-qualified stock options to
purchase 50,000 shares of common stock at an exercise price of $2.00 per share
each year. These non-qualified stock options are exercisable at any time during
each year the agreement is in effect. The non-qualified stock options were
issued to the strategic advisor in 2002. No options were issued to the strategic
advisor under the agreement in 2001. Therefore, the tables in this note do not
reflect any options issued to the strategic advisor.


                                      -32-
<PAGE>

POWER EFFICIENCY CORPORATION
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2001 AND 2000


NOTE 11 -- COMMITMENTS AND CONTINGENCIES:

The Company leases office, warehouse and research facilities under operating
leases. The Ann Arbor, Michigan lease expired on June 30, 2001. This lease
continues on a month to month basis. The Company and the landlord are informally
discussing the possibility of relocating to a larger facility. The New Hyde
Park, New York lease expires on June 30, 2004.

In July 2001, the Company opened a research, development and marketing facility
in New York. Initial costs incurred in opening the facility were approximately
$19,300, and were attributable to furniture, telephones, electrical build-outs
and moving costs. The New Hyde Park, New York lease expires on June 30, 2004.

Minimum future rentals which consist of the New Hyde Park facility lease are as
follows:

              Year
              ----
              2002         $ 55,410
              2003           56.244
              2004           28,332
                           ---------
                           $139,986
                           =========

Rent expense, including base rent and additional charges, for the year ended
December 31, 2001 and 2000 was $94,431 and $35,159, respectively.

Power Efficiency is an exclusive licensee pursuant to a patent license agreement
of certain power factor controller technology owned by the United States, as
represented by the National Aeronautics and Space Administration (NASA). This
license agreement covers the United States of America and its territories and
possessions on an exclusive basis and foreign sales on a non-exclusive basis.
Such license agreement does not require the Company to pay royalties to NASA in
connection with the Company's sale of products employing technology utilizing
the licensed patents. The agreement terminates upon the expiration of all of the
licensed patents, currently December 2002. The Company filed and received its
own patent (No. 5.821.726) that expires in 2017 that management believes will
protect the Company's intellectual property position when the last of the NASA
patents expire in December 2002.

The Company is involved with certain claims and counterclaims related to
litigation for breach of contract arising out of the manufacture and assembly of
certain electronic component parts. The Company has accrued approximately
$21,300 at December 31, 2001, related to these claims. In November 2001, the
parties agreed to settlement of all of their respective claims. In exchange for
full releases, the essential terms of the settlement are: (a) the Company agreed
to pay $5,000 plus 7,500 newly issued shares of common stock to the
manufacturer; and (b) the manufacturer agreed to return to the Company items
provided in order to fulfill the Company's contracts. The settlement agreement
has not been executed as of the report date. In the opinion of management, after
consultation with legal counsel, the outcome of such matter is not expected to
have a material adverse effect on the Company's financial position or results of
operations.

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


                                      -33-
<PAGE>

POWER EFFICIENCY CORPORATION
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2001 AND 2000


Power Efficiency currently utilizes three subcontractors to manufacture the
Company's controller boards. These subcontractors provide facilities, equipment,
supervision and labor required to assemble; wire; check; test; package; and ship
the controller boards. These subcontractors are hired on an as needed basis to
produce a minimum number of units via a purchase order. Power Efficiency does
not incur any liabilities to subcontractors until purchase orders are issued. No
purchase orders were issued or outstanding to subcontractors at December 31,
2001.

In its original Form 10-SB, filed on October 20, 2000, the Company inadvertently
filed its Private Placement Memorandum as an Exhibit. This may constitute
general solicitation under Rule 502(c) of Regulation D and the Registrant may be
in violation of Section 5 of the Securities Act of 1933 and be unable to avail
itself of the exemption found in Rule 506 of Regulation D as to that offering.
The Company believes it can establish pre-existing connections with all
purchasers under the Private Placement Memorandum. If proceedings based on this
inadvertent filing were commenced against the Company, purchasers under the
Private Placement Memorandum, possibly together with other purchasers of the
Company's securities, may make claim for rescission of their investments, which
if successful may be as low as zero or exceed $725,000. Such claims would be
subject to any applicable defenses that the Registrant may assert, including
statute of limitations. The last sales under the Private Placement Memorandum
were made in March, 2001. Therefore, the Company believes that the statute of
limitations for such claims under the Securities Act has expired.


                                      -34-
<PAGE>

POWER EFFICIENCY CORPORATION
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2001 AND 2000


NOTE 12 -- RELATED PARTY TRANSACTIONS:

During the years ended December 31, 2001 and 2000, salaries and/or consulting
fees of $306,000 and $134,732 were paid to officers/directors/stockholders of
the Company, respectively. These amounts are included in research and
development and in selling, general and administrative expenses for the years
ended December 31, 2001 and 2000.

On May 23, 2001, the Company's board of directors ratified an agreement with a
strategic advisor, owned by a director of the Company, to provide strategic
direction and operational strategies to the Company. The initial term of this
agreement is one year (January 1 to December 31, 2001) and it shall
automatically renew for successive thirty-six month periods. The agreement may
be terminated by either party giving notice of termination at least 180 days
prior to its conclusion. The strategic advisor receives $500 per month, plus
expenses, until the Company raises $1.0 million or more in investments at which
time the monthly compensation shall increase to $4,500 per month, plus expenses.
The strategic advisor was paid approximately $5,700 in 2001. The agreement also
provides for the strategic advisor to receive non-qualified stock options to
purchase 50,000 shares of common stock at an exercise price of $2.00 per share
each year. These non-qualified stock options are exercisable at any time during
each year the agreement is in effect. The exercise price of $2.00 per share was
negotiated by the parties and was primarily based upon the fact that the Company
had previously re-priced outstanding options held by other employees on
September 7, 2000, and issued new options in 2000 with exercise prices of $2.00
per share, as discussed in Note 10.

During 2001 and 2000, the Company incurred legal fees of $102,215 and $52,501 to
a law firm. A partner in that firm and the firm are currently stockholders of
the Company.

Included in accounts payable and accrued expenses at December 31, 2001 is
approximately $71,100 due to certain employees for back pay and reimbursable
expenses. Also included in accounts payable and accrued expenses at December 31,
2001, is approximately $113,400 due to officers for back pay, interest and
expense reimbursements.

NOTE 13 -- INSURANCE COVERAGE:

The Company's general liability and product liability insurance coverage lapsed
in mid-August 1999 for non-payment of premiums. Subsequent to the Company's
purchase of certain assets and liabilities of Performance Control in August
2000, the Company again obtained general liability and product liability
insurance coverages. The Company believes that there is no material risk of loss
to the Company from possible product liability claims against the Company during
the lapse in coverage. No product liability claims have been filed against the
Company to date.


                                      -35-
<PAGE>

POWER EFFICIENCY CORPORATION
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2001 AND 2000


NOTE 14 -- SUPPLEMENTAL DISCLOSURE OF CASH FLOWS INFORMATION:

Cash paid during the year ended December 31, for:

                                           2001          2000
                                      -----------------------------
                Income Taxes          $         --    $        328
                                      =============================
                Interest              $     34,843    $     18,905
                                      =============================

NON-CASH INVESTING AND FINANCING ACTIVITIES:

2001
----

Common stock issued in connection with
extinguishment of stockholder note payable                      $  230,000
                                                                ==========

Common stock issued for services rendered                       $   30,000
                                                                ==========

2000
----

Common stock issued in connection with acquisition
of certain assets and liabilities of Performance Control
(Note 4)                                                        $2,669,388
                                                                ==========
Common stock issued for settlement of outstanding
professional fees                                               $   73,812
                                                                ==========

NOTE 15 -- DEBT RESTRUCTURING:

The Board of Directors, on September 7, 2000, authorized renegotiating a
$100,000 loan from a stockholder until the earlier of (i) January 31, 2001; or
(ii) the closing date of the Company's receipt of $625,000 in gross proceeds
from an equity financing. As additional consideration for the extension of the
due date, the Company granted an option to purchase an aggregate 75,000
authorized but unissued shares of the Company's common stock at the set exercise
price of $2.00 per share.

On March 15, 2001, the $100,000 loan, plus accrued interest thereon, and the
option to purchase 75,000 shares of common stock were renegotiated and converted
into 125,000 shares of Power Efficiency's common stock.

The Company accounted for this transaction as a capital transaction between
related parties during the first quarter of 2001. The difference of $130,000
between the fair value of the equity interest and the carrying amount of the
payable was recognized as a loss by the Company and is included in selling,
general and administrative expenses.


                                      -36-
<PAGE>

POWER EFFICIENCY CORPORATION
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2001 AND 2000


NOTE 16 -- EMPLOYMENT AGREEMENTS:

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

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

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

NOTE 17 -- PRIVATE STOCK OFFERING:

The May 16, 2000 Private Placement involved the sale of up to 40 Units. The
closing of the Company's purchase of certain assets and assumption of certain
liabilities of Performance Control was conditioned upon the sale of a minimum of
12 Units ($300,000). Each Unit was comprised of 25,000 shares of common stock at
$1.00 per share and a warrant to purchase an additional 25,000 shares of common
stock. If reached, the maximum offering would have involved a total of 2 million
shares of common stock: 1 million shares of stock issued with the 40 Units and 1
million shares of stock that were available under the 40 warrants. The Units
were sold at a price of $25,000 per Unit. The Company sold a total of 29 Units
with total proceeds of $725,000. The Company sold 20 Units in 2000 and nine
Units from the beginning of 2001 through March 7, 2001, the date the Company's
board of directors agreed to terminate the Private Placement. The proceeds from
the sale of these Units were deposited to the general operating account of the
Company to be utilized for working capital purposes.

In its original Form 10-SB, filed on October 20, 2000, the Company inadvertently
filed its Private Placement Memorandum as an Exhibit. This may constitute
general solicitation under Rule 502(c) of Regulation D and the Company may be in
violation of Section 5 of the Securities Act of 1933 and be unable to avail
itself of the exemption found in Rule 506 of Regulation D as to that offering.
The Company believes it can establish pre-existing connections with all
qwpurchasers under the Private Placement Memorandum. If proceedings based on
this inadvertent filing were commenced against the Company, purchasers under the
Private Placement Memorandum, possibly together with other purchasers of the
Company's securities, may make claim for rescission of their investments, which
if successful may exceed $725,000. Such claims would be subject to any
applicable defenses that the Registrant may assert, including statute of
limitations. The last sale under the Private Placement Memorandum was made on
March 1, 2001 and the shares were delivered to the investor on May 4, 2001. The
Company, in consultation with legal counsel, believes that, although rescission
claims are possible, liability is remote. Therefore, the Company believes that
the statute of limitations for such claims under the Securities Act has expired.


                                      -37-
<PAGE>

POWER EFFICIENCY CORPORATION
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2001 AND 2000


NOTE 18 -- STOCKHOLDER AND OFFICERS' LOANS:

On May 24, 2001, the Company borrowed $300,000 from a stockholder. The loan is
due and payable in a single payment of principal and interest on June 1, 2003.
The loan bears interest at 10% per annum payable on the due date. The note is
subordinated to the bank as required under the terms of the Company's line of
credit agreement.

On August 30, 2001, and September 12, 2001, this same stockholder advanced the
Company an additional $50,000. These promissory notes are due and payable in a
single payment of principal and interest on demand. The notes bear interest at
10% per annum payable on demand.

At various times during the fourth quarter of 2001, the two principal officers
advanced the Company funds with a total of $31,500 and $24,000, respectively.
These advances are evidenced by promissory notes, which are due and payable in a
single payment, principal and interest on demand. The notes bear interest at 10%
per annum payable on demand.

Another stockholder advanced the Company $10,245 during February 2002. The two
principal officers also advanced the Company $4,000 and $14,396, respectively,
at various times during January and February 2002.

NOTE 19 -- STOCKHOLDERS' EQUITY:

On May 14, 2001, the Company sold 118,750 shares of common stock to an
accredited investor, as that term is defined in Rule 501(a) of Regulation D
under the Securities Act of 1933. The first 25,000 shares were sold for $100,000
and the remaining 93,750 shares were sold for $300,000. The shares were sold in
reliance on Rule 506 of Regulation D and Section 4(2) of the Securities Act of
1933.

On June 19, 2001, the Company issued 10,000 shares of common stock for payment
of services. The total fees that were set aside in exchange for the stock were
equal to $30,000. The shares were issued in reliance on Rule 506 of Regulation D
and Section 4(2) of the Securities Act of 1933.

During 2000, the Company agreed to issue 17,525 and 30,000 shares of common
stock for legal and consulting services rendered and such shares were issued in
2001. The total services that were provided totaled $43,812 and $23,000,
respectively. The shares were issued in reliance on Rule 506 of Regulation D and
Section 4(2) of the Securities Act of 1933.

The stockholders of the Company on November 26, 2001 approved an amendment to
the Certificate of Incorporation to increase the Company's capitalization to
50,000,000 shares of common stock, $.001 par value and 10,000,000 shares of
preferred stock, $.001 par value.

The Company is presently in the process of having the Certificate of
Incorporation amended. Such authorized increased capitalization amounts have
been shown on the balance sheet.


                                      -38-
<PAGE>

POWER EFFICIENCY CORPORATION
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2001 AND 2000


NOTE 20 -- CORRECTIONS TO PREVIOUSLY ISSUED FINANCIAL STATEMENTS:

Certain corrections were made to previously issued financial statements for
2000. Such corrections related primarily to the valuation of assets acquired
from Performance Control, valuation of the repriced options and the value of the
options issued during the year.

The effect of such corrections for the year ended December 31, 2000 were as
follows:



                        As Previously
                           Reported          As Restated
                     -----------------------------------------
Net Loss                  $(661,050)        $(4,354,080)

Basic Loss Per            $    (.13)        $      (.86)
Common Share


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

         Not applicable.


                                      -39-
<PAGE>



                                    PART III
                                    --------

Item 9.  Director, Executive Officers, Promoters and Control Persons;
         Compliance with Section 16(a) of the Exchange Act

         See the information under the caption "Section 16(a) Beneficial
Ownership Reporting Compliance" contained in the Proxy Statement for the Annual
Meeting of Stockholders of the Company to be held on November 26, 2001, which
information is incorporated herein by reference.

Item 10. Executive Compensation

         See the information under the caption "Compensation of Executive
Officers and Directors" contained in the Proxy Statement for the Annual Meeting
of Stockholders of the Company to be held on November 26, 2001, which
information is incorporated herein by reference.

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

         See the information under the captions "Voting Securities" and
"Directors and Executive Officers" contained in the Proxy Statement for the
Annual Meeting of Stockholders of the Company to be held on November 26, 2001,
which information is incorporated herein by reference

Item 12. Certain Relationships and Related Transactions

              See the information under the caption "Certain Relationships and
Related Transactions" contained in the Proxy Statement for the Annual Meeting of
Stockholders of the Company to be held on November 26, 2001, which information
is incorporated herein by reference.

Item 13. Exhibits and Reports on Form 8-K

(a)      Exhibits

The following exhibits are filed as part of this report:

<TABLE>
<CAPTION>

Description of Document                                                                                 Location
-----------------------                                                                                 --------
<S>       <C>                                                                                           <C>
2.1       Asset Purchase Agreement by and between the Registrant and Performance Control, L.L.C.
          dated August 7, 2000.                                                                         **
3.1       Certificate of Incorporation.                                                                 **
3.2       By-Laws.                                                                                      **
4.1       Certificate of Incorporation. See Exhibit 3.1 above.                                          **
4.2       By-Laws. See Exhibit 3.2 above.                                                               **
10.1      Asset based lending agreement with Bank One dated December 6, 2000.                           ***
10.2      August 7, 2000 Stockholders' Agreement.                                                       **
10.3      Lease Agreement for Registrant's Ann Arbor, Michigan facility dated February 16, 1996.        **
10.4      Purchase Agreement between the Registrant and Millar Elevator Service Company dated
          August 17, 2000.                                                                              ***
10.5      Purchase Agreement between the Registrant and Montgomery Kone, Inc.
          dated December 1, 1998.                                                                       ***
10.6      Certificate of Liability Insurance.                                                           **
10.7      United States Patent #5,821,726.                                                              **
10.8      Purchase Agreement between the Registrant and Defense Supply Center Richmond dated
          January 12, 2000.                                                                             **

</TABLE>


                                      -40-
<PAGE>

<TABLE>

<S>       <C>                                                                                           <C>
10.9      1994 Stock Option Plan.                                                                       **
10.10     Patent License Agreement (DN-858) with NASA.                                                  ****
10.11     Patent License Agreement (DE-256) with NASA.                                                  ****
10.12     Settlement and Release Agreement with NASA.                                                   ****
10.13     Modification No. 1 to Patent License Agreement (DE-256) with NASA.                            ****
10.14     Purchase Order from Otis Elevator Co.                                                         ****
10.15     Letter Agreement with Lee W. Greenberg d/b/a ARI Group.                                       ****
10.16     Product Warranty.                                                                             ****
10.17     Test Report from Medsker Electric, Inc.                                                       ****
10.18     Test Report from Oak Ridge National Laboratory.                                               ****
10.19     Test Report from Oregon State University -- The Motor Systems Resource
          Facility.                                                                                     ****
10.20     Test Report from Otis Elevator Co.                                                            ****
10.21     Line of Credit Agreement with Bank One, Michigan dated May 10, 2001.                          ****
10.22     Waiver Letter from Bank One dated May 31, 2002                                                Filed
                                                                                                        herewith
10.23     2000 Stock Option Plan                                                                        ****
10.24     Employment Agreement with Stephen Shulman                                                     ****
10.25     Employment Agreement with Nicholas Anderson                                                   ****

</TABLE>

---------------

**   Previously filed by the Registrant as an Exhibit on Form 10-SB, on October
     20, 2000.
***  Previously filed by the Registrant as an Exhibit on Form 10-SB/A, on April
     12, 2001.
**** Previously filed by the Registrant as an Exhibit on Form 10-SB/A, on
     October 26, 2001.


                                      -41-
<PAGE>

                                   SIGNATURES

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

                                             POWER EFFICIENCY CORPORATION



Dated: September 6, 2002                     By: /s/ Raymond J. Skiptunis
                                                 -----------------------------
                                                 Raymond J. Skiptunis, President


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

Dated:  September 6, 2002                    By: /s/ Raymond J. Skiptunis
                                                 ------------------------------
                                                 Raymond J. Skiptunis,
                                                 President and Director


Dated:  September 6, 2002                    By: /s/ Nicholas Anderson
                                                 ------------------------------
                                                 Nicholas Anderson, Director


Dated:  September 6, 2002                    By: /s/ Scott Straka
                                                 ------------------------------
                                                 Scott Straka, Director


Dated:  September 6, 2002                    By: /s/ Leonard Bellezza
                                                 ------------------------------
                                                 Leonard Bellezza, Director

                                      -42-
<PAGE>


                                  EXHIBIT INDEX
                                  -------------

<TABLE>
<CAPTION>

Description of Document                                                                                 Location
-----------------------                                                                                 --------
<S>       <C>                                                                                           <C>
2.1       Asset Purchase Agreement by and between the Registrant and Performance Control, L.L.C.
          dated August 7, 2000.                                                                         **
3.1       Certificate of Incorporation.                                                                 **
3.2       By-Laws.                                                                                      **
4.1       Certificate of Incorporation. See Exhibit 3.1 above.                                          **
4.2       By-Laws. See Exhibit 3.2 above.                                                               **
10.1      Asset based lending agreement with Bank One dated December 6, 2000.                           ***
10.2      August 7, 2000 Stockholders' Agreement.                                                       **
10.3      Lease Agreement for Registrant's Ann Arbor, Michigan facility dated February 16, 1996.        **
10.4      Purchase Agreement between the Registrant and Millar Elevator Service Company dated
          August 17, 2000.                                                                              ***
10.5      Purchase Agreement between the Registrant and Montgomery Kone, Inc.
          dated December 1, 1998.                                                                       ***
10.6      Certificate of Liability Insurance.                                                           **
10.7      United States Patent #5,821,726.                                                              **
10.8      Purchase Agreement between the Registrant and Defense Supply Center Richmond dated
          January 12, 2000.                                                                             **
10.9      1994 Stock Option Plan.                                                                       **
10.10     Patent License Agreement (DN-858) with NASA.                                                  ****
10.11     Patent License Agreement (DE-256) with NASA.                                                  ****
10.12     Settlement and Release Agreement with NASA.                                                   ****
10.13     Modification No. 1 to Patent License Agreement (DE-256) with NASA.                            ****
10.14     Purchase Order from Otis Elevator Co.                                                         ****
10.15     Letter Agreement with Lee W. Greenberg d/b/a ARI Group.                                       ****
10.16     Product Warranty.                                                                             ****
10.17     Test Report from Medsker Electric, Inc.                                                       ****
10.18     Test Report from Oak Ridge National Laboratory.                                               ****
10.19     Test Report from Oregon State University -- The Motor Systems Resource
          Facility.                                                                                     ****
10.20     Test Report from Otis Elevator Co.                                                            ****
10.21     Line of Credit Agreement with Bank One, Michigan dated May 10, 2001.                          ****
10.22     Waiver Letter from Bank One dated May 31, 2002                                                Filed
                                                                                                        herewith
10.23     2000 Stock Option Plan                                                                        ****
10.24     Employment Agreement with Stephen Shulman                                                     ****
10.25     Employment Agreement with Nicholas Anderson                                                   ****

</TABLE>

----------------

**   Previously filed by the Registrant as an Exhibit on Form 10-SB, on October
     20, 2000.
***  Previously filed by the Registrant as an Exhibit on Form 10-SB/A, on April
     12, 2001.
**** Previously filed by the Registrant as an Exhibit on Form 10-SB/A, on
     October 26, 2001.


                                      -43-