**Securities
      and Exchange Commission**


**Washington,
      D.C. 20549**


**FORM
      10-K**





x
            
            **Annual
                report under Section 13 or 15(d) of the Securities Exchange Act of
                1934**For
                the fiscal year ended December 31, 2007o
            
            **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**


(Exact
      name of registrant as specified in its Charter)





**Delaware**
            
            **22-3337365**(State or Other Jurisdiction of Incorporation or Organization)
            
            (I.R.S. Employer Identification No.)**3960
                Howard Hughes Pkwy, Ste 460****Las
                Vegas, NV**
            
            **89169**(Address
                of Principal Executive Offices)
            
            (Zip
                Code)





**(702)
      697-0377**


(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 Company: (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 Company was required to file such reports), and (2) has been subject
      to
      such filing requirements for the past 90 days. Yes x No o




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




Indicate
      by check mark whether the registrant is a large accelerated filer, an
      accelerated filer, a non-accelerated filer or a smaller reporting company.
      See
      definition of "accelerated filer and large accelerated filer" and “smaller
      reporting company” in Rule 12b-2 of the Exchange Act. (Check one):





Large
                accelerated filero
            Accelerated
                filero
            Non-accelerated
                filer o
            Smaller
                reporting company x





Indicate
      by check mark whether the Company is a shell company (as defined in Rule 12b-2
      of the Exchange Act).


Yes
o
      No x





The
      issuer’s revenues for the year ended December 31, 2007 were $490,510.





As
      of
      March 20, 2008, the aggregate market value of the common stock held by
      non-affiliates of the issuer was $9,277,725. This amount is based on the closing
      price of $0.30 per share for the Company’s common stock as of such date.




On
      March
      20, 2008 there were 40,411,858 shares of the Company’s common stock outstanding.




**DOCUMENTS
      INCORPORATED BY REFERENCE**




None.





In
      this
      report, references to “we”, “us” or “our” collectively refer to Power Efficiency
      Corporation.









**SPECIAL
      CAUTIONARY NOTICE REGARDING 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
      Company’s business objectives and strategy. Such forward-looking statements are
      based on current expectations, management beliefs, certain assumptions made
      by
      the Company’s management, and estimates and projections about the Company’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.




Factors
      that could cause actual events or results to differ materially include, but
      are
      not limited to, the following: continued market acceptance of the Company’s
      products; the Company’s ability to expand and/or modify its products on an
      ongoing basis; general demand for the Company’s products, intense competition
      from other developers, manufacturers and/or marketers of energy reduction and/or
      power saving products; the Company’s negative net tangible book value; the
      Company’s negative cash flow from operations; delays or errors in the Company’s
      ability to meet customer demand and deliver products on a timely basis; the
      Company’s lack of working capital; the Company’s need to upgrade its facilities;
      changes in laws and regulations affecting the Company 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; 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 Company 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 Company files from time to
      time
      with the Securities and Exchange Commission (the “SEC”), particularly Annual
      Reports on Form 10-K, Quarterly Reports on Form 10-Q and any Current Reports
      on
      Form 8-K.









**GLOSSARY
      OF TERMS**




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




Alternating Current (AC)
            
            A
                type of electrical current, the direction of which is reversed at
                regular
                intervals or cycles; in the U.S. the standard is 120 reversals or
                60
                cycles per second; typically abbreviated as AC.Ampere
                (amp)
            
            A
                unit of measure for an electrical current; the amount of current
                that
                flows in a circuit; abbreviated as amp.Current
                (Electrical)
            
            The
                flow of electrical energy (electricity) in a conductor, measured
                in
                amperes.Cycle
            
            In
                an alternating current, the current goes from zero potential (or
                voltage)
                to a maximum in one direction, back to zero, and then to a maximum
                potential (or voltage) in the other direction. The number of complete
                cycles per second determines the current frequency; in the U.S. the
                standard for alternating current is 60 cycles.Efficiency
            
            Efficiency
                is the ratio of work (or energy) output to work (or energy) input,
                and
                cannot exceed 100 percent.Energy
            
            The
                capability of doing work.Horsepower
                (HP)
            
            A
                unit for measuring the power of motors or the rate of doing work.
                One
                horsepower equals 33,000 foot-pounds of work per minute or 746
                watts.Induction
            
            The
                production of an electric current in a conductor by the variation
                of a
                magnetic field in its vicinity.Induction
                Motor
            
            The
                simplest and most rugged electric motor, it consists of a wound stator
                and
                a rotor assembly. The AC induction motor is so named because the
                electric
                current flowing in its secondary member (the rotor) is induced by
                the
                alternating current flowing in its primary member (stator). The power
                supply is connected only to the stator. The combined electromagnetic
                efforts of the two currents produce the force to create
                rotation.Inrush
                Current
            
            The
                current that flows at the instant of connection of a motor to the
                power
                source. Usually expressed as a multiple of motor full-load
                current.Kilowatt
                (kW)
            
            A
                standard unit of electrical power equal to one thousand
                watts.Load
            
            The
                demand on an energy producing system. The energy consumption or
                requirement of a piece or group of equipment.Motor
            
            A
                machine supplied with external energy that is converted into force
                and/or
                motion.Power
            
            The
                rate at which work is done, typically measured in watts or
                horsepower.Power
                Factor
            
            The
                ratio of watts to volt-amperes of an AC electric
                circuit.Soft-start
            
            Soft-start
                is the regulation of the supply voltage from an initial low value
                to full
                voltage during the starting process.Torque
                (Motor)
            
            The
                rotating force provided by a motor. The units of torque may be expressed
                as pound-foot, pound-inch (English system), or newton-meter (metric
                system).









Torque
                (Starting)
            
            This
                torque is what is available to initially get the load moving and
                begin its
                acceleration.Transformer
            
            An
                electromagnetic device that changes the voltage of alternating current
                electricity; it consists of an induction coil having a primary and
                secondary winding and a closed iron core.Voltage
            
            The
                amount of electromotive force, measured in volts that exists between
                two
                points.Watt
            
            The
                amount of power required maintaining a current of one ampere at a
                pressure
                of one volt when the two are in phase with each other. One horsepower
                is
                equal to 746 watts.









**PART
      I**




**Item
                1.**
            **Description
                of Business.**




(a)
            Business
                Development




**Formation**




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




(b)
            Business
                of the Company




**The
      Company’s Principal Products and Technology**




In
      the
      late 1990s the Company commenced the sale of its principal and proprietary
      product that reduces energy consumption in alternating current induction motors
      in certain applications. This product has been known by several names, including
      the *Power
      Commander* ®
and *Power
      Genius* .
      Going
      forward, the company has chosen to call its product Motor Efficiency Controllers
      (“MEC”).





The
      Company has developed patented and patent-pending technologies for effectively
      controlling the energy usage of an electric motor. The Company’s first United
      States Patent was granted in 1998. Over the past two years the Company has
      undertaken extensive study and computer modeling of motors and their energy
      use,
      and has developed digital technologies for its controllers. In the process,
      the
      Company has discovered what it believes are significant innovations and has
      completed numerous patent filings around these new inventions. The Company
      has
      branded these collective patented and patent pending technologies as *E-SAVE
      Technology* TM
and
      has
      filed for a trademark on this name.





The
      Company has developed technologies and products for use on three phase and
      single phase motors. Three phase power and motors are generally found in
      industrial and commercial buildings for larger applications than single phase
      power and motors.




The
      Company’s marketing efforts have been initially focused on the Three-Phase
      version. The Company’s three phase MEC is designed to have the following
      functionality:




1.
            Start
                a motor


2.
            Provide
                a soft start for the motor, bringing it gradually from rest to full
                speed


3.
            Save
                energy when the motor is at full speed but is less than fully
                loaded





The
      MEC
      is unique particularly because of its energy savings capabilities. The product
      reduces energy consumption by electric motors by electronically sensing and
      controlling the amount of energy the motor consumes. A motor with an MEC
      installed only uses the energy it needs to perform its work task, thereby
      increasing its efficiency. The result is a reduction of energy consumption
      of up
      to 35% in applications that do not always run at peak load levels.




The
      Company’s management believes its Motor Efficiency Controllers offer certain
      advantages over competing products for the following reasons:




·
            Motor
                and Equipment Life: The MEC extends motor life by reducing the stress
                and
                strain on the motor and surrounding equipment, and reduces the amperage
                to
                the motor, which results in cooler
                running.


·
            Successful
                Utility and Customer Tests: The MEC has been successfully tested
                by
                numerous electric utilities and customers. For example, Paragon Consulting
                Services, a contractor for Nevada Power Company, the electric utility
                for
                southern Nevada, performed 8 field tests on escalators and one on
                an
                elevator in major Las Vegas casinos. The tests resulted in average
                energy
                savings of over 30% on the escalators and 20% on the elevator.


·
            Utility
                Incentive Financing: The product has qualified for rebate incentive
                financing, most frequently called “rebates”, from many electric utilities.
                This financing is generally paid to the end user of the MEC as an
                incentive to invest in energy saving products. As such, this financing
                effectively decreases the cost of the Company’s MEC for end users. The
                utilities that have approved the Company’s products for incentive
                financing include: Nevada Power Company, the Los Angeles Department
                of
                Water and Power, Sierra Pacific Power, Southern California Edison,
                the New
                York Power Authority, Excel Energy and San Diego Gas and
                Electric.











·
            Acceptance
                by Original Equipment Manufacturers: The Company’s products have been
                approved and installed by numerous original equipment manufacturers
                (“OEMs”) in the escalator and granulator
                industries.




***Three-Phase
      MEC***




The
      Company initially focused its marketing efforts for the Three-Phase MEC in
      the
      elevator and escalator industry, although the Company is also actively marketing
      this product to other industries such as recycling, mining, plastics, and
      manufacturing. Industries that operate equipment such as conveyor systems,
      crushing equipment, stamping presses, granulators, grinders, shredders and
      other
      motor driven equipment with varying loads, are believed to be viable target
      markets for the Three-Phase MEC. The Company is seeking to target markets with
      appropriate applications and market access, using direct sales, OEMs and select
      resellers and reps to address these markets.




***Single-Phase
      Product***





Like
      the
      Company’s Three-Phase product described above, the Company’s Single-Phase
      product ** reduces
      energy consumption in electric motors by sensing and controlling the amount
      of
      energy the motor consumes. Many motors commonly used in home appliances and
      other consumer goods are single-phase AC motors. Since the single-phase product
      is much smaller, has a much lower price point, and can be incorporated directly
      into a broad variety of applications, the Company believes it is a product
      most
      suitable for installation at the OEM level.





***Product
      Development***





The
      Company has devoted significant time and resources in the past several years
      toward developing “digital” versions of its three phase and single phase
      products. Through this process, the Company has transformed its technology
      so
      that its key technological breakthroughs are primarily incorporated in algorithm
      and software on a microchip. The Company believes the digital versions of its
      products have several distinct advantages over the older analog versions,
      including:




·
            Increased
                ease of installation and reduced technical support requirements.
                For
                example, instead of approximated and manual adjustments during
                installation, which can require technical support from the Company,
                the
                digitized unit will allow more simplified and precise adjustments
                by
                customers and third party
                installers.


·
            Reduced
                product size, which is important for many
                installations.


·
            Input-output
                communications capabilities, so the device can communicate with external
                control systems.


·
            Increased
                functionality. The Company expects to be able to add new functionality
                to
                the products. These new functions may include such things as:


o
            Recording
                and reporting of actual energy
                savings;


o
            Prediction
                of maintenance problems by reading and reporting on changes in the
                motor’s
                operating characteristics; and


o
            More
                secure intellectual property protection through the use of secured
                chips
                and software.





**Marketing
      and Sales**




The
      Company’s marketing efforts have historically been concentrated in the elevator
      and escalator industry, primarily to OEMs of elevator and escalator equipment
      and end users that own this equipment. The Company is also focused on the mining
      and aggregate industry and the plastics industry. End users of the Company’s
      products include retail chains, hotels, airports, transit systems, and mining
      and manufacturing companies.




The
      Company sells products primarily through direct sales and with OEM resellers.
      In
      the future, the Company is focused on initially penetrating markets through
      direct sales. Once some market penetration and traction is achieved, the Company
      will then work with OEMs and other resellers to achieve higher volume sales.
      The
      Company’s longer term goal is to be a high value supplier of technologies, with
      numerous OEMs and other resellers engaged with high volume sales and/or
      licensing agreements.





**Manufacturing
      and Distribution**




The
      Company’s products are manufactured internally and by a multi-billion dollar
      global contract manufacturer, Sanmina SCI (“Sanmina”). The Company’s strategy is
      to manufacture internally products that sell at lower volumes, such as MECs
      for
      very large motors, and to have Sanmina manufacture higher volume products,
      such
      as smaller units and circuit boards. The Company believes this strategy allows
      for high quality production, cost efficiencies, and the capability to rapidly
      increase production volumes. Management believes this strategy has the ability
      to meet the Company’s production needs and the Company would be successful in
      finding alternative manufacturers should Sanmina not be available to manufacture
      our product.









**Competition**




Power
      Efficiency believes the principal competitive factors in the Company’s markets
      include innovative product development, return on investment from energy
      savings, product quality, product performance, utility rebate acceptance,
      established customer relationships, name recognition, distribution and
      price.





***Three-Phase
      Competition*** **.** The
      Company’s three phase MEC’s principal capabilities include being a motor
      starter, providing a soft start for the motor, and reducing the motor’s
      electricity consumption once the motor is at full speed. The Company believes
      its products are unique primarily because of the last capability – energy
      savings.





The
      first
      two capabilities are commonly found in existing motor control products. There
      are billions of dollars of motor starters and soft starts sold every year.
      These
      products are typically manufactured and marketed by large motor control
      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 Company 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 Company to commence and expand
      its
      operations or operate in a profitable manner.





There
      are
      also several small companies that reportedly make products that combine motor
      starting, soft starting and energy savings. The Company is unaware of any large
      company that makes a product of this nature. Although the Company has not
      completed any formal market study, the Company believes its Three-Phase
      MEC ** has
      the
      following competitive advantages over other products:




·
            It
                combines soft start features with energy savings features in a single
                integrated unit that is CSA and CE certified and achieves energy
                savings
                levels of up to 15% to 35% in independent, third party
                testing;


·
            Its
                circuitry is proprietary, protected by one patent. Numerous other
                patent
                filings on new innovations are pending approval of the U.S. Patent
                and
                Trademark Office;


·
            It
                has been tested extensively by utilities with documented energy savings
                and approval for incentive financing
                rebates;


·
            It
                is accepted by OEMs in the escalator and granulator
                industries.******





***Single-Phase
      Competition*** *.* There have been several companies that have, with different technologies,
      attempted to exploit this market due to the enormous opportunity in single-phase
      motor applications. These products include among others, “Green Plug” (voltage
      clamping), “Power Planner” (digital microchip) and “Econelectric” (power factor
      control). The Company has made numerous innovations in the past two years that
      it believes overcome many of the problems with these and the Company’s earlier
      designs. The Company has filed for patents on these innovations and has a well
      developed prototype that it has successfully tested on various single phase
      motors and applications.




***High
      Efficiency Motors*** *.* Motors are rated by their efficiency at full load. However, when motors,
      including “high efficiency motors” are lightly loaded, they become very
      inefficient. Management believes that the energy savings gain attributable
      to
      high efficiency motors is materially lower than that of its MEC on underloaded
      motor applications. Furthermore, the Company’s products are able to save energy
      on underloaded high efficiency motors, so that such motors and the Company’s
      technology are not mutually exclusive.




**Source
      of Supply and Availability of Raw Materials**




The
      MEC
      has been designed to use standard, off-the-shelf, easily acquired components,
      except for the custom made circuit boards. Such off-the-shelf components are
      basic items readily available worldwide at competitive prices. They come in
      standard and miniature versions and offer the Company latitude in product design
      and production. Although the Company believes 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 they will remain so readily available or at comparable
      prices.




**Customers**




The
      Company currently does business with approximately 20 customers. Of this number,
      three customers presently account for approximately 84% of the Company’s gross
      revenues. These customers and their respective gross revenue percentages are
      KONE, Inc. – 41%; Los Angeles Metropolitan Transit Authority – 32%;
      and Matrix Energy Services, Inc. – 11%. In light of the Company’s
      intentions to focus its business on a limited number of markets, the Company
      is,
      and may continue to be, dependent upon a limited number of customers.
      Accordingly, the loss of one or more of these customers may have a material
      adverse effect upon the Company’s business.









**Patents
      and Proprietary Rights**




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




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





The
      Company has filed five provisional patents and one utility patent on new
      inventions associated with the development of its digital products. The Company
      anticipates filing additional utility patents in the coming months. In addition,
      the Company is continually making improvements to its products and technologies,
      and anticipates making additional patent filings on new inventions when
      warranted.




***NASA
      License Agreement***




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




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




The
      Company has obtained U.S. Trademark registration of the *Power
      Commander* ®
mark
      and has filed for a trademark on *E-Save
      Technology* TM.




**Government
      Regulation**




The
      Company is not required to be certified by any government agencies. However,
      most of the Company’s products are manufactured to comply with specific codes
      that meet industry accepted safety standards. Presently, many of the Company’s
      products comply with UL 508 Industrial Control Equipment and the Company has
      also received certification meeting CSA (Canadian Standards Association)
      B44.1/ASME-17.5 Elevator and Escalator Electrical Equipment for many of the
      Company’s products. Many of the Company’s products are also CE marked. The
      Department of Commerce does not require the Company’s technology to be certified
      for export. The Company’s industrial code is 421610 and the SIC code is
      5063.





**Deregulation
      of Electrical Energy**




Sales
      of
      the Company’s product are not dependent on deregulation of the electrical energy
      market as the Company’s product can be sold in regulated and deregulated
      markets.




**Research
      and Development**




The
      Company intends to continue its research and development effort to introduce
      new
      products based on its energy saving technology. Towards this end, the Company
      spent $667,786 and $567,591 in fiscal years 2007 and 2006, respectively, on
      research and development activities, virtually none of which was borne by
      customers. A major focus of the Company’s foreseeable research and development
      activities will be on completing larger versions of the digital MEC. The Company
      also anticipates the possibility of working with OEMs that make or purchase
      motor control equipment, in order to develop products with features or
      specifications they require.









**Effect
      of Environmental Regulations**




The
      Company 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 Company has had,
      or
      is expected to have, a material effect upon the capital expenditures, earnings,
      or competitive position of the Company.




**Employees**




At
      the
      date of this document, the Company employs eighteen people on a full time basis.
      Of this number, one is engaged in accounting and finance, three in operations
      and general management, eight in sales and marketing, and six in product
      research and development, engineering and manufacturing. At such time as
      business conditions dictate, the Company may hire additional personnel for,
      among other things, increased marketing and sales. The Company has no collective
      bargaining agreements and considers its relationship with its employees to
      be
      good. The Company utilizes consultants in the areas of marketing, product and
      technology development and finance on a regular basis.





(c)
            Reports
                to Security Holders





The
      Company is a smaller reporting company, and as such files Annual Reports on
      Form
      10-K, Quarterly Reports on Form 10-Q under the scaled disclosure requirements
      and Current Reports on Form 8-K on a regular basis with the SEC.





The
      public may read and copy any materials the Company files with the SEC at the
      SEC’s Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549. The
      public may obtain information on the operation of the Public Reference Room
      by
      calling the SEC at 1-800-SEC-0330. The SEC maintains an internet site that
      contains reports, proxy and information statements, and other information
      regarding issuers that file electronically with the SEC at
      http://www.sec.gov.





**Item
                1A.**
            **Risk
                Factors.**




***RISKS
      RELATED TO OUR BUSINESS***




**Unless
      The Company Achieves Profitability and Related Positive Cash Flow, It May Not
      Be
      Able To Continue Operations, And Its Auditors Have Questioned Its Ability To
      Continue As A "Going Concern".**




The
      Company has suffered recurring losses from operations, and experienced
      approximately a $2,851,000 deficiency of cash from operations for the year
      ended
      December 31, 2007. For the years ended December 31, 2007 and December 31,
      2006, we had net losses of $3,891,795 and $5,020,775, respectively. In our
      Auditor’s Report dated March 25, 2008 on our December 31, 2007 financial
      statements included in this report, our auditors have stated that these factors
      raise substantial doubt about our ability to continue as a “going concern”. Our
      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 we be unable to continue in
      existence.





The
      Company’s continuation as a “going concern” is dependent upon achieving
      profitable operations and related positive cash flow and satisfying our
      immediate cash needs by external financing until we are profitable. Our plans
      to
      achieve profitability include developing new products, obtaining new customers
      and increasing sales to existing customers. We are seeking to raise additional
      capital through equity issuance, debt financing and other types of financing,
      but we cannot guarantee that sufficient capital will be raised.




**The
      Company Has A Limited Operating History, Has Experienced Recurring Losses And
      Has Limited Revenue.**




To
      date,
      and due principally to a lack of working capital, our operations have been
      limited in scale. Although we have an arrangement with an outsourced production
      facility to manufacture our products, have established relationships with
      suppliers, and have received contracts for our products, we may experience
      difficulties in production scale-up, product distribution, and obtaining and
      maintaining working capital until such time as our operations have been
      scaled-up to normal commercial levels. We have not had a profitable quarter
      in
      the past three years and we cannot guarantee we will ever operate profitably.
      In
      addition, we have limited revenue. For the year ended December 31, 2007, our
      total revenues were $490,510, and for the year ended December 31, 2006, our
      total revenues were $188,811.





**The
      Company Does Not Have A Bank Line Of Credit.**




At
      the
      present time, the Company does not have a bank line of credit, which further
      restricts its financial flexibility.









**The
      Company Will Require Additional Funds To Meet Its Cash Operating Expenses And
      Achieve Its Current Business Strategy.**




The
      Company continues to have limited working capital and will be dependent upon
      additional financing to meet capital needs and repay outstanding debt. We cannot
      guarantee additional financing will be available on acceptable terms, if at
      all.
      We also need additional financing to raise the capital required to fully
      implement our business plan. Our current fixed operating expense level is
      approximately $250,000 to $300,000 per month. Although we currently have over
      12
      months of working capital, we
      may
      nevertheless need to issue additional debt or equity securities to raise
      required funds, and as a result existing equity owners would be
      diluted.





When
      our
      operations require additional financing, if we are unable to obtain it on
      reasonable terms, we would be forced to restructure, file for bankruptcy or
      cease operations, any of which could cause you to lose all or part of your
      investment in us.





**The
      Company’s Management Group Owns Or Controls A Significant Number Of The
      Outstanding Shares Of Our Common Stock And Will Continue To Have Significant
      Ownership Of Our Voting Securities For The Foreseeable
      Future.**




As
      of the
      date of this report, management controls approximately twenty-one percent
      ( 21%) of our
      issued and outstanding Common Stock and voting equivalents. As a result, these
      persons will have the ability, acting as a group, to effectively control our
      affairs and business, including the election of directors and, subject to
      certain limitations, approval or preclusion of fundamental corporate
      transactions. This concentration of ownership of our common stock
      may:




·
            delay
                or prevent a change in the control;




·
            impede
                a merger, consolidation, takeover, or other transaction involving
                the
                Company; or




·
            discourage
                a potential acquirer from making a tender offer or otherwise attempting
                to
                obtain control of the Company.




Additionally, **** Summit
      Energy Ventures, LLC (“Summit”) owns seventeen percent (17%) of our common
      stock and voting equivalents, which is included in the above number. Summit
      is
      controlled by Steven Strasser, our Chairman and CEO, and he has the right to
      vote all shares owned by Summit. The remaining equity in Summit is owned by
      BJ
      Lackland, our CFO. These relationships are discussed in more detail under
“Certain Relationships And Related Party Transactions” herein.




**The
      Company’s Business Depends Upon The Maintenance Of Our Proprietary Technology,
      And We Rely, In Part, On Contractual Provisions To Protect Our Trade Secrets
      And
      Proprietary Knowledge.**





The
      Company depends upon its proprietary technology, relying principally upon trade
      secret and patent law to protect this technology. The Company also regularly
      enters into confidentiality agreements with key employees, customers, potential
      customers, and vendors and limits access to and distribution of trade secrets
      and other proprietary information. However, these measures may not be adequate
      to prevent misappropriation of our technology. Additionally, our competitors
      may
      independently develop technologies substantially equivalent or superior to
      our
      technology. In addition, the laws of some foreign countries do not protect
      our
      proprietary rights to the same extent as the laws of the United States. We
      also
      are subject to the risk of adverse claims and litigation alleging infringement
      of intellectual property rights of others.





Confidentiality
      agreements to which we are party may be breached, and we may not have adequate
      remedies for any breach. Our trade secrets may also be known without breach
      of
      such agreements or may be independently developed by competitors. Our inability
      to maintain the proprietary nature of our technology and processes could allow
      our competitors to limit or eliminate any competitive advantages we may
      have.





**The
      Company Is Potentially Dependent On Third-Party Suppliers.**





Although
      we believe most of the key components required for the production of our
      products are currently available in sufficient production quantities from
      multiple sources, they may not 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 us. Also, in
      the
      event that we, or our contract manufacturer, as applicable, are unable to
      develop or acquire components in a timely fashion, our ability to achieve
      production yields, revenues and net income can be expected to be adversely
      affected. Additionally, we are dependent on Sanmina-Sci to manufacture our
      higher volume products. While we believe we would be successful in finding
      alternative manufacturers should this manufacturer not be available to
      manufacture our product, it could take substantial time and effort to locate
      such alternatives and, depending on the timing of the loss of Sanmina-Sci,
      could
      result in disruption in delivery schedules and harm to our clients and our
      reputation and future prospects.









**The
      Company Is Developing And Commercializing New Energy Saving Technologies And
      Products Which Will Involve Uncertainty And Risks Related To Product Development
      And Market Acceptance.**





Our
      success is dependent, to a large degree, upon our ability to fully develop
      and
      commercialize our technology and gain industry acceptance of our products based
      upon our technology and its perceived competitive advantages. Accordingly,
      our
      prospects must be considered in light of the risks, expenses and difficulties
      frequently encountered in connection with the establishment of a new business
      in
      a highly competitive industry, characterized by frequent new product
      introductions. We anticipate that we will incur substantial expense in
      connection with the development and testing of our proposed products and expect
      these expenses to result in continuing and significant losses until such time,
      if ever, that we are able to achieve adequate levels of sales or license
      revenues.





**The
      Company Has Expanded Its Marketing Strategy.**





Our
      products have been distributed primarily through OEMs. We have recently begun
      pursuing an expanded distribution strategy designed to reduce our reliance
      on
      OEMs. Pursuant to this strategy, we are increasing our direct sales efforts
      into
      new markets. Our future growth and profitability will depend upon the successful
      development of business relationships with additional OEMs, growth in direct
      sales, and sales through select resellers and reps to penetrate the market
      with
      our products.





**The
      Company Currently Depends On A Small Number Of Customers And Expect To Continue
      To Do So.**





The
      Company currently does business with approximately 20 customers. Of this number,
      three customers accounted for approximately 84% of our gross revenues in 2007.
      We are, and may continue to be, dependent upon a small number of customers.
      Accordingly, the loss of one or more of these customers is likely to have a
      material adverse effect on our business.




**Most
      Of The Company’s Current And Potential Competitors Have Greater Name
      Recognition, Financial, Technical And Marketing Resources, And More Extensive
      Customer Bases And Industry Relationships Than We Do, All Of Which Could Be
      Leveraged To Gain Market Share To Our Detriment, Particularly In An Environment
      Of Rapid Technological Change.**




Although
      we believe we have limited competition for our specific technology, we compete
      against a number of companies for dollars in the electric motor energy savings
      market, many of which have longer operating histories, established markets
      and
      far greater financial, advertising, research and development, manufacturing,
      marketing, personnel and other resources than we currently have or may
      reasonably expect to have in the foreseeable future. This competition may have
      an adverse effect on our ability to expand our operations or operate profitably.
      The motor control industry is also highly competitive and characterized by
      rapid
      technological change. Our future performance will depend in large part upon
      our
      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 we are
      not
      competitive in our ongoing research and development efforts, our products may
      become obsolete, or be priced above competitive levels. However, management
      believes, based upon their performance and price, our products are attractive
      to
      customers. We cannot guarantee that competitors will not introduce comparable
      or
      technologically superior products, which are priced more favorably than our
      products.




**Changes
      In Retail Energy Prices Could Affect The Company’s
      Business.**





We
      have
      found that a customer’s decision to purchase an MEC (or similar product) is
      primarily driven by the payback on the investment resulting from the increased
      energy savings. Although management believes that current retail energy prices
      support an attractive return on investment for our products, the future retail
      price of electrical energy may not remain at such levels, and price fluctuations
      reducing energy expense could adversely affect product demand.





**Loss
      Of Key Personnel Could Have Significant Adverse
      Consequences.**





We
      currently depend on the services of Steve Strasser, and BJ Lackland, our Chief
      Executive Officer and Chief Financial Officer, respectively. The loss of the
      services of either of these persons could have an adverse effect on our
      business. As discussed under “Management”, we have entered into long-term
      employment contracts with Messrs. Strasser and Lackland, but such contracts
      do
      not guarantee they will remain with us.









**The
      Company Does Not Have “Key Man” Life Insurance.**





The
      Company presently does not have any key man life insurance policies. As soon
      as
      practicable following the commencement of profitable operations (which may
      never
      occur), we intend to purchase key man life insurance on the life of our
      principal executive officer, Steven Strasser. Upon purchase of such insurance,
      we intend to pay the premiums and be the sole beneficiary. The lack of such
      insurance may have a material adverse effect upon our business.





**Delaware
      Law Limits The Liability Of Our Directors.**





Pursuant
      to our Certificate of Incorporation, the Company’s directors are not liable to
      us or our 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 involved 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.





**Potential
      Product Liability Claims May Not Be Fully Covered By
      Insurance.**





The
      Company may be subject to potential product liability claims that could, in
      the
      absence of sufficient insurance coverage, have a material adverse impact on
      us.
      Presently, we have general liability coverage that includes product liability
      up
      to $2,000,000 and umbrella liability up to $4,000,000. Any large product
      liability suits occurring early in our growth may significantly and adversely
      affect our ability to expand the market for our products.




**RISKS
      RELATED TO OUR COMMON STOCK AND CAPITAL STRUCTURE**





**Trading
      In Our Common Stock Over The Last 12 Months Has Been Limited, So Investors
      May
      Not Be Able To Sell As Many Of Their Shares As They Want At Prevailing
      Prices.**




Shares
      of
      our common stock are traded on the OTC Bulletin Board. Approximately 94,000
      shares were traded on an average daily trading basis for the 12 months ended
      December 31, 2007. If limited trading in our common stock continues, it may
      be
      difficult for shareholders to sell their shares. Also, the sale of a large
      block
      of our common stock could depress the market price to a greater degree than
      a
      company that typically has a higher volume of trading of its
      securities.




**The
      Limited Public Trading Market May Cause Volatility In The Company's Stock
      Price.**




The
      Company’s common stock is currently traded on a limited basis on the OTC
      Bulletin Board under the symbol “PEFF”. The quotation of our common stock on the
      OTC Bulletin Board does not assure that a meaningful, consistent and liquid
      trading market currently exists, and in recent years such market has experienced
      extreme price and volume fluctuations that have particularly affected the market
      prices of many smaller companies like us. Our common stock is thus subject
      to
      this volatility. Sales of substantial amounts of our common stock, or the
      perception that such sales might occur, could adversely affect prevailing market
      prices of our common stock.





**An
      Active And Visible Trading Market For Our Common Stock May Not
      Develop.**





We
      cannot
      predict whether an active market for our common stock will develop in the
      future. In the absence of an active trading market:




·
            Investors
                may have difficulty buying and selling or obtaining market
                quotations;




·
            Market
                visibility for our common stock may be limited;
                and




·
            A
                lack of visibility for our common stock may have a depressive effect
                on
                the market price for our common
                stock.




The
      OTC
      Bulletin Board is an inter-dealer, over-the-counter market that provides
      significantly less liquidity than NASDAQ, and quotes for stocks included on
      the
      OTC Bulletin Board are not listed in the financial sections of newspapers,
      as
      are those for the NASDAQ Stock Market. The trading price of the common stock
      is
      expected to be subject to significant fluctuations in response to variations
      in
      quarterly operating results, changes in analysts’ earnings estimates,
      announcements of innovations by the Company or its competitors, general
      conditions in the industry in which we operate and other factors. These
      fluctuations, as well as general economic and market conditions, may have a
      material or adverse effect on the market price of our common stock.









**Penny
      Stock Regulations May Impose Certain Restrictions On Marketability Of The
      Company's Securities.**





The
      SEC
      has adopted regulations which generally define a “penny stock” to be any equity
      security that has a ** market
      price of less than $5.00 per share or an ** exercise
      price of less than $5.00 per share, subject to certain exceptions. As a result,
      our common stock is subject to rules that impose additional requirements on
      broker-dealers who sell such securities to persons other than established
      customers and accredited investors (generally those with net worth in excess
      of
      $1,000,000 or annual income exceeding $200,000, or $300,000 together with their
      spouse). For transactions covered by these rules, the broker-dealer must make
      a
      special suitability determination for the purchase of such securities and have
      received the purchaser’s written consent to the transaction prior to the
      purchase. Additionally, for any transaction involving a penny stock, unless
      exempt, the rules require the delivery, prior to the transaction, of a risk
      disclosure document relating to the penny stock market. The broker-dealer must
      also disclose the commission payable to both the broker-dealer and the
      registered representative, current quotations for the securities and, if the
      broker-dealer is the sole market maker, the broker-dealer must disclose this
      fact and the broker-dealer’s presumed control over the market. Finally, monthly
      statements must be sent disclosing recent price information for the penny stock
      held in the account and information on the limited market in penny stocks.
      Consequently, the “penny stock” rules may restrict the ability of broker-dealers
      to sell the Company’s securities and may affect the ability of investors to sell
      the Company’s securities in the secondary market and the price at which such
      purchasers can sell any such securities.




Stockholders
      should be aware that, according to the Commission, the market for penny stocks
      has suffered in recent years from patterns of fraud and abuse. Such patterns
      include:




·
            Control
                of the market for the security by one or a few broker-dealers that
                are
                often related to the promoter or
                issuer;




·
            Manipulation
                of prices through prearranged matching of purchases and sales and
                false
                and misleading press releases;




·
            "Boiler
                room" practices involving high pressure sales tactics and unrealistic
                price projections by inexperienced sales
                persons;




·
            Excessive
                and undisclosed bid-ask differentials and markups by selling
                broker-dealers; and




·
            The
                wholesale dumping of the same securities by promoters and broker-dealers
                after prices have been manipulated to a desired level, along with
                the
                inevitable collapse of those prices with consequent investor
                losses.




The
      Company’s management is aware of the abuses that have occurred historically in
      the penny stock market.




**The
      Company May Never Pay Cash Dividends On Our Common Stock.**





We
      have
      not paid or declared any dividends on our common stock and do not anticipate
      paying or declaring any cash dividends on our common stock in the foreseeable
      future.





**Sales
      Of Common Stock Under Rule 144 May Adversely Affect The Market Price Of Our
      Common Stock.**





*Possible
      Resales under Rule 144.* Of the
      40,411,858 shares of the Company’s common stock outstanding on the date of this
      report, 27,676,701 shares are freely trading in the market place (the “Free
      Trading Shares”). The Free Trading Shares are comprised mostly of shares (1)
      originally issued in private offerings of common stock from June through March
      2007, that were later registered in the Company’s SB-2 Registration Statements
      (the “Registration Statement”), both declared effective on May 14, 2007 and (2)
      shares originally issued in transactions exempt from registration under the
      Securities Act.





The
      remaining 12,735,157 shares of our common stock outstanding are restricted
      securities as defined in Rule 144 and under certain circumstances may be resold
      without registration pursuant to Rule 144. These shares include the 8,320,569
      shares held by Summit and Steven Strasser in the aggregate, and 1,165,539 shares
      held by a directors and insiders





In
      addition, the Company had approximately 29,204,968 common stock purchase
      warrants outstanding and approximately 14,309,896 common stock options
      outstanding as of the date of this report, including the warrants issued in
      connection with the recent private offer and sale of preferred stock units
      (See
      Note 18 to the Financial Statements). The shares issuable on exercise of the
      options and warrants may, under certain circumstances, be available for public
      sale in the open market under the Registration Statement or pursuant to Rule
      144, subject to certain limitations.









In
      general, pursuant to Rule 144, after satisfying a six month holding period:
      (i)
      affiliated stockholder (or stockholders whose shares are aggregated) 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 and (ii) non-affiliated stockholders may sell without
      such limitations, provided we are current in our public reporting obligations.
      Rule 144 also permits the sale of securities by non-affiliates that have
      satisfied a one year holding period without any limitation or restriction.
      Any
      substantial sale of the common stock pursuant to Rule 144 may have an adverse
      effect on the market price of the Company’s shares.





**Exercise
      Of Outstanding Options And Warrants Will Dilute Ownership Of Outstanding
      Shares.**





As
      of the
      date of this report, the Company has reserved 71,429 shares of common stock
      for
      issuance upon exercise of stock options or similar awards which may be granted
      pursuant to the 1994 Plan, of which no options are outstanding. Furthermore,
      we
      have reserved 20,000,000 shares of our common stock for issuance upon exercise
      of stock options or similar awards which may be granted pursuant to the 2000
      Plan, of which options to purchase an aggregate of 14,309,896 shares are
      outstanding. The outstanding options under the 2000 Plan have a weighted average
      exercise price of $0.36. As of the date of this report, we have issued warrants
      exercisable for 29,204,968 shares of common stock to financial consultants,
      investors, former employees and other business partners, having a weighted
      average exercise price of $0.45 and expiring on various dates from October
      2009
      to January 2013. Exercise of these options and warrants in the future will
      reduce the percentage of common stock held by the public stockholders.
      Furthermore, the terms on which we could obtain additional capital during the
      life of the options and warrants may be adversely affected, and it should be
      expected that the holders of the options and warrants would exercise them at
      a
      time when we would be able to obtain equity capital on terms more favorable
      than
      those provided for by such options and warrants.





**The
      Company’s Issuance Of “Blank Check” Preferred Stock Could Adversely Affect Our
      Common Stockholders.**





The
      Company’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, our 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
      our
      common stock. In the event of issuance, the preferred stock could be used as
      a
      method of discouraging, delaying or preventing a change in control of the
      Company, which could have the effect of discouraging bids for the Company and
      thereby prevent stockholders from receiving the maximum value for their shares.
      From October 29, 2007, through January 21, 2008, the Company sold 140,000 shares
      of its Series B preferred stock in a private offering of units (See Note 18
      to
      the Financial Statements).





***Line
      of Credit***




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





**Item
                1B.**
            **Unresolved
                Staff Comments.**





None




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




The
      Company’s corporate office space is located at 3960 Howard Hughes Pkwy, Suite
      460, Las Vegas, Nevada 89169. The office lease calls for rent of $11,292 per
      month, plus annual increases equal to 3%, through the end of the lease term
      in
      February 2011.





The
      Company leased research and development space at 6380 South Valley View Blvd,
      Suite 412, Las Vegas, Nevada 89118. The lease calls for rent of $1,995 plus
      common area maintenance charges, per month, through the end of the lease term
      in
      August 2010.





The
      Company leased manufacturing and warehouse space at 6380 South Valley View
      Blvd,
      Suite 402, Las Vegas, Nevada 89118. The lease calls for rent of $1,605 plus
      common area maintenance charges, per month, through the end of the lease term
      in
      August 2010.









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





At
      the
      present time, the Company is not involved in any litigation.





**Item
                4.**
            **Submission
                of Matters to a Vote of Security
                Holders.**





None.





**PART
      II**




**Item
                5.**
            **Market
                for Common Equity and Related Stockholder
                Matters.**




**Market
      for Common Stock**




The
      Company’s common stock is thinly traded on the National Association of
      Securities Dealers’ Over the Counter Bulletin Board (“OTCBB”) under the symbol
“PEFF”.




The
      following table sets forth the high and low bid information for quarterly
      periods in the two twelve month periods ended December 31, 2007 and December
      31,
      2006.




**Twelve months Ended December 31, 2007**
            
            **High**
            
            **Low**October
                1, 2007 — December 31, 2007
            
            $
            0.70
            
            
            0.37July
                1, 2007 — September 30, 2007
            
            
            0.75
            
            
            0.20April
                1, 2007 — June 30, 2007
            
            
            0.26
            
            
            0.20January
                1, 2007 — March 31, 2007
            
            
            0.30
            
            
            0.18




**Twelve months Ended December 31, 2006**
            
            **High**
            
            **Low**October
                1, 2006 — December 31, 2006
            
            $
            0.40
            
            $
            0.21July
                1, 2006 — September 30, 2006
            
            
            0.30
            
            
            0.18April
                1, 2006 — June 30, 2006
            
            
            0.43
            
            
            0.20January
                1, 2006 — March 31, 2006
            
            
            0.40
            
            
            0.20




As
      of the
      date of this report, there were 162 shareholders of record of the Company’s
      common stock.




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




EQUITY
      COMPENSATION PLAN INFORMATION


Number of
                securities to be
                issued upon
                exercise of
                outstanding
                options, warrants
                and rights (a)
              
              Weighted average
                exercise price of
                outstanding options,
                warrants and rights
                (b)
              
              Number of
                securities
                remaining
                available for
                future issuance
                under 2000 Stock
                Option and
                Restricted Stock
                Plan (excluding
                securities reflected
                in column (a))(c)2000
                  Stock Option and Restricted Stock Plan approved by security
                  holders
              
              
              14,309,896
              
              $
              0.36
              
              
              5,690,104Equity
                  compensation plans not approved by security holders
              
              
              0
              
              
              0.00
              
              
              0Total
              
              
              14,309,896
              
              $
              0.36
              
              
              5,690,104









The
      Company maintains a Stock Option Equity Compensation Plan. (See Note 12 to
      the
      Financial Statements)





**Recent
      Sales of Unregistered Securities**





During
      the period covered by this report we did not issue any securities that were
      not
      registered under the Securities Act of 1933, as amended, except previously
      disclosed in a quarterly report on Form 10-Q or a current report on Form
      8-K.




**Item
                6.**
            **Selected
                Financial Data**





We
      are a
“smaller reporting company” as defined by Regulation S-K and as such, are not
      providing the information contained in this item pursuant to Regulation
      S-K.





**Item
                7.**
            **Management’s
                Discussion and Analysis of Financial Condition and Results of Operations
                or Plan of Operation.**




**OVERVIEW**




The
      Company 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
      Company began generating revenues from sales of its MEC line of motor
      controllers in the late 1990s. As of December 31, 2007, the Company had total
      stockholders’ equity of $6,972,640 primarily due to the Company’s sale of
      134,400 shares of Series B Convertible Preferred Stock in a private offering
      in
      October through December 2007; 14,116,680 shares of common stock in a private
      stock offering in November 2006 through March 2007, 14,500,000 shares of common
      stock in a private stock offering in July and August of 2005, the Company’s sale
      of 2,346,233 shares of Series A-1 Convertible Preferred stock to Summit Energy
      Ventures, LLC in June of 2002 and the conversion of notes payable of
      approximately $1,047,000 into 982,504 shares of Series A-1 Convertible Preferred
      stock in October of 2003. In addition, in August 2000, the Company purchased
      the
      assets of Percon, formerly the largest distributor of the Company’s products.
      The transaction was accounted for as a purchase and the Company’s Statements of
      Operations includes Percon’s results of operations since the date of
      acquisition. The consolidation of the operations of both entities allowed the
      Company 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 Company
      as part of the sale.




**RESULTS
      OF OPERATIONS: FISCAL YEAR 2007 COMPARED TO FISCAL YEAR
      2006**




**REVENUES**




Revenues
      for the year ended December 31, 2007, were $490,510 compared to $188,811 for
      the
      year ended December 31, 2006, an increase of $301,699, or 160%. This increase
      is
      mainly attributable to an increase in sales in the elevator and escalator market
      segment. Specifically, sales increased due to wider acceptance by a number
      of
      OEMs, sales to large transit authorities, and acceptance by utilities.




**COST
      OF REVENUES**




Cost
      of
      revenues for the year ended December 31, 2007 were $340,468 compared to $136,240
      for the year ended December 31, 2006, an increase of $204,228 or 150%. As a
      percentage of product revenues, total costs of product revenues decreased to
      approximately 69% for the year ended December 31, 2007 compared to approximately
      72% for the year ended December 31, 2006. The decrease in the costs as a
      percentage of product revenues was due to a higher volume of sales in 2007,
      which resulted in lower per unit production costs, as well as charging higher
      prices in 2007, which resulted in higher margins.





**GROSS
      MARGIN**





Gross
      margin for the year ended December 31, 2007 was $150,042 compared to $52,571
      for
      the year ended December 31, 2006, an increase of $97,471 or 185%. This increase
      was primarily due to a higher volume of sales in 2007 and charging higher prices
      in 2007.









**OPERATING
      EXPENSES**




**Research
      and Development Expenses**




Research
      and development expenses were $667,786 for the year ended December 31, 2007
      compared to $567,591 for the year ended December 31, 2006, an increase of
      $100,195 or 18%. This increase is mainly attributable to the Company’s continued
      research and development efforts on its digital controller for both its
      single-phase and three-phase products, including additional personnel in the
      Company’s research and development department, which resulted in higher salaries
      and related payroll costs.





**Selling,
      General and Administrative Expenses**




Selling,
      general and administrative expenses were $2,721,284 for the year ended December
      31, 2007, compared to $3,118,233 for the year ended December 31, 2006, a
      decrease of $396,949 or 13%. The decrease in selling, general and administrative
      expenses over the prior year was due primarily to a decrease in payroll and
      payroll related costs, including SFAS 123R expenses (see Note 12 to the
      Financial Statements), and to decreases in financing costs.





Interest
      expense was approximately $679,306 for the year ended December 31, 2007, as
      compared to $1,354,195 for the year ended December 31, 2006, a decrease of
      $674,889 or 50%. The decrease in interest expense is primarily related to
      non-cash finance charges related to the value of stock warrants issued in
      connection with debt securities issued by the Company in 2006. These debts
      securities were paid off in full during 2007, resulting in the elimination
      of
      the non-cash charges by the end of 2007. Total non-cash interest expense for
      the
      year ended December 31, 2007 was $431,087, compared to $1,039,445 for the year
      ended December 31, 2006, a decrease of $608,358 or 59%.





**Financial
      Condition, Liquidity, and Capital Resources: For the Year Ended December 31,
      2007**




Since
      inception, the Company has financed its operations primarily through the sale
      of
      its securities. In 2007, the Company received approximately $7,745,000 in gross
      proceeds from a private placement of its preferred stock, common stock and
      warrants to purchase common stock, as to which the Company is required to file
      a
      registration statement on Form SB-2 or other relevant registration statement.
      Of
      this amount, $1,850,000 was converted from existing debt securities. Also in
      2007, the Company grossed approximately $680,000 in cash from the exercise
      of
      warrants. As of December 31, 2007 the Company has received a total of
      approximately $20,305,000 from public and private offerings of its equity
      securities, received $300,000 from a bridge note with a shareholder (which
      was
      converted into 3,000,000 shares of common stock and 1,500,000 warrants with
      an
      additional investment of $300,000 on July 8, 2005), received approximately
      $445,386 under a bank line of credit (which was repaid during 2002), and
      received $1,000,000 under a line of credit with a shareholder (which was
      converted to Series A-1 Preferred Convertible shares during 2003). In October
      2004 and February 2005, the Company received $1,589,806 in debt financing
      through a debt offering arranged by a placement agent, Pali Capital. Of this
      total, $300,000 plus accrued interest was converted from borrowings with the
      same shareholder as referenced above. In April 2006, the Company received
      $1,000,000 in debt financing from EMTUCK , LLC, in which the managing member
      is
      a management company wholly owned and controlled by Steven
      Strasser, the Company's
      CEO .
      In May
      2006, the Company received an additional $500,000 in debt financing from EMTUCK.
      In November 2006, the Company received $2,000,000 in debt financing. Of this
      amount, $1,450,000 was converted from borrowings from prior investors. This
      $2,000,000 note was paid off in full in October of 2007. As of December 31,
      2007
      the Company had cash of $5,086,378 and has no outstanding debt
      securities.




Net
      cash
      used for operating activities for the year ended December 31, 2007 was
      $2,850,927 which primarily consisted of: a net loss of $3,891,795; less bad
      debt
      expense of $16,934, depreciation and amortization of $47,036, loss on disposal
      of fixed assets of $3,516, amortization of debt discounts of $419,859,
      amortization of deferred financing costs of $11,228, deferred rent of
      $12,063, warrants and options issued in connection with settlements,
      services from consultants, vendors, the forgiveness of indebtedness, the
      issuance of debt, and to employees and consultants of $655,392, decreases in
      inventory of $25,090 and prepaid expenses of $29,173, increases in accounts
      receivable of $93,994, and deposits of $88,388. In addition, these amounts
      were
      partially offset by increases in accounts payable and accrued expenses of
      $1,354, and customer deposits of $1,605.





Net
      cash
      used for operating activities for the year ended December 31, 2006 was
      $2,756,724 which primarily consisted of: a net loss of $5,020,775; less bad
      debt
      expense of $11,470, depreciation and amortization of $34,028, loss on disposal
      of fixed assets of $585, amortization of debt discounts of $1,039,451,
      amortization of deferred financing costs of $70,364, warrants and options issued
      in connection with settlements, services from consultants, vendors, the
      forgiveness of indebtedness, the issuance of debt, and to employees and
      consultants of $1,074,848, common stock issued for consulting services of
      $90,000, decreases in accounts receivable of $26,464, and inventory of $14,487,
      increases in prepaid expenses of $3,206, deposits of $33,875, and restricted
      cash related to a note payable of $4,688. In addition, these amounts were
      partially offset by decreases in accounts payable and accrued expenses of
      $55,454, customer deposits of $5,105 and an increase in accrued salaries and
      payroll taxes of $4,682.









Net
      cash
      used in investing activities for fiscal year 2007 was $92,537, compared to
      $90,567 in fiscal year 2006.  The amount for 2007 consisted of the purchase
      of fixed assets of $85,610, and costs related to patent applications of $6,927.
      The amount for 2006 consisted of the purchase of fixed assets.




Net
      cash
      provided by financing activities for fiscal year 2007 was $6,336,258 which
      consisted of proceeds from the issuance of equity securities, net of costs,
      of
      $8,347,369. This amount was offset by payments on notes payable of
      $2,011,111.





Net
      cash
      provided by financing activities for fiscal year 2006 was $3,531,755 which
      primarily consisted of proceeds from the issuance of equity securities, net
      of
      costs, of $3,180,000, proceeds from the issuance of debt securities of
      $2,000,000 and proceeds from a line of credit of $1,500,000. These amounts
      were
      offset by payments on notes payable of $1,648,245 and payments on a line of
      credit of $1,500,000.





The
      Company expects to increase 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
      Company anticipates that operating expenses will constitute a material use
      of
      any cash resources.





**Cash
      Requirements and Need for Additional Funds**




The
      Company anticipates a substantial need for cash to fund its working capital
      requirements. In accordance with the Company’s prepared expansion plan, it is
      the opinion of management that approximately $3.0 - $3.6 million will be
      required to cover operating expenses, including, but not limited to, marketing,
      sales, research and operations during the next twelve months .
      Although we currently have over 12 months of working capital, we
      may
      nevertheless need to issue additional debt or equity securities to raise
      required funds. If the Company is unable to obtain funding on reasonable terms
      or finance its needs through current operations, the Company will be forced
      to
      restructure, file for bankruptcy or cease operations.




Notable
      changes to expenses are expected to include an increase in the Company’s sales
      personnel and efforts, and developing more advanced versions of the Company’s
      technology and products.





**Recent
      Accounting Pronouncements**




See
“Note
      2 – Summary of Significant Accounting Policies” to the Financial Statements
      for an explanation of recent accounting pronouncements impacting the
      Company.




**Item
                7A.**
            **Quantitative
                and Qualitative Disclosures About Market
                Risk**





We
      are a
“smaller reporting company” as defined by Regulation S-K and as such, are not
      providing the information contained in this item pursuant to Regulation
      S-K.




**Item
                8.**
            **Financial
                Statements and Supplementary
                Data.**







**POWER
        EFFICIENCY CORPORATION**
  FINANCIAL
          STATEMENTS
 
 DECEMBER
        31, 2007 AND 2006
  
  **POWER
        EFFICIENCY CORPORATION**
 
 DECEMBER
        31, 2007 AND 2006
 
 INDEX
 
 PageReport
                  of Independent Registered Public Accounting Firm
              
              F-1Financial
                  Statements:Balance
                  Sheet
              
              F-2Statements
                  of Operations
              
              F-3Statements
                  of Changes in Stockholders' Equity
              
              F-4Statements
                  of Cash Flows
              
              F-5Notes
                  to Financial Statements
              
              F-6
                  - F-26
  
 
 **REPORT
        OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**
  Board
        of
        Directors and Stockholders
 Power
        Efficiency Corporation
 Las
        Vegas, Nevada
 
 We
        have
        audited the accompanying balance sheet of Power Efficiency Corporation, (a
        Delaware corporation) (the "Company") as of December 31, 2007, and the related
        statements of operations, changes in stockholders' equity, and cash flows
        for
        each of the years ended December 31, 2007 and 2006. 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 the standards of the Public Company
        Accounting Oversight Board (United States). Those standards require that
        we plan
        and perform the audit to obtain reasonable assurance about whether the financial
        statements are free of material misstatement. The Company is not required
        to
        have, nor were we engaged to perform, an audit of its internal control over
        financial reporting. Our audit included consideration of internal control
        over
        financial reporting as a basis for designing audit procedures that are
        appropriate in the circumstances, but not for the purpose of expressing an
        opinion on the effectiveness of the Company’s internal control over financial
        reporting. Accordingly, we express no such opinion. An audit also includes
        examining, on a test basis, evidence supporting the amounts and 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 referred to above present fairly, in all
        material respects, the financial position of Power Efficiency Corporation
        at
        December 31, 2007 and the results of its operations and its cash flows for
        the
        years ended December 31, 2007 and 2006 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, and
        the
        Company has experienced a deficiency of cash from operations. These matters
        raise substantial doubt as to the Company's ability to continue as a going
        concern. Management's plans in regard to these matters are also discussed
        in
        Note 3. The financial statements do not include any adjustments that might
        result from the outcome of these uncertainties.
 
 /s/Sobel
                  & Co., LLCCertified
                  Public AccountantsMarch
                  25, 2008Livingston,
                  New Jersey
  **F-1**
 **POWER
          EFFICIENCY CORPORATION**
 BALANCE
          SHEET
 DECEMBER
          31, 2007
 
 **ASSETS**CURRENT
                    ASSETS:Cash
                
                $
                5,086,378Accounts
                    receivable, net of allowance of $19,648
                
                
                109,252Inventories
                
                
                131,762Prepaid
                    expenses and other current assets
                
                
                41,296Total
                    Current Assets
                
                
                5,368,688PROPERTY
                    AND EQUIPMENT, Net
                
                
                112,106OTHER
                    ASSETS:Deposits
                
                
                122,263Patents,
                    net
                
                
                39,746Goodwill
                
                
                1,929,963Total
                    Other Assets
                
                
                2,091,972$
                7,572,766**LIABILITIES
                    AND STOCKHOLDERS' EQUITY**CURRENT
                    LIABILITIES:Accounts
                    payable and accrued expenses
                
                $
                538,488Customer
                    deposits
                
                
                1,605Accrued
                    salaries and payroll taxes
                
                
                47,970Total
                    Current Liabilities
                
                
                588,063LONG-TERM
                    LIABILITIES:Deferred
                    Rent
                
                
                12,063Total
                    Long-Term Liabilities
                
                
                12,063Total
                    Liabilities
                
                
                600,126COMMITMENTS
                    AND CONTINGENCIESSTOCKHOLDERS'
                    EQUITY:Series
                    B Convertible Preferred Stock, $0.001 par value 10,000,000 shares
                    authorized, 134,400 issued and outstanding
                
                
                134Common
                    stock, $0.001 par value, 100,000,000 shares authorized, 40,367,523
                    shares
                    issued and oustanding
                
                
                40,368Additional
                    paid-in capital
                
                
                33,741,902Accumulated
                    deficit
                
                
                (26,809,764
                )Total
                    Stockholders' Equity
                
                
                6,972,640$
                7,572,766
 
 *See
          report of independent registered public accounting firm and notes to financial
          statements.*
  **F-2**
  **POWER
          EFFICIENCY CORPORATION**
 STATEMENTS
          OF OPERATIONS
 
 
 **Year Ended December 31,****2007**
                
                **2006**REVENUES
                
                $
                490,510
                
                $
                188,811COMPONENTS
                    OF COST OF SALES:Material,
                    labor and overhead
                
                
                340,468
                
                
                136,240GROSS
                    MARGIN
                
                
                150,042
                
                
                52,571COSTS
                    AND EXPENSES:Research
                    and development
                
                
                667,786
                
                
                567,591Selling,
                    general and administrative
                
                
                2,721,284
                
                
                3,118,233Depreciation
                    and amortization
                
                
                47,036
                
                
                34,028Total
                    Costs and Expenses
                
                
                3,436,106
                
                
                3,719,852LOSS
                    FROM OPERATIONS
                
                
                (3,286,064
                )
                
                (3,667,281
                )OTHER
                    INCOME (EXPENSE):Interest
                    income
                
                
                80,481
                
                
                9,243Interest
                    expense
                
                
                (679,306
                )
                
                (1,354,195
                )Total
                    Other Expenses, Net
                
                
                (598,825
                )
                
                (1,344,952
                )LOSS
                    BEFORE PROVISION FOR TAXES
                
                
                (3,884,889
                )
                
                (5,012,233
                )PROVISION
                    FOR TAXES
                
                
                (6,906
                )
                
                (8,542
                )NET
                    LOSS
                
                $
                (3,891,795
                )
                $
                (5,020,775
                )BASIC
                    AND FULLY DILUTED LOSS PER COMMON SHARE
                
                $
                (0.10
                )
                $
                (0.20
                )WEIGHTED
                  AVERAGE COMMON SHARES OUTSTANDINGBASIC
                
                
                38,541,012
                
                
                25,150,386
 
 *See
          report of independent registered public accounting firm and notes to financial
          statements.*
  **F-3**
  **POWER
          EFFICIENCY CORPORATION**
 STATEMENTS
          OF CHANGES IN STOCKHOLDERS' EQUITY
 YEAR
          ENDED DECEMBER 31, 2007 AND 2006
 
 **Additional**
                
                
                
                **Total****Common Stock**
                
                **Preferred Stock**
                
                **Paid-in**
                
                **Accumulated**
                
                **Stockholders'****Shares**
                
                **Amount**
                
                **Shares**
                
                **Amount**
                
                **Capital**
                
                **Deficit**
                
                **Equity**Balance,
                    January 1, 2006
                
                
                23,439,266
                
                $
                23,439
                
                
                -
                
                $
                -
                
                $
                19,189,177
                
                $
                (17,897,194
                )
                $
                1,315,422Issuance
                    of common stock
                
                
                11,000,008
                
                
                11,000
                
                
                -
                
                
                -
                
                
                3,199,300
                
                
                -
                
                
                3,210,300Common
                    stock issued upon exercise of warrants
                
                
                602,735
                
                
                603
                
                
                -
                
                
                -
                
                
                (603
                )
                
                -
                
                
                -Warrants
                    and options issued in connection with the issuance of common
                    stock and
                    debt securities and to employees and consultants
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                2,569,965
                
                
                -
                
                
                2,569,965Expenses
                    related to issuance of common stock
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                (30,000
                )
                
                -
                
                
                (30,000
                )Net
                    loss
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                (5,020,775
                )
                
                (5,020,775
                )Balance,
                    December 31, 2006
                
                
                35,042,009
                
                
                35,042
                
                
                -
                
                
                -
                
                
                24,927,839
                
                
                (22,917,969
                )
                
                2,044,912Issuance
                    of common stock
                
                
                3,416,672
                
                
                3,417
                
                
                -
                
                
                -
                
                
                1,021,583
                
                
                -
                
                
                1,025,000Issuance
                    of preferred stock
                
                
                -
                
                
                -
                
                
                134,400
                
                
                134
                
                
                6,719,866
                
                
                -
                
                
                6,720,000Common
                    stock issued upon exercise of options and warrants
                
                
                1,908,842
                
                
                1,909
                
                
                -
                
                
                -
                
                
                681,591
                
                
                -
                
                
                683,500Warrants
                    and options issued with common stock and debt and to employees and
                    consultants, including debt discount
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                472,153
                
                
                -
                
                
                472,153Expenses
                    related to issuances of preferred and common stock
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                (81,130
                )
                
                -
                
                
                (81,130
                )Net
                    loss
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                (3,891,795
                )
                
                (3,891,795
                )Balance,
                    December 31, 2007
                
                
                40,367,523
                
                $
                40,368
                
                
                134,400
                
                $
                134
                
                $
                33,741,902
                
                $
                (26,809,764
                )
                $
                6,972,640
 
 *See
          report of independent registered public accounting firm and notes to financial
          statements.*
  **F-4**
  **POWER
          EFFICIENCY CORPORATION**
 STATEMENTS
          OF CASH FLOWS
 
  **Year Ended December 31,****2007**
                
                **2006**CASH
                    FLOWS PROVIDED BY (USED FOR):OPERATING
                    ACTIVITIES:Net
                    loss
                
                $
                (3,891,795
                )
                $
                (5,020,775
                )Adjustments
                    to reconcile net loss to net cash used for operating
                    activities:Bad
                    debt expense
                
                
                16,934
                
                
                11,470Depreciation
                    and amortization
                
                
                47,036
                
                
                34,028Loss
                    on disposition of fixed assets
                
                
                3,516
                
                
                585Debt
                    discount related to issuance of debt securities
                
                
                419,859
                
                
                1,039,451Amortization
                    of deferred financing costs
                
                
                11,228
                
                
                70,364Deferred
                    rent
                
                
                12,063
                
                
                -Warrants
                    and options issued in connection with settlements, services from
                    consultants, vendors, the forgiveness of indebtedness, the issuance
                    of
                    debt, and to employees and consultants
                
                
                655,392
                
                
                1,074,848Common
                    Stock issued for consulting services
                
                
                -
                
                
                90,000Changes
                    in certain assets and liabilities:Accounts
                    receivable
                
                
                (93,994
                )
                
                26,464Inventory
                
                
                25,090
                
                
                14,487Prepaid
                    expenses and other
                
                
                29,173
                
                
                (3,206
                )Deposits
                
                
                (88,388
                )
                
                (33,875
                )Restricted
                    cash related to payment of indebtedness
                
                
                -
                
                
                (4,688
                )Accounts
                    payable and accrued expenses
                
                
                1,354
                
                
                (55,454
                )Customer
                    deposits
                
                
                1,605
                
                
                (5,105
                )Accrued
                    salaries and payroll taxes
                
                
                -
                
                
                4,682Net
                    Cash Used for Operating Activities
                
                
                (2,850,927
                )
                
                (2,756,724
                )INVESTING
                    ACTIVITIES:Costs
                    related to patent applications
                
                
                (6,927
                )
                
                -Purchase
                    of property, equipment and other assets
                
                
                (85,610
                )
                
                (90,567
                )Net
                    Cash Used for Investing Activities
                
                
                (92,537
                )
                
                (90,567
                )FINANCING
                    ACTIVITIES:Proceeds
                    from issuance of equity securities, net of costs
                
                
                8,347,369
                
                
                3,180,000Proceeds
                    from issuance of debt securities
                
                
                -
                
                
                2,000,000Proceeds
                    from line of credit
                
                
                -
                
                
                1,500,000Payments
                    on notes payable
                
                
                (2,011,111
                )
                
                (1,648,245
                )Payments
                    on line of credit
                
                
                -
                
                
                (1,500,000
                )Net
                    Cash Provided by Financing Activities
                
                
                6,336,258
                
                
                3,531,755INCREASE
                    IN CASH
                
                
                3,392,794
                
                
                684,464CASHBeginning
                    of year
                
                
                1,693,584
                
                
                1,009,120End
                    of year
                
                $
                5,086,378
                
                $
                1,693,584
 
 *See
          report of independent registered public accounting firm and notes to financial
          statements.*
  **F-5**
  **POWER
        EFFICIENCY CORPORATION**
 NOTES
        TO
        FINANCIAL STATEMENTS
 DECEMBER
        31, 2007 AND 2006
 
 NOTE
          1 -
          NATURE OF BUSINESS:
 Power
        Efficiency Corporation ("Power Efficiency" and/or the "Company"), is
        incorporated in Delaware. Power Efficiency designs, develops, markets and
        sells
        proprietary solid state electrical devices designed to 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 one principal and proprietary product: the three
        phase
        Motor Efficiency Controller, which is used in industrial and commercial
        applications, such as rock crushers, granulators, and escalators. Additionally,
        the Company has developed a digital single phase controller in pre-production
        form, in preparation for working with Original Equipment Manufacturers (“OEMs”)
        to Incorporate the technology into their equipment..
 
 The
        Company's primary customers have been original equipment manufacturers (OEM's)
        and commercial accounts located throughout the United States of America and
        various countries.
 
 Power
        Efficiency formed Design Efficient Energy Services, LLC, a Delaware limited
        liability company. This entity was formed to obtain energy grants and rebates
        for customers of the Company from state governmental bodies. Design Efficient
        Energy Services, LLC has been inactive since inception.
 
 NOTE
        2 -
        SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
 
 **Use
        of Estimates:**
 The
        preparation of financial statements in conformity with 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.
 
 **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
        arise. Such circumstances may include, but are not limited too, the
        discontinuation of a product line or re-engineering certain components making
        certain parts obsolete. At December 31, 2007, inventories consisted primarily
        of
        raw materials. Management has determined a reserve for inventory obsolescence
        is
        not necessary at December 31, 2007.
 
 **Accounts
        Receivable:**
 The
        Company carries its accounts receivable at cost less an allowance for doubtful
        accounts and returns. On a periodic basis, the Company evaluates its accounts
        receivable and establishes an allowance for doubtful accounts, based on a
        history of past write-offs and collections and current credit
        conditions.
 
 **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 3 to 7 years.
  **F-6**
  **POWER
          EFFICIENCY CORPORATION**
 NOTES
          TO
          FINANCIAL STATEMENTS
 DECEMBER
          31, 2007 AND 2006
 
 **Website:**
 Website
        development, 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 a component of cost of sales.
 
 **Deferred
        Financing Costs:**
 Expenditures
        incurred in conjunction with debt or equity capital issuances are deferred as
        other assets until the related offering is complete. Once the offering is
        completed, costs related to equity issuances will be offset against equity
        proceeds, and such costs related to debt issuances are amortized on a straight
        line basis, over the life of the debt. Both equity and debt related costs
        are
        expensed if the offering is not completed.
 
 **Patents:**
 Costs
        associated with applying for U.S. patents based upon technology developed
        by the
        Company are capitalized. At the time the patent is awarded, the asset will
        be
        amortized on a straight line basis, over the remaining term of the patent.
        If no
        patent is issued, these costs will be expensed in the period when it is
        determined that no patent will be issued.
 
 **Deferred
        Rent:**
 The
        Company accounts for rent expense on a straight-line basis for financial
        reporting purposes. The difference between cash payments and rent expense
        is
        included in deferred rent.
 
 **Revenue
        Recognition:**
 Revenue
        from product sales is recognized at the time of shipment, when all services
        are
        complete. Returns and other sales adjustments (warranty accruals, 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 accounts for employee stock options as compensation expense, in
        accordance with SFAS No. 123R, “Share Based Payments.” SFAS No. 123R requires
        companies to expense the value of employee stock options and similar awards,
        and
        applies to all outstanding and vested stock-based awards.
  **F-7**
  **POWER
          EFFICIENCY CORPORATION**
 NOTES
          TO
          FINANCIAL STATEMENTS
 DECEMBER
          31, 2007 AND 2006
 In
        computing the impact, the fair value of each option is estimated on the date
        of
        grant based on the Black-Scholes options-pricing model utilizing certain
        assumptions for a risk free interest rate; volatility; and expected remaining
        lives of the awards. The assumptions used in calculating the fair value of
        share-based payment awards represent management's best estimates, but these
        estimates involve inherent uncertainties and the application of management
        judgment. As a result, if factors change and the Company uses different
        assumptions, the Company’s stock-based compensation expense could be materially
        different in the future. In addition, the Company is required to estimate
        the
        expected forfeiture rate and only recognize expense for those shares expected
        to
        vest. In estimating the Company’s forfeiture rate, the Company analyzed its
        historical forfeiture rate, the remaining lives of unvested options, and
        the
        amount of vested options as a percentage of total options outstanding. If
        the
        Company’s actual forfeiture rate is materially different from its estimate, or
        if the Company reevaluates the forfeiture rate in the future, the stock-based
        compensation expense could be significantly different from what we have recorded
        in the current period. The impact of applying SFAS No. 123R approximated
        $655,000 and $1,075,000 in additional compensation expense during the years
        ended December 31, 2007 and 2006, respectively. Such amounts are included
        in
        research and development expenses and selling, general and administrative
        expense on the statement of operations.
 
 **Product
        Warranties:**
 The
        Company warrants its products for two years. Estimated product warranty expenses
        are accrued in cost of sales at the time the related sale is recognized.
        Estimates of warranty expenses are based primarily on historical warranty
        claim
        experience. Warranty expenses include accruals for basic warranties for products
        sold.
 
 **Provision
        for Income Taxes:**
 The
        Company utilizes the asset and liability method of accounting for income
        taxes
        pursuant to SFAS No. 109, Accounting for Income Taxes". SFAS No. 109 requires
        the recognition of deferred tax assets and liabilities for both the expected
        future tax impact of differences between the financial statement and tax
        basis
        of assets and liabilities, and for the expected future tax benefit to be
        derived
        from tax loss and tax credit carryforwards. SFAS No. 109 additionally requires
        the establishment of a valuation allowance to reflect the likelihood of
        realization of deferred tax assets.
 
 The
        provision for taxes represents state franchise taxes.
 
 **Goodwill:**
 SFAS
        No.
        142, “Goodwill and Other Intangible Assets” requires that goodwill shall no
        longer be amortized. Goodwill is tested for impairment on an annual basis
        and
        between annual tests on a quarterly basis, utilizing a two-step test, as
        described in SFAS No. 142.
 
 **Advertising:**
 Advertising
        costs are expensed as incurred. Advertising expenses were $7,504 and $1,733
        for
        the years ended December 31, 2007 and 2006, respectively.
  **F-8**
  **POWER
        EFFICIENCY CORPORATION**
 NOTES
        TO
        FINANCIAL STATEMENTS
 DECEMBER
        31, 2007 AND 2006
 
 **New
        Accounting Pronouncements:**
 In
        September 2006, the FASB issued SFAS No. 157, *“Fair
        Value Measurements.”* SFAS
        No.
        157 defines fair value, establishes a framework for measuring fair value
        in
        generally accepted accounting principles, and expands disclosures about fair
        value measurements. SFAS No. 157 is effective for fiscal years beginning
        after
        November 15, 2007. The adoption of SFAS No. 157 is not expected to have a
        material impact on our financial condition, results of operations or cash
        flows.
 
 In
        February 2007, the FASB issued SFAS No. 159, *“The
        Fair Value Option for Financial Assets and Financial Liabilities: Including
        an
        amendment of FASB Statement No. 115.”* SFAS
        No.
        159 permits entities to measure many financial instruments and certain other
        items at fair value with changes in fair value reported in earnings. The
        FASB
        issued SFAS No. 159 to mitigate earnings volatility that arises when financial
        assets and liabilities are measured differently, and to expand the use of
        fair
        value measurement for financial instruments. SFAS No. 159 is effective for
        fiscal years beginning after November 15, 2007. The adoption of SFAS No.
        159 is
        not expected to have a material impact on our financial condition, results
        of
        operations or cash flows.
  In
        May
        2007, the FASB issued FASB Staff Position FIN 48-1, *“Definition of
        Settlement in FASB Interpretation No. 48.”* FIN 48-1 provides guidance on
        how to determine whether a tax position is effectively settled for the purpose
        of recognizing previously unrecognized tax benefits. FIN 48-1 is effective
        retroactively to January 1, 2007. The implementation of FIN 48 and FIN 48-1
        did
        not have a material impact on the Company’s financial position, results of
        operations or cash flows.
  **Financial
        Statement Reclassifications:**
 Certain
        reclassifications have been made to the 2006 financial statements in order
        for
        them to conform to the 2007 financial statement presentation.
  
 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, and the Company experienced a
        $2,850,927 deficiency of cash from operations in 2007. While the Company
        appears
        to have adequate liquidity at December 31, 2007, there can be no assurances
        that
        such liquidity will remain sufficient.
  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 is seeking to raise additional capital through
        equity issuance, debt financing or other types of financing (See Note 22).
        However, there are no assurances that sufficient capital will be
        raised.
  On
        January 21, 2008, the Company closed on a private offering of its Series
        B
        Preferred Stock which grossed $280,000 (See Notes 18 and Note 22).
  **F-9**
 **POWER
          EFFICIENCY CORPORATION**
 NOTES
          TO
          FINANCIAL STATEMENTS
 DECEMBER
          31, 2007 AND 2006
 
 NOTE
        4 -
        PREPAID EXPENSES AND OTHER CURRENT ASSETS:
 
  At
        December 31, 2007, prepaid expenses and other current assets are comprised
        as
        follows:
 
 Prepaid
                  insurance
              
              $
              19,705Prepaid
                  expenses
              
              
              87,958Prepaid
                  expenses and other current assets
              
              $
              107,663
  
 NOTE
        5 -
        PROPERTY AND EQUIPMENT:
 
 At
        December 31, 2007, property and equipment is comprised as follows:
 
 Machinery
                  and equipment
              
              $
              151,497Office
                  furniture and equipment
              
              
              26,326177,923Less:
                  Accumulated depreciation
              
              
              65,717Property
                  and Equipment, Net
              
              $
              112,106
 
 Depreciation
        for the years ended December 31, 2007 and 2006 amounted to $46,044 and $29,778,
        respectively.
  
 NOTE
        6 -
        GOODWILL:
 
  In
        accordance with SFAS No. 142, "Goodwill and Other Intangible Assets", previously
        recognized intangible assets deemed to have indefinite useful lives were
        tested
        by management for impairment during fiscal 2007 utilizing a two-step test. An
        annual
        goodwill impairment test was performed by management in addition to quarterly
        goodwill impairment tests.
 
 The
        first
        part of the test is to compare the Company’s fair market value (the number of
        the Company’s common shares outstanding multiplied by the closing stock price of
        the date of the test), to the book value of the Company (the Company’s total
        stockholders’ equity, as of the date of the test). If the fair market value of
        the Company is greater than the book value, no impairment exists as of the
        date
        of the test. However, if book value exceeds fair market value, the Company
        must
        perform part two of the test, which involves recalculating the implied goodwill
        by repeating the acquisition analysis that was originally used to calculate
        goodwill, using purchase accounting as if the acquisition happened on the
        date
        of the test, to calculate the implied goodwill as of the date of the
        test.
 
 The
        Company’s most recent impairment analysis was performed on December 31, 2007, on
        the Company’s single reporting unit. As of December 31, 2007, the Company’s fair
        market value was $22,199,036, and the Company’s book value was $6,972,640. Based
        on this, no impairment exists as of December 31, 2007.
 
 Circumstances
        may arise in which the Company will perform an impairment test in addition
        to
        its annual and quarterly tests. An example of one of these circumstances
        would
        be a sudden sharp drop in the Company’s stock price.
  **F-10**
 **POWER
          EFFICIENCY CORPORATION**
 NOTES
          TO
          FINANCIAL STATEMENTS
 DECEMBER
          31, 2007 AND 2006
 
 
 NOTE
        7 -
        INTANGIBLE ASSETS:
 
  Intangible
        assets subject to amortization consists of the following for the year ended
        December 31, 2007:
 
 Patents
              
              $
              49,602Less:
                  Accumulated amortization
              
              
              9,856Intangible
                  Assets, Net
              
              $
              39,746
 
 Amortization
        expense in 2007 and 2006 amounted to $992 and $4,205, respectively.
 
 During
        2007, the Company capitalized approximately $7,000 in expenses related to
        patent
        filings. The Company will begin amortizing these costs over the life of the
        patent, once the patent is approved by the appropriate authorities.
 
 Amortization
        expense expected in the succeeding five years for the Company’s existing patents
        is as follows:
 
 2008
              
              $
              9922009
              
              
              9922010
              
              
              9922011
              
              
              9922012
              
              
              992Thereafter
              
              
              34,786$
              39,746
  
 NOTE
          8 -
          CONCENTRATIONS OF CREDIT RISKS:
  Financial
        instruments which potentially subject the Company to concentrations of credit
        risk, consist primarily of cash and temporary cash investments and accounts
        receivables.
 
 The
        Company maintains cash balances which at times may be 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.
 
 Three
        customers accounted for approximately 84% of 2007 sales and 70% of accounts
        receivable at December 31, 2007. Four customers accounted for approximately
        75% of 2006 sales.
 
 International
        sales as a percentage of total revenues for the years ended December 31 are
        as
        follows:
 
 **County**
              
              **2007**
              
              **2006**Sweden
              
              
              2
              %
              
              3
              %
  **F-11**
  **POWER
          EFFICIENCY CORPORATION**
 NOTES
          TO
          FINANCIAL STATEMENTS
 DECEMBER
          31, 2007 AND 2006
 NOTE
          9 – PRODUCT WARRANTIES
 
 Accrued
        warranty expenses at December 31, 2006 and 2007 consist of the
        following:
 
 Balance,
                  January 1, 2006
              
              $
              -Additions
              
              
              2,580Deductions
              
              
              (2,580
              )Balance,
                  December 31, 2006
              
              
              -Additions
              
              
              4,151Deductions
              
              
              (742
              )Balance,
                  December 31, 2007
              
              $
              3,409
 
 
 NOTE
        10 -
        PROVISION FOR TAXES:
 
 
 As
        of
        December 31, 2007 and 2006, the Company has available, on a federal tax basis,
        net operating loss carryforwards of approximately $19,800,000 and $15,900,000,
        respectively. These net operating losses expire at varying amounts through
        2027.
        The net operating loss carryforwards result in deferred tax assets of
        approximately $6,700,000 and $5,400,000 at December 31, 2007 and 2006,
        respectively; however, a valuation reserve has been recorded for the full
        amount
        due to the uncertainty of realization of the deferred tax assets.
 
 A
        reconciliation of the statutory tax rates for the years ended December 31
        is as
        follows:
 
 **2007**
              
              **2006**Statutory
                  rate
              
              
              (34
              )%
              
              (34
              )%State
                  income tax – all states
              
              
              (6
              )%
              
              (6
              )%(40
              )%
              
              (40
              )%Current
                  year valuation allowance
              
              
              40
              %
              
              40
              %Benefit
                  for income taxes
              
              
              0
              %
              
              0
              %
  **F-12**
  **POWER
        EFFICIENCY CORPORATION**
 NOTES
        TO
        FINANCIAL STATEMENTS
 DECEMBER
        31, 2007 AND 2006
 
 NOTE
        11 -
        WARRANTS:
 
 
 Warrant
        activity during the years ended December 31, 2007 and 2006 follows:
 
 **Warrants**
              
              **Average**
                **Exercise Price**Warrants
                  outstanding at January 1, 2006
              
              
              13,252,217
              
              $
              0.45Issued
                  during 2006
              
              
              10,821,576
              
              
              0.36Exercised
                  during 2006
              
              
              (1,701,063
              )
              
              0.20Warrants
                  outstanding at December 31, 2006
              
              
              22,372,730
              
              
              0.42Issued
                  during 2007
              
              
              9,528,338
              
              
              0.52Exercised
                  during 2007
              
              
              (2,143,659
              )
              
              0.40Cancelled
                  and expired during 2007
              
              
              (743,441
              )
              
              0.40Warrants
                  outstanding at December 31, 2007
              
              
              29,013,968
              
              $
              0.45
 
 During
        2007, the Company issued the following warrants: 100,000 warrants as consulting
        fees to a sales consultant, which were valued at $15,458 and expensed and
        included in selling, general and administrative expenses; 1,000,000 warrants
        as
        consulting fees to a technical consultant, which were valued at $228,200,
        however, these warrants have special vesting provisions, therefore the Company
        did not recognize an expense for these warrants in 2007; 1,708,338 warrants
        to
        investors, in connection with the Company’s private offering of common stock
        (See Note 19), which were valued at $224,843 and recorded as additional paid
        in
        capital; 6,720,000 warrants to investors, in connection with the Company’s
        private offering of its Series B preferred stock (See Note 19), which were
        valued at $3,421,631 and recorded as additional paid in capital.
 
 During
        2006, the Company issued the following warrants: 300,000 warrants as consulting
        fees to an investment bank, which were valued at $74,430 and expensed and
        included in selling, general and administrative expenses; 24,000 warrants
        as
        consulting fees to a technical consultant, which were valued at $1,098 and
        expensed and included in research and development expenses; 2,647,572 warrants
        to noteholders in connection with the Company’s issuance of debt securities,
        which were valued at $1,104,383, recorded as a debt discount, and amortized
        to
        interest expense over the life of the notes; 7,850,004 warrants to investors,
        in
        connection with the Company’s private offering of common stock and debt
        securities, which closed on November 30, 2006 (See Notes 16 and 19), which
        were
        valued at $1,344,456 and
        recorded as additional paid in capital.
 
 The
        fair
        value of each warrant is estimated on the date of grant based on the
        Black-Scholes options-pricing model utilizing certain assumptions for a risk
        free interest rate; volatility; and expected remaining lives of the awards.
        The
        assumptions used in calculating the fair value of share-based payment awards
        represent management's best estimates, but these estimates involve inherent
        uncertainties and the application of management judgment. In addition, the
        Company is required to estimate the expected forfeiture rate and only recognize
        expense for those shares expected to vest. In estimating the Company’s
        forfeiture rate, the Company analyzed its historical forfeiture rate, the
        remaining lives of unvested options, and the amount of vested options as
        a
        percentage of total options outstanding.
  **F-13**
  **POWER
        EFFICIENCY CORPORATION**
 NOTES
        TO
        FINANCIAL STATEMENTS
 DECEMBER
        31, 2007 AND 2006
 
  The
        fair
        value of warrants granted is estimated on the date of grant based on the
        weighted-average assumptions in the table below. The assumption for the expected
        life is based on evaluations of historical and expected exercise behavior.
        The
        risk-free interest rate is based on the U.S. Treasury rates at the date of
        grant
        with maturity dates approximately equal to the expected life at the grant
        date.
        The historical stock volatility of the Company’s common stock is used as the
        basis for the volatility assumption.
 
 **Years ended
                  December 31,****2007**
              
              **2006**Weighted
                  average risk-free rate
              
              
              4.5
              %
              
              4.5
              %Average
                  expected life in years
              
              
              3.6
              
              
              3.5Expected
                  dividends
              
              
              None
              
              
              NoneVolatility
              
              
              166
              %
              
              100
              %Forfeiture
                  rate
              
              
              40
              %
              
              24
              %
  NOTE
        12 -
        STOCK OPTION PLAN:
 
  Stock
        Option Plan activity during the years ended December 31, 2007 and 2006
        follows:
 
 **Shares**
              
              **Average**
                **Exercise Price**Options
                  outstanding and exercisable at January 1, 2006
              
              
              12,470,363
              
              $
              0.46Granted
                  during 2006
              
              
              5,587,500
              
              
              0.24Cancelled
                  during 2006
              
              
              (3,259,592
              )
              
              0.45Expired
                  during 2006
              
              
              (63,375
              )
              
              14.00Options
                  outstanding and exercisable at December 31, 2006
              
              
              14,734,896
              
              $
              0.33Granted
                  during 2007
              
              
              3,725,000
              
              
              0.35Cancelled
                  during 2007
              
              
              (4,050,000
              )
              
              0.23Exercised
                  during 2007
              
              
              (100,000
              )
              
              0.20Options
                  outstanding and exercisable at December 31, 2007
              
              
              14,309,896
              
              $
              0.36
 
 Weighted
        average remaining contractual life at December 31, 2007, for all options
        is 7.15
        years.
 
 In
        2000,
        the Company adopted the 2000 Stock Option and Restricted Stock Plan (the
        "2000
        Plan"). On June 8, 2007, the 2000 Plan was amended and restated. The 2000
        Plan,
        as restated and amended, provides for the granting of options to purchase
        up to
        20,000,000 shares of common stock. 100,000 options have been exercised to
        date.
        There are 14,309,896 options outstanding under the 2000 Plan.
 
 During
        2007, the Company granted 3,725,000 stock options to directors and employees
        at
        exercise prices approximating fair market value of the stock on the date
        of each
        grant. Such issuances to directors and employees were valued at $714,239,
        utilizing similar factors as described below, which was expensed and is included
        in research and development expenses and selling, general and administrative
        expenses.
  **F-14**
 **POWER
          EFFICIENCY CORPORATION**
 NOTES
          TO
          FINANCIAL STATEMENTS
 DECEMBER
          31, 2007 AND 2006
 During
        2006, the Company granted 5,587,500 stock options to directors, officers
        and
        employees at exercise prices approximating fair market value of the stock
        on the
        date of each grant. Such issuances to directors, officers and employees were
        valued at $999,320, utilizing similar factors as described below, which was
        expensed and is included in research and development expenses and selling,
        general and administrative expenses.
 
 In
        1994,
        the Company adopted a Stock Option Plan (the "1994 Plan"). The 1994 Plan
        provides for the granting of options to purchase up to 71,429 shares of common
        stock. No options have been exercised to date. There are no options outstanding
        under the 1994 Plan, and the Company does not plan to issue any more options
        under this plan.
 
 **Share
        Based Compensation Payments:**
 During
        the year ended December 31, 2007, the Board of Directors authorized the net
        issuance of 3,725,000 stock options to directors, officers and employees.
        During
        the year ended December 31, 2006, the Board of Directors authorized the net
        issuance of 5,587,500 stock options to officers, employees and consultants.
        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 166% and 100% for the
        years
        ended December 31, 2007 and 2006, respectively; risk-free interest rate of
        4.5%
        for the years ended December 31, 2007 and 2006; and expected lives of
        approximately 10.0 years.
 
 The
        Company accounts for employee stock options as compensation expense, in
        accordance with SFAS No. 123R, “Share Based Payments.” SFAS No. 123R requires
        companies to expense the value of employee stock options and similar
        awards.
 
 In
        computing the impact, the fair value of each option is estimated on the date
        of
        grant based on the Black-Scholes options-pricing model utilizing certain
        assumptions for a risk free interest rate; volatility; and expected remaining
        lives of the awards. The assumptions used in calculating the fair value of
        share-based payment awards represent management's best estimates, but these
        estimates involve inherent uncertainties and the application of management
        judgment. As a result, if factors change and the Company uses different
        assumptions, the Company’s stock-based compensation expense could be materially
        different in the future. In addition, the Company is required to estimate
        the
        expected forfeiture rate and only recognize expense for those shares expected
        to
        vest. In estimating the Company’s forfeiture rate, the Company analyzed its
        historical forfeiture rate, the remaining lives of unvested options, and
        the
        amount of vested options as a percentage of total options outstanding. If
        the
        Company’s actual forfeiture rate is materially different from its estimate, or
        if the Company reevaluates the forfeiture rate in the future, the stock-based
        compensation expense could be significantly different from what we have recorded
        in the current period.
  **F-15**
  **POWER
        EFFICIENCY CORPORATION**
 NOTES
        TO
        FINANCIAL STATEMENTS
 DECEMBER
        31, 2007 AND 2006
   
 NOTE
        13 -
        COMMITMENTS AND CONTINGENCIES:
 
  **Leases:**
 The
        Company leases office space, a manufacturing and warehousing facility, and
        a
        research and development facility in Las Vegas, Nevada. The office space
        lease
        was assigned to the Company by the Chief Executive Officer, on the same terms
        and conditions, effective February 24, 2006. The lease includes a payment
        of
        $11,292 per month, plus annual increases of 3% per year, which includes all
        cleaning and utilities, except phone and internet service. The term of the
        lease
        is five years.
 
 On
        July
        1, 2007, the Company began leasing a research and development facility. The
        lease includes a payment of $1,995, plus common area maintenance charges,
        per
        month. The term of the lease is three years and one month. On November 1,
        2007,
        the Company amended the lease to include additional space, which it will
        utilize
        for its manufacturing and warehousing facility. The amendment to the lease
        calls
        for an additional payment of $1,605, plus common area maintenance charges,
        per
        month, and carries the same terms and conditions as the original
        lease.
 
 Minimum
        future rentals are as follows:
 
 **Year**2008
              
              $
              170,2062009
              
              
              190,6642010
              
              
              177,0912011
              
              
              12,688$
              550,649
 
 Rent
        expense, including base rent and additional charges, for the year ended December
        31, 2007 and 2006 was $173,545 and $139,919, respectively.
 
 **Patent
        License Agreements:**
 The
        Company was 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 covered 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 did 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 terminated on December 16, 2002 upon
        the
        expiration of all of the licensed patents. 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. ****
  **Software
          User License Agreements:**
 The
          Company entered into an agreement to purchase software licenses for accounting,
          manufacturing and CRM software. The total amount of the software license
          agreement is approximately $66,000 and the software licenses begin in
          2008.
  **F-16**
  **POWER
        EFFICIENCY CORPORATION**
 NOTES
        TO
        FINANCIAL STATEMENTS
 DECEMBER
        31, 2007 AND 2006
 
  **Litigation:**
 Presently,
        the Company is not involved in any litigation.
 
 On
        March
        19, 2007, the Company reached an agreement with GE Fanuc Automation North
        America, Inc. (“GE Fanuc”) to cease using its Power Genius name for its
        products. As consideration, GE Fanuc paid the Company $20,000.
 
 **Subcontractors:**
 During
        2006, the Company utilized one subcontractor in Michigan and one subcontractor
        in Nevada as turn-key manufacturers for its analog product. On March 15,
        2006,
        the Company terminated its agreement with its Livonia, Michigan subcontractor.
        In December of 2007, the Company ceased using the Las Vegas, Nevada
        subcontractor and began to manufacture its analog and some of its digital
        product in-house.
 
 The
        Company directly sources its own analog circuit boards from a contract circuit
        board manufacturer. Over the past year, the Company has primarily sourced
        analog
        circuit boards from RMF Design and Manufacturing (“RMF”), based outside of
        Toronto, Canada. The Company believes RMF has the ability to meet the Company’s
        analog circuit board production needs and the Company would be successful
        in
        finding alternative manufacturers should RMF not be available to manufacture
        these circuit boards.
 
 On
        September 6, 2007, the Company entered into a manufacturing service agreement
        with Sanima-Sci Corporation (“Sanmina-Sci”) for the production of digital units
        and digital circuit boards. Pursuant to this agreement, the Company will
        purchase an amount of digital units, subject to certain minimum quantities,
        from
        Sanima-Sci equal to an initial firm order agreed upon by the Company and
        Sanima-Sci and subsequent nine-month requirements forecasts. The initial
        term of
        the contract is one year, and upon expiration of the initial term, the contract
        will continue on a year to year basis until one party gives notice to
        terminate.  At
        the
        present time the Company is not able to determine if the actual purchases
        will
        be in excess of these minimum commitments, or if any potential liability
        will be
        incurred. At December 31, 2007, the Company has approximately $100,000 in
        open
        purchase orders with this subcontractor. Additionally, the Company is committed
        for an additional $300,000 during the initial term of this agreement. At
        December 31, 2007, the Company has approximately $81,000 on deposit with
        Sanmina-Sci.
 
 **Investment
        Advisory Agreements:**
 The
        Company entered into a consulting agreement with an investment advisor on
        December 1, 2004. The agreement calls for the investment advisor to assist
        the
        Company in devising financial and marketing strategies, and also to assist
        the
        Company in raising funds on a non-exclusive basis through the offering of
        debt
        and/or equity securities. The agreement expired on November 30, 2005 and
        was
        renewed on February 21, 2006. The company shall pay the investment advisor
        the
        amount of $4,000 per month, plus expenses approved by the Company and issue
        300,000 options. The Company terminated the engagement with the consultant
        for
        non-performance on April 20, 2006. The Company paid the investment advisor
        $35,000 during the year ended  December 31, 2006, and the agreement has
        been satisfied in full.
  **F-17**
  **POWER
        EFFICIENCY CORPORATION**
 NOTES
        TO
        FINANCIAL STATEMENTS
 DECEMBER
        31, 2007 AND 2006
  
 On
        January 2, 2006, the Company entered into a consulting agreement with an
        investor relations firm. As
        part
        of the compensation, the Company granted 300,000 shares
        of the Company’s common stock having a
        total value of $90,000, which such cost is
        expensed in selling, general and administrative expenses. This
        consulting agreement expired on July 2, 2006 and was not renewed .
  On
        January 6, 2006, the Company entered into a marketing agreement with an
        investment bank. In
        connection with this agreement, the Company issued a
        five
        year warrant to purchase up to 300,000 shares of Common Stock ,
        with an
        exercise price of $0.25 per share .
        The
        total value of the 300,000 warrants issued to the investment bank approximates
        $74,430 and is expensed in selling, general and administrative expenses.
        The
        Company terminated this agreement on June 23, 2006,
        however, the warrants
        remain exercisable for five years
        from the date of issuance.
 
 The
        Company entered into an agreement with an investment bank on October 13,
        2006.
        In accordance with this agreement, the investment bank served as the Company’s
        non-exclusive placement agent for a private stock offering of 10,700,008
        shares
        of common stock and 5,350,004 warrants which closed on November 30, 2006
        (See
        Note 19). The investment bank was paid a retainer fee of $5,000, and the
        agreement called for the investment bank to receive 5.5% of the total cash
        invested by investors introduced by the investment bank upon closing. The
        investment bank introduced no investors in the private stock offering which
        closed on November 30, 2006. The Company subsequently terminated this agreement
        on January 13, 2007.
 
 
 NOTE
        14 -
        RELATED PARTY TRANSACTIONS:
 
 
 During
        the years ended December 31, 2007 and 2006, consulting fees of $12,000 and
        $7,000 were paid to a director and stockholder of the Company, respectively.
        These amounts are included in selling, general and administrative
        expenses.
 
 On
        October 29, 2007, the Company entered into a financing transaction in which
        it
        issued 113,500 units, each unit consisting of one share of the Company’s series
        B preferred stock and a warrant to purchase up to 50 shares of the Company’s
        common stock for $3,825,000 in cash and the cancellation of $1,850,000 of
        debt
        securities. In this transaction, Steven Strasser, the Company’s Chief Executive
        Officer purchased 16,000 units for $250,000 in cash and the cancellation
        of a
        $550,000 note; George Boyadjieff, a director and senior technical advisor
        of the
        Company, purchased 4,000 units for $200,000 in cash; Douglas Dunn, a director
        of
        the Company, purchased 1,000 units for $50,000 in cash; Gary Rado, a director
        of
        the Company, purchased 2,000 units for $100,000 in cash (See Note
        18).
  **F-18**
 **POWER
          EFFICIENCY CORPORATION**
 NOTES
          TO
          FINANCIAL STATEMENTS
 DECEMBER
          31, 2007 AND 2006
 
  On
        November 30, 2006, the Company entered into a financing transaction in which
        it
        issued 10,700,008 shares of its common stock and 5,350,004 warrants to purchase
        common stock for $3,210,000 and $2,000,000 in senior secured notes in a private
        offering of equity and debt. In this transaction, Steven Strasser, the Company’s
        Chief Executive Officer purchased 1,166,668 shares of common stock and 583,334
        warrants for $350,000, and was issued a senior secured note for $550,000;
        John
        (BJ) Lackland, the Company’s Chief Financial Officer purchased 100,000 shares of
        common stock and 50,000 warrants for $30,000; Robert Murray, the Company’s
        former Chief Operating Officer purchased 100,000 shares and 50,000 warrants
        for
        $30,000; George Boyadjieff, a director and senior technical advisor of the
        Company was issued 1,000,000 shares of common stock and 500,000 warrants
        for
        $300,000; and Commerce Energy Group was issued a $200,000 secured note and
        250,000 warrants (See Notes 16 and 19). The $2,000,000 in senior secured
        notes
        were paid off in full on October 29, 2007 (See Note 18).
 
 On
        April
        19, 2006, the Company entered into a financing transaction in which it issued a
        $1,000,000 secured convertible note
        (the "EMTUCK Note") to EMTUCK, LLC ("EMTUCK"), in which the managing member
        is a
        management company wholly owned and controlled by Steven
        Strasser, the Company's
        CEO .
        On May
        19, 2006, the Note was increased to $1,500,000. This note was paid off in
        full
        on November 30, 2006 (See Notes 16 and 19).
  Interest
          expense of approximately $665,000 and $440,000 for the years ended December
          31,
          2007 and 2006, respectively, was associated with related
          parties.
  
 NOTE
        15 -
        SUPPLEMENTAL DISCLOSURE OF CASH FLOWS INFORMATION:
 
 
 Cash
        paid
        during the year ended December 31, for:
 
 **2007**
              
              **2006**Interest
              
              $
              248,219
              
              $
              314,750Income/Franchise
                  Taxes
              
              $
              6,906
              
              $
              8,542
  **F-19**
 **POWER
          EFFICIENCY CORPORATION**
 NOTES
          TO
          FINANCIAL STATEMENTS
 DECEMBER
          31, 2007 AND 2006
 NOTE
          16 -
          NOTES PAYABLE:
 
 On
        November 30, 2006, the Company entered into a financing transaction in which
        the
        Company issued $2,000,000 of its two year, senior, secured promissory notes
        (collectively the “Notes”, individually a “Note”). The Notes bear interest of
        15% per annum. Interest due under the Notes is payable quarterly, with the
        principal and final quarterly interest payment becoming due November 30,
        2008.
        The Notes have a first priority security interest in all of the assets of
        the
        Company. Upon the occurrence of an “Event of Default” (as defined in the Note,
        included herein as an exhibit) the holder may, upon written notice to the
        Company, elect to declare the entire principal amount of the Note then
        outstanding together with accrued unpaid interest thereon due and payable.
        Upon
        receipt of such notice, the Company shall have seven business days to cure
        the
        Event of Default, and if uncured on the eighth business day, all principal
        and
        interest shall become immediately due and payable. The Company also issued
        with
        2,500,000 warrants (the “Debt Warrants”) to purchase common stock of the Company
        to the holders of the Notes. The Debt Warrants have a per share exercise
        price
        of $0.40 and expire November 29, 2011. 1,250,000 of the Debt Warrants are
        exercisable immediately, with the remaining 1,250,000 Debt Warrants becoming
        exercisable in equal amounts over 24 months beginning December 29, 2006.
        The
        common stock issuable upon exercise of the Debt Warrants has piggyback
        registration rights, and can be included in the Company’s next registration
        statement. The
        Debt
        Warrants have a cashless exercise provision, but only if the registration
        statement on which the common stock issuable upon exercise of the Debt Warrants
        is not then effective. The Notes were paid off in full on October 29, 2007
        (See
        Note 18.)
 
 The
        $2,000,000 loan consisted of $550,000 from Steven Strasser, the Company’s
        Chairman, Chief Executive Officer and the Company’s largest beneficial
        shareholder, $200,000 from Commerce Energy Group, Inc, the Company’s second
        largest shareholder prior to the Offering, and $1,250,000 from individual
        investors. $1,450,000 of these Notes came from the exchange of existing
        promissory notes of the Company.
 
 The
        Company’s previously issued notes, including $1,464,306 issued on October 27,
        2004, $125,000 issued on February 24, 2005 (collectively the “Pali Notes”) and
        $1,500,000 issued to EMTUCK, were paid off in November 2006, and such paid
        off
        note holders no longer hold a security interest in the Company’s
        assets.
  **F-20**
  **POWER
          EFFICIENCY CORPORATION**
 NOTES
          TO
          FINANCIAL STATEMENTS
 DECEMBER
          31, 2007 AND 2006
  On
        April
        19, 2006, the Company entered into a financing transaction in which it issued
        a
        $1,000,000 secured convertible note to EMTUCK (See Note 14). On May 19, 2006,
        the EMTUCK Note was increased to $1,500,000. The EMTUCK Note bears interest
        of
        10.75% per annum, with interest payments due quarterly, beginning July 19,
        2006.
        The EMTUCK Note's principal becomes due on January 19, 2007 (the "Maturity
        Date"). The Company can draw on the Note, in increments of up to $200,000,
        and
        interest is calculated on the outstanding principal drawn. The EMTUCK Note
        is
        secured by a first lien and security interest in all of the Company's accounts
        receivable and inventory now or hereafter acquired, and a second lien and
        security interest in all other collateral, subordinate to the existing lien
        and
        security interest in favor of Pali Capital Corporation as representative
        of the
        holders the Pali Notes. In the event of default (as defined in the EMTUCK
        Note),
        EMTUCK may, upon written notice to the Company, elect to declare the entire
        principal amount of the Note then outstanding, together with accrued and
        unpaid
        interest thereon due and payable. Upon receipt of such notice, the Company
        shall
        have seven business days to cure the event of default and if uncured on the
        eighth business day, all principal and accrued interest shall become immediately
        due and payable. The EMTUCK Note was paid off in full on November 30,
        2006.
 
 The
        members of EMTUCK were issued 2,083,334 warrants in conjunction with the
        EMTUCK
        Note, with an exercise price of $0.24 per share. 1,458,334 warrants vested
        immediately, and the remaining 625,000 warrants vested equally over nine
        (9)
        months. The warrants have a cashless exercise provision and will have a 5
        year
        term. If after the date of issuance of the warrants, the Registrant files
        a
        registration statement under the Securities Act of 1933, or amends an existing
        registration statement, in either case, the Registrant will use its best
        efforts
        to include the shares issuable on exercise of the warrants in such registration
        statement or amended registration statement.
 
 On
        October 17, 2005, the Company issued a $50,000 promissory note payable to
        its
        former landlord in connection with a settlement agreement. The note is
        non-interest bearing and calls for monthly payments of $2,778 of principal
        beginning November 17, 2005. In connection with this note payable, the Company
        recorded a note discount of $6,146 on the Company’s balance sheet. During the
        years ended December 31, 2007 and December 31, 2006, the Company paid $11,111
        and $33,327 in principal, respectively. As of December 31, 2007, this note
        has
        been paid off in full.
 
 On
        December 15, 2004, the Company issued a $25,334 promissory note payable to
        a
        former officer, in connection with a settlement agreement (See Note 17),
        at 15%.
        The note calls for monthly payments of $1,580, principal and interest, beginning
        January 2005 and matured on June 15, 2006. During the years ended December
        31,
        2006 the Company paid $8,997 in principal. As of December 31, 2007 this note
        has
        been paid off in full.
  **F-21**
 
 **POWER
        EFFICIENCY CORPORATION**
 NOTES
        TO
        FINANCIAL STATEMENTS
 DECEMBER
        31, 2007 AND 2006
 
  
 NOTE
        17 -
        EMPLOYMENT AND CONSULTING AGREEMENTS:
 
 
 On
        June
        1, 2005, the Company entered into an employment and compensation agreement
        with
        Steven Strasser, the Company’s Chief Executive Officer. The agreement is for a
        term of five years, with a base salary for the first year of the agreement
        of
        $275,000 with annual increases of at least 5% of the current year’s base salary
        and bonuses at the discretion of the compensation committee of the board
        of
        directors. During the first year of the Agreement, an amount equal to $215,000
        of the base salary shall be paid by grant of stock options under the Company’s
        2000 Stock Option and Restricted Stock Plan to purchase 1,612,500 shares
        of the
        Company’s common stock, vesting in equal quarterly installments over the year
        ending June 1, 2006, and the remaining $60,000 of the base salary is to be
        paid
        in cash. The agreement with this Chief Executive Officer also provides, among
        other things, for reimbursement of certain business expenses and for certain
        payments to be made to this Chief Executive Officer in the event of a change
        of
        control. This Chief Executive Officer also received 1,818,180 incentive stock
        options which will vest over a five year period and have an exercise price
        of
        $0.22, and 1,181,820 non-qualified stock options which will vest over a five
        year period and have an exercise price of $0.20. The agreement also provides
        for
        certain non-competition and nondisclosure covenants.
 
 On
        June
        1, 2005, the Company entered into an employment and compensation agreement
        with
        John Lackland, the Company’s Chief Financial Officer. The agreement is for a
        term of five years, with a base salary for the first year of the agreement
        of
        $175,000 with annual increases of at least 5% of the current year’s base salary
        and bonuses at the discretion of the compensation committee of the board
        of
        directors. During the first year of the Agreement, an amount equal to $55,000
        of
        the base salary shall be paid by grant of stock options under the Company’s 2000
        Stock Option and Restricted Stock Plan to purchase 412,500 shares of the
        Company’s common stock, vesting in equal quarterly installments over the year
        ending June 1, 2006, and the remaining $120,000 of the base salary is to
        be paid
        in cash. The agreement with this Chief Financial Officer also provides, among
        other things, for reimbursement of certain business expenses and for certain
        payments to be made to this Chief Financial Officer in the event of a change
        of
        control. This Chief Financial Officer also received 1,733,750 incentive stock
        options which will vest over a five year period and have an exercise price
        of
        $0.20, and 66,250 non-qualified stock options which vested on June 1, 2006
        and
        have an exercise price of $0.20. The agreement also provides for certain
        non-competition and nondisclosure covenants.
 
 On
        June
        1, 2005, the Company entered into an employment and compensation agreement
        with
        Nicholas Anderson, the Company’s former Chief Technology Officer. On May 15,
        2006, the Company terminated Nicholas
        Anderson, for
        cause, and cancelled his employment agreement with the Company. The Company has not accrued a loss
        related to this termination and does not foresee any material loss in its
        ability to manufacture current products or develop new
        products.
  **F-22**
  **POWER
        EFFICIENCY CORPORATION**
 NOTES
        TO
        FINANCIAL STATEMENTS
 DECEMBER
        31, 2007 AND 2006
  
 On
        June
        9, 2005, the Company entered into a consulting agreement with an advisor
        to
        serve as the Company’s Senior Technical Advisor. The term of this agreement is
        for 24 months and calls for the advisor to assist the Company in digitizing
        the
        Company’s technology. For his services, the Company agreed to issue the advisor
        400,000 options, vesting quarterly from the date of the agreement. In addition,
        the Company will reimburse all reasonable and necessary expenses incurred
        by the
        advisor. In the event that the Company’s annual sales from digital products
        reaches $5,000,000, the Company will pay the advisor a $100,000 one time
        bonus.
        The agreement contains confidentiality and non-competition provisions. This
        agreement can be terminated in 90 days by either party by written notices.
        On
        June 6, 2007, the Company renewed the agreement with the advisor. In connection
        with the renewal, the Company granted the advisor 1,000,000 warrants, which
        vest
        upon the approval of certain patents, created by the advisor, by the US Patent
        Office, or the buy-out of the Company, whichever occurs first.
 
 On
        March
        1, 2007, the Company entered into a consulting agreement with a sales and
        marketing consultant. The term of this agreement is for 12 months and calls
        for
        the consultant to assist the Company in its business development, sales and
        marketing efforts. For his services, the Company has agreed to issue the
        consultant 100,000 warrants, vesting quarterly from the date of the agreement.
        In addition, the Company will reimburse all reasonable and necessary expenses
        incurred by the consultant. This agreement contains confidentiality and
        non-competition provisions. Each party has the right to cancel this agreement
        with no less than 10 days notice in writing.
 
 On
        March
        21, 2007, the Company entered into a consulting agreement with a product
        manager. The term of this agreement is for two years and calls for the product
        manager to assist the company in product development and marketing. For his
        services, the Company agreed to pay the product manager $6,250 per month,
        due on
        the 1 st of each
        month, as well as 400,000 stock options, which vest over the term of the
        agreement. In addition, the Company will reimburse all reasonable and necessary
        expenses incurred by the product manager. The agreement contains confidentiality
        and non-competition provisions. Each party has the right to cancel this
        agreement upon 30 days written notice. This agreement was terminated on April
        11, 2007 and all obligations have been satisfied in full, and all stock options
        issued to the product manager were cancelled.
 
 NOTE
        18 -
        ISSUANCE OF SERIES B CONVERTIBLE PREFERRED STOCK:
 
  On
        October 29, 2007, the Company issued and sold 113,500 units (the “Units”), each
        Unit consisting of one share of the Company’s Series B Preferred Stock, par
        value $.001 per share (“Series B Preferred Stock”), and a warrant to purchase 50
        shares of the Company’s common stock, resulting in the sale and issuance of an
        aggregate of 113,500 shares of Series B Preferred Stock and warrants to
        purchase, initially, up to 5,675,000 shares of the Company’s common stock (the
“Warrants”), in a private offering (the “Preferred Offering”) for $5,675,000 in
        cash and cancellation of indebtedness (See Note 16). Many of the purchasers
        of
        Units were either officers, directors or pre-existing stockholders or
        noteholders of the Company (See Note 14).
  **F-23**
  **POWER
        EFFICIENCY CORPORATION**
 NOTES
        TO
        FINANCIAL STATEMENTS
 DECEMBER
        31, 2007 AND 2006
  
 In
        connection with the Preferred Offering, the Company has agreed to use its
        reasonable best efforts to file a registration statement (the “Registration
        Statement”) to register the common stock issuable upon conversion of the Series
        B Preferred Stock issued, as well as the common stock issuable upon exercise
        of
        the Warrants, not later than 60 days from the termination date of the Offering
        (the “Termination Date”), and must use its reasonable best efforts to have the
        Registration Statement declared effective not later than 120 days from the
        Termination Date.
 
 Each
        share of Series B Preferred Stock is initially convertible into 100 shares
        of
        the Company’s common stock, subject to adjustment under certain circumstances.
        The Series B Preferred Stock is convertible at the option of the holder at
        any
        time. The Series B Preferred Stock is also subject to mandatory conversion
        in
        the event the average closing price of the Company’s common stock for any ten
        day period equals or exceeds $1.00 per share, such conversion to be effective
        on
        the trading day immediately following such ten day period. The Series B
        Preferred Stock has an 8% dividend, payable annually in cash or stock, at
        the
        discretion of the Company’s board of directors. As
        such,
        none is accredited in these financial statements.
 
 The
        Preferred Offering was conducted pursuant to an exemption from the registration
        requirements of the Securities Act of 1933, as amended, pursuant to Regulation
        D, Section 4(2) and Rule 506 thereunder. No placement agent or underwriter
        was
        used in connection with the Offering and there is no commission, finder’s fee or
        other compensation due or owing to any party.
 
 On
        November 8, 2007, the Company sold 5,000 units, resulting in the sale and
        issuance of 5,000 shares of Series B Preferred Stock and warrants to purchase
        up
        to 250,000 shares of the Company’s common stock, for $250,000 under the
        Preferred Offering.
 
 On
        November 15, 2007, the Company sold 1,400 units, resulting in the sale and
        issuance of 1,400 shares of Series B Preferred Stock and warrants to purchase
        up
        to 70,000 shares of the Company’s common stock, for $70,000 under the Preferred
        Offering.
 
 On
        December 20, 2007, the Company sold 9,500 units, resulting in the sale and
        issuance of 9,500 shares of Series B Preferred Stock and warrants to purchase
        up
        to 475,000 shares of the Company’s common stock, for $475,000 under the
        Preferred Offering.
 
 On
        December 28, 2007, the Company sold 5,000 units, resulting in the sale and
        issuance of 5,000 shares of Series B Preferred Stock and warrants to purchase
        up
        to 250,000 shares of the Company’s common stock, for $250,000 under the
        Preferred Offering.
  **F-24**
  **POWER
        EFFICIENCY CORPORATION**
 NOTES
        TO
        FINANCIAL STATEMENTS
 DECEMBER
        31, 2007 AND 2006
 
  
 NOTE
        19 -
        STOCKHOLDERS' EQUITY:
 
  On
        November 30, 2006, the Company issued and sold 10,700,008 shares of its common
        stock and 5,350,004 warrants to purchase its common stock (the “Equity
        Warrants”), in a private offering (the “Offering”) for $3,210,000 in cash,
        cancellation of indebtedness and in lieu of compensation owed to certain
        employees, officers and directors of the Company. The per share purchase
        price
        of the common stock was $0.30. The Equity Warrants have a per share exercise
        price of $0.40, are exercisable immediately and expire November 29, 2011.
        The
        Company must use best efforts to file a Registration Statement to register
        the
        common stock issued, together with those issuable upon exercise of the Equity
        Warrants, not later than 60 days from the termination of the Offering, and
        must
        use its best efforts to have the Registration Statement declared effective
        not
        later than 120 days from the termination of the Offering. Should
        the Company not be able to meet these registration requirements, the Company
        may
        be assessed liquidating damages. The
        Offering terminated on March 31, 2007. The Equity Warrants have a cashless
        exercise provision, but only if the Registration Statement is not then
        effective.
 
 The
        $3,210,000 investment included $250,000 from Steven Strasser, the Company’s
        Chief Executive Officer, $30,000 from John (BJ) Lackland, the Company’s Chief
        Financial Officer, $30,000 from Robert Murray, the Company’s former Chief
        Operating Officer, and $300,000 from George Boyadjieff, a Director of the
        Company.
 
 The
        Offering was conducted pursuant to an exemption from the registration
        requirements of the Securities Act of 1933, as amended, pursuant to Regulation
        D, Section 4(2) and Rule 506 thereunder. No placement agent or underwriter
        is
        entitled to compensation in connection with either the Offering or the sale
        of
        the Notes and there is no commission, finder’s fee or other compensation due or
        owing to any party.
 
 On
        January 19, 2007, the Company issued and sold 666,668 shares of its common
        stock
        and 333,334 Equity Warrants, in the Offering for $200,000 in cash, under
        the
        same terms as described above.
 
 On
        March
        2, 2007, the Company issued and sold 1,583,336 shares of its common stock
        and
        791,668 Equity Warrants, in the Offering for $475,000 in cash, under the
        same
        terms as described above.
 
 On
        March
        7, 2007, the Company issued and sold 333,334 shares of its common stock and
        166,667 Equity Warrants, in the Offering, for $100,000 in cash, under the
        same
        terms as described above.
 
 On
        March
        30, 2007, the Company issued and sold 500,000 shares of its common stock
        and
        250,000 Equity Warrants, in the Offering, for $150,000 in cash, under the
        same
        terms as described above.
 
 On
        March
        31, 2007, the Company issued and sold 333,334 shares of its common stock
        and
        166,667 Equity Warrants in the Offering, for $100,000 in cash, under the
        same
        terms as described above.
  **F-25**
  **POWER
        EFFICIENCY CORPORATION**
 NOTES
        TO
        FINANCIAL STATEMENTS
 DECEMBER
        31, 2007 AND 2006
 
  
 NOTE
        20 -
        FAIR VALUE OF FINANCIAL INSTRUMENTS:
 
 
 SFAS
        No.
        107 “Disclosure About the Fair Value of Financial Instruments”, requires
        disclosure of fair value information about financial instruments. The carrying
        amounts reported in the balance sheet for cash, accounts receivable, accounts
        payable and accrued expenses approximate fair value because of their short
        term
        nature.
  
 NOTE
        21 -
        401(K) RETIREMENT PLANS:
 
 
 On
        August
        1, 2006, the Company adopted a 401(k) retirement plan (the 401(k) Plan).
        The
        401(k) Plan is voluntary, and available to all employees who have been with
        the
        Company for at least six months. The Company may make discretionary
        contributions. The Company did not make any contributions in 2007 or
        2006.
  
 NOTE
        22 -
        SUBSEQUENT EVENTS:
 
  On
          January 7, 2008, the Company entered into a consulting agreement with a
          European
          sales and marketing consultant. The agreement calls for the consultant
          to assist
          the Company in the business planning, and ultimately commercial development
          and
          marketing of the Company’s MEC line of products in Europe. For his services, the
          Company has agreed to pay the consultant 64,920 € per year, which is
          approximately equivalent to $100,000 per year. In addition, the Company
          will
          reimburse all reasonable and necessary expenses incurred by the consultant.
          The
          initial term of this agreement is for 5 years, and can be terminated by
          either
          party upon 90 days written notice.
 On
          January 21, 2008, the Company sold 5,600 units under the Preferred Offering,
          resulting in the issuance of 5,600 shares of its Series B Preferred Stock
          and
          warrants to purchase up to 280,000 shares of the Company’s common stock, for
          $280,000. This was the final closing in the Preferred
          Offering.
 
 On
        January 23, 2008, the Company signed an efficiency aggregation contract with
        San
        Diego Gas & Electric Company (“SDG&E”). Under the terms of this
        contract, SDG&E will pay the Company $0.14 per kWh of energy saved in the
        first year of operation of the MEC, for new installations of the MEC in
        SDG&E’s service area. Payment to the Company is subject to certain
        inspections, approvals and time restrictions. The term of this contract is
        for 5
        years, and either party may terminate this contract upon written
        notice.
  **F-26**






**Item
                9.**
            **Changes
                in and Disagreements with Accountants on Accounting and Financial
                Disclosure.**None.




**Item
                9A.**
            **Controls
                and Procedures.**




(a)
      Disclosure Controls and Procedures.




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




(b)
      Internal Control Over Financial Reporting.





During
      the year ended December 31, 2007, there were no significant changes in the
      Company’s internal controls or in other factors that could significantly affect
      these controls subsequent to the date of their evaluation, nor were there any
      significant deficiencies or material weaknesses in the Company’s internal
      controls. Accordingly, no corrective actions were required or
      undertaken.





(c)
      Management’s Report on Internal Control Over Financial Reporting




Our
      Chief
      Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), are responsible
      for establishing and maintaining adequate internal control over financial
      reporting, as such term is defined in Rule 13a-15(f) of the Securities Exchange
      Act of 1934, as amended (the “Exchange Act”).




Internal
      control over financial reporting is promulgated under the Exchange Act as a
      process designed by, or under the supervision of, our CEO and CFO and effected
      by our board of directors, management and other personnel, to provide reasonable
      assurance regarding the reliability of financial reporting and the preparation
      of financial statements for external purposes in accordance with generally
      accepted accounting principles and includes those policies and procedures that:




•    Pertain
      to the maintenance of records that in reasonable detail accurately and fairly
      reflect the transactions and dispositions of our assets;




• Provide
      reasonable assurance that transactions are recorded as necessary to permit
      preparation of financial statements in accordance with generally accepted
      accounting principles, and that our receipts and expenditures are being made
      only in accordance with authorizations of our management and directors; and




• Provide
      reasonable assurance regarding prevention or timely detection of unauthorized
      acquisition or disposition of our assets that could have a material effect
      on
      the financial statements.




Readers
      are cautioned that internal control over financial reporting, no matter how
      well
      designed, has inherent limitations and may not prevent or detect misstatements.
      Therefore, even effective internal control over financial reporting can only
      provide reasonable assurance with respect to the financial statement preparation
      and presentation.




Our
      management, under the supervision and with the participation of our CEO and
      CFO,
      has evaluated the effectiveness of our disclosure, controls and procedures
      as
      defined in Exchange Act Rules 13a-15(e) and15d-15(e) as of the end of the period
      covered by this Report based upon the framework in Internal Control—Integrated
      Framework issued by the Committee of Sponsoring Organizations of the Treadway
      Commission (COSO). Based on such evaluation, our management has made an
      assessment that our internal control over financial reporting is effective
      as of
      December 31, 2007.




This
      annual report does not include an attestation report of the Company's registered
      public accounting firm regarding internal control over financial reporting.
      Management's report was not subject to attestation by the Company's registered
      public accounting firm pursuant to temporary rules of the Securities and
      Exchange Commission that permit the Company to provide only management's report
      in this annual report.









**Item
                9B.**
            **Other
                Information.**





None.





**PART
      III**




**Item
                10.**
            **Directors,
                Executive Officers, and Corporate
                Governance.**




**INFORMATION
      ABOUT THE COMPANY'S EXECUTIVE OFFICERS AND DIRECTORS**





The
      following table lists the current executive officers and directors and, in
      the
      case of directors, their length of service on the board. Each director is
      elected to hold office for a term expiring at the first annual meeting of
      stockholders held following such director's election and until his successor
      has
      been elected and qualified, or until his prior resignation or removal. All
      of
      the Company's current directors were either appointed by the plurality of votes
      cast by the holders of our common stock present, or represented, at the 2005
      Annual Meeting of the Stockholders in February, 2006, or elected by the board.





**Name**
            
            **Age**
            
            **DirectorSince**
            
            **Position**Steven
                Z. Strasser
            
            59
            
            2002
            
            Chairman,
                Chief Executive OfficerJohn
                (BJ) Lackland
            
            37
            
            2002
            
            Director,
                Chief Financial Officer, and SecretaryRaymond
                J. Skiptunis
            
            65
            
            2002
            
            Director,
                Chairman of the Audit CommitteeGeorge
                Boyadjieff
            
            69
            
            2006
            
            Director,
                Senior Technical AdvisorDouglas
                M. Dunn
            
            65
            
            2006
            
            DirectorRichard
                Morgan
            
            62
            
            2007
            
            DirectorGary
                Rado
            
            66
            
            2005
            
            Director




**Director
      Independence**




Pursuant
      to SEC rules, a majority of our Board of Directors is comprised of independent
      directors, as defined under Section 121(A) of the American Stock Exchange
      Constitution and Rules. Messrs. Skiptunis, Dunn, Morgan and Rado are independent
      directors. Our audit committee is comprised of Messrs. Skiptunis, Dunn and
      Rado;
      and our compensation committee is comprised of Messrs. Skiptunis and Dunn,
      all
      of whom are independent directors.




**Steven
      Strasser** –
      Chairman and Chief Executive Officer. Prior to becoming the Company’s CEO in
      October 2004, Mr. Strasser was the Managing Director, founder and majority
      owner
      of Summit Energy Ventures LLC (“Summit”), the largest shareholder in Power
      Efficiency Corporation. Summit is a private equity firm focused on investments
      in companies with energy efficiency technologies. At Summit, Mr. Strasser spent
      four years, from 2001-2005, evaluating and investing in energy technology
      companies and serving on the boards of portfolio companies. Mr. Strasser has
      been a director since August 2002.




From
      1984
      through 2000, Mr. Strasser was the founder and CEO of Northwest Power
      Enterprises. Over its seventeen-year history, Northwest Power Enterprises and
      its predecessor companies were involved in multiple aspects of the energy
      development business.




Mr. Strasser
      received law degrees from McGill University, Montreal, Canada and the University
      of Washington, Seattle, Washington.




**John
      (BJ) Lackland** –
      Director, Chief Financial Officer, and Secretary. Mr. Lackland became the
      Company’s CFO in October 2004. Mr. Lackland has been the Vice President and
      Director Summit Energy Ventures since 2001, a private equity firm that is the
      largest shareholder in Power Efficiency Corporation. Summit focuses on
      investments in companies with energy efficiency technologies. At Summit, Mr.
      Lackland evaluated and invested in energy technology companies and served on
      the
      boards of portfolio companies. Prior to joining Summit, Mr. Lackland was
      the Director of Strategic Relations at Encompass Globalization, where he was
      in
      charge of strategic alliances and mergers and acquisitions. Prior to Encompass,
      he was the Director of Strategic Planning and Corporate Development at an
      Internet business development consulting company, where he was in charge of
      strategic planning and investor relations. Mr. Lackland has been an
      independent consultant to Fortune 1,000 companies and startups.
      Mr. Lackland also worked at The National Bureau of Asian Research, an
      internationally acclaimed research company focusing on U.S. policy toward Asia,
      where he led economic and political research projects for Microsoft, Dell,
      Compaq and U.S. government agencies. Mr. Lackland has been a director since
      August 2002.









Mr. Lackland
      earned an M.B.A. from the University of Washington Business School, an M.A.
      in
      International Studies (Asian Studies) from the University of Washington’s
      Jackson School of International Studies, and a B.A. in Politics, Philosophy
      and
      Economics from Claremont McKenna College.




**Raymond
      J. Skiptunis** –
      Director since July 2002. Mr. Skiptunis was a director at TAG Entertainment,
      a
      movie production company from 2004 until January, 2007. Until September 2006,
      Mr. Skiptunis also served as an executive consultant at TAG Entertainment,
      from 2004. Prior to TAG Entertainment, Mr. Skiptunis was a self employed
      business consultant from 2003 to 2005. From November of 2001 through October
      of
      2003, Mr. Skiptunis worked with the Company in various capacities, including
      consultant, CFO and interim CEO. From 1990 to 1996, Mr. Skiptunis served as
      Vice Chairman and CEO of Teamstaff, Inc., a professional employer organization.
      Prior to his time with Teamstaff, Inc., Mr. Skiptunis was the Chairman and
      President of Venray Management Corp, a venture capital firm, from 1983 to 1990,
      and the Vice President, CFO and a board member of Biosearch Medical Products
      from 1978 to 1983. Mr. Skiptunis earned a Bachelor of Science in Accounting
      from Rutgers University.




**George
      Boyadjieff —** Director
      and Senior Technical Advisor. Mr. Boyadjieff has been a director of the Company
      since May 2006, and Senior Technical Advisor of the Company since April 2005.
      Mr. Boyadjieff is the retired CEO of the former Varco International, a New
      York
      Stock Exchange traded oil service company with over $1.3 billion in annual
      revenues at the time of Mr. Boyadjieff’s retirement. Varco has recently merged
      with National Oil Well to become National Oil Well Varco (NOV). Mr. Boyadjieff
      joined Varco in 1969 as Chief Engineer and was appointed CEO in 1991. Currently
      Mr. Boyadjieff is a director of Southwall Technologies, a Silicon Valley hi-tech
      firm. Mr. Boyadjieff joined Southwall in December 2004.




Mr.
      Boyadjieff holds over 50 US patents related to oil and gas well drilling
      equipment.




Mr.
      Boyadjieff holds BS and MS degrees in Mechanical Engineering from the University
      of California at Berkeley and is a graduate of the University of California
      at
      Irvine executive program.




**Dr.
      Douglas Dunn —** Director
      since May 2006. Dr. Dunn has had an extensive career in research, business
      and
      academic leadership. Dr. Dunn served as dean of Carnegie Mellon University's
      Graduate School of Industrial Administration (now the Tepper School of Business)
      from July 1996 through June 2002, after which he retired. He began his career
      AT&T Bell Laboratories, and his corporate experienced culminated in senior
      positions as a corporate officer leading Federal Regulatory Matters, Regional
      Government Affairs, and Visual Communications and Multimedia Strategy for
      AT&T. Dr. Dunn is a board member of Universal Stainless & Alloy
      Products, Inc. (NasdaqNM: USAP) and Solutions Consulting, a technology
      consulting firm, which is wholly owned by Perot Systems, Inc. He holds a Ph.D.
      in business from the University of Michigan, an MS in industrial management
      and
      a BS in physics from the Georgia Institute of Technology.




**Richard
      Morgan –** Director
      since January 2007. Mr. Morgan is currently Of Counsel at Lionel Sawyer &
Collins. Mr. Morgan is the former Dean and a former Professor of Law at the
      William S. Boyd School of Law at the University of Nevada, Las Vegas, a position
      he held from September 1, 1997 through the end of June 2007. Mr. Morgan is
      an
      experienced legal educator, having served as dean at both the Arizona State
      University College of Law and the University of Wyoming College of Law. Mr.
      Morgan earned his B.A. in Political Science at the University of California,
      Berkeley in 1967. In 1971 he received his J.D. from UCLA, where he was an editor
      of the UCLA Law Review. He practiced with the Los Angeles law firm of Nossaman,
      Krueger & Marsh in the corporate/securities areas from 1971 to 1980. He was
      a professor at the Arizona State University College of Law from 1980 to 1987
      and
      served as associate dean from 1983 to 1987. He was dean at the University of
      Wyoming College of Law from 1987 to 1990 and returned to the Arizona State
      University College of Law in 1990, where he served as dean and professor of
      law
      until 1997. He currently serves as chair of the ABA Standards Review
      Committee.




**Gary
      Rado** –
      Director since September 2005. Mr. Rado retired in 2002 after being the
      President of Casio Inc. USA. Before joining Casio Inc. in 1996, Mr. Rado
      was with Texas Instruments Inc. for 21 years. He moved from District Sales
      Manager to Area Sales Manager to National Sales Manager of the Consumer Products
      Division. This division was responsible for home computer, calculator and
      educational products such as Speak and Spell. Mr. Rado was then promoted to
      Division Manager of Consumer Products worldwide and VP of marketing and sales.
      He ran the division for 7 years, with two years of running the division while
      based in Europe. Mr. Rado earned a Bachelors of Science in Business
      Administration from Concord College in 1963.









**Board
      of Directors and Committees of the Board**





Our
      business affairs are conducted under the direction of our board of directors.
      The role of our board of directors is to effectively govern our affairs for
      the
      benefit of our stockholders and, to the extent appropriate under governing
      law,
      of other constituencies, which include our employees, customers, suppliers
      and
      creditors. Our board strives to ensure the success and continuity of our
      business through the selection of a qualified management team. It is also
      responsible for ensuring that our activities are conducted in a responsible
      ethical manner. Our board of directors has two standing committees, an audit
      committee and a compensation committee.




Our
      board
      of directors met seven times in 2007. None of the current directors missed
      more
      than one meeting during the period for which they have been a director and
      the
      meetings held by committees of the board of directors on which they serve.




We
      do not
      have a policy that requires directors to attend our annual meetings of
      stockholder. However, all directors attended the 2007 Meeting of Stockholders
      on
      June 8, 2007.




**Audit
      Committee**




Raymond
      Skiptunis, Douglas Dunn and Gary Rado currently serve as our audit committee.
      Messrs. Skiptunis, Dunn and Rado are each independent directors as required
      by
      Section 301 of the Sarbanes-Oxley Act of 2002, Rule 10A(3)(b)(1) of the
      Securities Exchange Act of 1934 and Section 121(A) of the American Stock
      Exchange Constitution and Rules. Raymond Skiptunis, the Chairman of our audit
      committee, qualifies as a financial expert. Our audit committee, among other
      things:




•  selects
      the independent auditors, considering independence and
      effectiveness;




•  discusses
      the scope and results of the audit with the independent auditors and reviews
      with management and the independent auditors our interim and year-end operating
      results;




•  considers
      the adequacy of our internal accounting controls and audit
      procedures;




•  reviews
      and approves all audit and non-audit services to be performed by the independent
      auditors; and




•  administers
      the whistleblower policy.




The
      audit
      committee has the sole and direct responsibility for appointing, evaluating
      and
      retaining our independent auditors and for overseeing their work.




**Compensation
      Committee**




Raymond
      Skiptunis and Douglas Dunn currently function as our compensation committee.
      Messrs. Skiptunis and Dunn are independent directors as required by SEC Rules
      and as defined in Section 121(A) of the American Stock Exchange Constitution
      and
      Rules. Our compensation committee, among other things:




•  recommends
      to the board of directors the compensation level of the executive
      officers;




•  reviews
      and makes recommendations to our board of directors with respect to our equity
      incentive plans;




•  establishes
      and reviews general policies relating to compensation and benefits of our
      employees.




**Committee
      Interlocks and Insider Participation**





None
      of
      our executive officers currently serves as a member of the board of directors
      or
      compensation committee of any entity that has one or more executive officers
      serving on our board of directors or compensation committee.




SECTION
      16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE





Section
      16 of the Securities Exchange Act of 1934, as amended, requires that all
      executive officers and directors of the Company and all persons who beneficially
      own more than ten percent of the Company's common stock file an initial report
      of their ownership of the Company's securities on Form 3 and report changes
      in
      their ownership of the Company's securities on Form 4 or Form 5. These filings
      must be made with the Securities and Exchange Commission and the National
      Association of Securities Dealers with a copy sent to the Company. To our
      knowledge, all executive officers, directors and all persons who beneficially
      own more than ten percent of the Company’s common stock have timely filed these
      filings.










**CODE
      OF ETHICS**





The
      Company has not adopted a code of ethics. The Company has been focused on
      developing technology, generating sales and raising capital to support
      operations and consequently has not focused on adopting a code of ethics. In
      early 2006, the Company developed and implemented an official Employee Manual
      that requires ethical behavior from its employees, and defines the consequences
      of unethical behavior by its employees.





**Item
                11.**
            **Executive
                Compensation.**




**Summary
      Compensation Table**




The
      following table summarizes compensation information for the last two fiscal
      years for (i) Mr. Steven Z. Strasser, our Principal Executive Officer and (ii)
      John (BJ) Lackland, our Principal Financial Officer, who were serving as
      executive officers at the end of the fiscal year and who we refer to
      collectively, the Named Executive Officers.




**SUMMARY
        COMPENSATION TABLE**
 
 Name and principal
                position
              
              Year
              
              Salary ($)
              
              Bonus
                ($)
              
              Stock
                Awards
                ($)
              
              Option
                Awards ($)
              
              Non-Equity
                Incentive Plan
                Compensation ($)
              
              Nonqualified
                Deferred
                Compensation
                Earnings ($)
              
              All Other
                Compensation
                ($)
              
              Total
                  ($)Steven
                  Z. Strasser(1)
              
              2007
              
              $
              297,172
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              $
              297,172Chairman
                    and Chief
              
              2006
              
              $
              288,750
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              $
              288,750Executive
                OfficerJohn
                  (BJ) Lackland (2)
              
              2007
              
              $
              189,109
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              $
              189,109Director
                  and Chief
              
              2006
              
              $
              183,750
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              $
              183,750Financial
                  Officer
              
              
              
              
              
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -


**Narrative
      Disclosure to Summary Compensation Table**




During
      2004, we hired the following officers: Steven Strasser, Chief Executive Officer,
      and John (BJ) Lackland, Chief Financial Officer. Effective June 1, 2005, the
      Company entered into employment agreements with the above officers. These two
      individuals comprise our current executive officers. The term of each agreement
      is five years. In the event of a defined change in control of the Company,
      each
      agreement will provide for accelerated vesting of stock options and a cash
      severance payment equal to 2.99 times the executive's then current salary and
      previous year's bonus.




The
      following table sets forth the material financial terms of the agreements for
      each of our executives as of December 31, 2007:


**Name**
              
              **Salary****(1)**
              
              **Bonus****(4)**
              
              **Common Stock**
                **Options****(5)**Steven
                  Strasser
              
              $
              275,000
              (2)
              
              
              
              
              3,000,000BJ
                  Lackland
              
              $
              175,000
              (3)
              
              
              
              
              1,800,000







(1)
            To
                be increased annually by at least 5% of prior
                year.




(2)
            First
                year's salary to be paid $60,000 in cash and options to purchase
                1,612,500
                shares of Common Stock at an exercise price equal to not less than
                market
                at date of grant in lieu of remaining cash vesting quarterly over
                one
                year.









(3)
            First
                year's salary to be paid $120,000 in cash and options to purchase
                412,500
                shares of Common Stock at an exercise price equal to market at date
                of
                grant in lieu of remaining cash vesting quarterly over one
                year.




(4)
            At
                the Board's discretion.




(5)
            Vesting
                evenly and quarterly over five
                years.




**Outstanding
      equity awards**


**OUTSTANDING
        EQUITY AWARDS AT FISCAL YEAR-END**


OPTION
                  AWARDS
              
              STOCK
                  AWARDSName
              
              Number of
                Securities
                Underlying
                Unexercised
                Options (#)
                Exercisable
              
              Number of
                Securities
                Underlying
                Unexercised
                Options
                (#)
                Unexercisable
              
              Equity Incentive
                Plan Awards:
                Number of
                Securities
                Underlying
                Unexercised
                UnearnedOptions
                (#)
              
              Option
                Exercise
                Price
                ($)
              
              Option
                Expiration
                Date
              
              Number of
                Shares or
                Units of
                Stock That
                Have Not
                Vested
                (#)
              
              Market
                Value of
                Shares or
                Units of
                Stock
                That Have
                Not
                Vested
                ($)
              
              Equity
                Incentive Plan
                Awards:
                Number of
                Unearned
                Shares, Units
                or Other
                Rights That
                Have Not
                Vested
                (#)
              
              Equity Incentive
                Plan Awards:
                Market or
                Payout Value of
                Unearned
                Shares, Units or
                Other Rights
                That Have Not
                Vested
                (#)Steven Strasser
              
              
              1,590,972
              
              
              971,817
              
              
              -
              
              $
              0.22
              
              
              5/31/2010
              
              
              -
              
              
              -
              
              
              -
              
              
              -1,521,588
              
              
              518,183
              
              
              -
              
              $
              0.20
              
              
              5/31/2015
              
              
              -
              
              
              -
              
              
              -
              
              
              -600,000
              
              
              -
              
              
              -
              
              $
              0.65
              
              
              11/28/2015
              
              
              -
              
              
              -
              
              
              -
              
              
              -BJ Lackland
              
              
              1,252,500
              
              
              960,000
              
              
              -
              
              $
              0.20
              
              
              5/31/2015
              
              
              -
              
              
              -
              
              
              -
              
              
              -375,000
              
              
              -
              
              
              -
              
              $
              0.65
              
              
              11/28/2015
              
              
              -
              
              
              -
              
              
              -
              
              
              -





**Stock
      Option Plan Narrative Disclosure**




As
      of
      December 31, 2007, we had an aggregate of 14,309,896 shares of Common Stock
      available for issuance under our stock plans. The following is a description
      of
      our plans.




*2000
      Stock Option and Restricted Stock Plan, or the 2000 Plan*




The
      2000
      Plan, was adopted by our board of directors and our stockholders in 2000. On
      June 8, 2007, the 2000 Plan was amended and restated. As of December 31, 2007,
      no restricted shares of Common Stock have been issued, and 100,000 of the
      outstanding options to purchase shares of our Common Stock have been exercised
      pursuant to the 2000 Plan. There are 14,309,896 options outstanding under the
      2000 Plan as of December 31, 2007.




*Share
      Reserve* .
      Under
      the 2000 Plan, we have initially reserved for issuance an aggregate of
      20,000,000 shares.




*Administration* .
      The
      2000 Plan is administered by the board of directors. The stock option awards
      qualify as "performance-based-compensation" within the meaning of
      Section 162(m) of the Internal Revenue Code of 1986, or the Code, with two
      or more outside directors within the meaning of Section 162(m) of the Code.
      The
      board of directors has the power to determine the terms of the awards, including
      the exercise price, the number of shares subject to each award, the
      exercisability of the awards and the form of consideration payable upon
      exercise.




*Eligibility* .
      Awards
      under the 2000 Plan may be granted to any of our employees, directors or
      consultants or those of our affiliates.




*Options* .
      With
      respect to non-statutory stock options intended to qualify as "performance-based
      compensation" within the meaning of Section 162(m) of the Code and incentive
      stock options, the exercise price must be at least equal to the fair market
      value of our Common Stock on the date of grant. In addition, the exercise price
      for any incentive stock option granted to any employee owning more than 10%
      of
      our Common Stock may not be less than 110% of the fair market value of our
      Common Stock on the date of grant. The term of any stock option may not exceed
      ten years, except that with respect to any participant who owns 10% or more
      of
      the voting power of all classes of our outstanding capital stock, the term
      for
      incentive stock options must not exceed five years.









*Stock
      Awards* .
      The
      administrator may determine the number of shares to be granted and impose
      whatever conditions to vesting it determines to be appropriate, including
      performance criteria. The criteria may be based on financial performance,
      personal performance evaluations and/or completion of service by the
      participant. The administrator will determine the level of achievement of
      performance criteria. Unless the administrator determines otherwise, shares
      that
      do not vest typically will be subject to forfeiture or to our right of
      repurchase, which we may exercise upon the voluntary or involuntary termination
      of the participant's service with us for any reason, including death or
      disability.




*Adjustments
      upon Merger or Change in Control* .
      The
      2000 Plan provides that in the event of a merger with or into another
      corporation or a "change in control," including the sale of all or substantially
      all of our assets, and certain other events, our board of directors (or a
      committee of the board of directors) may, in its discretion, provide for some
      or
      all of:




·
            assumption
                or substitution of, or adjustment to, each outstanding
                award;




·
            acceleration
                of the vesting of options and stock appreciation
                rights;




·
            termination
                of any restrictions on stock awards or cash awards;
                or




·
            cancellation
                of awards in exchange for a cash payment to the
                participant.




*Amendment
      and Termination* .
      The
      board of directors has the authority to amend, alter or discontinue the 2000
      Plan, subject to the approval of the stockholders, but no amendment will impair
      the rights of any award, unless mutually agreed to between the participant
      and
      the administrator.




***Compensation
      of Directors Summary Table***




**DIRECTOR
        COMPENSATION**
  Name(a)
                  
                  Fees Earned
                    or Paid in
                    Cash
                    ($)
                  
                  Stock
                    Awards ($)
                  
                  Option Awards
                    ($)
                  
                  Non-Equity Incentive
                    Plan Compensation
                    ($)
                  
                  Non-Qualified
                    Deferred
                    Compensation
                    Earnings
                    ($)
                  
                  All
                    Other
                    Compensation ($)
                  
                  Total ($)Raymond
                      J. Skiptunis
                  
                  $
                  12,000
                  
                  
                  -
                  
                  $
                  40,200
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  $
                  52,200George
                      Boyadjieff
                  
                  
                  -
                  
                  
                  -
                  
                  $
                  26,800
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  $
                  26,800Douglas
                      M. Dunn
                  
                  
                  -
                  
                  
                  -
                  
                  $
                  26,800
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  $
                  26,800Richard
                      Morgan
                  
                  
                  -
                  
                  
                  -
                  
                  $
                  26,800
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  $
                  26,800Gary
                      Rado
                  
                  
                  -
                  
                  
                  -
                  
                  $
                  26,800
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  $
                  26,800




**Narrative
      to Director Compensation**




In
      January 2007, non-employee directors received options to purchase 100,000 shares
      of common stock per year for their board service, pro-rated for the quarters
      in
      the year they served. Employee directors do not receive compensation for serving
      on the board of directors. The Chairman of the Audit Committee received an
      additional 50,000 options per year, pro-rated for the quarters in the year
      he
      served, and $1,000 per month. Depending on the anticipated workload and
      organization, the board of directors may elect to increase the compensation
      for
      committee members and/or all non-executive board members.









**Limitation
      of Liability and Indemnification of Directors and Officers**




Our
      certificate of incorporation provides that the personal liability of our
      directors shall be limited to the fullest extent permitted by the provisions
      of
      Section 102(b)(7) of the General Corporation Law of the State of Delaware,
      or the DGCL. Section 102(b)(7) of the DGCL generally provides that no
      director shall be liable personally to us or our stockholders for monetary
      damages for breach of fiduciary duty as a director, provided that our
      certificate of incorporation does not eliminate the liability of a director
      for
      (i) any breach of the director's duty of loyalty to us or our stockholders;
      (ii) acts or omissions not in good faith or that involve intentional
      misconduct or a knowing violation of law; (iii) acts or omissions in
      respect of certain unlawful dividend payments or stock redemptions or
      repurchases; or (iv) any transaction from which such director derives
      improper personal benefit. The effect of this provision is to eliminate our
      rights and the rights of our stockholders through stockholders' derivative
      suits
      on our behalf, to recover monetary damages against a director for breach of
      her
      or his fiduciary duty of care as a director including breaches resulting from
      negligent or grossly negligent behavior except in the situations described
      in
      clauses (i) through (iv) above. The limitations summarized above,
      however, do not affect our or our stockholders' ability to seek non-monetary
      remedies, such as an injunction or rescission, against a director for breach
      of
      her or his fiduciary duty.




In
      addition, our certificate of incorporation and bylaws provide that we shall,
      to
      the fullest extent permitted by Section 145 of the DGCL, indemnify all
      directors and officers who we may indemnify pursuant to Section 145 of the
      DGCL. Section 145 of the DGCL permits a company to indemnify an officer or
      director who was or is a party or is threatened to be made a party to any
      proceeding because of his or her position, if the officer or director acted
      in
      good faith and in a manner he or she reasonably believed to be in or not opposed
      to the best interests of such company and, with respect to any criminal action
      or proceeding, had no reasonable cause to believe his or her conduct was
      unlawful. We have entered into indemnification agreements with our directors
      and
      officers consistent with indemnification to the fullest extent permitted under
      the DGCL.




We
      maintain a directors' and officers' liability insurance policy covering certain
      liabilities that may be incurred by our directors and officers in connection
      with the performance of their duties. The entire premium for such insurance
      is
      paid by us.




Insofar
      as indemnification for liabilities arising under the Securities Act, our
      directors and officers, and persons controlling us pursuant to the foregoing
      provisions, we have been informed that in the opinion of the SEC, such
      indemnification is against public policy as expressed in the Securities Act
      and
      is therefore unenforceable.




**Item
                12.**
            **Security
                Ownership of Certain Beneficial Owners and Management and Related
                Stockholder Matters.**





**STOCK
      OWNERSHIP**





The
      following table sets forth information as to our shares of common stock
      beneficially owned as of March 20, 2008 **** by
      (i)
      each person known by us to be the beneficial owner of more than five percent
      of
      our outstanding common stock, (ii) each of our directors, (iii) each of our
      executive officers named in the Summary Compensation Table and (iv) all of
      our
      directors and executive officers as a group.


**Title of Class**
              
              **Name and Address of**
                **Beneficial Owner(1)**
              
              **Shares Owned**
              
              **Percent of**
                **Shares Owned(10)**Common
                  Stock
              
              Steven
                  Strasser, CEO, Chairman of the Board
              
              19,417,169
              (2)
              37.72
              %Common
                  Stock
              
              John
                  (BJ) Lackland, CFO, Director
              
              1,920,500
              (3)
              4.56
              %Common
                  Stock
              
              Raymond
                  J. Skiptunis, Director
              
              396,039
              (4)
              Less
                  than 1
              %Common
                  Stock
              
              Gary
                  Rado, Director
              
              525,000
              (5)
              1.28
              %Common
                  Stock
              
              George
                  Boyadjieff, Director
              
              2,725,000
              (6)
              6.47
              %Common
                  Stock
              
              Douglas
                  Dunn, Director
              
              325,000
              (7)
              Less
                  than 1
              %Common
                  Stock
              
              Richard
                  Morgan, Director
              
              100,000
              (8)
              Less
                  than 1
              %Common
                  Stock
              
              Summit
                  Energy Ventures, LLC
              
              8,803,901
              (2)
              20.77
              %Common
                  Stock
              
              Sarkowski
                  Family L.P.
              
              7,136,981
              
              16.15
              %Common
                  Stock
              
              Ron
                  Boyer
              
              8,435,768
              
              17.80
              %Common
                  Stock
              
              Commerce
                  Energy Group
              
              4,464,376
              (9)
              10.73
              %Common
                  Stock
              
              All
                  Executive Officers and Directors as a Group (6 persons)
              
              25,408,708
              
              36.12
              %







(1)
            Information
                in this table regarding directors and executive officers is based
                on
                information provided by them. Unless otherwise indicated in the footnotes
                and subject to community property laws where applicable, each of
                the
                directors and executive officers has sole voting and/or investment
                power
                with respect to such shares. The address for each of the persons
                reported
                in the table other than Commerce Energy Group is in care of Power
                Efficiency Corporation at 3960 Howard Hughes Pkwy, Ste 460, Las Vegas,
                Nevada 89169.




(2)
            Includes
                8,803,901 common shares and common shares subject to options and
                warrants
                exercisable within 60 days of the date hereof held by Summit, in
                which
                Steven Strasser is one of two members, 1,760,000 common shares subject
                to
                the conversion of 17,600 shares of Series B Preferred Stock, and
                9,336,600
                common shares subject to options and warrants which are presently
                exercisable or will become exercisable within 60 days of the date
                hereof.
                Mr. Strasser was also granted an additional 1,150,000 common shares
                subject to options and warrants which will become exercisable after
                60
                days of the date hereof. Mr. Strasser’s options and warrants expire on
                various dates from May, 2010 through November,
                2015.









(3)
            Includes
                1,777,500 common shares and common shares subject to options and
                warrants
                presently exercisable or will become exercisable within 60 days of
                the
                date hereof. Mr. Lackland was also granted an additional 810,000
                common
                shares subject to options which will become exercisable after 60
                days of
                the date hereof. Mr. Lackland’s options and warrants expire on various
                dates from May, 2010 through November,
                2015.




(4)
            Includes
                373,500 common shares subject to options and warrants presently
                exercisable or will become exercisable within 60 days of the date
                hereof.
                Mr. Skiptunis’ options and warrants expire on various dates from October,
                2014 through January, 2017.




(5)
            Includes
                200,000 common shares subject to the conversion of 2,000 shares of
                Series
                B Preferred Stock, and 325,000 common shares subject to options presently
                exercisable or will become exercisable within 60 days of the date
                hereof.
                Mr. Rado’s options expire on various dates from September, 2015 through
                January, 2017.




(6)
            Includes
                400,000 common shares subject to the conversion of 4,000 shares of
                Series
                B Preferred Stock, and 1,325,000 common shares subject to options
                and
                warrants presently exercisable or will become exercisable within
                60 days
                of the date hereof. Mr. Boyadjieff’s options and warrants expire on
                various dates from April, 2010 through January,
                2017.




(7)
            Includes
                100,000 common shares subject to the conversion of 1,000 shares of
                Series
                B Preferred Stock, and 225,000 common shares subject to options presently
                exercisable or which will become exercisable within 60 days of the
                date
                hereof. Dr. Dunn’s options expire on various dates from May 2016 through
                January, 2017.




(8)
            Includes
                100,000 common shares subject to options presently exercisable or
                which
                will become exercisable within 60 days of the date hereof. Mr. Morgan’s
                options expire January, 2017.




(9)
            Includes
                400,000 common shares subject to the conversion of 4,000 shares of
                Series
                B Preferred Stock, and 815,327 common shares subject to warrants
                presently
                exercisable or which will become exercisable within 60 days of the
                date
                hereof, as well as 3,249,049 common shares owned by Commerce’s wholly
                owned subsidiary, Commonwealth Energy Corporation. Commerce’s warrants
                expire on various dates from October 2009 through November
                2011.




(10)
            The
                percentage for common stock includes all common shares subject to
                options
                and warrants exercisable within 60 days of the date
                hereof.




**Item
                13.**
            **Certain
                Relationships, Related Transactions and Director
                Independence.**




**Relationship
      with Steven Strasser and Summit**




Mr.
      Strasser, our CEO, owns 99.5% of Summit. As of December 31, 2007, Summit owned
      6,803,901 shares of our common stock and 2,000,000 warrants to purchase common
      stock. In addition, Mr. Strasser owns beneficially 19,417,169 shares of common
      stock (including those shares beneficially owned by Summit) issued
      or
      issuable on the exercise of options and warrants, and the conversion of Series
      B
      Preferred Stock, exercisable within 60 days of December 31, 2007.




On
      October 29, 2007, Mr. Strasser purchased 16,000 units, resulting in the issuance
      of 16,000 shares of Series B Preferred Stock and 800,000 warrants to purchase
      the Company’s common stock, for $250,000 in cash the conversion of a $550,000
      note.




**Relationship
      with John (BJ) Lackland**




Mr.
      Lackland, our CFO, owns 0.5% of Summit. Mr. Lackland owns beneficially 1,920,500
      shares of common stock, issued or issuable on the exercise of options and
      warrants exercisable within 60 days of December 31, 2007.




**Item
                14.**
            **Principal
                Accountant Fees and
                Services.**




(1)
      Audit
      Fees.





The
      aggregate fees billed in fiscal years 2007 and 2006 for professional services
      rendered by the principal registered accountant for the audit of the Company's
      annual financial statements and review of financial statements included in
      the
      Company’s Form 10-QSB or services that are normally provided by the accountant
      in connection with statutory and regulatory filings or engagements for those
      fiscal years were $52,390 and $53,051, respectively.










(2)
      Audit-Related Fees.





The
      aggregate fees billed in fiscal years 2007 and 2006 for assurance and related
      services by the principal accountant that are reasonably related to the
      performance of the audit or review of the Company's financial statements and
      are
      not reported under Item 14(1) above were $12,800 and $7,420, respectively.
      The
      audit-related fees were for professional services rendered in conjunction with
      SEC Registration Statement filings and amendments thereto.





(3)
      Tax
      Fees.





The
      aggregate fees billed in fiscal years 2007 and 2006 for professional services
      rendered by the principal accountant for tax compliance, tax advice, and tax
      planning were $3,250 and $3,000, respectively.





(4)
      All
      Other Fees





The
      aggregate fees billed in fiscal years 2007 and 2006 for products and services
      provided by the principal accountant, other than the services reported in Items
      14(1) through 15(3) above were $0 and $0, respectively.





(5)
      Audit
      Committee Approval





During
      fiscal year 2007 and 2006, the Audit Committee pre-approved all engagements
      and
      fees for services the principal registered accountant provided since it was
      formally formed. Prior to the formation of the Audit Committee, the entire
      Board
      functioned as the Audit Committee and pre-approved all engagements and fees
      for
      services the principal registered accountant provided.




**PART
      IV**





**Item
                15.**
            **Exhibits.**




(a)
            Exhibits




**EXHIBIT
      INDEX**




**Description
      of Document**





**Exhibit****Number**
            
            **Description**3.1
            
            Certificate
                of Incorporation of the Company, incorporated by reference to Exhibit
                3.1
                to the Company's Annual Report on Form 10-SB filed on October 20,
                2000.3.2
            
            Amendment
                to the Certificate of Incorporation of the Company dated June 5,
                2002,
                incorporated by reference to Exhibit 3.1 to Company's Current Report
                on
                Form 8-K filed on June 18, 2002.3.3
            
            Amendment
                to the Certificate of Incorporation of the Company dated July 6,
                2005;
                incorporated by reference to Exhibit 3.3 to the Company’s Form SB-2
                Registration Statement filed October 25, 2005.3.4
            
            Amendment
                to the Certificate of Incorporation of the Company dated October
                13, 2005;
                incorporated by reference to Exhibit 3.4 to the Company’s Form SB-2
                Registration Statement filed October 25, 2005.3.5
            
            Amended
                and Restated By-laws of the Company dated March 23, 2004; incorporated
                by
                reference to Exhibit 3.1 to Company’s Quarterly Report on Form 10-QSB
                filed on May 14, 2004.4.1
            
            Stock
                Purchase Agreement dated June 14, 2002, incorporated by reference
                to
                Exhibit 4.1 to Company's Current Report on Form 8-K filed on June
                18,
                2002.4.2
            
            Registration
                Rights Agreement dated June 14, 2002, incorporated by reference to
                Exhibit
                4.4 to Company's Current Report on Form 8-K filed on June 18,
                2002.4.3
            
            Certificate
                of Designation dated June 13, 2002, incorporated by reference to
                Exhibit
                4.5 to Company's Current Report on Form 8-K filed on June 18,
                2002.4.4
            
            Certificate
                of Amendment of Certificate of Designation of Series A Convertible
                Preferred Stock of Power Efficiency Corporation, incorporated by
                reference
                to Exhibit 4.2 to Company's Current Report on Form 8-K filed on May
                25,
                2003.









4.5
            
            Specimen
                common stock Certificate of the Company, incorporated by reference
                to
                Exhibit 4.5 to the Company’s Form SB-2/A Registration Statement filed
                December 8, 2005.4.6
            
            Agreement
                dated April 22, 2005, between the Company and Summit Energy Ventures,
                LLC,
                for the issuance of preferred stock and warrants; incorporated by
                reference to Exhibit 4.6 to the Company’s Form SB-2 Registration Statement
                filed October 25, 2005.4.7
            
            Agreement
                dated April 22, 2005, between the Company and Commerce Energy Group,
                Inc.,
                for the issuance of preferred stock and warrants; incorporated by
                reference to Exhibit 4.7 to the Company’s Form SB-2 Registration Statement
                filed October 25, 2005.4.8
            
            Letter
                of Intent dated April 18, 2005, between the Company and Joseph Stevens
                & Company, Inc., with respect to the private offering of common stock
                and warrants; incorporated by reference to Exhibit 4.8 to the Company’s
                Form SB-2 Registration Statement filed October 25,
                2005.4.9
            
            Form
                of Equity Warrant,incorporated
                by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K,
                filed January 24, 20074.10
            
            Form
                of Equity Warrant,incorporated
                by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K,
                filed March 8, 200710.1
            
            Lease
                Agreement for Company's Ann Arbor, Michigan facility dated February
                16,
                1996, incorporated by reference to Exhibit 10(c) to Company's Annual
                Report on Form 10-SB filed on October 20, 2000.10.2
            
            Stock
                Purchase Warrant dated June 14, 2002, incorporated by reference to
                Exhibit
                4.2 to Company's Current Report on Form 8-K filed on June 18,
                2002.10.3
            
            Amended
                and Restated Stockholders' Agreement dated June 14, 2002, incorporated
                by
                reference to Exhibit 4.3 to Company's Current Report on Form 8-K
                filed on
                June 18, 2002.10.4
            
            United
                States Patent #5,821,726, incorporated by reference to Exhibit 10(g)
                to
                Company's Annual Report on Form 10-SB filed on October 20,
                2000.10.5
            
            1994
                Stock Option Plan, incorporated by reference to Exhibit 10(i) to
                Company's
                Annual Report on Form 10-SB filed on October 20, 2000.10.6
            
            Patent
                License Agreement (DN-858) with NASA, incorporated by reference to
                Exhibit
                10.10 to Company's Amended Annual Report on Form 10-SB/A filed on
                October
                26 2001.10.7
            
            Patent
                License Agreement (DE-256) with NASA incorporated by reference to
                Exhibit
                10.11 to Company's Amended Annual Report on Form 10-SB/A filed on
                October
                26 2001.10.8
            
            Settlement
                and Release Agreement with NASA incorporated by reference to Exhibit
                10.12
                to Company's Amended Annual Report on Form 10-SB/A filed on October
                26
                2001.10.9
            
            Modification
                No. 1 to Patent License Agreement (DE-256) with NASA, incorporated
                by
                reference to Exhibit 10.13 to Company's Amended Annual Report on
                Form
                10-SB/A filed on October 26 2001.10.10
            
            Product
                Warranty, incorporated by reference to Exhibit 10.16 to Company's
                Amended
                Annual Report on Form 10-SB/A filed on October 26 2001.10.11
            
            Test
                Report from Medsker Electric, Inc., incorporated by reference to
                Exhibit
                10.17 to Company's Amended Annual Report on Form 10-SB/A filed on
                October
                26 2001.10.12
            
            Test
                Report from Oak Ridge National Laboratory, incorporated by reference
                to
                Exhibit 10.18 to Company's Amended Annual Report on Form 10-SB/A
                filed on
                October 26 2001.10.13
            
            Test
                Report from Oregon State University – The Motor Systems Resource
                Facility, incorporated by reference to Exhibit 10.19 to Company's
                Amended
                Annual Report on Form 10-SB/A filed on October 26 2001.10.14
            
            Test
                Report from Otis Elevator Co., incorporated by reference to Exhibit
                10.20
                to Company's Amended Annual Report on Form 10-SB/A filed on October
                26
                2001.10.15
            
            Employment
                Agreement with Stephen Shulman, incorporated by reference to Exhibit
                10.23
                to Company's Amended Annual Report on Form 10-SB/A filed on October
                26
                2001.10.16
            
            Employment
                Agreement with Nicholas Anderson, incorporated by reference to Exhibit
                10.24 to Company's Amended Annual Report on Form 10-SB/A filed on
                October
                26 2001.10.17
            
            Employment
                Agreement with Raymond J. Skiptunis, incorporated by reference to
                Exhibit
                10.24 to Company's Annual Report on Form 10-KSB filed on March 31,
                2003.10.18
            
            Revolving
                Credit Note dated May 8, 2003, incorporated by reference to Exhibit
                10.1
                to Company's Current Report on Form 8-K filed May 25,
                2003.10.19
            
            Security
                Agreement dated May, 2003, incorporated by reference to Exhibit 10.2
                to
                Company's Current Report on Form 8-K filed May 25,
                2003.









10.20
            
            Certificate
                of Amendment of Warrant, incorporated by reference to Exhibit 10.4
                to
                Company's Current Report on Form 8-K filed May 25,
                2003.10.21
            
            Employment
                Agreement with Richard Koch dated June 9, 2003, incorporated by reference
                to Exhibit 10.1 to Company's Current Report on Form 8-K filed June
                20,
                2003.10.22
            
            Settlement
                and Release Agreement with Raymond J. Skiptunis dated June 9, 2003,
                incorporated by reference to Exhibit 10.2 to Company's Current Report
                on
                Form 8-K filed June 20, 2003.10.23
            
            Employment
                Agreement with Raymond J. Skiptunis dated June 9, 2003 incorporated
                by
                reference to Exhibit 10.3 to Company's Current Report on Form 8-K
                filed
                June 20, 2003.10.24
            
            Employment
                Agreement with Keith Collin dated November 13, 2003, incorporated
                by
                reference to Exhibit 10.1 to Company's Quarterly Report on Form 10-QSB
                filed November 14, 2003.10.25
            
            Employment
                Agreement with Thomas Mills dated October 6, 2003, incorporated by
                reference to Exhibit 10.2 to Company's Quarterly Report on Form 10-QSB
                filed November 14, 2003.10.26
            
            Subscription
                Agreement with Nicholas Anderson dated September 30, 2003, incorporated
                by
                reference to Exhibit 10.3 to Company's Quarterly Report on Form 10-QSB
                filed November 14, 2003.10.27
            
            Settlement
                Agreement with Nicholas Anderson dated September 30, 2003, incorporated
                by
                reference to Exhibit 10.4 to Company's Quarterly Report on Form 10-QSB
                filed November 14, 2003.10.28
            
            Settlement
                Agreement and Mutual General Release with Stephen L. Shulman and
                Summit
                Energy Ventures, LLC dated October 3, 2003, incorporated by reference
                to
                Exhibit 10.5 to Company's Quarterly Report on Form 10-QSB filed November
                14, 2003.10.29
            
            Promissory
                Note granted to Stephen Shulman dated September 15, 2003 incorporated
                by
                reference to Exhibit 10.6 to Company's Quarterly Report on Form 10-QSB
                filed November 14, 2003.10.30
            
            Amendment
                to the Amended and Restated Stockholders' Agreement among Anthony
                Caputo,
                Nicholas Anderson, Philip Elkus, Stephen Shulamn, Performance Control,
                LLC, Summit Energy Ventures, LLC and Power Efficiency Corporation
                dated
                September 22, 2003, incorporated by reference to Exhibit 10.7 to
                Company's
                Quarterly Report on Form 10-QSB filed November 14,
                2003.10.31
            
            Regulation
                S Stock Purchase Agreement with Starz Investments Limited dated April
                23,
                2003, incorporated by reference to Exhibit 10.9 to Company's Quarterly
                Report on Form 10-QSB filed November 14, 2003.10.32
            
            Addendum
                to the Regulation S Stock Purchase Agreement dated June 13, 2003
                incorporated by reference to Exhibit 10.10 to Company's Quarterly
                Report
                on Form 10-QSB filed November 14, 2003.10.33
            
            Warrant
                Agreement with Summit Energy Ventures, LLC dated February 26, 2004,
                incorporated by reference to Exhibit 10.33 to Company's Current Report
                on
                Form 8-K filed February 27, 2004.10.34
            
            Consulting
                Agreement with Raymond Skiptunis dated September 22, 2003, incorporated
                by
                reference to Exhibit 10.35 to Company's Annual Report on Form 10-KSB
                filed
                March 10, 2004.10.35
            
            Business
                Property Lease with Arens Investment Company dated November 1, 2003,
                incorporated by reference to Exhibit 10.36 to Company's Annual Report
                on
                Form 10-KSB filed March 10, 2004.10.36
            
            Subscription
                Agreement with Richard Koch dated December 23, 2003, incorporated
                by
                reference to Exhibit 10.37 to Company's Annual Report on Form 10-KSB
                filed
                March 10, 2004.10.37
            
            Subscription
                Agreement with Raymond Skiptunis dated January 8, 2004, incorporated
                by
                reference to Exhibit 10.38 to Company's Annual Report on Form 10-KSB
                filed
                March 10, 2004.10.38
            
            Subscription
                Agreement with Leonard Bellezza dated February 16, 2004, incorporated
                by
                reference to Exhibit 10.39 to Company's Annual Report on Form 10-KSB
                filed
                March 10, 2004.10.39
            
            Letter
                agreement with Pali Capital, Inc. dated February 25, 2004, incorporated
                by
                reference to Exhibit 10.40 to Company's Annual Report on Form 10-KSB
                filed
                March 10, 2004.10.40
            
            Amended
                and Restated 2000 Stock Option and Restricted Stock Plan dated February
                23, 2004, incorporated by reference to Exhibit 10.41 to Company's
                Annual
                Report on Form 10-KSB filed March 10, 2004.10.41
            
            Amended
                and Restated 1994 Stock Option Plan, incorporated by reference to
                Exhibit
                10.42 to Company's Annual Report on Form 10-KSB filed March 10,
                2004.10.42
            
            Line
                of Credit Agreement with Summit Energy Ventures, LLC, incorporated
                by
                reference to Exhibit 10.1 to Company's Current Report on Form 8-K
                filed
                May 5, 2004.10.43
            
            Single
                Phase Licensing Agreement with Commerce Energy Group, incorporated
                by
                reference to Exhibit 10.1 to Company's Quarterly Report on Form 10-QSB
                filed November 15, 2004.10.44
            
            Settlement
                and Consulting Agreement with Ray Skiptunis dated September 27, 2004,
                incorporated by reference to Exhibit 10.45 to the Company's Annual
                Report
                on Form 10-KSB filed on March 31,
                2005.









10.45
            
            Settlement
                Agreement with Richard Koch dated December 15, 2004, incorporated
                by
                reference to Exhibit 10.46 to the Company's Annual Report on Form
                10-KSB
                filed on March 31, 2005.10.46
            
            Management
                Agreement with Northwest Power Management, Inc. dated November 18,
                2004,
                incorporated by reference to Exhibit 10.47 to the Company's Annual
                Report
                on Form 10-KSB filed on March 31, 2005.10.47
            
            Business
                Property Lease Amendment involving Glenborough LLC and Northwest
                Power
                Management, Inc. dated February 7, 2005, incorporated by reference
                to
                Exhibit 10.48 to the Company's Annual Report on Form 10-KSB filed
                on March
                31, 2005.10.48
            
            Settlement
                and Consulting Agreement with Keith Collin dated September 27, 2004,
                incorporated by reference to Exhibit 10.49 to the Company's Annual
                Report
                on Form 10-KSB filed on March 31, 2005.10.49
            
            Settlement
                Agreement with Tom Mills dated December 21, 2004, incorporated by
                reference to Exhibit 10.50 to the Company's Annual Report on Form
                10-KSB
                filed on March 31, 2005.10.50
            
            Business
                Property Sublease with Famair, Inc. dated February 11, 2005, incorporated
                by reference to Exhibit10.51 to the Company's Annual Report on Form
                10-KSB
                filed on March 31, 2005.10.51
            
            Placement
                Agency Agreement Dated as of June 1, 2005, between the Company and
                Joseph
                Stevens & Co., Inc.; incorporated by reference to Exhibit 10.51 to the
                Company’s Form SB-2 Registration Statement filed October 25,
                2005.10.52
            
            Form
                of Placement Agent Warrant issued pursuant to Exhibit 10.51; incorporated
                by reference to Exhibit 3.2 to Company’s Current Report on Form 8-K Filed
                on July 15,200510.53
            
            Form
                of Investor Warrant; incorporated by reference to Exhibit 3.1 to
                Company’s
                Current Report on Form 8-k filed on July 15, 200510.54
            
            Consulting
                agreement with George Boyadjieff, dated June 9, 2005; incorporated
                by
                reference to Exhibit 10.54 to the Company’s Form 10-KSB filed on March 31,
                200610.55
            
            Consulting
                agreement with Steven Blum dated February 21, 2006; incorporated
                by
                reference to Exhibit 10.55 to the Company’s Form 10-KSB filed on March 31,
                200610.56
            
            Consulting
                agreement with CEO Cast, Inc, dated January 2, 2006; incorporated
                by
                reference to Exhibit 10.56 to the Company’s Form 10-KSB filed on March 31,
                200610.57
            
            Letter
                agreement with USBX Advisory Services, LLC, dated January 6, 2006;
                incorporated by reference to Exhibit 10.57 to the Company’s Form 10-KSB
                filed on March 31, 200610.58
            
            Employment
                agreement with Steven Strasser dated June 1, 2005; incorporated by
                reference to Exhibit 8.1 to the Company’s Current Report of Form 8-K filed
                July 13, 2005.10.59
            
            Employment
                agreement with John Lackland dated June 1, 2005; incorporated by
                reference
                to Exhibit 8.2 to the Company’s Current Report on Form 8-K filed on July
                13, 2005.10.60
            
            Employment
                agreement with Nicholas Anderson dated June 1, 2005; incorporated
                by
                reference to Exhibit 8.3 to the Company’s Current Report on Form 8-K filed
                on July 13, 2005.10.61
            
            Interim
                financing agreement with EMTUCK, LLC dated April 18, 2006; incorporated
                by
                reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K
                filed on April 24, 2006.10.62
            
            Promissory
                note granted to EMTUCK, LLC dated April 19, 2006; incorporated by
                reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K
                filed on April 24, 2006.10.63
            
            Security
                agreement with EMTUCK, LLC dated April 19, 2006; incorporated by
                reference
                to Exhibit 10.3 to the Company’s Current Report on Form 8-K filed on April
                24, 2006.10.64
            
            Form
                of EMTUCK Warrant; incorporated by reference to Exhibit 10.4 to the
                Company’s Current Report on Form 8-K filed on April 24,
                2006.10.65
            
            Promissory
                note granted to EMTUCK, LLC dated May 19, 2006; incorporated by reference
                to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed on May
                26, 2006.10.66
            
            Form
                of Pali Note Extension Consent Letter dated October 23, 2006; incorporated
                by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K
                filed on October 27, 2006.10.67
            
            Form
                of Securities Purchase Agreement, dated November 30, 2006; incorporated
                by
                reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K
                filed on December 5, 2006.10.68
            
            Form
                of Note, dated November 30, 2006; incorporated by reference to Exhibit
                4.1
                to the Company’s Current Report on Form 8-K filed on December 5,
                2006.10.69
            
            Form
                of Debt Warrant; incorporated by reference to Exhibit 4.2 to the
                Company’s
                Current Report on Form 8-K filed on December 5,
                2006.









10.70
            
            Form
                of Equity Warrant; incorporated by reference to Exhibit 4.3 to the
                Company’s Current Report on Form 8-K filed on December 5,
                2006.10.71
            
            Form
                of Securities Purchase Agreement, incorporated by reference to Exhibit
                10.1 to the Company’s Current Report on Form 8-K filed on January 24,
                2007.10.72
            
            Consulting
                Agreement amendment with George Boyadjieff, dated June 9, 2007,incorporated
                by reference to the Quarterly Report on Form 10-QSB filed on August
                13,
                2007.10.73
            
            Manufacturing
                Services Agreement, dated September 6, 2007 by and among the Company
                and Sanima-Sci Corporation,incorporated
                by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K
                filed on September 13, 200710.74
            
            Consulting
                Agreement amendment with George Boyadjieff, dated June 9, 2007,incorporated
                by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form
                10-QSB filed on August 13, 2007.10.75
            
            Manufacturing
                Services Agreement, dated September 6, 2007 by and among the Company
                and
                Sanima-Sci Corporation, incorporated by reference to Exhibit 10.1
                to the
                Company’s Current Report on Form 8-K filed on September 12,
                2007.13.1
            
            Annual
                Report on Form 10-KSB for the year ended December 31, 2004, incorporated
                by reference filed on March 31, 2005.13.2
            
            Amended
                Annual Report on Form 10-KSB/A for the year ended December 31, 2004,
                incorporated by reference filed on September 21, 2005.13.3
            
            Quarterly
                Report on Form 10-QSB for the three and six months ended June 30,
                2005,
                incorporated by reference filed on August 15, 2005.20.1
            
            Registration
                Statement on Form SB-2, incorporated by reference filed on December
                20,
                2005.20.2
            
            Post
                Effective Amendment No. 1 to Form SB-2 Registration Statement,
                incorporated by reference filed on September 19, 2006.20.3
            
            Post
                Effective Amendment No. 2 to Form SB-2 Registration Statement,
                incorporated by reference filed on April 30, 2007.20.4
            
            Registration
                Statement on Form SB-2, incorporated by reference filed on April
                25,
                2007.22.1
            
            Proxy
                Statement on Form DEF 14A, incorporated by reference filed on May
                4,
                2007.23.1
            
            Consent
                of Sobel & Co., LLC, Independent Registered Public Accounting Firm,
                incorporated by reference to Exhibit 23.1 to the Company’s Post Effective
                Amendment No. 2 to Form SB-2 Registration Statement filed on May
                4,
                2007.23.2
            
            Consent
                of Ellenoff Grossman & Schole, LLP (included in Exhibit
                5.1).23.3
            
            Consent
                of Sobel & Co., LLC, Independent Registered Public Accounting Firm,
                incorporated by reference to Exhibit 23.1 to the Company’s Post Effective
                Amendment No. 2 to Form SB-2 Registration Statement filed on May
                11,
                2007.24.1
            
            Power
                of Attorney incorporated by reference to Exhibit 24.1 to the Company’s
                Post Effective Amendment No. 1 to Form SB-2 Registration Statement
                filed
                on September 19, 2006.31.1
            
            Certification
                of Steven Strasser pursuant to Section 302 of the Sarbanes-Oxley
                Act of
                2002; filed herewith31.2
            
            Certification
                of John Lackland pursuant to Section 302 of the Sarbanes-Oxley Act
                of
                2002; filed herewith32.1
            
            Certification
                of Steven Strasser pursuant to Section 906 of the Sarbanes Oxley
                Act of
                2002; filed herewith32.2
            
            Certification
                of John Lackland pursuant to Section 906 of the Sarbanes Oxley Act
                of
                2002; filed herewith







**SIGNATURES**




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




POWER
                EFFICIENCY CORPORATIONDated: 
                March 26, 2008
            By:
            /s/STEVEN
                STRASSERSteven
                Strasser, President and ChiefExecutive Officer and Chairman of the
                BoardDated: 
                March 26, 2008
            By:
            /s/JOHN
                LACKLANDJohn
                Lackland, Chief Financial Officer
                andDirector




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




Dated: 
                March 26, 2008
            By:
            /s/Gary
                RadoGary
                Rado, DirectorDated: 
                March 26, 2008
            By:
            /s/
                George BoydjieffGeorge
                Boyadjieff, DirectorDated: 
                March 26, 2008
            By:
            /s/Douglas
                DunnDr.
                Douglas Dunn, DirectorDated: 
                March 26, 2008
            By:
            /s/Richard
                MorganRichard
                Morgan, DirectorDated: 
                March 26, 2008
            By:
            /s/Raymond
                J. SkiptunisRaymond
                J. Skiptunis, Director