**Securitiesand Exchange Commission**

**Washington, D.C. 20549**

 

**FORM 10-KSB/A**

**Amendment No. 1**

 

**ý****Annual report under Section 13 or 15(d) ofthe Securities**

**Exchange Act of 1934**

 

**For the fiscal year ended December 31, 2004**

 

**o****Transition report under Section 13 or15(d) of the Securities**

**Exchange Act of 1934**

 

**For the transition period from                      to                      **

 

**Commission File Number: 000-31805**

 

**Power Efficiency Corporation**

(Name of Small Business Issuer in its Charter)

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

 

**(702) 697-0377**

(Issuer’s Telephone Number, Including Area Code)

 

Securities Registered under Section 12(g) ofthe Exchange Act:

 

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

(Title of Class)

 

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

 

Check if there is nodisclosure of delinquent filers in response to Item 405 of Regulation S-Bcontained in this form, and no disclosure will be contained, to the best ofregistrant’s knowledge, in definitive proxy or information statementsincorporated by reference in Part III of this Form 10-KSB or anyamendment to this Form 10-KSB. o

 

The issuer’s revenues forthe year ended December 31, 2004 were $284,373.

 

As of March 11, 2005,the aggregate market value of the common stock held by non-affiliates of theissuer was approximately $565,913. This amount is based on the closing price of$0.30 per share for the registrant’s stock as of such date.

 

On March 11, 2005 therewere 5,020,477 shares of the registrant’s common stock outstanding.

 

**Documents Incorporated by Reference**

 

None

 

 

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**EXPLANATORY NOTE**

 

ThisAmendment No. 2 on Form 10-KSB/A to Power Efficiency Corporation’s(the “Company” or the “Registrant”) Annual Report on Form 10-KSB for theyear ended December 31, 2004 (the “Original Filing”), which was filed withthe Securities and Exchange Commission on March 31, 2005, and as amendedon Form 10-KSB/A for the year ended December 31, 2004 (the “FirstAmendment”, collectively the “Filings”), which was filed with the Securitiesand Exchange Commission on April 6 2005, is being filed to amend theFilings as follows:

 

•                  Item 6. Management’s Discussion and Analysisis amended to properly reflect the Company’s Financial Condition, Liquidity andCapital Resources: For the Year Ended December 31, 2004 information.

 

•                  Item 7. Financial Statements is amended torevise the Cash Flow Statement to properly reflect the Company’s cash flows forthe year ended December 31, 2004.

 

ThisAmendment No. 2 is filed pursuant to the Securities and ExchangeCommission Release No. 34-50754 which provides for 45 additional daysbeyond the date of the Original Filing for the filing of the above.

 

Asa result of these amendments, the certifications pursuant to Section 302of the Sarbanes-Oxley Act of 2002, as filed as exhibits to the Original Filing,have been re-executed and re-filed as of the date of this Form 10-KSB/A.

 

Exceptfor the amendments described above, this Form 10-KSB/A does not modify orupdate other disclosures in, or exhibits to, the Original Filing.

 

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

 

**OVERVIEW**

 

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

 

The Registrant began generating revenues from salesof its patented *Power Commander*®line of motor controllers in late 1995. As of December 31, 2004, theRegistrant had total stockholders’ equity of $1,068,330 primarily due to theRegistrant’s sale of 2,346,233 shares of Series A-1 Convertible Preferredstock to Summit Energy Ventures, LLC in June of 2002 and the conversion ofnotes payable of approximately $1,047,000 into 982,504 shares of Series A-1Convertible Preferred stock in October of 2003. In addition, in August 2000,the Registrant purchased the assets of Percon, formerly the largest distributorof the Registrant’s products. The transaction was accounted for as a purchaseand the Registrant’s Statements of Operations includes Percon’s results ofoperations since the date of acquisition. The consolidation of the operationsof both entities allowed the Registrant to integrate the administrative, sales,marketing and manufacturing operations of Percon. Percon had developed salescontacts with major OEM’s in the elevator/escalator industry and transferredthose agreements to the Registrant as part of the asset sale.

 

**RESULTS OF OPERATIONS: FISCAL YEAR2004 COMPARED TO FISCAL YEAR 2003**

 

**REVENUES**

 

Revenues for the twelve months ended December 31,2004, were $284,373 compared to $397,673 for the twelve months ended December 31,2003, a decrease of $113,300, or 28%. The decrease in revenues was principallyattributable to a lack of funding to pursue the Registrant’s sales strategy aswell as the failure of the Registrant’s former management efforts to improvesales. New management has reassessed the Registrant’s sales efforts andbelieves it is taking steps to improve sales by pursuing tighter relationshipswith important OEM customers, as well as direct and distributor sales to moredesirable markets and customers.

 

**COST OF REVENUES**

 

Cost of revenues for the twelve months ended December 31,2004 were $258,135 compared to $360,972 for the twelve months ended December 31,2003, a decrease of $102,837 or 28%. The decrease in cost of revenues wasprimarily attributed to the decrease in revenues and an overall reduction inthe cost of materials from the Registrant’s suppliers.  These improvementswere partially off-set by an increase in the inventory obsolescence expense to$100,000 for the twelve months ended December 31, 2003 compared to $29,484for the twelve months ended December 31, 2004, a decrease of $70,516 or71%.  The decrease in the inventory obsolescence expense was principallyattributable to reserves taken for certain inventory components usedexclusively in slow moving products.

 

**GROSS MARGIN**

 

Gross margin for the twelve months ended December 31,2004 was $26,238 compared to $36,701 for the twelve months ended December 31,2003, a decrease of $10,463 or 29%.  This decrease was primarily due tothe increase in material, labor, and overhead offset by the inventoryobsolescence expense described above.  Excluding the inventoryobsolescence expense, gross margin as a percentage of revenue for the twelve

 

1

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months ended December 31, 2004 was 20% comparedto 34% for the twelve months ended December 31, 2003.  The decreasewas primarily attributable to a decrease in sales attributable to a lack offunding as described above, as well as the inventory obsolescence expensedescribed above.

 

**OPERATING EXPENSES**

 

**Research and Development Expenses**

 

Research and development expenses were $327,202 forthe twelve months ended December 31, 2004 compared to $420,376 for thetwelve months ended December 31, 2003, a decrease of $93,174 or 22%. This decrease is primarily attributable to reduced expenses due to therestructuring of the Company’s operations in the 3 rd quarter2004.  Costs incurred were for the development of the low cost, low horsepowerPlatform A product family, the single-phase controller, and the fast-reactionintegrator board.

 

**Selling, General and AdministrativeExpenses**

 

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

 

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

 

Sinceinception, the Registrant has financed its operations primarily through thesale of its equity securities. As of December 31, 2004 the Registrant hasreceived a total of approximately $6,254,800 from public and private offeringsof its equity securities, received approximately $445,386 under a bank line ofcredit (which was repaid during 2002), and received $1,000,000 under a line ofcredit with a shareholder (which was converted to Series A-1 PreferredConvertible shares during 2003). In October 2004, the Company received$1,464,806 in debt financing through a debt offering arranged by a placementagent, Pali Capital. Of this total, $300,000 plus accrued interest wasconverted from borrowings with the same shareholder as referenced above. As of December 31,2004 the Registrant had cash and cash equivalents of $392,471. In February 2005,the Registrant received an additional $125,000 in debt financing under thissame debt offering.

 

Netcash used for operating activities for the twelve months ended December 31,2004 was $1,396,150 which primarily consisted of: a net loss of $2,465,631;less allowances for inventory obsolescence of $29,484, depreciation andamortization of $116,294, loss on disposition of fixed assets of $31,036,amortization of debt discounts of $97,000, warrants and options issued inconnection with settlements, services from consultants and vendors, theforgiveness of indebtedness and the issuance of debt of $550,969, an increasein restricted cash related to a note payable of $219,721, decreases in accountsreceivable of $1,701, inventory of $143,396 and prepaid expenses and other of$13,079. In addition, these amounts were partially offset by an increase inaccounts payable and accrued expenses of $142,830 and accrued salaries andpayroll taxes of $84,841.

 

Netcash used for operating activities for the twelve months ended December 31,2003 was $2,028,798 which primarily consisted of: a net loss of $3,016,717;less allowances for bad debts and customer returns of $17,000, allowances forinventory obsolescence of $100,000 and impairment of customer contracts of$40,948, depreciation and amortization of $120,700, additional paid in capital related to issuance of stock options of $77,158,common stock issued for services of $614,991, interest converted to debt of$46,896 and decreases in accounts receivable of $31,511 and inventory of$43,353. In addition, these amounts were partially offset by an increase inprepaid expenses of $18,832 and deposits of $2,646, and decreases in accountspayable and accrued expenses of $63,866 and accrued salaries and payroll taxesof $19,294.

 

Netcash used in investing activities for fiscal year 2004 was $10,187, compared to$42,617 in fiscal year 2003.  The amount for fiscal year 2004 consisted ofthe purchase of property, equipment and other assets of $14,657, which wasoffset by the proceeds from the sale of property, equipment and other assets of$4,470.  The amount for fiscal year 2003entirely consisted of the purchase of property, equipment and other assets.

 

Netcash provided by financing activities for fiscal year 2004 was $1,513,300 whichprimarily consisted of proceeds from the issuance of debt securities of$300,000, from which a $15,000 fee was paid, the issuance of additional debtsecurities of $1,150,000, from which a fee of $115,000 was paid. These amountswere offset by an increase in deferred financing costs of $117,885 and thepayment on loans from stockholders of $40,000. Net cash provided by financing activities for fiscal year 2003 was$2,099,215, which primarily consisted of proceeds from the issuance of equitysecurities of $1,131,965, net of costs, and advances from line of credit of$1,000,000; off-set by deferred financing costs of $32,750.

 

TheRegistrant expects to experience growth in its operating expenses, particularlyin research and development and selling, general and administrative expenses,for the foreseeable future in order to execute its business strategy. As aresult, the Registrant anticipates that operating expenses will constitute amaterial use of any cash resources.

 

2

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**Cash Requirements and Need forAdditional Funds**

 

The Company anticipates a substantial need for cashto fund its working capital requirements. In accordance with the Company’sprepared expansion plan, it is the opinion of management that approximately$1.75 million will be required to cover operating expenses, including, but notlimited to, marketing, sales and operations during the next twelve months. Thisamount does not include the funds required to repay the secured debt issued bythe company as described in Note 22 to the Financial Statements and the Company’sForms 8-K filed on March 2, 2005 and November 5, 2004.

 

On October 16, 2003, the Company entered intoan agreement with an investment banker whereby the investment banker wouldprovide the company with investment banking services.  The investmentbanker was retained with the intention of attempting to raise $10 million ormore through a public sale of stock in the first quarter of 2004.  Sincethe agreement was executed, the Company has learned that such a transaction isprobably not possible until after the Company has generated substantiallygreater sales than it has generated in the past.  On February 25,2004, the Company signed a formal letter of agreement with the same investmentbanker.  Under this letter, the Company appointed the investment banker,as its exclusive representative for 120 days, to attempt to raise money for theCompany.  The investment banker introduced the Company to investors andparticipated in presentations to investors to purchase the Company’ssecurities.  The investment banker was unable to sell any securitiesduring the 120 days, but the Registrant continued to work with the investmentbanker and sold secured notes in October 2004. The Company paid theinvestment 10% of the gross proceeds of restricted securities sold during theagreement (excluding those sold to an affiliate) as well as issued an amount ofwarrants equal to 10% of the total warrants issued to the investors in thesecured notes. (See November 5, 2004 8K for additional details.) If theCompany is acquired, merged, or enters into a joint venture with an investorintroduced by the investment banker, the Company agrees to pay a fee of 3% ofthe gross proceeds (cash, stock, other assets acquired, or debt assumed). TheCompany’s agreement with the investment banker has now expired and the offeringof notes has been closed.

 

The Company entered into a consulting agreement withan investment advisor on December 1, 2004.  The agreement calls forthe investment advisor to assist the Company in devising financial andmarketing strategies, and also to assist the Company in raising funds on anon-exclusive basis through the offering of debt and/or equitysecurities.  The company shall pay the investment advisor the amount of$3,000 per month, plus expenses approved by the Company, and issued 300,000options.  The sum of $3,000 per month will be adjusted to $5,000 per monthonce the Board of Directors and the Company agree to adjust the salaries of theChief Executive Officer, Chief Financial Officer and the General Manager. The agreement contains confidentiality and non-competition provisions. The term of the agreement is 12 months and can be terminated by either party on90 days notice in writing.  As of December 31, 2004, the Company paidthe investment advisor $3,000.

 

**Recent Accounting Pronouncements**

 

See “Note 2 – Summary of Significant AccountingPolicies” of the Financial Statements for an explanation of recent accountingpronouncements impacting the Company.

 

3

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

 

**POWER EFFICIENCY CORPORATION**

 

DECEMBER 31, 2004 AND 2003 

 

INDEX

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

 

4

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**REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTINGFIRM**

 

Board of Directors and Stockholders

Power Efficiency Corporation

Las Vegas, Nevada

 

We have audited the accompanying balance sheet ofPower Efficiency Corporation, (a Delaware corporation) (the “Company”) as of December 31,2004, and the related statements of operations, changes in stockholders’equity, and cash flows for each of the years ended December 31, 2004 and2003.  These financial statements are the responsibility of the Company’smanagement.  Our responsibility is to express an opinion on thesefinancial statements based on our audits.

 

We conducted our audits in accordance with thestandards of the Public Company Accounting Oversight Board (UnitedStates).  Those standards require that we plan and perform the audit toobtain reasonable assurance about whether the financial statements are free ofmaterial misstatement.  The Company is not required to have, nor were weengaged to perform, an audit of its internal control over financialreporting.  Our audit included consideration of internal control overfinancial reporting as a basis for designing audit procedures that areappropriate in the circumstances, but not for the purpose of expressing anopinion on the effectiveness of the Company’s internal control over financialreporting.  Accordingly, we express no such opinion.  An audit alsoincludes examining, on a test basis, evidence supporting the amounts andestimates made by management, as well as evaluating the overall financialstatement presentation.  We believe that our audits provide a reasonablebasis for our opinion.

 

In our opinion, the financial statements referred toabove present fairly, in all material respects, the financial position of PowerEfficiency Corporation at December 31, 2004 and the results of itsoperations and its cash flows for the years ended December 31, 2004 and2003 in conformity with accounting principles generally accepted in the UnitedStates of America.

 

The accompanying financial statements have beenprepared assuming that the Company will continue as a going concern.  Asdiscussed in Note 3 to the financial statements, the Company has sufferedrecurring losses from operations, the Company has experienced a deficiency ofcash from operations and lacks sufficient liquidity to continue itsoperations.  These matters raise substantial doubt as to the Company’sability to continue as a going concern.  Management’s plans in regard tothese matters are also discussed in Note 3.  The financial statements donot include any adjustments that might result from the outcome of theseuncertainties.

 

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

 

 

March 29, 2005

Livingston, New Jersey

 

5

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**POWER EFFICIENCY CORPORATION**

BALANCESHEET

DECEMBER 31, 2004

 
| **ASSETS**                                                                                                                                                   |   |        |      |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-------------|-----------|
|                                                                                                                                                         |   |        |      |
| CURRENT  ASSETS:                                                                                                                                             |   |        |      |
| Cash                                                                                                                                                         |   | $           | 392,471   |   |
| Accounts  receivable, net of reserve and allowance of $21,229                                                                                                |   | 31,533      |      |
| Inventories,  net                                                                                                                                            |   | 187,817     |      |
| Prepaid  expenses and other current assets                                                                                                                   |   | 235,102     |      |
| Total  Current Assets                                                                                                                                        |   | 846,923     |      |
|                                                                                                                                                         |   |        |      |
| PROPERTY AND  EQUIPMENT, Net                                                                                                                                 |   | 26,320      |      |
|                                                                                                                                                         |   |        |      |
| OTHER  ASSETS:                                                                                                                                               |   |        |      |
| Patents, net                                                                                                                                                 |   | 6,504       |      |
| Goodwill                                                                                                                                                     |   | 1,929,963   |      |
| Website, net                                                                                                                                                 |   | 9,775       |      |
| Deferred  financing costs, net                                                                                                                               |   | 98,718      |      |
|                                                                                                                                                         |   | 2,044,960   |      |
|                                                                                                                                                         |   |        |      |
|                                                                                                                                                         |   | $           | 2,918,203 |   |
|                                                                                                                                                         |   |        |      |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**                                                                                                                |   |        |      |
|                                                                                                                                                         |   |        |      |
| CURRENT  LIABILITIES:                                                                                                                                        |   |        |      |
| Accounts  payable and accrued expenses                                                                                                                       |   | $           | 639,266   |   |
| Accrued  salaries and payroll taxes                                                                                                                          |   | 128,467     |      |
| Notes  payable - Pali Capital, Net                                                                                                                           |   | 981,801     |      |
| Notes  payable - former officers                                                                                                                             |   | 73,889      |      |
| Total  Current Liabilities                                                                                                                                   |   | 1,823,428   |      |
|                                                                                                                                                         |   |        |      |
| LONG-TERM  LIABILITIES:                                                                                                                                      |   |        |      |
| Note payable  - former officer                                                                                                                               |   | 26,445      |      |
|                                                                                                                                                         |   |        |      |
| Total  Liabilities                                                                                                                                           |   | 1,849,873   |      |
|                                                                                                                                                         |   |        |      |
| COMMITMENTS AND CONTINGENCIES                                                                                                                                |   |        |      |
|                                                                                                                                                         |   |        |      |
| STOCKHOLDERS’  EQUITY:                                                                                                                                  |   |        |      |
| Series A-1  convertible preferred stock, $.001 par value, 10,000,000 shares authorized,  3,328,737 shares issued and outstanding issued and outstanding |   | 3,329       |      |
| Common  stock, $.001 par value, 7,142,857 shares authorized, 5,020,477 shares issued  and oustanding                                                         |   | 5,020       |      |
| Additional  paid-in capital                                                                                                                                  |   | 16,386,612  |      |
| Accumulated  deficit                                                                                                                                         |   | (15,326,631 | )         |
| Total  Stockholders’ Equity                                                                                                                             |   | 1,068,330   |      |
|                                                                                                                                                         |   |        |      |
|                                                                                                                                                         |   | $           | 2,918,203 |   |

 

*See report of independentregistered public accounting firm and notes to financial statements.*

 

6

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**POWER EFFICIENCY CORPORATION**

STATEMENTSOF OPERATIONS

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

 

*See report of independentregistered public accounting firm and notes to financial statements.*

 

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**POWER EFFICIENCY CORPORATION**

STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

YEAR ENDED DECEMBER 31, 2004 AND 2003

 
| ** **                                                                                                                                                       | ** ** | ** **       | ** ** | ** **          | ** ** | ** **       | ** ** | ** **  | ** ** | ** **      | ** ** | **Additional**         | ** ** | ** **  | ** ** | **Total**  | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------|------------|---------------------|------------|------------------|------------|-------------|------------|-----------------|------------|------------------------|------------|-------------|------------|------------|------------|
| ** **                                                                                                                                                       | ** ** | **Common Stock** | ** ** | **Preferred Stock** | ** ** | **Subscription** | ** ** | **Paid-in** | ** ** | **Accumulated** | ** ** | **Stockholders’** | ** ** |
| ** **                                                                                                                                                       | ** ** | **Shares**       | ** ** | **Amount**          | ** ** | **Shares**       | ** ** | **Amount**  | ** ** | **Receivable**  | ** ** | **Capital**            | ** ** | **Deficit** | ** ** | **Equity** | ** ** |
| Balance, January 1,  2003                                                                                                                                   |       | 940,088          |       | $                   | 940        |             | 2,346,233  |        | $          | 2,346           |       | $                      | —     |        | $          | 11,749,702 |       | $ | (9,844,283 | ) | $ | 1,908,705 |   |
| Issuance of  common stock                                                                                                                                        |       | 684,765          |       | 685                 |       | —           |       | —      |       | (181,045        | )          | 1,228,037              |       | —      |       | 1,047,677  |       |
| Exercise of  warrants                                                                                                                                            |       | 50,100           |       | 51                  |       | —           |       | —      |       | —          |       | 84,237                 |       | —      |       | 84,288     |       |
| Conversion of Summit debt to preferred stock                                                                                                                     |       | —           |       | —              |       | 982,504          |       | 983         |       | —          |       | 1,045,913              |       | —      |       | 1,046,896  |       |
| Common stock issued for settlement of compensation  and other accrued expenses                                                                                   |       | 172,582          |       | 173                 |       | —           |       | —      |       | —          |       | 1,034,800              |       | —      |       | 1,034,973  |       |
| Non-qualified stock options issued below market                                                                                                                  |       | —           |       | —              |       | —           |       | —      |       | —          |       | 77,158                 |       | —      |       | 77,158     |       |
| Net loss 2003                                                                                                                                                    |       | —           |       | —              |       | —           |       | —      |       | —          |       | —                 |       | (3,016,717  | )          | (3,016,717 | )          |
| Balance, December 31,  2003                                                                                                                                 |       | 1,847,535        |       | $                   | 1,849      |             | 3,328,737  |        | $          | 3,329           |       | $                      | (181,045   | )           | $          | 15,219,847 |       | $ | (12,861,000 | ) | $ | 2,182,980 |   |
| Summit exercising all outstanding warrants                                                                                                                       |       | 3,134,102        |       | 3,134               |       | —           |       | —      |       | —          |       | —                 |       | —      |       | 3,134      |       |
| Fractional shares one-for-seven reverse split                                                                                                                    |       | 25,260           |       | 24                  |       | —           |       | —      |       | —          |       | —                 |       | —      |       | 24         |       |
| Common stock issued for services rendered                                                                                                                        |       | 13,580           |       | 13                  |       | —           |       | —      |       | —          |       | 35,796                 |       | —      |       | 35,809     |       |
| Common stock issued in exchange for subscriptions  receivable                                                                                                    |       | —           |       | —              |       | —           |       | —      |       | 181,045         |       | —                 |       | —      |       | 181,045    |       |
| Warrants issued in connection with issuance of Notes  Payable - Pali Capital                                                                                     |       |             |       |                |       |             |       |        |       |            |       | 580,000                |       |        |       | 580,000    |       |
| Options and Warrants issued in connection with  settlements and services from consultants and vendors, the forgiveness of  indebtedness and the issuance of debt |       | —           |       | —              |       | —           |       | —      |       | —          |       | 550,969                |       | —      |       | 550,969    |       |
| Net loss 2004                                                                                                                                                    |       | —           |       | —              |       | —           |       | —      |       | —          |       | —                 |       | (2,465,631  | )          | (2,465,631 | )          |
| Balance, December 31, 2004                                                                                                                                  |       | 5,020,477        |       | $                   | 5,020      |             | 3,328,737  |        | $          | 3,329           |       | $                      | —     |        | $          | 16,386,612 |       | $ | (15,326,631 | ) | $ | 1,068,330 |   |

 

*See report of independedntregistered public accouning firm and notes to financial statements.*

 

8

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**POWER EFFICIENCY CORPORATION**

STATEMENTSOF CASH FLOWS

 
| ** **                                                                                                                                                                       | ** ** | **Year Ended December 31,** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                                                                                                                                       | ** ** | **2004**                         | ** ** | **2003** | ** ** |
| CASH FLOWS PROVIDED BY (USED FOR):                                                                                                                                               |       |                             |       |   |   |
| OPERATING  ACTIVITIES:                                                                                                                                                           |       |                             |       |   |   |
| Net loss                                                                                                                                                                         |       | (2,465,631                       | )          | (3,016,717 | ) |
| Adjustments  to reconcile net loss to net cash used for operating activities:                                                                                                    |       |                             |       |   |   |
| Bad debt  expense                                                                                                                                                                |       | 5,493                            |       | 17,000 |   |
| Inventory  obsolescence reserve                                                                                                                                                  |       | 29,484                           |       | 100,000 |   |
| Impairment  of customer contracts                                                                                                                                                |       | 20,141                           |       | 40,948 |   |
| Depreciation  and amortization                                                                                                                                                   |       | 116,294                          |       | 120,700 |   |
| Loss on  disposition of fixed assets                                                                                                                                             |       | 31,036                           |       | — |   |
| Debt  discount related to issuance of debt securities                                                                                                                            |       | 97,000                           |       | — |   |
| Warrants and  options issued in connection with settlements, services from former  employees, consultants and vendors, the forgiveness of indebtedness and the  issuance of debt |       | 550,969                          |       | — |   |
| Issuance of  stock options below market value                                                                                                                                    |       | —                           |       | 77,158 |   |
| Common stock  issued for services                                                                                                                                                |       | 34,819                           |       | 614,991 |   |
| Accrued  interest on converted debt                                                                                                                                              |       | —                           |       | 46,896 |   |
| Changes in  certain assets and liabilities:                                                                                                                                      |       |                             |       |   |   |
| (Increase)  decrease in:                                                                                                                                                         |       |                             |       |   |   |
| Accounts  receivable                                                                                                                                                             |       | 1,701                            |       | 31,511 |   |
| Inventory                                                                                                                                                                        |       | 143,369                          |       | 43,353 |   |
| Prepaid  expenses and other                                                                                                                                                      |       | 13,079                           |       | (18,832 | ) |
| Restricted  cash related to payment of indebtedness                                                                                                                              |       | (219,721                         | )          | — |   |
| Deposits                                                                                                                                                                         |       | 18,146                           |       | (2,646 | ) |
| Increase  (decrease) in:                                                                                                                                                         |       |                             |       |   |   |
| Accounts  payable and accrued expenses                                                                                                                                           |       | 142,830                          |       | (63,866 | ) |
| Accrued  salaries and payroll taxes                                                                                                                                              |       | 84,841                           |       | (19,294 | ) |
| Net Cash  Used for Operating Activities                                                                                                                                          |       | (1,396,150                       | )          | (2,028,798 | ) |
|                                                                                                                                                                             |       |                             |       |   |   |
| INVESTING ACTIVITIES:                                                                                                                                                            |       |                             |       |   |   |
| Purchase of  property, equipment and other assets                                                                                                                                |       | (14,657                          | )          | (42,617 | ) |
| Proceeds  from the sale of property, equipment and other assets                                                                                                                  |       | 4,470                            |       | — |   |
| Net Cash  Used for Investing Activities                                                                                                                                          |       | (10,187                          | )          | (42,617 | ) |
|                                                                                                                                                                             |       |                             |       |   |   |
| FINANCING ACTIVITIES:                                                                                                                                                            |       |                             |       |   |   |
| Deferred  financing costs                                                                                                                                                        |       | (117,885                         | )          | (32,750 | ) |
| Proceeds  from issuance of equity securities, net of costs                                                                                                                       |       | 181,045                          |       | 1,131,965 |   |
| Proceeds  from issuance of debt securities, net of costs                                                                                                                         |       | 1,464,806                        |       | — |   |
| Advances  from line of credit agreement                                                                                                                                          |       | —                           |       | 1,000,000 |   |
| Loans from  stockholders, officers, and former officers                                                                                                                          |       | 25,334                           |       | — |   |
| Payments on  loans to stockholders, officers and former officers                                                                                                                 |       | (40,000                          | )          | — |   |
| Net Cash  Provided by Financing Activities                                                                                                                                       |       | 1,513,300                        |       | 2,099,215 |   |
|                                                                                                                                                                             |       |                             |       |   |   |
| INCREASE IN CASH                                                                                                                                                                 |       | 106,963                          |       | 27,800 |   |
|                                                                                                                                                                             |       |                             |       |   |   |
| CASH                                                                                                                                                                             |       |                             |       |   |   |
| Beginning of  year                                                                                                                                                               |       | 285,508                          |       | 257,708 |   |
|                                                                                                                                                                             |       |                             |       |   |   |
| End of year                                                                                                                                                                      |       | 392,471                          |       | 285,508 |   |

 

*See report of independentregistered public accounting firm and notes to financial statements.*

 

9

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**POWER EFFICIENCY CORPORATION**

NOTES TO FINANCIAL STATEMENTS

DECEMBER 31, 2004 AND 2003

 

NOTE 1  -  NATURE OF BUSINESS:

 

Power Efficiency Corporation (“Power Efficiency”and/or the “Company”), was incorporated in Delaware on October 19,1994.  Power Efficiency designs, develops, markets and sells proprietarysolid state electrical devices designed to effectively reduce energyconsumption in alternating current induction motors.  Alternating currentinduction motors are commonly found in industrial and commercial facilitiesthroughout the world.  The Company currently has two principal andproprietary products: the Three Phase *PowerCommander®*, which is used in industrial applications, and theSingle Phase *Power Commander®*,which is used in consumer applications.  The Company also engages inresearch and development of new, related energy saving products.

 

The Company’s primary customers have been originalequipment manufacturers (OEM’s) and commercial accounts located throughout theUnited States of America, Mexico, China, and Canada.  Since the thirdquarter of 2003, the Company began to actively market to internationaldistributors and directly to large national accounts.

 

On September 15, 2003, Power Efficiency formedDesign Efficient Energy Services, LLC, a Delaware limited liabilitycompany.  This entity will primarily be used in the future to obtainenergy grants and rebates for customers of the Company from state governmentalbodies.  Design Efficient Energy Services, LLC has been inactive sinceinception.

 

NOTE 2  -  SUMMARY OF SIGNIFICANTACCOUNTING POLICIES:

 

**Use of Estimates:**

The preparation of financial statements inconformity with accounting principles generally accepted in the United Statesof America requires management to make estimates and assumptions that affectthe reported amounts of assets and liabilities and disclosure of contingentassets and liabilities at the date of the financial statements and the reportedamounts of revenues and expenses during the reporting period.  Actualresults may differ from those estimates.

 

Significant estimates have been made by managementin several areas, including the allowance for bad debts, inventories and thevaluation of goodwill.  Actual results could differ materially from theseestimates, making it reasonably possible that a change in these estimates couldoccur in the near term.

 

**Inventories:**

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

 

**Accounts Receivable:**

The Company carries its accounts receivable at costless an allowance for doubtful accounts and returns.  On a periodic basis,the Company evaluates its accounts receivable and establishes an allowance fordoubtful accounts, based on a history of past write-offs and collections andcurrent credit conditions.

 

**Research and Development:**

Research and development expenditures are charged toexpense as incurred.

 

**Property, Equipment andDepreciation:**

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

 

**Website and Amortization:**

Website is stated at cost.  Website costscapitalized include application and infrastructure development stage costs andgraphics.  Amortization is computed on a straight line basis, based uponthe estimated useful life of the website which is three years.  Websitemaintenance 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 ofsales.

 

10

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**Deferred Financing Costs:**

Expenditures incurred in conjunction with debt orequity capital issuances are deferred as other assets.  Such costs will beoffset against equity proceeds, amortized on a straight line basis, over thelife of the debt, or expensed if the offering is not completed.

 

**Patents:**

Costs associated with applying for U.S. patentsbased upon technology developed by the Company are capitalized.  At thetime the patent is awarded, the asset will be amortized on a straight linebasis, 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 patentwill be issued.

 

**Revenue Recognition:**

Revenue from product sales to OEM’s and distributorsis recognized at the time of shipment to the OEM’s and distributors when allservices are complete.  Returns and other sales adjustments (discounts andshipping credits) are provided for in the same period the related sales arerecorded.

 

**Loss Per Common Share:**

Loss per common share is determined by dividing netloss available to common stockholders by the weighted average number of commonshares outstanding during the year.  Diluted loss per share is notpresented since giving effect to potential common shares would beanti-dilutive.

 

**Accounting for Stock BasedCompensation:**

The Company has elected to follow AccountingPrinciples Board Opinion No. 25, “Accounting for Stock Issued to Employees”(APB25).  If the option price under the Stock Option Plans equals orexceeds the fair market value of the common shares on the date of grant, nocompensation cost is recognized under the provisions of APB25 for stockoptions.  If the option price under the Stock Option Plans is less thanthe fair market value of the common stock on the date of grant, compensationcost is recognized for the difference.

 

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

 

The Company utilizes SFAS 123 for accounting fornonemployee stock based compensation.  The Company recognized expensebased on fair value on the date of grant of awards consistent with theprovisions on SFAS 123 as amended by SFAS 148.

 

**Product Warranties:**

The Company warrants itsproducts for eighteen months.  During the warranty period, the Company’spolicy is to replace the defective product.  The Company has beenproviding for warranty costs as they are incurred.  The Companyperiodically reviews warranty claims and will establish a reserve for warrantyclaims when such amount is determinable and necessary based on historicalinformation.

 

**Provision for Income Taxes:**

 

The Company utilizes the asset and liability methodof accounting for income taxes pursuant to SFAS No. 109, Accounting forIncome Taxes”.  SFAS No. 109 requires the recognition of deferred taxassets and liabilities for both the expected future tax impact of differencesbetween the financial statement and tax basis of assets and liabilities, andfor the expected future tax benefit to be derived from tax loss and tax creditcarryforwards.  SFAS No. 109 additionally requires the establishmentof a valuation allowance to reflect the likelihood of realization of deferredtax assets.

 

The provision for taxes represents state franchisetaxes.

 

**Goodwill:**

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

 

**Advertising:**

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

 

**New Accounting Pronouncements:**

The Financial Accounting Standards Board (FASB) hasissued several new standards during 2004.  In November 2004, the FASBissued SFAS No. 151, “Inventory Costs –an amendment of ARB No. 43.” SFAS No. 151 requires idle facility expenses, freight, handling costs, andwasted material (spoilage) costs to be recognized as current periodcharges.  It also requires that allocation of fixed production overheadsto the costs of conversion be based on the normal capacity of the productionfacilities.  SFAS No. 151 will be effective for inventory costsincurred during the fiscal years beginning after June 15, 2005.  TheCompany is evaluating the impact of this pronouncement on its financialstatements.

 

11

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In December 2004, FASB issued SFAS 123(R), “Share-BasedPayment,” which revises SFAS 123, “Accounting for Stock-Based Compensation,”and supersedes APB Opinion No. 25, “Accounting for Stock Issued toEmployees.”  SFAS 123(R) requires fair value recognition of stock optiongrants in the income statement as an expense and is effective for the firstannual reporting period that begins after December 15, 2005.  Thispronouncement may have a material impact on the Company’s operating results. The Company is in the process of evaluating the impact of this pronouncement onits financial statements.

 

**Financial StatementReclassifications:**

Certain reclassifications have been made to the 2003financial statements in order for them to conform to the 2004 financialstatement presentation.

 

NOTE 3  - GOING CONCERN:

 

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

 

These factors raise substantial doubt about theCompany’s ability to continue as a going concern.  The financialstatements do not include any adjustments relating to the recoverability andclassification of recorded asset amounts or the amount of liabilities thatmight be necessary should the Company be unable to continue in existence.

 

Continuation of the Company as a going concern isdependent upon achieving profitable operations.  Management’s plans toachieve profitability include developing new products, obtaining new customersand increasing sales to existing customers.  Management is seeking toraise additional capital through equity issuance, debt financing or other typesof financing.  (See Note 22).  However, there are no assurances thatsufficient capital will be raised.

 

NOTE 4  - PREPAID EXPENSES AND OTHER CURRENTASSETS:

 

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

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

 

In connection with the issuance of certain senior,secured notes (See Note 13), the Company is required by the placement agent, torestrict an amount of cash, in an escrow account, equal to the annual interestpayments on those senior, secured notes.  The annual interest rate is 15%,and as of December 31, 2004, the Company had $219,720 in restricted cash,which was transferred to as separate bank account in March 2005.

 

NOTE 5  - PROPERTY AND EQUIPMENT:

 

At December 31, 2004, property and equipment iscomprised as follows:

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

 

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

 

NOTE 5 – PROPERTY AND EQUIPMENT: (Continued)

 

On November 1, 2004, the Company formally movedthe Company’s headquarters to Las Vegas, Nevada from Livonia, Michigan and itsresearch and development facilities to Carlstadt, New Jersey.  (See Note20).  In connection with this move, the Company incurred losses ondisposition of fixed assets of $31,036.

 

NOTE 6  - GOODWILL:

 

In accordance with SFAS No. 142, “Goodwill andOther Intangible Assets”, previously recognized intangible assets deemed tohave indefinite useful lives were tested by management for impairment duringfiscal 2004.  An annual goodwill impairment test was performed bymanagement in addition to quarterly goodwill impairment tests.  Theimpairment tests consisted of a comparison of the fair value of the intangibleasset with its carrying amount.  Since the carrying amount of theintangible asset did not exceed its fair value, management concluded noimpairment loss was required to be recognized.

 

12

----

 

NOTE 7  - INTANGIBLE ASSETS:

 

Intangible assets subject to amortization consistsof the following for the year ended December 31, 2004:

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

 

 

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

 

Amortization expense expected in the succeeding fiveyears is as follows:

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

 

NOTE 8  - CONCENTRATIONS OF CREDIT RISKS:

 

Financial instruments which potentially subject theCompany to concentrations of credit risk, consist primarily of cash and temporarycash investments and accounts receivables.

 

The Company maintains cash balances at a singlefinancial institution.  Amounts at this institution are insured by theFederal Deposit Insurance Corporation up to $100,000.  The Company mayfrom time to time maintain balances in excess of the insured limits.

 

Sales and accounts receivable currently are from arelatively small number of customers of the Company’s products.  TheCompany closely monitors extensions of credit.

 

Four customers accounted for approximately 60% of2004 sales and 30% of accounts receivable at December 31, 2004. Three customers accounted for approximately 69% of 2003 sales.

 

International sales as a percentage of totalrevenues for the years ended December 31, 2004 and 2003 are as follows:

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

 

NOTE 9  - INVENTORIES:

 

Inventories at December 31, 2004 consist of thefollowing:

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

 

13

----

 

NOTE 10  - PROVISION FOR TAXES:

 

As of December 31, 2004 and 2003, the Companyhas available, on a federal tax basis, net operating loss carryforwards ofapproximately $8,300,000 and $6,200,000, respectively.  These netoperating losses expire at varying amounts through 2024.  The netoperating loss carryforwards result in deferred tax assets of approximately$2,800,000 and $2,100,000 at December 31, 2004 and 2003; however, avaluation reserve has been recorded for the full amount due to the uncertaintyof realization of the deferred tax assets.

 

A reconcilaiton of the statutory tax rates for theyears ended December 31, 2004 and 2003 is as follows:

 

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

 

NOTE 11  - WARRANTS:

 

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

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

 

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

 

During 2003, in connection with the Company’s saleof common stock under Regulation S, the Company issued 32,958 warrants forcommissions.  During 2003, 32,958 warrants were exercised in conjunctionwith the sale of common stock under Regulation S.  17,143 placementwarrants were exercised in connection with the May 16, 2000 PrivatePlacement Memorandum pursuant to Rule 506.

 

NOTE 12  - STOCK OPTION PLAN:

 

Stock Option Plan activity during the years ended December 31,2004 and 2003 follows:

 
| ** **                                                     | ** ** | **Shares** | ** ** | **Average  Exercise Price** | ** ** |
|----------------------------------------------------------------|------------|------------|------------|-----------------------------|------------|
| Options outstanding and exercisable at January 1,  2003   |       | 419,092    |       | $14.00                      |       |
| Granted during 2003                                            |       | 336,929    |       | 6.37                        |       |
| Cancelled during 2003                                          |       | (57,143    | )          | 14.00                       |       |
| Expired during 2003                                            |       | (75,843    | )          | 8.33                        |       |
| Options outstanding and exercisable at December 31,  2003 |       | 623,035    |       | $11.69                      |       |
| Granted during 2004                                            |       | 2,900,500  |       | 0.65                        |       |
| Cancelled during 2004                                          |       | (109,155   | )          | 9.76                        |       |
| Expired during 2004                                            |       | (241,648   | )          | 7.28                        |       |
| Options outstanding and exercisable at December 31,  2004 |       | 3,172,732  |       | $2.00                       |       |

 

14

----

 

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

 

In 2000, the Company adopted the 2000 Stock Optionand Restricted Stock Plan (the “2000 Plan”).  On September 8, 2003,the 2000 Plan was amended and restated.  The 2000 Plan, as restated andamended, provides for the granting of options to purchase up to 5,000,000shares of common stock.  This was conditional upon consent of the majorityof the Series A Preferred stock.  This consent was attained on October 11,2004.  No options have been exercised to date.

 

During 2004, the Company granted 2,461,500 stockoptions to officers and employees at exercise prices approximating fair marketvalue of the stock on that day.  The Company issued 439,000 options during2004 to consultants for services rendered.  Such issuances to consultantswere valued at approximately $110,000, utilizing similar factors as describedbelow, which was expensed and is included in selling, general andadministrative expenses.

 

During 2003, the Company granted 336,929 stockoptions to officers and employees at exercise prices approximating fair marketvalue of the stock on that day.  Where the exercise prices approximatedthe fair market value of the stock; the Company was not required to recognizecompensation expense.  In connection with the employment agreements of thePresident and Chief Executive Officer and the Vice President of GovernmentalOperations, the Company recongnized additional compensation expense ofapproximately $77,000.  This additional compensation expense is includedin 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 topurchase up to 71,429 shares of common stock.  No options have beenexercised to date.  There are 66,232 options outstanding under the 1994Plan.

 

There are 3,106,500 options outstanding under the2000 Plan.

 

**SFAS No. 123 Disclosures:**

During the year ended December 31, 2004, theBoard of Directors authorized the net issuance of 2,461,500 to officers andemployees.  During the year ended December 31, 2003, the Board ofDirectors authorized the net issuance of 294,071 (net of 42,858 options thatwere both issued and cancelled during the year).  The fair value of eachoption grant was estimated on the date of grant using the Black-Scholesoption-pricing model with the following weighted-average assumptions used forgrants: expected volatility of 100%; risk-free interest rate of 4%; andexpected lives of approximately 10.0 years.

 

Had compensation cost for the Company’s stock optionplan been recognized based on the fair value at the grant date for awardsconsistent with the provisions of SFAS No. 123, as amended by SFAS No. 148,the Company’s net loss and loss per share for the years ended December 31,2004 and 2003, would have been as follows.

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

 

NOTE 13  - COMMITMENTS AND CONTINGENCIES:

 

**Leases:**

The Company leases office, warehouse and researchfacilities under an operating lease.  On October 5, 2004, the Company’sboard of directors formally approved moving the Company’s headquarters fromLivonia, Michigan to Las Vegas, Nevada and as of November 1, 2004, theCompany’s facility in Livonia was vacated entirely and all administrativefunctions have moved to Las Vegas.  The Las Vegas, Nevada lease wasentered into on July 1, 2004 and extends to June 30, 2007 (see Note14).  The Livonia, Michigan lease was entered into on November 1, 2003and extends to December 31, 2008.  The Ann Arbor, Michigan lease wasterminated effective December 15, 2003.  The New Hyde Park, New Yorklease was terminated June 30, 2003.  The Company plans on leasingadditional office space and facilities in Las Vegas, Nevada and Floral Park,New York in early 2005. (See Note 22).

 

Minimum future rentals are as follows:

 

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

 

15

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Rent expense, including base rent and additionalcharges, for the year ended December 31, 2004 and 2003 was $81,943 and$123,833, respectively.

 

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

 

During 2003, the Company also leased office space inPalm Desert, California on a month to month basis from one of the Company’sshareholders.  Rent expense for this space for the year ended December 31,2003 was $18,680.

 

**Patent License Agreements:**

During 2004, the Company transferred a patent forsingle phase technology to one of its shareholders, in exchange for anexclusive licensing agreement and for exchanging a $300,000 short term note fora one year note.  The licensing agreement is for ten years with a threeyear extension, provides the Company an opportunity to buyout the license inthe future for the amount of funds invested by the shareholder if theshareholder has not successfully marketed the product utilizing the patentedtechnology, and provides the Company a royalty equivalent to 5% of the netprofits from the shareholder’s sales of products utilizing the transferredpatented technology.

 

During 2004, the Company wrote off the costsassociated with obtaining the patent originally transferred.

 

**Litigation:**

The Company is currently in litigation with theowners of the Livonia, Michigan property that the Company vacated in2004.  The Company’s legal counsel has advised that it is premature todetermine the likelihood and extent of any damages.  The Company hasaccrued a reserve for the estimated loss in relation to the settlement of thelitigation.

 

**Subcontractors:**

Power Efficiency currently utilizes threesubcontractors to manufacture the Company’s controller boards.  Thesesubcontractors provide facilities, equipment, supervision and labor required toassemble; wire; check; test; package; and ship the controller boards. These subcontractors are hired on an as needed basis to produce a minimumnumber of units via a purchase order.  Power Efficiency does not incur anyliabilities to subcontractors until purchase orders are issued.  Nopurchase orders were issued or outstanding to subcontractors at December 31,2004.  The Company plans to have manufacturing done by turn-key providersand as of December 31, 2004 was in the process of qualifying vendors.

 

**Investment Advisory Agreements:**

The Company entered into an investment consultingagreement with the former Chief Financial Officer on September 22,2003.  This agreement provides for the former officer to provideconsulting services.  The Company shall pay (i) the amount of $4,000per month, half payable on the 15 day and half payable on the last day of eachmonth, (ii) $7,000 per month accrued and payable at the rate of 5% of allcash raised through the issuance of debt or equity, and (iii) $2,000 permonth to assist in negotiations with creditors.  In addition, the Companywill reimburse all reasonable and necessary expenses incurred by theconsultant.  The agreement contains confidentiality and non-competitionprovisions.  This agreement can be terminated in 30 days by either partyby written notices. At December 31, 2004, the Company paid $25,000 andissued 36,000 warrants, valued at approximately $9,000, to satisfy thisagreement in full.

 

The Company entered into an agreement with aregistered securities broker dealer in February, 2004.  In accordance withthis agreement, the registered securities broker dealer serves as the Company’splacement agent for the issuance of $1,464,806 in senior, secured notes. The notes bear interest at 15% per annum and mature on October 27, 2005,and are presented net of unamortized discount of $483,000 at December 31,2004.  The Company paid $115,000 and issued 132,693 warrants ascommissions to the registered securities broker dealer.  Should theCompany issue more notes under the same offering, the registered securitiesbroker dealer has a right to receive 10% of the gross proceeds of the notesissued and an amount of warrants equal to 10% of the warrants issued toinvestors in the notes.  However, there will be no fees on notes andwarrants issued to any persons or entities that are the Company’s directors,affiliates, officers or employees.

 

The Company entered into a consulting agreement withan investment advisor on December 1, 2004.  The agreement calls forthe investment advisor to assist the Company in devising financial and marketingstrategies, and also to assist the Company in raising funds on a non-exclusivebasis through the offering of debt and/or equity securities.  The companyshall pay the investment advisor the amount of $3,000 per month, plus expensesapproved by the Company, and issued 300,000 options, which resulted in anexpense of approximately $75,000.  The sum of $3,000 per month will beadjusted to $5,000 per month once the Board of Directors and the Company agreeto adjust the salaries of the Chief Executive Officer, Chief Financial Officerand the General Manager.  The agreement contains confidentiality andnon-competition provisions.  The term of the agreement is 12 months andcan be terminated by either party on a 90 day notice in writing.

 

NOTE 14  -  RELATED PARTY TRANSACTIONS:

 

During the years ended December 31, 2004 and2003, consulting fees of $31,000 and $27,456 were paid toofficers/directors/stockholders of the Company, respectively.  These amounts are included in research anddevelopment and in selling, general and administrative expenses.

 

On February 25, 2004, the Company released astrategic advisor from an agreement the Company’s board of directors ratifiedon May 23, 2003.  In connection with the release agreement, thestrategic advisor was issued 35,714 warrants, valued at approximately $9,000,to satisfy all remaining obligations in full.

 

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In 2003, the Company incurred costs of $19,550 forthe development of their website.  This work was performed by a relativeof the Company’s former President and Chief Executive Officer.  On December 22,2004, the Company entered into a settlement agreement with the relative of theCompany’s former President and Chief Executive Officer to pay $375 and issue39,000, valued at approximately $10,000, options as payment for the costsincurred.  As of December 31, 2004, this agreement was satisfied infull.

 

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

 

At December 31, 2004, the Company owes this lawfirm approximately $40,000.  Of this $40,000, $15,000 is to be paidshortly after December 31, 2004, and the remaining $25,000 is to be paidwhen the Company raises financing of over $1,000,000.  Such amount isincluded on the balance sheet in accounts payable and accrued expenses.

 

On November 18, 2004,the Company’s board of directors ratified an agreement with a managementcompany, wholly owned by the current Chief Executive Officer of the company. The agreement is cancelable upon 30 days written notice by either partyand calls for the Company to pay the management company a fee of $20,000 permonth.   The Company also subleases office space in Las Vegas, Nevadafrom the management company under this agreement.  The Company pays for80% of the rent, general office expenses and utilities for the space, all ofwhich is included in the monthly fee.  Also included in the monthly feeare the salaries and benefits for the Chief Executive Officer, Chief FinancialOfficer and Administrator of the Company.  As of December 31, 2004,management fees of $40,000 was paid by the company.

 

NOTE 15  -  SUPPLEMENTAL DISCLOSURE OFCASH FLOWS INFORMATION:

 

Cash paid during the year ended December 31,for:

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

 

NOTE 16  -  NOTES PAYABLE – FORMEROFFICERS:

 

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

 

On December 15, 2004, the Company issued a$25,334 promissory note payable to a former officer, in connection with asettlement agreement (See Note 17),  at 15%. The note calls for monthlypayments of $1,580, principal and interest, beginning January 2005 andmatures on June 15, 2006.

 

NOTE 17  -  EMPLOYMENT AND CONSULTINGAGREEMENTS:

 

On October 20, 2004, the Company’s ChiefTechnology Officer signed a salary reduction agreement, which superscedes anemployment agreement the Company’s board of directors ratified on May 23,2001.  The agreement provides for a salary of $60,000 per year until suchtime that the company can reasonably afford to fund its business plan and payexecutives higher salaries.

 

The agreement also provides for severance paymentsequal to the greater of (i) $468,000 or (ii) the executive’s basesalary for the preceding three years, in the event that at any time during theemployment term the agreement is terminated by the Company (a) withoutcause, (b) for

 

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disability, or (c) for death, or if theexecutive terminates the agreement for cause.  The agreement also providesfor a payment to the executive upon a change in control equal to the product ofthe executive’s base salary in the year of the change in control times 2.99.

 

On November 7, 2002, the Company entered intoan employment and compensation agreement with the Company’s Chief ExecutiveOfficer and Chief Financial Officer at the time.  This agreement wasterminated through a settlement and release agreement dated June 7,2003.  On January 8th 2004, the Company settled this obligation in fullby issuing 15,397 shares of common stock to the former officer. This number ofshares equaled the amount of deferred compensation divided by the Company’sstock price on January 8th, 2004.

 

On June 12, 2003, the Company entered into anemployment agreement with a new Chief Executive Officer.  In addition to abase salary, this individual also received 142,857 stock options, which willvest over a five-year period.

 

On August 27, 2004 this Chief Executive Officerresigned from the Company and the Company reached a settlement agreement thatincluded the payment of some accrued wages and vacation in cash, some paymentover time through an unsecured note with a principal balance of $25,334, andthe issuance of 85,000 warrants, valued at approximately $22,000, for thepurchase of the Company’s common stock in lieu of cash payment. The warrantsexpire five years from the date of issuance.

 

On September 15, 2003, the Company entered intoan employment agreement with a new Chief Financial Officer.

 

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

 

In September 2004 the Company hired its currentChief Executive Officer and Interim Chief Financial Officer. Their compensationand certain expenses are reimbursed pursuant to an agreement with a managementcompany wholly owned by the Chief Executive Officer. (See Note 14).

 

NOTE 18  -  TRANSACTIONS WITH CURRENT ANDFORMER OFFICERS:

 

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

 

On October 16, 2003, the Company settled adispute with its former president and chief executive officer regarding theearly termination of his employment contract.  According to the terms ofthe settlement, the former officer has released the Company from any claims hehas against the Company in exchange for (i) an immediate payment of$25,000; (ii) a promissory note for $115,000 that is to be paid off over atwo and one half year period; and (iii) 32,143  shares of the Company’scommon stock.  The former officer is an accredited investor and theissuance of shares was exempt from registration under the Securities Act of1933, as amended, pursuant to Regulation D.  The Company had recorded anestimated settlement amount of approximately $135,000 for this claim. Therefore, the settlement resulted in a non-recurring selling, general andadministrative expense of approximately $229,000.

 

NOTE 19  -  ISSUANCE OF SERIES A-1CONVERTIBLE PREFERRED STOCK:

 

Pursuant to the original issuance of Series A-1Convertible Preferred Stock in June 2002, the Company has asked for andreceived on October 11, 2004, a waiver of certain anti-dilution rights sothat the issuance of up to a specific number of options and warrants withexercise prices of no less than $0.65 per share will not trigger theseanti-dilution rights.  Had the waiver not been received,  in theevent that the Company issues shares at a price less than $1.281 per share, theconversion rights of the Series A-1 Convertible Preferred Stock would havebeen adjusted so that the Series A-1 Convertible Preferred Stock canconvert into such number of shares that Summit would have received had itbought common stock at such lower price.  Furtermore, the conversionrights of the Series A-1 Convertible Preferred Stock would also have beenadjusted in the event that any shares, warrants, options or promissory note isissued with a price or conversion price less than $1.281 per share.

 

In the event of a Liquidation Event, the holders ofthe Series A-1 Convertible Preferred Stock are entitled to two times theprice paid by Summit for such stock.  Thereafter, the remaining corporateassets would be distributed among the holders of common stock and Series A-1Convertible Preferred Stock on a pro rata basis.  The existence of the Series A-1Convertible Preferred Stock’s anti-dilution provisions may reduce thepercentage of common stock held by the public stockholders.  Furthermore,the terms on which the Company could obtain additional capital may be adverselyaffected by the Series A-1 Convertible Preferred Stock’s anti-dilutionprovisions and superior liquidation preference.

 

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

 

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NOTE 20  -  STOCKHOLDERS’ EQUITY:

 

During 2004, the Company issued 700,700 warrants tosettle outstanding liabilities with former employees, consultants and vendors,132,693 warrants for commissions related to the issuance of debt, and 1,752,882warrants to noteholders.   (See Note 11).

 

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

 

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

 

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

 

On October 16, 2003, the Company issued 64,286shares of common stock related to the settlement requirements of a formerofficer’s employment contract.

 

On September 30, 2003, the Company issued76,663 shares of common stock to pay for amounts owed to an officer of theCompany for notes payable, accounts payable and accrued salaries.

 

During 2003, the Company issued 40,357 shares ofcommon stock related to the exercising of warrants.

 

At various dates during 2003, the Company issued665,803 shares of common stock related to the sale of the Company’s commonstock.

 

NOTE 21  -  FAIR VALUE OF FINANCIALINSTRUMENTS:

 

SFAS No. 107 “Disclosure About the Fair Valueof Financial Instruments”, requires disclosure of fair value information aboutfinancial instruments.  The carrying amounts reported in the balance sheetfor cash, accounts receivable, accounts payable and accrued expensesapproximate fair value because of their short term nature.  The carryingamounts of notes payable and longer term debt approximates fair value becausethose financial instruments bear interest at rates that approximate currentmarket rates for loans with similar maturities and credit quality.  Noneof these financial instruments are held for trading purposes.

 

NOTE 22  -  SUBSEQUENT EVENTS (UNAUDITED):

 

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

 

In March 2005, the Company will beginsubleasing space from Famair, Inc. in Floral Park, New York. The subleasegives the Company space primarily for research, development and technicalsupport activities. The sublease costs the Company $1,000 per month, whichincludes all utilities, cleaning, phone and interenet, and the term ismonth-to-month.

 

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

 

On February 24, 2005, the Company entered intoa financing transaction in which the Company issued $125,000 in senior, securednotes under the same offering through which the Company issued $1,464,806 innotes as described in Note 13. This offering was originally intended toclose on December 31, 2004 but the placement agent and the Company agreedto keep the offering open past the original closing date. After the February 24closing the offering was terminated.

 

The holders of the Notes will promptly be issued115,385 warrants for every $100,000 Note. With its issuance of $125,000 inNotes, the Company will issue, in aggregate, 144,232 warrants.  The Companypaid a placement agent a commission of $12,500 and 14,423 warrants with thesame rights and provisions as the Warrants issued to the holders of the Notes.

 

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

 

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**SIGNATURES**

 

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

 

**POWER EFFICIENCY CORPORATION**

 

 
| *Dated: September 16, 2005* | *By:*                             | */s/  Steven Strasser* |   |
|----------------------------------|-----------------------------------|------------------------|--------|
|                             | *Steven  Strasser, President and* |
|                             | *Chief  Executive Officer*        |
|                             |                              |
| *Dated: September 16, 2005* | *By:*                             | */s/ John  Lackland*   |   |
|                             | *John  Lackland, Interim Chief*   |
|                             | *Financial  Officer*              |

 

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