Securities
and Exchange Commission


Washington,
D.C. 20549


FORM
10-K





x
              
              Annual
      report under Section 13 or 15(d) of the Securities Exchange Act of
      1934For
      the fiscal year ended December 31, 2008 ̈
              
              Transition
      report under Section 13 or 15(d) of the Securities Exchange Act of
      1934For
      the transition period from ____________ to
  ____________




Commission
File Number: 000-31805




Power Efficiency
  Corporation(Exact
      name of registrant as specified in its Charter)Delaware
                      
                      22-3337365(State
      or Other Jurisdiction of Incorporation or Organization)
                      
                      (I.R.S.
      Employer Identification No.)3960
      Howard Hughes Pkwy, Ste 460Las
      Vegas, NV
                      
                      89169(Address
      of Principal Executive Offices)
                      
                      (Zip
      Code)(702) 697-0377(Issuer’s
      Telephone Number, Including Area Code)Securities
      Registered under Section 12(g) of the Exchange Act:Common Stock, $.001 Par
    Value(Title
      of
Class)




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




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




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





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





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


Yes  ̈ No x




As of
June 30, 2008, the aggregate market value of the common stock held by
non-affiliates of the issuer was $10,180,314 This amount is based on the closing
price of $0.34 per share for the Company’s common stock as of such
date.




On March
30, 2009 there were 43,255,441 shares of the Company’s common stock
outstanding.









DOCUMENTS
INCORPORATED BY REFERENCE


None.





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







SPECIAL
CAUTIONARY NOTICE REGARDING FORWARD-LOOKING STATEMENTS




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




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




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







GLOSSARY
OF TERMS




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




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









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







PART I




Item
      1.
                Description
      of Business.




(a)
                  Business
  Development




Formation




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




(b)
                  Business of the
  Company




The
Company’s Principal Products and Technology




In the
late 1990s the Company commenced the sale of its initial product, which is based
on analog technology and reduces energy consumption in alternating current
induction motors in certain applications. This product has been known by several
names, including the Power
Commander® and Power
Genius.  In 2005 the Company began development of a digital
product that would overcome many of the commercial limitations of the analog
product. In 2008 the first generation of the digital product was launched. Going
forward, the company has chosen to call its products Motor Efficiency
Controllers (“MEC”).





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





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




The
Company’s marketing efforts initially focused on the three-phase version but it
is also now marketing the single-phase product. The Company’s digital
Three-Phase MEC is designed to have the following functionality:


1.
            Start
      a motor


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


3.
            Provide
      various motor protection capabilities, such as sensing current overload,
      phase loss, under- and over-voltage, and
more.


4.
            Save
      energy when the motor is at full speed but is less than fully
      loaded





The
Company’s digital Single-Phase MEC is designed to have the following
functionality:


1.
            Start
      a motor


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


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





Three-Phase
and Single-Phase MECs are unique particularly because of their energy savings
capabilities. The product reduces energy consumption by electric motors by
electronically sensing and controlling the amount of energy the motor consumes.
A motor with an MEC installed only uses the energy it needs to perform its work
task, thereby increasing its efficiency. The result is a reduction of energy
consumption typically ranging from 15% - 35% in applications that do not always
run at peak load levels.  The amount of energy savings depends on a
variety of factors, including the load on the motor and the motor’s
characteristics.




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


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









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


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


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




Three-Phase
MEC




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




Single-Phase
Product





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





Product
Development





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


·
            Motor
      starter and motor protection capabilities similar to standard solid state
      starters sold by large motor control companies. The analog product could
      not start a motor and provided no motor protection, so the customer had to
      purchase these items at additional costs for components and installation.
      The digital MEC instead incorporates all these functions and therefore
      replaces a standard solid state motor
control.


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


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


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


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


o
            Recording
      and reporting of actual energy
savings;


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


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





Marketing
and Sales




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









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





Manufacturing
and Distribution




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





Competition




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





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





The first
two capabilities are commonly found in existing motor control products. There
are billions of dollars of motor starters and soft starts sold every year. These
products are typically manufactured and marketed by large motor control
companies, many of which have longer operating histories, established markets
and far greater financial, advertising, research and development, manufacturing,
marketing, personnel and other resources than the Company currently has or may
reasonably be expected to have in the foreseeable future. This competition may
have an adverse effect on the ability of the Company to commence and expand its
operations or operate in a profitable manner.





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


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


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


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


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





Single-Phase
Competition.  There have been
several companies that have, with different technologies, attempted to exploit
this market due to the enormous opportunity in single-phase motor applications.
These products include among others, “Green Plug” (voltage clamping), “Power
Planner” (digital microchip) and “Econelectric” (power factor control). The
Company has made numerous innovations in the past three years that it believes
overcome many of the problems with these and the Company’s earlier designs. The
Company has filed for patents on these innovations and has reduced the product
in size and cost to the point it can be sold to OEMs of applicable appliances
and other equipment driven by single-phase AC motors.




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









Source
of Supply and Availability of Raw Materials




The MEC
has been designed to use standard, off-the-shelf, easily acquired components,
except for the custom made circuit boards. Such off-the-shelf components are
basic items readily available worldwide at competitive prices. They come in
standard and miniature versions and offer the Company latitude in product design
and production. Although the Company believes most of the key components
required for the production of its products are currently available in
sufficient production quantities from multiple sources, there can be no
assurance they will remain so readily available or at comparable
prices.




Customers




The
Company currently does business with approximately 20 customers. Of this number,
four customers presently account for approximately 82% of the Company’s gross
revenues.   These customers and their respective gross revenue
percentages are KONE – 60%; Berry Plastics – 10%; CED Elevator – 6%; and The Las
Vegas Conventions and Visitors Authority – 6%.  In light of the
Company’s intentions to focus its business on a limited number of markets, the
Company is, and may continue to be, dependent upon a limited number of
customers. Accordingly, the loss of one or more of these customers may have a
material adverse effect upon the Company’s business.




Patents
and Proprietary Rights




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




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





The
Company has filed three utility patents on new inventions associated with the
development of its digital products.  The Company is continually
making improvements to its products and technologies, and anticipates making
additional patent filings on new inventions when warranted.





The
Company has obtained U.S. Trademark registration of the Power Commander® mark and the
E-Save Technology®
mark.





NASA
License Agreement




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




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




Government
Regulation




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









Deregulation
of Electrical Energy




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




Research
and Development




The
Company intends to continue its research and development effort to introduce new
products based on its energy saving technology. Towards this end, the Company
spent $1,016,158 and $667,786 in fiscal years 2008 and 2007, respectively, on
research and development activities, virtually none of which was borne by
customers. A major focus of the Company’s foreseeable research and development
activities will be on completing additional features and refinements to the
three-phase and single phase products. The Company also anticipates the
possibility of working with OEMs that make or purchase motor control equipment,
in order to develop products with features or specifications they
require.




Effect
of Environmental Regulations




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




Employees




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





(c)
                  Reports to Security
  Holders





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





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





Item
      1A.
                Risk
      Factors.




RISKS
RELATED TO OUR BUSINESS





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




The
Company has suffered recurring losses from operations, and experienced a
deficiency of cash of approximately $3,100,000 and $2,851,000 from operations
for the years ended December 31, 2008 and 2007, respectively.  For the
years ended December 31, 2008 and December 31, 2007, we had net losses of
$3,948,204 and $3,891,795, respectively.  In our Auditor’s Report
dated March 30, 2009 on our December 31, 2008 financial statements included
in this report, our auditors have stated that these factors raise substantial
doubt about our ability to continue as a “going concern”.  Our
financial statements do not include any adjustments relating to the
recoverability and classification of recorded asset amounts or the amount of
liabilities that might be necessary should we be unable to continue in
existence.





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









We
Have A Limited Operating History, Have Experienced Recurring Losses And Have
Limited Revenue.




To date,
and due principally to a lack of working capital, our operations have been
limited in scale. Although we have an arrangement with an outsourced production
facility to manufacture our products, have established relationships with
suppliers, and have received contracts for our products, we may experience
difficulties in production scale-up, product distribution, and obtaining and
maintaining working capital until such time as our operations have been
scaled-up to normal commercial levels.  We have not had a profitable
quarter in the past three years and we cannot guarantee we will ever operate
profitably. In addition, we have limited revenue. For the year ended December
31, 2008, our total revenues were $480,513, and for the year ended
December 31, 2007, our total revenues were $490,510.





We
Do Not Have A Bank Line Of Credit.




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





We
Will Require Additional Funds To Meet Our Cash Operating Expenses And Achieve
Our Current Business Strategy.




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





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





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




As of the
date of this report, management controls approximately nineteen percent (19%) of
our issued and outstanding Common Stock and voting equivalents.
Additionally,Summit Energy Ventures,
LLC (“Summit”) owns twelve percent (12%) of our common stock and voting
equivalents, which is included in the above number. Summit is controlled by
Steven Strasser, our Chairman and CEO, and he has the right to vote all shares
owned by Summit. The remaining equity in Summit is owned by BJ Lackland, our
CFO.  As a result, these persons will have the ability, acting as a
group, to effectively control our affairs and business, including the election
of directors and, subject to certain limitations, approval or preclusion of
fundamental corporate transactions. This concentration of ownership of our
common stock may:




·
            delay
      or prevent a change in the control;




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




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




The
relationships between Summit and our executive officers are discussed in more
detail under “Certain Relationships And Related Party Transactions”
herein.




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





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









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





We
Are Potentially Dependent On Third-Party Suppliers.





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





We
Are Developing And Commercializing New Energy Saving Technologies And
Products Which Will Involve Uncertainty And Risks Related To Product Development
And Market Acceptance.





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





We
Have Limited Experience in Direct Sales.





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





We
Currently Depend On A Small Number Of Customers And Expect To Continue To Do
So.





The
Company currently does business with approximately 20 customers. Of this number,
four customers accounted for approximately 82% of our gross revenues in
2008.  We are, and may continue to be, dependent upon a small number
of customers. Accordingly, the loss of one or more of these customers is likely
to have a material adverse effect on our business.




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




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









Changes
In Retail Energy Prices Could Affect Our Business.





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





Loss
Of Key Personnel Could Have Significant Adverse Consequences.





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





We
Do Not Have “Key Man” Life Insurance.





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





Delaware
Law Limits The Liability Of Our Directors.





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





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





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




RISKS
RELATED TO OUR COMMON STOCK AND CAPITAL STRUCTURE





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




Shares of
our common stock are traded on the OTC Bulletin Board. Approximately 27,000
shares were traded on an average daily trading basis for the 12 months ended
December 31, 2008.  If limited trading in our common stock continues,
it may be difficult for shareholders to sell their shares. Also, the sale of a
large block of our common stock could depress the market price to a greater
degree than a company that typically has a higher volume of trading of its
securities.





The
Limited Public Trading Market May Cause Volatility In Our Stock
Price.




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





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





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




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









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




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




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





Penny
Stock Regulations May Impose Certain Restrictions On Marketability Of Our
Securities.





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




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




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




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




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




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




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




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




We
May Never Pay Cash Dividends On Our Common Stock.





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





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





Possible Resales under Rule
144. Of the 43,255,441 shares of the Company’s common stock
outstanding on the date of this report, 27,238,284 shares are freely trading in
the market place (the “Free Trading Shares”). The Free Trading Shares are
comprised mostly of shares (1) originally issued in private offerings of common
stock from June through March 2007, that were later registered in the Company’s
S-1 Registration Statement (the “Registration Statement”), declared effective on
October 10, 2008 and (2) shares originally issued in transactions exempt from
registration under the Securities Act.









The
remaining 15,869,157 shares of our common stock outstanding are restricted
securities as defined in Rule 144 and under certain circumstances may be resold
without registration pursuant to Rule 144.  These shares include the
9,035,294 shares held by Summit and Steven Strasser in the aggregate, and
1,340,539 shares held by directors and insiders





In
addition, the Company had approximately 29,994,780 common stock purchase
warrants outstanding and approximately 13,579,896 common stock options
outstanding as of the date of this report, including the warrants issued in
connection with the private offer and sale of preferred stock units in 2007 (See
Note 18 to the Financial Statements).  The shares issuable on exercise
of the options and warrants may, under certain circumstances, be available for
public sale in the open market under the Registration Statement or pursuant to
Rule 144, subject to certain limitations.





In
general, pursuant to Rule 144, after satisfying a six month holding period: (i)
affiliated stockholder (or stockholders whose shares are aggregated) may, under
certain circumstances, sell within any three month period a number of securities
which does not exceed the greater of 1% of the then outstanding shares of common
stock or the average weekly trading volume of the class during the four calendar
weeks prior to such sale and (ii) non-affiliated stockholders may sell without
such limitations, provided we are current in our public reporting
obligations.  Rule 144 also permits the sale of securities by
non-affiliates that have satisfied a one year holding period without any
limitation or restriction.  Any substantial sale of the common stock
pursuant to Rule 144 may have an adverse effect on the market price of the
Company’s shares.





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





As of the
date of this report, the Company has reserved 71,429 shares of common stock for
issuance upon exercise of stock options or similar awards which may be granted
pursuant to the 1994 Plan, of which no options are
outstanding.  Furthermore, we have reserved 20,000,000 shares of our
common stock for issuance upon exercise of stock options or similar awards which
may be granted pursuant to the 2000 Plan, of which options to purchase an
aggregate of 13,579,896 shares are outstanding. The outstanding options under
the 2000 Plan have a weighted average exercise price of $0.37. As of the date of
this report, we have issued warrants exercisable for 29,994,780 shares of common
stock to financial consultants, investors, former employees and other business
partners, having a weighted average exercise price of $0.45 and expiring on
various dates from October 2009 to July 2013. Exercise of these options and
warrants in the future will reduce the percentage of common stock held by the
public stockholders. Furthermore, the terms on which we could obtain additional
capital during the life of the options and warrants may be adversely affected,
and it should be expected that the holders of the options and warrants would
exercise them at a time when we would be able to obtain equity capital on terms
more favorable than those provided for by such options and
warrants.





Our
Issuance Of “Blank Check” Preferred Stock Could Adversely Affect Our Common
Stockholders.





The
Company’s Certificate of Incorporation authorizes the issuance of “blank check”
preferred stock with such designations, rights and preferences as may be
determined from time to time by the board of directors. Accordingly, our Board
of Directors is empowered, without stockholder approval, to issue preferred
stock with dividends, liquidation, conversion, voting or other rights that could
adversely affect the relative voting power or other rights of the holders of our
common stock. In the event of issuance, the preferred stock could be used as a
method of discouraging, delaying or preventing a change in control of the
Company, which could have the effect of discouraging bids for the Company and
thereby prevent stockholders from receiving the maximum value for their
shares.  From October 29, 2007, through January 21, 2008, the Company
sold 140,000 shares of its Series B preferred stock in a private offering of
units (See Note 18 to the Financial Statements).





Item
      1B.
                Unresolved
      Staff Comments.





None




Item
      2.
                Description
      of Property.




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









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





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





Item
      3.
                Legal
      Proceedings.





The
Company is currently involved in a lawsuit against two of its former directors,
who were also employees of the Company, and the company formed by the two former
directors (collectively, the “Defendants”).  The Company filed this
action against the Defendants for misappropriation of trade secrets, false
advertising, defamation/libel and other claims primarily arising from the
Defendant’s use of the Company’s confidential and proprietary information in the
development and marketing of motor control products.  The Company
seeks a temporary retraining order, preliminary injunction, permanent
injunction, damages, exemplary damages, attorneys’ fees and costs against the
Defendants.  The Company’s original complaint was filed on November
25, 2008, and its amended complaint was filed on January 5, 2009, in the U.S.
District Court, District of Nevada.





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





None.





PART II




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




Market
for Common Stock




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




The
following table sets forth the high and low bid information for quarterly
periods in the two twelve month periods ended December 31, 2008 and December 31,
2007




Twelve
      months Ended December 31, 2008
                        
                        High
                        
                        
                        LowOctober
      1, 2008 — December 31, 2008
                        
                        $
                        0.25
                        
                        
                        
                        0.08July
      1, 2008 — September 30, 2008
                        
                        
                        0.32
                        
                        
                        
                        0.19April
      1, 2008 — June 30, 2008
                        
                        
                        0.39
                        
                        
                        
                        0.26January
      1, 2008 — March 31, 2008
                        
                        
                        0.55
                        
                        
                        
                        0.26




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




As of the
date of this report, there were 162 shareholders of record of the Company’s
common stock and 647 shareholders who hold the Company’s common stock in street
name.




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








EQUITY
COMPENSATION PLAN INFORMATION


Number of
                        securities to be
                        issued upon
                        exercise of
                        outstanding
                        options, warrants
                        and rights (a)
                      
                      
                      Weighted average
                        exercise price of
                        outstanding options,
                        warrants and rights
                        (b)
                      
                      
                      Number of
                        Securities
                        Remaining
                        available for
                        future issuance
                        under 2000 Stock
                        Option and
                        Restricted Stock
                        Plan (excluding
                        securities reflected
                        in column (a))(c)2000
      Stock Option and Restricted Stock Plan approved by security
      holders
                      
                      
                      13,579,869
                      
                      
                      $
                      0.37
                      
                      
                      
                      6,420,131Equity
      compensation plans not approved by security holders
                      
                      
                      0
                      
                      
                      
                      0.00
                      
                      
                      
                      0Total
                      
                      
                      13,579,896
                      
                      
                      $
                      0.37
                      
                      
                      
                      6,420,131





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





Recent
Sales of Unregistered Securities





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





Item
      6.
                Selected
      Financial Data





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





Item
      7.
                Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations.




OVERVIEW




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




The
Company began generating revenues from sales of its MEC line of motor
controllers in the late 1990s. As of December 31, 2008, the Company had total
stockholders’ equity of $4,046,747 primarily due to (i) the Company’s sale of
140,000 shares of Series B Convertible Preferred Stock in a private offering
from October of 2007 through January of 2008, (ii) the Company’s sale of
12,950,016 shares of common stock in a private stock offering from November of
2006 through March of 2007, (iii) the Company’s sale of 14,500,000 shares of
common stock in a private stock offering in July and August of 2005, (iv) the
Company’s sale of 2,346,233 shares of Series A-1 Convertible Preferred stock to
Summit Energy Ventures, LLC in June of 2002 and (v) the conversion of notes
payable of approximately $1,047,000 into 982,504 shares of Series A-1
Convertible Preferred Stock in October of 2003.




RESULTS
OF OPERATIONS: FISCAL YEAR 2008 COMPARED TO FISCAL YEAR 2007




REVENUES




Revenues
for the year ended December 31, 2008, were approximately $481,000 compared to
approximately $491,000 for the year ended December 31, 2007, a decrease of
$10,000 or 2%.  This decrease is mainly attributable to a decrease in
sales in the elevator and escalator market segment in
2008.  Specifically, escalator manufacturer and service provider sales
fell to approximately $363,000 for the year ended December 31, 2008, from
$466,000 for the year ended December 31, 2007.  Sales of the analog
product to one escalator manufacturer and service provider, which is one of the
Company’s largest customers, slowed during this period in anticipation of
release of their private label version of our digital product.  The
digital product is being tested and evaluated for use on a retrofit and OEM
basis by this customer.  The digital product offers greater features
and functionality compared to the analog product, making it more attractive as
an OEM product.  The decrease in sales to the escalator segment was
partially offset by an increase in sales to industrial and other customers,
which totaled approximately $117,000 for the year ended December 31, 2008,
compared to $24,000 for the year ending December 31, 2007.  For the
year ended December 31, 2008, industrial and other sales, which entirely
consisted of digital units, was approximately 21% of total sales, and escalator
and elevator sales, which consisted almost entirely of analog units, was
approximately 79% of total sales.









COST
OF REVENUES




Cost of
revenues for the year ended December 31, 2008 were approximately $398,000
compared to approximately $340,000 for the year ended December 31, 2007, an
increase of $58,000, or 17%.  As a percentage of revenues, total costs
of sales increased to approximately 82% for the year ended December 31, 2008
compared to approximately 69% for the year ended December 31,
2007.  The increase in the costs as a percentage of revenues was
primarily due the Company’s replacement of 40 Platform E MECs with more feature
rich and expensive Platform 1 MECs for no additional charge to the
customer.  This transaction added approximately $22,000 to the
Company’s cost of sales for the year ended December 31, 2008.  All of
the Platform E MECs returned to the Company were not installed, and in good
working condition.  However, with the release of the new digital line
of MECs, the Company determined that the Platform E units that were returned
were obsolete, and therefore did not record the units back into
inventory.  Furthermore, during the year ended December 31, 2008, the
Company also wrote off the remaining Platform E components, as well as many
components that were for analog use only, held in its inventory.  In
total, the Company recorded a direct write off of inventory of
approximately $41,000 for the year ended December 31,
2008.   Excluding the direct write off of inventory of $41,000
and the $22,000 charge from replacing Platform E units with Platform 1 units,
the Company’s cost of sales was approximately $335,000, or 70% of revenue for
the year ended December 31, 2008.





Allocated
overhead costs were approximately $25,000 for the year ended December 31, 2008
compared to approximately $20,000 for the year ended December 31, 2007, an
increase of $5,000 or 25%.  As a percentage of revenues, allocated
overhead costs were 5% for the year ended December 31, 2008 compared to 4% for
the year ended December 31, 2007.  Allocated overhead costs as a
percentage of sales increased due to the Company developing in-house light
manufacturing and warehousing capabilities in December of 2007.





GROSS
PROFIT





Gross
profit for the year ended December 31, 2008 was $83,000 compared to
approximately $150,000 for the year ended December 31, 2007, a decrease of
$67,000 or 45%.  This decrease was primarily due to the factors
described above.





OPERATING
EXPENSES




Research
and Development Expenses




Research
and development expenses were $1,016,000 for the year ended December 31, 2008
compared to approximately $668,000 for the year ended December 31, 2007, an
increase of $348,000 or 52%. This increase is mainly attributable to the
Company’s continued research and development efforts on its digital controller
for both its single-phase and three-phase products.  Specifically, the
increased costs include additional personnel in the Company’s research and
development department, which resulted in higher salaries and related payroll
costs during the year ended December 31, 2008, as well as new product testing
and certification expenses.  These increased costs were partially
offset by a decrease in stock based compensation expenses during the year ended
December 31, 2008.





Selling,
General and Administrative Expenses




Selling,
general and administrative expenses were approximately $3,033,000 for the year
ended December 31, 2008, compared to approximately $2,721,000 for the year ended
December 31, 2007, an increase of $312,000 or 11%. The increase in selling,
general and administrative expenses compared to the prior year was primarily due
to an increase in payroll, and payroll related costs, as well as increases in
sales travel expenses, marketing, tradeshows and advertising expenses, and sales
related legal and consulting expenses.  The increases in payroll
expenses were due to the growth of the Company’s sales personnel.









Financial
Condition, Liquidity, and Capital Resources: For the Year Ended December 31,
2008




Since
inception, the Company has financed its operations primarily through the sale of
its securities.  In 2008 and 2007, the Company received a total of
approximately $8,025,000 in gross proceeds from a private placement of its
preferred stock, common stock and warrants to purchase common stock, as to which
the Company was required to file a registration statement on Form SB-2 or other
relevant registration statement.  Of this amount, $1,850,000 was
converted from existing debt securities.  Also in 2007, the Company
grossed approximately $680,000 in cash from the exercise of
warrants.  As of December 31, 2008 the Company has received a total of
approximately $20,305,000 from public and private offerings of its equity
securities, received $300,000 from a bridge note with a shareholder (which was
converted into 3,000,000 shares of common stock and 1,500,000 warrants with an
additional investment of $300,000 on July 8, 2005), received approximately
$445,386 under a bank line of credit (which was repaid during 2002), and
received $1,000,000 under a line of credit with a shareholder (which was
converted to Series A-1 Preferred Convertible shares during 2003). In October
2004 and February 2005, the Company received $1,589,806 in debt financing
through a debt offering arranged by a placement agent, Pali Capital. Of this
total, $300,000 plus accrued interest was converted from borrowings with the
same shareholder as referenced above.  In April 2006, the Company
received $1,000,000 in debt financing from EMTUCK , LLC, in which the managing
member is a management company wholly owned and controlled by Steven Strasser,
the Company's CEO.  In May 2006, the Company received an additional
$500,000 in debt financing from EMTUCK.  In November 2006, the Company
received $2,000,000 in debt financing.  Of this amount, $1,450,000 was
converted from borrowings from prior investors.  This $2,000,000 note
was paid off in full in October of 2007.  As of December 31, 2008 the
Company had cash of $2,100,013 and has no outstanding debt
securities.




Net cash
used for operating activities for the year ended December 31, 2008 was
$3,102,847 which primarily consisted of: a net loss of $3,948,204; less bad debt
expense of $7,770, inventory obsolescence expense of $40,758, depreciation and
amortization of $74,539, amortization of capitalized manufacturing expenses of
$6,791, warrants and options issued in connection with the issuance of debt
securities, and to employees and consultants of $765,504, common stock issued
for consulting services of $7,960, decreases in accounts receivable of $57,323
and deposits of $84,057, increases in inventory of $155,016 and prepaid expenses
of $12,660.  In addition, these amounts were partially offset by
decreases in accounts payable and accrued expenses of $30,669 and customer
deposits of $1,605, and increases in deferred rent of $605.





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





Net cash
used in investing activities for fiscal year 2008 was $132,364, compared to
$92,537 in fiscal year 2007.  The amount for 2008 consisted of the purchase
of fixed assets of $104,857, and costs related to patent applications of
$27,507.  The amount for 2007 consisted of the purchase of fixed
assets of $85,610, and costs related to patent applications of
$6,927.




Net cash
provided by financing activities for fiscal year 2008 was
$248,846.  The entire amount consisted of the net proceeds from the
issuance of equity securities.





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





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





Cash
Requirements and Need for Additional Funds




The
Company anticipates a substantial need for cash to fund its working capital
requirements.  In accordance with the Company’s prepared expansion
plan, it is the opinion of management that approximately $3 million will be
required to cover operating expenses, including, but not limited to, marketing,
sales, research and operations during the next twelve
months.  Although we currently have several months of working capital,
we may nevertheless need to issue additional debt or equity securities to raise
required funds.  If the Company is unable to obtain funding on
reasonable terms or finance its needs through current operations, the Company
will be forced to restructure, file for bankruptcy or cease
operations.







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





Recent
Accounting Pronouncements





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





Item
      7A.
              Quantitative
      and Qualitative Disclosures About Market
Risk





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




Item
      8.
              Financial
      Statements and Supplementary
Data.







POWER EFFICIENCY
CORPORATION
 
 FINANCIAL
STATEMENTS
 
 DECEMBER 31, 2008 AND
2007
  
  POWER EFFICIENCY
CORPORATION
 
 DECEMBER 31, 2008 AND
2007
 
 INDEX
 
 PageReport
      of Independent Registered Public Accounting Firm
                    
                    F-1Financial
      Statements:Balance
      Sheets
                    
                    F-2Statements
      of Operations
                    
                    F-3Statements
      of Changes in Stockholders' Equity
                    
                    F-4Statements
      of Cash Flows
                    
                    F-5Notes
      to Financial Statements
                    
                    F-6 - F-24
  
  REPORT OF INDEPENDENT
REGISTERED PUBLIC ACCOUNTING FIRM
 
 Board of
Directors and Stockholders
 Power
Efficiency Corporation
 Las
Vegas, Nevada
 
 We have
audited the accompanying balance sheets of Power Efficiency Corporation, (a
Delaware corporation) (the "Company") as of December 31, 2008 and 2007, and the
related statements of operations, changes in stockholders' equity, and cash
flows for each of the years ended December 31, 2008 and 2007.  These
financial statements are the responsibility of the Company's
management.  Our responsibility is to express an opinion on these
financial statements based on our audits.
 
 We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States).  Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement.  The
Company is not required to have, nor were we engaged to perform, an audit of its
internal control over financial reporting.  Our audit included
consideration of internal control over financial reporting as a basis for
designing audit procedures that are appropriate in the circumstances, but not
for the purpose of expressing an opinion on the effectiveness of the Company’s
internal control over financial reporting.  Accordingly, we express no
such opinion.  An audit also includes examining, on a test basis,
evidence supporting the amounts and estimates made by management, as well as
evaluating the overall financial statement presentation.  We believe
that our audits provide a reasonable basis for our opinion.
 
 In our
opinion, the financial statements referred to above present fairly, in all
material respects, the financial position of Power Efficiency Corporation at
December 31, 2008 and 2007 and the results of its operations and its cash flows
for the years ended December 31, 2008 and 2007 in conformity with accounting
principles generally accepted in the United States of America.
 
 The
accompanying financial statements have been prepared assuming that the Company
will continue as a going concern.  As discussed in Note 3 to the
financial statements, the Company has suffered recurring losses from operations,
and the Company has experienced a deficiency of cash from
operations.  These matters raise substantial doubt as to the Company's
ability to continue as a going concern.  Management's plans in regard
to these matters are also discussed in Note 3.  The financial
statements do not include any adjustments that might result from the outcome of
these uncertainties.
 
 /s/Sobel
      & Co., LLCCertified
      Public Accountants
 
 March 30,
2009
 Livingston,
New Jersey
 F-1
  
 
 POWER
      EFFICIENCY CORPORATIONBALANCE SHEETS
 
 December 31,2008
                  
                  
                  2007ASSETSCURRENT
      ASSETS:Cash
                  
                  $
                  2,100,013
                  
                  
                  $
                  5,086,378Accounts
      receivable, net of allowance of $ 26,082 in 2008 and $19,648 in
      2007
                  
                  
                  44,159
                  
                  
                  
                  109,252Inventories
                  
                  
                  246,020
                  
                  
                  
                  131,762Prepaid
      expenses and other current assets
                  
                  
                  47,165
                  
                  
                  
                  41,296Total
      Current Assets
                  
                  
                  2,437,357
                  
                  
                  
                  5,368,688PROPERTY
      AND EQUIPMENT, Net
                  
                  
                  144,967
                  
                  
                  
                  112,106OTHER
      ASSETS:Deposits
                  
                  
                  38,206
                  
                  
                  
                  122,263Patents,
      net
                  
                  
                  64,711
                  
                  
                  
                  39,746Goodwill
                  
                  
                  1,929,963
                  
                  
                  
                  1,929,963Total
      Other Assets
                  
                  
                  2,032,880
                  
                  
                  
                  2,091,972$
                  4,615,204
                  
                  
                  $
                  7,572,766LIABILITIES
      AND STOCKHOLDERS' EQUITYCURRENT
      LIABILITIES:Accounts
      payable and accrued expenses
                  
                  $
                  555,789
                  
                  
                  $
                  586,458Customer
      Deposits
                  
                  
                  -
                  
                  
                  
                  1,605Total
      Current Liabilities
                  
                  
                  555,789
                  
                  
                  
                  588,063LONG-TERM
      LIABILITIES:Deferred
      Rent
                  
                  
                  12,668
                  
                  
                  
                  12,063Total
      Long-Term Liabilities
                  
                  
                  12,668
                  
                  
                  
                  12,063Total
      Liabilities
                  
                  
                  568,457
                  
                  
                  
                  600,126COMMITMENTS
      AND CONTINGENCIESSTOCKHOLDERS'
      EQUITY:Series
      B Convertible Preferred Stock, $0.001 par value 10,000,000 shares
      authorized, 140,000 issued and outstanding in 2008  and 134,000
      issued and outstanding in 2007
                  
                  
                  140
                  
                  
                  
                  134Common
      stock, $0.001 par value, 140,000,000 shares authorized, 43,255,441 shares
      issued and oustanding in 2008 and 40,367,523 shares issued and oustanding
      in 2007
                  
                  
                  43,256
                  
                  
                  
                  40,368Additional
      paid-in capital
                  
                  
                  35,307,119
                  
                  
                  
                  33,741,902Accumulated
      deficit
                  
                  
                  (31,303,768
                  )
                  
                  
                  (26,809,764
                  )Total
      Stockholders' Equity
                  
                  
                  4,096,747
                  
                  
                  
                  6,972,640$
                  4,615,204
                  
                  
                  $
                  7,572,766
 See
      report of independent registered public accounting firm and notes to
      financial statements.
                        F-2
  
  
 POWER
      EFFICIENCY CORPORATIONSTATEMENTS
      OF OPERATIONS
 
 Year Ended December 31,2008
                      
                      
                      2007REVENUES
                      
                      $
                      480,513
                      
                      
                      $
                      490,510COMPONENTS
      OF COST OF SALES:Material,
      labor and overhead
                      
                      
                      356,942
                      
                      
                      
                      340,468Inventory
      obsolesence expense
                      
                      
                      40,758
                      
                      
                      
                      -Total
      Cost of Sales
                      
                      
                      397,700
                      
                      
                      
                      340,468GROSS
      PROFIT
                      
                      
                      82,813
                      
                      
                      
                      150,042COSTS
      AND EXPENSES:Research
      and development
                      
                      
                      1,016,158
                      
                      
                      
                      667,786Selling,
      general and administrative
                      
                      
                      3,032,733
                      
                      
                      
                      2,721,284Depreciation
      and amortization
                      
                      
                      74,539
                      
                      
                      
                      47,036Total
      Costs and Expenses
                      
                      
                      4,123,430
                      
                      
                      
                      3,436,106LOSS
      FROM OPERATIONS
                      
                      
                      (4,040,617
                      )
                      
                      
                      (3,286,064
                      )OTHER
      INCOME (EXPENSE):Interest
      income
                      
                      
                      104,684
                      
                      
                      
                      80,481Interest
      expense
                      
                      
                      -
                      
                      
                      
                      (679,306
                      )Total
      Other Income (Expenses), Net
                      
                      
                      104,684
                      
                      
                      
                      (598,825
                      )LOSS
      BEFORE PROVISION FOR TAXES
                      
                      
                      (3,935,933
                      )
                      
                      
                      (3,884,889
                      )PROVISION
      FOR TAXES
                      
                      
                      (12,271
                      )
                      
                      
                      (6,906
                      )NET
      LOSS
                      
                      $
                      (3,948,204
                      )
                      
                      $
                      (3,891,795
                      )BASIC
      AND FULLY DILUTED LOSS PER COMMON SHARE
                      
                      $
                      (0.10
                      )
                      
                      $
                      (0.10
                      )WEIGHTED
      AVERAGE COMMON SHARES OUTSTANDINGBASIC
                      
                      
                      40,909,504
                      
                      
                      
                      38,541,012
 See
      report of independent registered public accounting firm and notes to
      financial statements.
                F-3
  
 
 POWER
      EFFICIENCY CORPORATIONSTATEMENTS
      OF CHANGES IN STOCKHOLDERS' EQUITYYEAR
      ENDED DECEMBER 31, 2008 AND 2007
 
 Additional
                    
                    
                    
                    
                    
                    TotalCommon Stock
                    
                    
                    Preferred Stock
                    
                    
                    Paid-in
                    
                    
                    Accumulated
                    
                    
                    Stockholders'Shares
                    
                    
                    Amount
                    
                    
                    Shares
                    
                    
                    Amount
                    
                    
                    Capital
                    
                    
                    Deficit
                    
                    
                    EquityBalance,
      January 1, 2007
                    
                    
                    35,042,009
                    
                    
                    $
                    35,042
                    
                    
                    
                    -
                    
                    
                    $
                    -
                    
                    
                    $
                    24,927,839
                    
                    
                    $
                    (22,917,969
                    )
                    
                    $
                    2,044,912Issuance
      of common stock
                    
                    
                    3,416,672
                    
                    
                    
                    3,417
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    1,021,583
                    
                    
                    
                    -
                    
                    
                    
                    1,025,000Issuance
      of preferred stock
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    134,400
                    
                    
                    
                    134
                    
                    
                    
                    6,719,866
                    
                    
                    
                    -
                    
                    
                    
                    6,720,000Common
      stock issued upon exercise of options and warrants
                    
                    
                    1,908,842
                    
                    
                    
                    1,909
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    681,591
                    
                    
                    
                    -
                    
                    
                    
                    683,500Warrants
      and options issued with common stock and debt and to employees and
      consultants, including debt discount
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    472,153
                    
                    
                    
                    -
                    
                    
                    
                    472,153Expenses
      related to issuance of preferred and common stock
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    (81,130
                    )
                    
                    
                    -
                    
                    
                    
                    (81,130
                    )Net
      loss
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    (3,891,795
                    )
                    
                    
                    (3,891,795
                    )Balance,
      December 31, 2007
                    
                    
                    40,367,523
                    
                    
                    
                    40,368
                    
                    
                    
                    134,400
                    
                    
                    
                    134
                    
                    
                    
                    33,741,902
                    
                    
                    
                    (26,809,764
                    )
                    
                    
                    6,972,640Issuance
      of common stock
                    
                    
                    40,000
                    
                    
                    
                    40
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    7,960
                    
                    
                    
                    -
                    
                    
                    
                    8,000Issuance
      of preferred stock
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    5,600
                    
                    
                    
                    6
                    
                    
                    
                    279,994
                    
                    
                    
                    -
                    
                    
                    
                    280,000Common
      stock dividends paid
                    
                    
                    2,729,000
                    
                    
                    
                    2,729
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    543,071
                    
                    
                    
                    (545,800
                    )
                    
                    
                    -Common
      stock issued upon exercise of options and warrants
                    
                    
                    118,918
                    
                    
                    
                    119
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    (119
                    )
                    
                    
                    -
                    
                    
                    
                    -Warrants
      and options issued with common stock and debt and to employees and
      consultants, including debt discount
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    765,504
                    
                    
                    
                    -
                    
                    
                    
                    765,504Expenses
      related to issuances of preferred and common stock
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    (31,193
                    )
                    
                    
                    -
                    
                    
                    
                    (31,193
                    )Net
      loss
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    (3,948,204
                    )
                    
                    
                    (3,948,204
                    )Balance,
      December 31, 2008
                    
                    
                    43,255,441
                    
                    
                    $
                    43,256
                    
                    
                    
                    140,000
                    
                    
                    $
                    140
                    
                    
                    $
                    35,307,119
                    
                    
                    $
                    (31,303,768
                    )
                    
                    $
                    4,046,747
 See
      report of independent registered public accounting firm and notes to
      financial statements.
                F-4
  
 
 POWER
      EFFICIENCY CORPORATIONSTATEMENTS OF CASH
  FLOWS
 
 Year Ended December 31,2008
                          
                          
                          2007CASH
      FLOWS PROVIDED BY (USED FOR):OPERATING
      ACTIVITIES:Net
      loss
                          
                          $
                          (3,948,204
                          )
                          
                          $
                          (3,891,795
                          )Adjustments
      to reconcile net loss to net cash used for operating
      activities:Bad
      debt expense
                          
                          
                          7,770
                          
                          
                          
                          16,934Inventory obsolescence
      expense
                          
                          
                          40,758
                          
                          
                          
                          -Depreciation
      and amortization
                          
                          
                          74,539
                          
                          
                          
                          47,036Amortization
      of capitalized manufacturing expenses
                          
                          
                          6,791
                          
                          
                          
                          -Loss
      on disposition of fixed assets
                          
                          
                          -
                          
                          
                          
                          3,516Debt
      discount related to issuance of debt securities
                          
                          
                          -
                          
                          
                          
                          419,859Amortization
      of deferred financing costs
                          
                          
                          -
                          
                          
                          
                          11,228Warrants
      and options issued in connection with settlements, services from
      consultants, vendors, the forgiveness of indebtedness, the issuance of
      debt, and to employees and consultants
                          
                          
                          765,504
                          
                          
                          
                          655,392Common
      Stock issued for consulting services
                          
                          
                          7,960
                          
                          
                          
                          -Changes
      in certain assets and liabilities:Accounts
      receivable
                          
                          
                          57,323
                          
                          
                          
                          (93,994
                          )Inventory
                          
                          
                          (155,016
                          )
                          
                          
                          25,090Prepaid
      expenses and other current assets
                          
                          
                          (12,660
                          )
                          
                          
                          29,173Deposits
                          
                          
                          84,057
                          
                          
                          
                          (88,388
                          )Accounts
      payable and accrued expenses
                          
                          
                          (30,669
                          )
                          
                          
                          1,354Customer
      deposits
                          
                          
                          (1,605
                          )
                          
                          
                          1,605Deferred
      rent
                          
                          
                          605
                          
                          
                          
                          12,063Net
      Cash Used for Operating Activities
                          
                          
                          (3,102,847
                          )
                          
                          
                          (2,850,927
                          )INVESTING
      ACTIVITIES:Costs
      related to patent applications
                          
                          
                          (27,507
                          )
                          
                          
                          (6,927
                          )Purchase
      of property, equipment and other assets
                          
                          
                          (104,857
                          )
                          
                          
                          (85,610
                          )Net
      Cash Used for Investing Activities
                          
                          
                          (132,364
                          )
                          
                          
                          (92,537
                          )FINANCING
      ACTIVITIES:Proceeds
      from issuance of equity securities, net of costs
                          
                          
                          248,846
                          
                          
                          
                          8,347,369Payments
      on notes payable
                          
                          
                          -
                          
                          
                          
                          (2,011,111
                          )Net
      Cash Provided by Financing Activities
                          
                          
                          248,846
                          
                          
                          
                          6,336,258(DECREASE)
      INCREASE IN CASH
                          
                          
                          (2,986,365
                          )
                          
                          
                          3,392,794CASHBeginning
      of year
                          
                          
                          5,086,378
                          
                          
                          
                          1,693,584End
      of year
                          
                          $
                          2,100,013
                          
                          
                          $
                          5,086,378
 See
      report of independent registered public accounting firm and notes to
      financial statements.
              F-5
  
  POWER
EFFICIENCY CORPORATION
 NOTES TO
FINANCIAL STATEMENTS
 DECEMBER
31, 2008 AND 2007
 
 NOTE
1  -  NATURE OF BUSINESS:
 
 Power
Efficiency Corporation ("Power Efficiency" and/or the "Company"), is
incorporated in Delaware.  Power Efficiency designs, develops, markets
and sells proprietary solid state electrical devices designed to reduce energy
consumption in alternating current induction motors.  Alternating
current induction motors are commonly found in industrial and commercial
facilities throughout the world.  The Company currently has one
principal and proprietary product: the three phase Motor Efficiency Controller,
which is used in industrial and commercial applications, such as rock crushers,
granulators, and escalators.  Additionally, the Company has developed
a digital single phase controller in pre-production form, in preparation for
working with Original Equipment Manufacturers (“OEMs”) to incorporate the
technology into their equipment.
 
 The
Company's primary customers have been original equipment manufacturers (OEM's)
and commercial accounts located throughout the United States of America and
various countries.
 
 Power
Efficiency formed Design Efficient Energy Services, LLC, a Delaware limited
liability company.  This entity was formed to obtain energy grants and
rebates for customers of the Company from state governmental
bodies.  Design Efficient Energy Services, LLC has been inactive since
inception.
 NOTE
2  -  SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES:
 
 
 Use
of Estimates:
 The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period.  Actual results may differ from those
estimates.
 
 Inventories:
 Inventories
are valued at the lower of cost (first-in, first-out) or market.  The
Company reviews inventory for impairments to net realizable value whenever
circumstances arise.  Such circumstances may include, but are not
limited too, the discontinuation of a product line or re-engineering certain
components making certain parts obsolete.  Management has determined a
reserve for inventory obsolescence is not necessary at December 31, 2008 or
2007.
 
 As of
December 31, inventories are comprised as follows:
 
 2008
                    
                    
                    2007Raw
      materials
                    
                    $
                    178,698
                    
                    
                    $
                    131,762Finished
      Goods
                    
                    
                    67,322
                    
                    
                    
                    -Inventories
                    
                    $
                    246,020
                    
                    
                    $
                    131,762
 
 Accounts
Receivable:
 The
Company carries its accounts receivable at cost less an allowance for doubtful
accounts and returns.  On a periodic basis, the Company evaluates its
accounts receivable and establishes an allowance for doubtful accounts, based on
a history of past write-offs and collections and current credit
conditions.
  F-6
  
 
 POWER
EFFICIENCY CORPORATION
 NOTES TO
FINANCIAL STATEMENTS
 DECEMBER
31, 2008 AND 2007
 
 Research
and Development:
 Research
and development expenditures are charged to expense as incurred.
 
 Property,
Equipment and Depreciation:
 Property
and equipment are stated at cost.  Maintenance and repairs are
expensed as incurred, while betterments are capitalized.  Depreciation
is computed using the straight-line method over the estimated useful lives of
the assets, which range from 3 to 7 years.
 
 Website:
 Website
development, maintenance and hosting costs are charged to expense as
incurred.
 
 Shipping
and Handling Costs:
 The
Company bills customers for freight.  Actual costs for shipping and
handling are included as a component of cost of sales.
 
 Deferred
Financing Costs:
 Expenditures
incurred in conjunction with debt or equity capital issuances are deferred as
other assets until the related offering is complete.  Once the
offering is completed, costs related to equity issuances will be offset against
equity proceeds, and such costs related to debt issuances are amortized on a
straight line basis, over the life of the debt.  Both equity and debt
related costs are expensed if the offering is not completed.
 
 Patents:
 Costs
associated with applying for U.S. patents based upon technology developed by the
Company are capitalized.  At the time the patent is awarded, the asset
will be amortized on a straight line basis, over the remaining term of the
patent.  If no patent is issued, these costs will be expensed in the
period when it is determined that no patent will be issued.
 
 Deferred
Rent:
 The
Company accounts for rent expense on a straight-line basis for financial
reporting purposes.  The difference between cash payments and rent
expense is included in deferred rent.
 
 Revenue
Recognition:
 Revenue
from product sales is recognized at the time of shipment, when all services are
complete.  Returns and other sales adjustments (warranty accruals,
discounts and shipping credits) are provided for in the same period the related
sales are recorded.
 
 Loss
Per Common Share:
 Loss per
common share is determined by dividing net loss available to common stockholders
by the weighted average number of common shares outstanding during the
year.  Diluted loss per share is not presented since giving effect to
potential common shares would be anti-dilutive.
 
 Accounting
for Stock Based Compensation:
 The
Company accounts for employee stock options as compensation expense, in
accordance with SFAS No. 123R, “Share Based Payments.”  SFAS No. 123R
requires companies to expense the value of employee stock options and similar
awards, and applies to all outstanding and vested stock-based
awards.
  F-7
  
  POWER
EFFICIENCY CORPORATION
 NOTES TO
FINANCIAL STATEMENTS
 DECEMBER
31, 2008 AND 2007
 
 In
computing the impact, the fair value of each option is estimated on the date of
grant based on the Black-Scholes options-pricing model utilizing certain
assumptions for a risk free interest rate; volatility; and expected remaining
lives of the awards.  The assumptions used in calculating the fair
value of share-based payment awards represent management's best estimates, but
these estimates involve inherent uncertainties and the application of management
judgment.  As a result, if factors change and the Company uses
different assumptions, the Company’s stock-based compensation expense could be
materially different in the future. In addition, the Company is required to
estimate the expected forfeiture rate and only recognize expense for those
shares expected to vest.  In estimating the Company’s forfeiture rate,
the Company analyzed its historical forfeiture rate, the remaining lives of
unvested options, and the amount of vested options as a percentage of total
options outstanding.  If the Company’s actual forfeiture rate is
materially different from its estimate, or if the Company reevaluates the
forfeiture rate in the future, the stock-based compensation expense could be
significantly different from what we have recorded in the current
period.  The impact of applying SFAS No. 123R approximated $766,000
and $655,000 in additional compensation expense during the years ended December
31, 2008 and 2007, respectively.  Such amounts are included in
research and development expenses and selling, general and administrative
expense on the statement of operations.
 
 Product
Warranties:
 The
Company warrants its products for two years.  Estimated product
warranty expenses are accrued in cost of sales at the time the related sale is
recognized. Estimates of warranty expenses are based primarily on historical
warranty claim experience. Warranty expenses include accruals for basic
warranties for products sold.
 
 Provision
for Income Taxes:
 The
Company utilizes the asset and liability method of accounting for income taxes
pursuant to SFAS No. 109, Accounting for Income Taxes".  SFAS No. 109
requires the recognition of deferred tax assets and liabilities for both the
expected future tax impact of differences between the financial statement and
tax basis of assets and liabilities, and for the expected future tax benefit to
be derived from tax loss and tax credit carryforwards.  SFAS No. 109
additionally requires the establishment of a valuation allowance to reflect the
likelihood of realization of deferred tax assets.
 
 In May
2007, the FASB issued FASB Staff Position FIN 48-1, “Definition of Settlement in FASB
Interpretation No. 48”.  FIN 48-1 provides guidance on how to
determine whether a tax position is effectively settled for the purpose of
recognizing previously unrecognized tax benefits.  FIN 48-1 is
effective retroactively to January 1, 2007.  Under FIN 48, the impact
of an uncertain tax position taken or expected to be taken on an income tax
return must be recognized in the financial statements at the amount that is more
likely than not to be sustained upon audit by the relevant taxing authority. An
uncertain income tax position will not be recognized in the financial statements
unless it is more likely than not of being sustained. The implementation of FIN
48 and FIN 48-1 did not have a material impact on the Company’s financial
position, results of operations or cash flows.
 
 The
provision for taxes represents state franchise taxes, interest and
penalties.
 
 Goodwill:
 SFAS No.
142, “Goodwill and Other Intangible Assets” requires that goodwill shall no
longer be amortized.  Goodwill is tested for impairment on an annual
basis and between annual tests on a quarterly basis, utilizing a two-step test,
as described in SFAS No. 142.
  F-8
  
  POWER
EFFICIENCY CORPORATION
 NOTES TO
FINANCIAL STATEMENTS
 DECEMBER
31, 2008 AND 2007
 
 Advertising:
 Advertising
costs are expensed as incurred.  Advertising expenses were $48,987 and
$7,504 for the years ended December 31, 2008 and 2007,
respectively.
 
 New
Accounting Pronouncements:
 
 In
December 2007, the FASB issued Statement of Financial Accounting Standards
No. 160, Noncontrolling
Interests in Consolidated Financial Statements—an amendment of ARB No. 51(“SFAS 160”). This Statement amends ARB 51 to establish accounting and
reporting standards for the noncontrolling interest in a subsidiary and for the
deconsolidation of a subsidiary. It clarifies that a noncontrolling interest in
a subsidiary is an ownership interest in the consolidated entity that should be
reported as equity in the consolidated financial statements. In addition to the
amendments to ARB 51, this Statement amends SFAS 128, Earnings per Share;so that
earnings-per-share data will continue to be calculated the same way those data
were calculated before this Statement was issued. This Statement is effective
for fiscal years, and interim periods within those fiscal years, beginning on or
after December 15, 2008. The Company will apply the provisions of SFAS 160
to any noncontrolling interests acquired after the effective date.
 
 In March
2008, the FASB issued SFAS 161, "Disclosures about Derivative
Instruments and Hedging Activities" (SFAS 161). The new standard is
intended to improve financial reporting about derivative instruments and hedging
activities by requiring enhanced disclosures to enable investors to better
understand their effects on an entity's financial position, results of
operations and cash flows. SFAS 161 is effective for our consolidated
financial statements issued for fiscal years and interim periods beginning with
our quarter ended March 31, 2009. We do not expect the adoption of
SFAS 161 to have a significant impact on our consolidated financial
statements.
 
 In May
2008, FASB issued SFAS No. 162, "The Hierarchy of Generally Accepted Accounting
Principles" ("SFAS 162"). SFAS 162 identifies the sources of accounting
principles and the framework for selecting the principles used in the
preparation of financial statements of nongovernmental entities that are
presented in conformity with generally accepted accounting principles ("GAAP")
in the United States (the GAAP hierarchy). SFAS 162 is effective 60 days
following the SEC's approval of the Public Company Accounting Oversight Board
amendments to AU Section 411, "The Meaning of Present Fairly in Conformity With
Generally Accepted Accounting Principles." The Company is currently reviewing
the effect, if any; the proposed guidance will have on its consolidated
financial statements.
 In April
2008, the FASB issued Staff Position No. 142-3, "Determination of the Useful Life of
Intangible Assets" (FSP FAS 142-3). FSP FAS 142-3 amends the
factors that should be considered in developing renewal or extension assumptions
used to determine the useful life of a recognized intangible asset under
SFAS 142, "Goodwill and
Other Intangible Assets". It is effective for fiscal years and interim
periods beginning with our quarter ended March 31, 2009, and will be
applied prospectively to intangible assets acquired after the effective date.
FSP FAS 142-3 also requires expanded disclosure related to the
determination of intangible assets recognized as of, and subsequent to the
effective date. The impact of FSP FAS 142-3 will depend on the size and
nature of acquisitions on or after January 1, 2009.
  F-9
  
  POWER
EFFICIENCY CORPORATION
 NOTES TO
FINANCIAL STATEMENTS
 DECEMBER
31, 2008 AND 2007
 
 Financial
Statement Reclassifications:
 Certain
reclassifications have been made to the 2007 financial statements in order for
them to conform to the 2008 financial statement presentation.
 
 NOTE
3  -  GOING CONCERN:
 
 The
accompanying financial statements have been prepared assuming the Company is a
going concern, which assumption contemplates the realization of assets and
satisfaction of liabilities in the normal course of business.  The
Company has suffered recurring losses from operations, and the Company
experienced a $3,102,847 deficiency of cash from operations in
2008.  While the Company appears to have adequate liquidity at
December 31, 2008, there can be no assurances that such liquidity will remain
sufficient.
 
 These
factors raise substantial doubt about the Company's ability to continue as a
going concern.  The financial statements do not include any
adjustments relating to the recoverability and classification of recorded asset
amounts or the amount of liabilities that might be necessary should the Company
be unable to continue in existence.  Continuation of the Company as a
going concern is dependent upon achieving profitable
operations.  Management's plans to achieve profitability include
developing new products, obtaining new customers and increasing sales to
existing customers.  Management is seeking to raise additional capital
through equity issuance, debt financing or other types of financing (See Note
22).  However, there are no assurances that sufficient capital will be
raised.
  
 NOTE
4  -  PREPAID EXPENSES AND OTHER CURRENT ASSETS:
 
 As of
December 31, prepaid expenses and other current assets are comprised as
follows:
 
 2008
                    
                    
                    2007Prepaid
      insurance
                    
                    $
                    10,192
                    
                    
                    $
                    19,705Prepaid
      expenses
                    
                    
                    36,973
                    
                    
                    
                    21,591Prepaid
      expenses and other current assets
                    
                    $
                    47,165
                    
                    
                    $
                    41,296
 
 NOTE
5  -  PROPERTY AND EQUIPMENT:
 
 At
December 31, 2007, property and equipment is comprised as follows:
 
 2008
                    
                    
                    2007Machinery
      and equipment
                    
                    $
                    253,976
                    
                    
                    $
                    151,497Office
      furniture and equipment
                    
                    
                    20,113
                    
                    
                    
                    26,326274,089
                    
                    
                    
                    177,923Less:  Accumulated
      depreciation
                    
                    
                    129,122
                    
                    
                    
                    65,717Property
      and Equipment, Net
                    
                    $
                    144,967
                    
                    
                    $
                    112,106
 
 Depreciation
for the years ended December 31, 2008 and 2007 amounted to $71,996 and $46,044,
respectively.
  F-10
  
  POWER
EFFICIENCY CORPORATION
 NOTES TO
FINANCIAL STATEMENTS
 DECEMBER
31, 2008 AND 2007
 NOTE
6  -  GOODWILL:
 
 In
accordance with SFAS No. 142, "Goodwill and Other Intangible Assets", previously
recognized intangible assets deemed to have indefinite useful lives were tested
by management for impairment during fiscal 2008 and 2007 utilizing a two-step
test.  An annual goodwill impairment test was performed by management
in addition to quarterly goodwill impairment tests.
 
 The first
part of the test is to compare the Company’s fair market value (the number of
the Company’s common shares outstanding multiplied by the closing stock price of
the date of the test), to the book value of the Company (the Company’s total
stockholders’ equity, as of the date of the test).  If the fair market
value of the Company is greater than the book value, no impairment exists as of
the date of the test.  However, if book value exceeds fair market
value, the Company must perform part two of the test, which involves
recalculating the implied goodwill by repeating the acquisition analysis that
was originally used to calculate goodwill, using purchase accounting as if the
acquisition happened on the date of the test, to calculate the implied goodwill
as of the date of the test.
 
 The
Company’s most recent impairment analysis was performed on December 31, 2008, on
the Company’s single reporting unit.  As of December 31, 2008, the
Company’s fair market value was $8,651,088, and the Company’s book value was
$4,046,747.  As of December 31, 2007, the Company’s fair market value
was $22,199,036, and the Company’s book value was $6,972,640.  Based
on this, no impairment exists as of December 31, 2008 and 2007.
 
 Circumstances
may arise in which the Company will perform an impairment test in addition to
its annual and quarterly tests.  An example of one of these
circumstances would be a sudden sharp drop in the Company’s stock price not as a
result of market conditions.
 
 NOTE
7  -  INTANGIBLE ASSETS:
 
 Intangible
assets subject to amortization consists of the following for the years ended
December 31:
 
 2008
                    
                    
                    2007Patents
                    
                    $
                    77,109
                    
                    
                    $
                    49,602Less:
      Accumulated amortization
                    
                    
                    12,398
                    
                    
                    
                    9,856Intangible
      Assets, Net
                    
                    $
                    64,711
                    
                    
                    $
                    39,746
 
 Amortization
expense in 2008 and 2007 amounted to $2,542 and $992, respectively.
 
 During
2008 and 2007, the Company capitalized approximately $28,000 and $7,000 in
expenses related to patent filings, respectively.  The Company will
begin amortizing these costs over the life of the patent, once the patent is
approved by the appropriate authorities.
  F-11
  
  POWER
EFFICIENCY CORPORATION
 NOTES TO
FINANCIAL STATEMENTS
 DECEMBER
31, 2008 AND 2007
 Amortization
expense expected in the succeeding five years for the Company’s existing patents
is as follows:
 
 2009
                      
                      $
                      2,5422010
                      
                      
                      2,5422011
                      
                      
                      2,5422012
                      
                      
                      2,5422013
                      
                      
                      2,542Thereafter
                      
                      
                      52,001$
                      64,711
  NOTE
8  -  CONCENTRATIONS OF CREDIT RISKS:
 
 Financial
instruments which potentially subject the Company to concentrations of credit
risk, consist primarily of cash and temporary cash investments and accounts
receivable.
 
 The
Company maintains cash balances which at times may be in excess of the insured
limits.
 
 Sales and
accounts receivable currently are from a relatively small number of customers of
the Company's products.  The Company closely monitors extensions of
credit.
 
 Four
customers accounted for approximately 82% of 2008 sales and 21% of accounts
receivable at December 31, 2008.  Three customers accounted for
approximately 84% of 2007 sales and 70% of accounts receivable at December 31,
2007.
 
 International
sales as a percentage of total revenues for the years ended December 31 are as
follows:
 
 Country
                  
                  2008
                  
                  
                  2007Sweden
                  
                  
                  1
                  %
                  
                  
                  2
                  %
 
 NOTE 9 –
PRODUCT WARRANTIES
 
 Accrued
warranty expenses at December 31, 2007 and 2008 consist of the
following:
 
 Balance,
      January 1, 2007
                    
                    $
                    -Additions
                    
                    
                    4,151Deductions
                    
                    
                    (742
                    )Balance,
      December 31, 2007
                    
                    
                    3,409Additions
                    
                    
                    6,758Deductions
                    
                    
                    (5,735
                    )Balance,
      December 31, 2008
                    
                    $
                    4,432
  F-12
  
  POWER
EFFICIENCY CORPORATION
 NOTES TO
FINANCIAL STATEMENTS
 DECEMBER
31, 2008 AND 2007
 
 NOTE
10  -  PROVISION FOR TAXES:
 
 As of
December 31, 2008 and 2007, the Company has available, on a federal tax basis,
net operating loss carryforwards of approximately $23,700,000 and $19,800,000,
respectively.  These net operating losses expire at varying amounts
through 2028.  The net operating loss carryforwards result in deferred
tax assets of approximately $8,000,000 and $6,700,000 at December 31, 2008 and
2007, respectively; however, a valuation reserve has been recorded for the full
amount due to the uncertainty of realization of the deferred tax
assets.
 
 A
reconciliation of the statutory tax rates for the years ended December 31 is as
follows:
 
 2008
                    
                    
                    2007Statutory
      rate
                    
                    
                    (34
                    )%
                    
                    
                    (34
                    )%State
      income tax – all states
                    
                    
                    (6
                    )%
                    
                    
                    (6
                    )%(40
                    )%
                    
                    
                    (40
                    )%Current
      year valuation allowance
                    
                    
                    40
                    %
                    
                    
                    40
                    %Benefit
      for income taxes
                    
                    
                    0
                    %
                    
                    
                    0
                    %
 
 
 NOTE
11  -  WARRANTS:
 
 Warrant
activity during the years ended December 31, 2008 and 2007 follows:
  Warrants
              
              
              Average
                Exercise PriceWarrants
      outstanding at January 1, 2007
              
              
              22,372,730
              
              
              $
              0.42Issued
      during 2007
              
              
              9,528,338
              
              
              
              0.52Exercised
      during 2007
              
              
              (2,143,659
              )
              
              
              0.40Cancelled
      and expired during 2007
              
              
              (743,441
              )
              
              
              0.40Warrants
      outstanding at December 31, 2007
              
              
              29,013,968
              
              
              
              0.45Issued
      during 2008
              
              
              1,280,000
              
              
              
              0.44Exercised
      during 2008
              
              
              (299,188
              )
              
              
              0.20Warrants
      outstanding at December 31, 2008
              
              
              29,994,780
              
              
              $
              0.45
  During
2008, the Company issued the following warrants:  1,000,000 warrants
as consulting fees to sales consultants, which were valued at $290,000, however,
these warrants have special vesting provisions, therefore, the Company did not
recognize an expense for these warrants in 2008; 280,000 warrants to investors,
in connection with the Company’s private offering of common stock (see Note 19),
which were valued at $90,160, and recorded as additional paid in
capital.  During 2008, the Company also expensed and included in
selling general and administrative expenses, $5,153 related to warrants, which
vested during 2008.  These warrants were issued in 2007 as consulting
fees to a sales consultant.
  F-13
  
  POWER
EFFICIENCY CORPORATION
 NOTES TO
FINANCIAL STATEMENTS
 DECEMBER
31, 2008 AND 2007
 
 During
2007, the Company issued the following warrants:  100,000 warrants as
consulting fees to a sales consultant, which were valued at $15,458 and expensed
and included in selling, general and administrative expenses; 1,000,000 warrants
as consulting fees to a technical consultant, which were valued at $228,200,
however, these warrants have special vesting provisions, therefore the Company
did not recognize an expense for these warrants in 2007; 1,708,338 warrants to
investors, in connection with the Company’s private offering of common stock
(See Note 19), which were valued at $224,843 and recorded as additional paid in
capital; 6,720,000 warrants to investors, in connection with the Company’s
private offering of its Series B preferred stock (See Note 19), which were
valued at $3,421,631 and recorded as additional paid in
capital.  During 2007, the Company also expense and included in
research and development expenses, $5,492 related to warrants which vested
during 2007.  These warrants were issued in 2006 as consulting fees to
a technical consultant.
 
 The fair
value of each warrant is estimated on the date of grant based on the
Black-Scholes options-pricing model utilizing certain assumptions for a risk
free interest rate; volatility; and expected remaining lives of the
awards.  The assumptions used in calculating the fair value of
share-based payment awards represent management's best estimates, but these
estimates involve inherent uncertainties and the application of management
judgment.  In addition, the Company is required to estimate the
expected forfeiture rate and only recognize expense for those shares expected to
vest.  In estimating the Company’s forfeiture rate, the Company
analyzed its historical forfeiture rate, the remaining lives of unvested
options, and the amount of vested options as a percentage of total options
outstanding.
 
 The fair
value of warrants granted is estimated on the date of grant based on the
weighted-average assumptions in the table below.  The assumption for
the expected life is based on evaluations of historical and expected exercise
behavior.  The risk-free interest rate is based on the U.S. Treasury
rates at the date of grant with maturity dates approximately equal to the
expected life at the grant date.  The historical stock volatility of
the Company’s common stock is used as the basis for the volatility
assumption.
 
 Years ended December 31,2008
                    
                    
                    2007Weighted
      average risk-free rate
                    
                    
                    4.06
                    %
                    
                    
                    4.5
                    %Average
      expected life in years
                    
                    
                    3.5
                    
                    
                    
                    3.6Expected
      dividends
                    
                    None
                    
                    
                    NoneVolatility
                    
                    
                    275
                    %
                    
                    
                    166
                    %Forfeiture
      rate
                    
                    
                    43
                    %
                    
                    
                    40
                    %
  F-14
  
  POWER
EFFICIENCY CORPORATION
 NOTES TO
FINANCIAL STATEMENTS
 DECEMBER
31, 2008 AND 2007
  
 NOTE
12  -  STOCK OPTION PLAN:
 
 Stock
Option Plan activity during the years ended December 31, 2008 and 2007
follows:
 
 Shares
                    
                    
                    Average
                      Exercise PriceOptions
      outstanding and exercisable at January 1, 2007
                    
                    
                    14,734,896
                    
                    
                    $
                    0.33Granted
      during 2007
                    
                    
                    3,725,000
                    
                    
                    
                    0.35Cancelled
      during 2007
                    
                    
                    (4,050,000
                    )
                    
                    
                    0.23Exercised
      during 2007
                    
                    
                    (100,000
                    )
                    
                    
                    0.20Options
      outstanding and exercisable at December 31, 2007
                    
                    
                    14,309,896
                    
                    
                    $
                    0.36Granted
      during 2008
                    
                    
                    1,095,000
                    
                    
                    
                    0.50Cancelled
      during 2008
                    
                    
                    (1,825,000
                    )
                    
                    
                    0.37Options
      outstanding and exercisable at December 31, 2008
                    
                    
                    13,579,896
                    
                    
                    $
                    0.37
 
 Weighted
average remaining contractual life at December 31, 2008, for all options is 7.03
years.
 
 In 2000,
the Company adopted the 2000 Stock Option and Restricted Stock Plan (the "2000
Plan").  On June 8, 2007, the 2000 Plan was amended and
restated.  The 2000 Plan, as restated and amended, provides for the
granting of options to purchase up to 20,000,000 shares of common
stock.  100,000 options have been exercised to date.  There
are 13,579,896 options outstanding under the 2000 Plan.
 
 During
2008, the Company granted 1,095,000 stock options to directors and employees at
exercise prices approximating fair market value of the stock on the date of each
grant.  Such issuances to directors and employees were valued at
$760,350, utilizing similar factors as described below, which were
expensed  and are included in research and development expenses and
selling, general and administrative expenses.
 
 During
2007, the Company granted 3,725,000 stock options to directors and employees at
exercise prices approximating fair market value of the stock on the date of each
grant.  Such issuances to directors and employees were valued at
$634,442, utilizing similar factors as described below, which were expensed and
are included in research and development expenses and selling, general and
administrative expenses.
 In 1994,
the Company adopted a Stock Option Plan (the "1994 Plan").  The 1994
Plan provides for the granting of options to purchase up to 71,429 shares of
common stock.  No options have been exercised to
date.  There are no options outstanding under the 1994 Plan, and the
Company does not plan to issue any more options under this plan.
 
 Share
Based Compensation Payments:
 During
the year ended December 31, 2008, the Board of Directors authorized the net
issuance of 1,095,000 stock options to directors and
employees.  During the year ended December 31, 2007, the Board of
Directors authorized the net issuance of 3,725,000 stock options to directors,
officers and employees.  The fair value of each option grant was
estimated on the date of grant using the Black-Scholes option-pricing model with
the following weighted-average assumptions used for grants: average expected
volatility of 275% and 166% for the years ended December 31, 2008 and 2007,
respectively; average risk-free interest rate of 4.06 % and 4.5% for the years
ended December 31, 2008 and 2007, respectively; and expected lives of
approximately 10.0 years.
  F-15
  
  POWER
EFFICIENCY CORPORATION
 NOTES TO
FINANCIAL STATEMENTS
 DECEMBER
31, 2008 AND 2007
 
 The
Company accounts for employee stock options as compensation expense, in
accordance with SFAS No. 123R, “Share Based Payments.”  SFAS No. 123R
requires companies to expense the value of employee stock options and similar
awards.
 
 In
computing the impact, the fair value of each option is estimated on the date of
grant based on the Black-Scholes options-pricing model utilizing certain
assumptions for a risk free interest rate; volatility; and expected remaining
lives of the awards.  The assumptions used in calculating the fair
value of share-based payment awards represent management's best estimates, but
these estimates involve inherent uncertainties and the application of management
judgment.  As a result, if factors change and the Company uses
different assumptions, the Company’s stock-based compensation expense could be
materially different in the future. In addition, the Company is required to
estimate the expected forfeiture rate and only recognize expense for those
shares expected to vest.  In estimating the Company’s forfeiture rate,
the Company analyzed its historical forfeiture rate, the remaining lives of
unvested options, and the amount of vested options as a percentage of total
options outstanding.  If the Company’s actual forfeiture rate is
materially different from its estimate, or if the Company reevaluates the
forfeiture rate in the future, the stock-based compensation expense could be
significantly different from what we have recorded in the current
period.
 
 
 
 Leases:
 The
Company leases office space, a manufacturing and warehousing facility, and a
research and development facility in Las Vegas, Nevada.  The office
space lease was assigned to the Company by the Chief Executive Officer, on the
same terms and conditions, effective February 24, 2006.  The lease
includes a payment of $11,292 per month, plus annual increases of 3% per year,
which includes all cleaning and utilities, except phone and internet
service.  The term of the lease is five years.
 
 On July
1, 2007, the Company began leasing a research and development
facility.  The lease includes a payment of $1,995, plus common area
maintenance charges, per month.  The term of the lease is three years
and one month.  On November 1, 2007, the Company amended the lease to
include additional space, which it will utilize for its manufacturing and
warehousing facility.  The amendment to the lease calls for an
additional payment of $1,605, plus common area maintenance charges, per month,
and carries the same terms and conditions as the original lease.
 
 Minimum
future rentals are as follows:
 
 Year2009
                          
                          
                          190,6642010
                          
                          
                          177,0912011
                          
                          
                          12,688$
                          380,443
 
 Rent
expense, including base rent and additional charges, for the year ended December
31, 2008 and 2007 was $212,742 and $173,545, respectively.
  F-16
  
  POWER
EFFICIENCY CORPORATION
 NOTES TO
FINANCIAL STATEMENTS
 DECEMBER
31, 2008 AND 2007
 
 Patent
License Agreements:
 The
Company was an exclusive licensee pursuant to a patent license agreement of
certain power factor controller technology owned by the United States, as
represented by the National Aeronautics and Space Administration
(NASA).  This license agreement covered the United States of America
and its territories and possessions on an exclusive basis and foreign sales on a
non-exclusive basis.  Such license agreement did not require the
Company to pay royalties to NASA in connection with the Company's sale of
products employing technology utilizing the licensed patents.  The
agreement terminated on December 16, 2002 upon the expiration of all of the
licensed patents.
 
 The
Company filed and received its own patent (No. 5.821.726) that expires in
2017 that management believes will protect the Company's intellectual property
position. The
Company has also filed three utility patents in new inventions associated with
the development of its digital products, which are all pending approval with the
U.S. Patent and Trademark Office.
 
 Software
User License Agreements:
 The
Company entered into an agreement to purchase software licenses for accounting,
manufacturing and CRM software.  The total amount of the software
license agreement is approximately $27,000 and the software licenses begin in
2009.
 
 Litigation:
 The
Company is currently involved in a lawsuit against two of its former directors,
who were also employees of the Company, and the company the two former directors
formed (collectively, the “Defendants”).  The Company filed this
action against the Defendants for misappropriation of trade secrets, false
advertising, defamation/libel and other claims primarily arising from the
Defendant’s use of the Company’s confidential and proprietary information in the
development and marketing of motor control products.  The Company
seeks a temporary retraining order, preliminary injunction, permanent
injunction, damages, exemplary damages, attorneys’ fees and costs against the
Defendants.  The Company’s original complaint was filed on November
25, 2008, and its amended complaint was filed on January 5, 2009, in the U.S.
District Court, District of Nevada.
 
 On March
19, 2007, the Company reached an agreement with GE Fanuc Automation North
America, Inc. (“GE Fanuc”) to cease using its Power Genius name for its
products.  As consideration, GE Fanuc paid the Company
$20,000.
 
 Subcontractors:
 During
2007, the Company utilized one subcontractor in Nevada as turn-key manufacturers
for its analog product.  In December of 2007, the Company ceased using
the Las Vegas, Nevada subcontractor and began to manufacture its analog and some
of its digital product in-house.
 
 The
Company directly sources its own analog circuit boards from a contract circuit
board manufacturer.  Over the past year, the Company has primarily
sourced analog circuit boards from RMF Design and Manufacturing (“RMF”), based
outside of Toronto, Canada.  The Company believes RMF has the ability
to meet the Company’s analog circuit board production needs and the Company
would be successful in finding alternative manufacturers should RMF not be
available to manufacture these circuit boards.
  F-17
  
  POWER
EFFICIENCY CORPORATION
 NOTES TO
FINANCIAL STATEMENTS
 DECEMBER
31, 2008 AND 2007
 
 On
September 6, 2007, the Company entered into a manufacturing service agreement
with Sanima-Sci Corporation (“Sanmina-Sci”) for the production of digital units
and digital circuit boards.  Pursuant to this agreement, the Company
will purchase an amount of digital units, subject to certain minimum quantities,
from Sanmina-Sci equal to an initial firm order agreed upon by the Company and
Sanmina-Sci and subsequent nine-month requirements forecasts.  The
initial term of the contract is one year, and upon expiration of the initial
term, the contract will continue on a year to year basis until one party gives
notice to terminate.At the present time the
Company is not able to determine if the actual purchases will be in excess of
these minimum commitments, or if any potential liability will be
incurred.  At December 31, 2008, the Company has approximately
$340,000 in open purchase orders with this subcontractor.  At December
31, 2007, the Company had approximately $100,000 in open purchase orders with
this subcontractor.  At December 31, 2007, the Company had
approximately $81,000 on deposit with Sanmina-Sci.
 
 Investment
Advisory Agreements:
 The
Company entered into an agreement with an investment bank on October 13,
2006.  In accordance with this agreement, the investment bank served
as the Company’s non-exclusive placement agent for a private stock offering of
10,700,008 shares of common stock and 5,350,004 warrants which closed on
November 30, 2006 (See Note 19).  The investment bank was paid a
retainer fee of $5,000, and the agreement called for the investment bank to
receive 5.5% of the total cash invested by investors introduced by the
investment bank upon closing.  The investment bank introduced no
investors in the private stock offering which closed on November 30,
2006.  The Company subsequently terminated this agreement on January
13, 2007.
 
 On
October 31, 2008, the Company entered into a consulting agreement with an
investor relations consulting firm.  This consulting agreement calls
for the consultant to perform investor relations services for the
Company.  For its services, the Company has agreed to pay the
consultant a monthly retainer of $6,500 and a total of 40,000 shares of the
Company’s common stock.  The term of the consulting agreement is
initially for 3 months, and can be extended at the end of the
term.  The agreement terminated in January 2009 and has not been
renewed.
  
 NOTE 14 -
RELATED PARTY TRANSACTIONS:
 
 During
the years ended December 31, 2008 and 2007, consulting fees of $12,000 were paid
in each year to a director and stockholder of the Company, respectively, for
serving as the Chairman of the Company’s Audit Committee.  These
amounts are included in selling, general and administrative
expenses.
 
 On
October 29, 2007, the Company entered into a financing transaction in which it
issued 113,500 units, each unit consisting of one share of the Company’s series
B preferred stock and a warrant to purchase up to 50 shares of the Company’s
common stock for $3,825,000 in cash and the cancellation of $1,850,000 of debt
securities.  In this transaction, Steven Strasser, the Company’s Chief
Executive Officer purchased 16,000 units for $250,000 in cash and the
cancellation of a $550,000 note; George Boyadjieff, a director and senior
technical advisor of the Company, purchased 4,000 units for $200,000 in cash;
Douglas Dunn, a director of the Company, purchased 1,000 units for $50,000 in
cash; Gary Rado, a director of the Company, purchased 2,000 units for $100,000
in cash (See Note 18).
  F-18
  
  POWER
EFFICIENCY CORPORATION
 NOTES TO
FINANCIAL STATEMENTS
 DECEMBER
31, 2008 AND 2007
 
 On
January 21, 2008, the Company issued and sold and additional 5,600 units under
the above referenced financing transaction.  In this closing, Steven
Strasser purchased 1,600 units for $80,000 in cash (See Note 18).
 On
November 30, 2006, the Company entered into a financing transaction in which it
issued 10,700,008 shares of its common stock and 5,350,004 warrants to purchase
common stock for $3,210,000 and $2,000,000 in senior secured notes in a private
offering of equity and debt.  In this transaction, Steven Strasser,
the Company’s Chief Executive Officer purchased 1,166,668 shares of common stock
and 583,334 warrants for $350,000, and was issued a senior secured note for
$550,000; John (BJ) Lackland, the Company’s Chief Financial Officer purchased
100,000 shares of common stock and 50,000 warrants for $30,000; Robert Murray,
the Company’s former Chief Operating Officer purchased 100,000 shares and 50,000
warrants for $30,000; George Boyadjieff, a director and senior technical advisor
of the Company was issued 1,000,000 shares of common stock and 500,000 warrants
for $300,000; and Commerce Energy Group was issued a $200,000 secured note and
250,000 warrants (See Notes 16 and 19).  The $2,000,000 in senior
secured notes were paid off in full on October 29, 2007 (See Note
18).
 
 Interest
expense of approximately $0 and $665,000 for the years ended December 31, 2008
and 2007, respectively, was associated with related parties.  Of the
$665,000 amount, approximately $75,000 was cash interest paid to the Company’s
Chief Executive Officer, approximately $173,000 was cash interest paid to other
investors who owned more than 5% of the Company’s outstanding common stock and
voting equivalents, and approximately $417,000 was amortization of debt discount
associated with related parties.
 
 
 
 Cash paid
during the year ended December 31, for:
 
 2008
                    
                    
                    2007Interest
                    
                    $
                    -
                    
                    
                    $
                    248,218Income/Franchise
      Taxes
                    
                    $
                    12,271
                    
                    
                    $
                    6,906
 
 
 Non-cash
items recorded during the year ended December 31, for:
 
 2008
                    
                    
                    2007Common
      Stock Dividends
                    
                    $
                    545,800
                    
                    
                    $
                    -
 
 
 
 On
November 30, 2006, the Company entered into a financing transaction in which the
Company issued $2,000,000 of its two year, senior, secured promissory notes
(collectively the “Notes”, individually a “Note”).   The Notes
were paid off in full on October 29, 2007 (See Note 18.)
  F-19
  
  POWER
EFFICIENCY CORPORATION
 NOTES TO
FINANCIAL STATEMENTS
 DECEMBER
31, 2008 AND 2007
 
 The
$2,000,000 loan consisted of $550,000 from Steven Strasser, the Company’s
Chairman, Chief Executive Officer and the Company’s largest beneficial
shareholder, $200,000 from Commerce Energy Group, Inc, the Company’s second
largest shareholder prior to the Offering, and $1,250,000 from individual
investors.  $1,450,000 of these Notes came from the exchange of
existing promissory notes of the Company.
 
 During
2005, the Company issued a $50,000 promissory note payable to its former
landlord in connection with a settlement agreement.  During the year
ended December 31, 2007, the Company paid $11,111 in principal.  As of
December 31, 2007, this note has been paid off in full.
 
 
 
 On June
1, 2005, the Company entered into an employment and compensation agreement with
Steven Strasser, the Company’s Chief Executive Officer.  The agreement
is for a term of five years, with a base salary for the first year of the
agreement of $275,000 with annual increases of at least 5% of the current year’s
base salary and bonuses at the discretion of the compensation committee of the
board of directors.   During the first year of the Agreement, an
amount equal to $215,000 of the base salary shall be paid by grant of stock
options under the Company’s 2000 Stock Option and Restricted Stock Plan to
purchase 1,612,500 shares of the Company’s common stock, vesting in equal
quarterly installments over the year ending June 1, 2006, and the remaining
$60,000 of the base salary is to be paid in cash.  The agreement with
this Chief Executive Officer also provides, among other things, for
reimbursement of certain business expenses and for certain payments to be made
to this Chief Executive Officer  in the event of a change of
control.  This Chief Executive Officer also received 1,818,180
incentive stock options which will vest over a five year period and have an
exercise price of $0.22, and 1,181,820 non-qualified stock options which will
vest over a five year period and have an exercise price of $0.20. The agreement
also provides for certain non-competition and nondisclosure
covenants.
 
 On June
1, 2005, the Company entered into an employment and compensation agreement with
John Lackland, the Company’s Chief Financial Officer.  The agreement
is for a term of five years, with a base salary for the first year of the
agreement of $175,000 with annual increases of at least 5% of the current year’s
base salary and bonuses at the discretion of the compensation committee of the
board of directors.   During the first year of the Agreement, an
amount equal to $55,000 of the base salary shall be paid by grant of stock
options under the Company’s 2000 Stock Option and Restricted Stock Plan to
purchase 412,500 shares of the Company’s common stock, vesting in equal
quarterly installments over the year ending June 1, 2006, and the remaining
$120,000 of the base salary is to be paid in cash.  The agreement with
this Chief Financial Officer also provides, among other things, for
reimbursement of certain business expenses and for certain payments to be made
to this Chief Financial Officer in the event of a change of
control.  This Chief Financial Officer also received 1,733,750
incentive stock options which will vest over a five year period and have an
exercise price of $0.20, and 66,250 non-qualified stock options which vested on
June 1, 2006 and have an exercise price of $0.20. The agreement also provides
for certain non-competition and nondisclosure covenants.
  F-20
  
  POWER
EFFICIENCY CORPORATION
 NOTES TO
FINANCIAL STATEMENTS
 DECEMBER
31, 2008 AND 2007
 
 On June
1, 2005, the Company entered into an employment and compensation agreement with
Nicholas Anderson, the Company’s former Chief Technology Officer.  On
May 15, 2006, the Company terminated Nicholas Anderson, for cause, and cancelled
his employment agreement with the Company.  The Company has not
accrued a loss related to this termination and does not foresee any material
loss in its ability to manufacture current products or develop new
products.
 
 On June
9, 2005, the Company entered into a consulting agreement with an advisor to
serve as the Company’s Senior Technical Advisor.  The term of this
agreement is for 24 months and calls for the advisor to assist the Company in
digitizing the Company’s technology.  For his services, the Company
agreed to issue the advisor 400,000 options, vesting quarterly from the date of
the agreement.  In addition, the Company will reimburse all reasonable
and necessary expenses incurred by the advisor.  In the event that the
Company’s annual sales from digital products reaches $5,000,000, the Company
will pay the advisor a $100,000 one time bonus.  The agreement
contains confidentiality and non-competition provisions.  This
agreement can be terminated in 90 days by either party by written
notices.  On June 6, 2007, the Company renewed the agreement with the
advisor.  In connection with the renewal, the Company granted the
advisor 1,000,000 warrants, which vest upon the approval of certain patents,
created by the advisor, by the US Patent Office, or the buy-out of the Company,
whichever occurs first.
 
 On March
1, 2007, the Company entered into a consulting agreement with a sales and
marketing consultant.  The term of this agreement is for 12 months and
calls for the consultant to assist the Company in its business development,
sales and marketing efforts.  For his services, the Company has agreed
to issue the consultant 100,000 warrants, vesting quarterly from the date of the
agreement.  In addition, the Company will reimburse all reasonable and
necessary expenses incurred by the consultant.  This agreement
contains confidentiality and non-competition provisions.  Each party
has the right to cancel this agreement with no less than 10 days notice in
writing.
 
 On March
21, 2007, the Company entered into a consulting agreement with a product
manager.  This agreement was terminated on April 11, 2007 and all
obligations have been satisfied in full, and all stock options issued to the
product manager were cancelled.
 
 On
January 7, 2008, the Company entered into a consulting agreement with a European
sales and marketing consultant.  This agreement was terminated on
September 1, 2008 and all obligations have been satisfied in full and all stock
options issued to the consultant were cancelled.
 
 On
January 23, 2008, the Company signed an efficiency aggregation contract with San
Diego Gas & Electric Company (“SDG&E”).  Under the terms of
this contract, SDG&E will pay the Company $0.14 per kWh of energy saved in
the first year of operation of the MEC, for new installations of the MEC in
SDG&E’s service area.   Payment to the Company is subject to
certain inspections, approvals and time restrictions.  The term of
this contract is for 5 years, and either party may terminate this contract upon
written notice.
  F-21
  
  POWER
EFFICIENCY CORPORATION
 NOTES TO
FINANCIAL STATEMENTS
 DECEMBER
31, 2008 AND 2007
 
 On
October 8, 2008 and October 27, 2008, the Company entered into two business
advisory agreements with two advisors.  The agreements call for each
of the advisors to perform introductory and business development services for
the Company.  For their services, the Company has agreed to grant each
advisor 250,000 common stock warrants, 50,000 of which will vest upon the
commencement of  testing of the Company’s technology as a direct
result of the advisors efforts, and the remaining 200,000 will vest upon the
purchase of the Company’s products or an agreement to license the Company’s
technology as a direct result of the advisors’ efforts.  The term of
each agreement is for one year or until the engagement is completed, whichever
occurs first, and can be cancelled by either party upon 60 days written
notice.
 
 
 
 On
October 29, 2007, the Company issued and sold 113,500 units (the “Units”), each
Unit consisting of one share of the Company’s Series B Preferred Stock, par
value $.001 per share (“Series B Preferred Stock”), and a warrant to purchase 50
shares of the Company’s common stock, resulting in the sale and issuance of an
aggregate of 113,500 shares of Series B Preferred Stock and warrants to
purchase, initially, up to 5,675,000 shares of the Company’s common stock (the
“Warrants”), in a private offering (the “Preferred Offering”) for $5,675,000 in
cash and cancellation of indebtedness (See Note 16).  Many of the
purchasers of Units were either officers, directors or pre-existing stockholders
or noteholders of the Company (See Note 14).
 
 In
connection with the Preferred Offering, the Company has agreed to use its
reasonable best efforts to file a registration statement (the “Registration
Statement”) to register the common stock issuable upon conversion of the Series
B Preferred Stock issued, as well as the common stock issuable upon exercise of
the Warrants, not later than 60 days from the termination date of the Offering
(the “Termination Date”), and must use its reasonable best efforts to have the
Registration Statement declared effective not later than 120 days from the
Termination Date.
 
 Each
share of Series B Preferred Stock is initially convertible into 100 shares of
the Company’s common stock, subject to adjustment under certain
circumstances.  The Series B Preferred Stock is convertible at the
option of the holder at any time.  The Series B Preferred Stock is
also subject to mandatory conversion in the event the average closing price of
the Company’s common stock for any ten day period equals or exceeds $1.00 per
share, such conversion to be effective on the trading day immediately following
such ten day period.  The Series B Preferred Stock has an 8% dividend,
payable annually in cash or stock, at the discretion of the Company’s board of
directors.  As such, none is accrued in these financial
statements.
 
 The
Preferred Offering was conducted pursuant to an exemption from the registration
requirements of the Securities Act of 1933, as amended, pursuant to Regulation
D, Section 4(2) and Rule 506 thereunder.  No placement agent or
underwriter was used in connection with the Offering and there is no commission,
finder’s fee or other compensation due or owing to any party.
 
 On
November 8, 2007, the Company sold 5,000 units, resulting in the sale and
issuance of 5,000 shares of Series B Preferred Stock and warrants to purchase up
to 250,000 shares of the Company’s common stock, for $250,000 under the
Preferred Offering.
  F-22
  
  POWER
EFFICIENCY CORPORATION
 NOTES TO
FINANCIAL STATEMENTS
 DECEMBER
31, 2008 AND 2007
 
 On
November 15, 2007, the Company sold 1,400 units, resulting in the sale and
issuance of 1,400 shares of Series B Preferred Stock and warrants to purchase up
to 70,000 shares of the Company’s common stock, for $70,000 under the Preferred
Offering.
 
 On
December 20, 2007, the Company sold 9,500 units, resulting in the sale and
issuance of 9,500 shares of Series B Preferred Stock and warrants to purchase up
to 475,000 shares of the Company’s common stock, for $475,000 under the
Preferred Offering.
 
 On
December 28, 2007, the Company sold 5,000 units, resulting in the sale and
issuance of 5,000 shares of Series B Preferred Stock and warrants to purchase up
to 250,000 shares of the Company’s common stock, for $250,000 under the
Preferred Offering.
 
 On
January 21, 2008, the Company issued and sold 5,600 units, resulting in the sale
and issuance of an aggregate of 5,600 shares of Series B Preferred Stock and
warrants to purchase up to 280,000 shares of the Company’s common stock for
$280,000 in cash under the Preferred Offering.
 
 On
November 1, 2008, the Company declared a stock dividend of 2,729,000 shares of
common stock, valued at $545,800,  payable to all of the holders of
it’s Series B Preferred Stock.  The dividend was paid on November 24,
2008.
 
 
 
 On
various dates from November 30, 2006 through March 31, 2007, the Company issued
and sold an aggregate of 14,116,680 shares of its common stock and 7,058,340
warrants to purchase its common stock (the “Equity Warrants”), in a private
offering (the “Offering”) for $4,235,000 in cash, cancellation of indebtedness
and in lieu of compensation owed to certain employees, officers and directors of
the Company.  The per share purchase price of the common stock was
$0.30.  The Equity Warrants have a per share exercise price of $0.40,
are exercisable immediately and expire on various dates from November 29, 2011
through March 30, 2012.
 
 The
$4,235,000 investment included $250,000 from Steven Strasser, the Company’s
Chief Executive Officer, $30,000 from John (BJ) Lackland, the Company’s Chief
Financial Officer, $30,000 from Robert Murray, the Company’s former Chief
Operating Officer, and $300,000 from George Boyadjieff, a Director of the
Company.
 
 The
Offering was conducted pursuant to an exemption from the registration
requirements of the Securities Act of 1933, as amended, pursuant to Regulation
D, Section 4(2) and Rule 506 thereunder.  No placement agent or
underwriter is entitled to compensation in connection with either the Offering
or the sale of the Notes and there is no commission, finder’s fee or other
compensation due or owing to any party.
  F-23
  
  POWER
EFFICIENCY CORPORATION
 NOTES TO
FINANCIAL STATEMENTS
 DECEMBER
31, 2008 AND 2007
 
 
 
 SFAS No.
107 “Disclosure About the Fair Value of Financial Instruments”, requires
disclosure of fair value information about financial instruments.  The
carrying amounts reported in the balance sheet for cash, accounts receivable,
accounts payable and accrued expenses approximate fair value because of their
short term nature.
 
 
 
 The
Company maintains a 401(k) retirement plan (the 401(k) Plan).  The
401(k) Plan is voluntary, and available to all employees who have been with the
Company for at least six months.  The Company may make discretionary
contributions.  The Company did not make any contributions in 2008 or
2007.
 
 
 
 On March
11, 2009, the Company elected a new director to its Board of
Directors.  For his services on the Board of Directors, the new
director received 100,000 options to purchase the Company’s common stock at an
exercise price of $0.11 per share.
 
 On March
11, 2009, the Company entered into an consulting agreement with the newly
elected director mentioned above.  The agreement is for a term of 12
months.  The consultant will receive $3,000 per month and 360,000
warrants to purchase the Company’s common stock, at an exercise price of $0.11
per share, under the terms of this agreement.  The warrants vest
equally over the term of the agreement.
  F-24




Item
      9.
              Changes
      in and Disagreements with Accountants on Accounting and Financial
      Disclosure.





None





Item
      9A.
              Controls
      and Procedures.




(a)
Disclosure Controls and Procedures.




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




(b)
Changes in Internal Control Over Financial Reporting.





During
the quarter ended December 31, 2008, there were no significant changes in the
Company’s internal controls or in other factors that could significantly affect
these controls subsequent to the date of their evaluation, nor were there any
significant deficiencies or material weaknesses in the Company’s internal
controls. Accordingly, no corrective actions were required or
undertaken.





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




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




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




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




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









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




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




Our
management, under the supervision and with the participation of our CEO and CFO,
has evaluated the effectiveness of our internal controls over financial
reporting as defined in Exchange Act Rules 13a-15(f) and15d-15(f) as of the end
of the period covered by this Report based upon the framework in Internal
Control—Integrated Framework issued by the Committee of Sponsoring Organizations
of the Treadway Commission (COSO).  Based on such evaluation, our
management has made an assessment that our internal control over financial
reporting is effective as of December 31, 2008.




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





Item
      9B.
              Other
      Information.





None.





PART III




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




INFORMATION
ABOUT THE COMPANY'S EXECUTIVE OFFICERS AND DIRECTORS





The
following table lists the current executive officers and directors and, in the
case of directors, their length of service on the board. Each director is
elected to hold office for a term expiring at the first annual meeting of
stockholders held following such director's election and until his successor has
been elected and qualified, or until his prior resignation or removal. All of
the Company's current directors were either appointed by the plurality of votes
cast by the holders of our common stock present, or represented, at the 2008
Annual Meeting of the Stockholders in July 2008, or elected by the
board.





Name
              
              Age
              
              Director
                Since
              
              PositionSteven
      Z. Strasser
              
              60
              
              2002
              
              Chairman,
      Chief Executive OfficerJohn
      (BJ) Lackland
              
              38
              
              2002
              
              Director,
      Chief Financial Officer, and SecretaryRaymond
      J. Skiptunis
              
              66
              
              2002
              
              Director,
      Chairman of the Audit CommitteeGeorge
      Boyadjieff
              
              70
              
              2006
              
              Director,
      Senior Technical AdvisorDouglas
      M. Dunn
              
              66
              
              2006
              
              DirectorRichard
      Morgan
              
              63
              
              2007
              
              DirectorGary
      Rado
              
              69
              
              2005
              
              DirectorGregory
      Curhan
              
              47
              
              2009
              
              Director,
      Consultant




Director
Independence




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




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









From 1984
through 2000, Mr. Strasser was the founder and CEO of Northwest Power
Enterprises.  Over its seventeen-year history, Northwest Power
Enterprises and its predecessor companies were involved in multiple aspects of
the energy development business.  Mr. Strasser received law degrees
from McGill University, Montreal, Canada and the University of Washington,
Seattle, Washington.




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




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




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




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




Mr.
Boyadjieff holds over 50 US patents related to oil and gas well drilling
equipment.  Mr. Boyadjieff holds BS and MS degrees in Mechanical
Engineering from the University of California at Berkeley and is a graduate of
the University of California at Irvine executive program.




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




Richard Morgan – Mr. Morgan is
currently of counsel to the law firm of Lionel, Sawyer & Collins, and is the
Dean Emeritus and a former Professor of Law at the William S. Boyd School of Law
at the University of Nevada, Las Vegas, a position he held from September 1,
1997 through June 30, 2007.  Mr. Morgan is an experienced legal
educator, having served as dean at both the Arizona State University College of
Law and the University of Wyoming College of Law.  Mr. Morgan earned
his B.A. in Political Science at the University of California, Berkeley in
1967.  In 1971 he received his J.D. from UCLA, where he was an editor
of the UCLA Law Review.  He practiced with the Los Angeles law firm of
Nossaman, Krueger & Marsh in the corporate/securities areas from 1971 to
1980.  He was a professor at the Arizona State University College of
Law from 1980 to 1987 and served as associate dean from 1983 to
1987.  He was dean at the University of Wyoming College of Law from
1987 to 1990 and returned to the Arizona State University College of Law in
1990, where he served as dean and professor of law until 1997.









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




Gregory Curhan– Mr. Curhan
most recently served as Executive Vice President of Merriman Curhan Ford Group,
Inc.  He also was President, Chairman of the Commitment Committee and Head
of the Cleantech investment banking team of Merriman Curhan Ford & Co., the
investment banking subsidiary of Merriman Curhan Ford Group, Inc., where he
worked from January 2002 to January 2009. Previously, he served as Chief
Financial Officer of WorldRes.com from May 1999 through June 2001. Prior to
joining WorldRes.com, Mr. Curhan served as Director of Global Technology
Research Marketing and Managing Director, specialty Technology Institutional
Equity Sales at Merrill Lynch & Co. from May 1998 to May 1999. From 1993
through 1998, Mr. Curhan served as Partner, Director of Equities, and as
Managing Director, Research Analyst at Volpe Brown Whelan.  Mr. Curhan was
a founder and principal of the investment advisor Curhan, Merriman Capital
Management from July 1988 through December 1992. From 1985 to 1988, Mr. Curhan
was Vice President, Institutional Sales at Montgomery Securities, and was a
Financial Analyst at Merrill Lynch from 1983 to 1985. Mr. Curhan earned his
Bachelor of Arts degree, summa cum laude, from Dartmouth College.




Board
of Directors and Committees of the Board





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




Our board
of directors met five times in 2008.  None of the current directors
missed any meetings during 2008 and the meetings held by committees of the board
of directors on which they serve.




We do not
have a policy that requires directors to attend our annual meetings of
stockholders.  All but one of the directors attended the 2008 Meeting
of Stockholders on July 11, 2008.




Audit
Committee




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




•           selects
the independent auditors, considering independence and
effectiveness;




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




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




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




•           administers
the whistleblower policy.




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









Compensation
Committee




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




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




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




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




Committee
Interlocks and Insider Participation





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




SECTION
16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE





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





CODE
OF CONDUCT





The
Company adopted a code of conduct on August 8, 2008.  In early 2006,
the Company developed and implemented an official Employee Manual that requires
ethical behavior from its employees, and defines the consequences of unethical
behavior by its employees.





Item
      11.
              Executive
      Compensation.




Summary
Compensation Table




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









SUMMARY
      COMPENSATION TABLEName
      and principal
                                position
                              
                              Year
                              
                              
                              Salary
      ($)
                              
                              
                              Bonus
                                ($)
                              
                              
                              Stock
                                Awards
                                ($)
                              
                              
                              Option
                                Awards
      ($)
                              
                              
                              Non-Equity
                                Incentive
      Plan
                                Compensation
      ($)
                              
                              
                              Nonqualified
                                Deferred
                                Compensation
                                Earnings
      ($)
                              
                              
                              All
      Other
                                Compensation
                                ($)
                              
                              
                              Total
      ($)Steven Z.
      Strasser(1)
                              
                              2008
                              
                              
                              $
                              311,208
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              $
                              311,208Chairman
      and Chief
                              
                              2007
                              
                              
                              $
                              297,172
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              $
                              297,172Executive
      OfficerJohn (BJ) Lackland
      (2)
                              
                              2008
                              
                              
                              $
                              198,042
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              $
                              198,042Director
      and Chief
                              
                              2007
                              
                              
                              $
                              189,109
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              $
                              189,109Financial
      Officer
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -





Narrative
Disclosure to Summary Compensation Table




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




The
following table sets forth the material financial terms of the agreements for
each of our executives as of December 31, 2008:




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


_________________




(1)
            To
      be increased annually by at least 5% of current year’s base
      salary.




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




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




(4)
            At
      the discretion of the disinterested members of the
  Board.




(5)
            Vesting
      evenly and quarterly over five
years.









Outstanding
equity awards




OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-ENDOPTION AWARDS
                                        
                                        STOCK AWARDSName
                                        
                                        Number of
                                          Securities
                                          Underlying
                                          Unexercised
                                          Options (#)
                                          Exercisable
                                        
                                        
                                        Number of
                                          Securities
                                          Underlying
                                          Unexercised
                                          Options
                                          (#)
                                          Unexercisable
                                        
                                        
                                        Equity Incentive
                                          Plan Awards:
                                          Number of
                                          Securities
                                          Underlying
                                          Unexercised
                                          Unearned
                                          Options
                                          (#)
                                        
                                        
                                        Option
                                          Exercise
                                          Price
                                          ($)
                                        
                                        Option
                                          Expiration
                                          Date
                                        
                                        Number of
                                          Shares or
                                          Units of
                                          StockThat
                                          HaveNot
                                          Vested
                                          (#)
                                        
                                        
                                        Market
                                          Value of
                                          Shares or
                                          Units of
                                          Stock
                                          ThatHave
                                          Not
                                          Vested
                                          ($)
                                        
                                        
                                        Equity
                                          Incentive Plan
                                          Awards:
                                          Number of
                                          Unearned
                                          Shares,Units
                                          or Other
                                          Rights That
                                          HaveNot
                                          Vested
                                          (#)
                                        
                                        
                                        Equity Incentive
                                          Plan Awards:
                                          Market or
                                          Payout Value of
                                          Unearned
                                          Shares, Units or
                                          Other Rights
                                          That Have Not
                                          Vested
                                          (#)Steven
      Strasser
                                        
                                        
                                        2,045,460
                                        
                                        
                                        
                                        527,269
                                        
                                        
                                        
                                        -
                                        
                                        
                                        $
                                        0.22
                                        
                                        5/31/2010
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -1,667,060
                                        
                                        
                                        
                                        327,731
                                        
                                        
                                        
                                        -
                                        
                                        
                                        $
                                        0.20
                                        
                                        5/31/2015
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -600,000
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        $
                                        0.65
                                        
                                        11/28/2015
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -BJ
      Lackland
                                        
                                        
                                        1,672,500
                                        
                                        
                                        
                                        540,000
                                        
                                        
                                        
                                        -
                                        
                                        
                                        $
                                        0.20
                                        
                                        5/31/2015
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -375,000
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        $
                                        0.65
                                        
                                        11/28/2015
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -





Stock
Option Plan Narrative Disclosure




As of
December 31, 2008, we had an aggregate of 13,579,896 shares of Common Stock
available for issuance under our stock plans. The following is a description of
our plans.




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




The 2000
Plan, was adopted by our board of directors and our stockholders in
2000.  On June 8, 2007, the 2000 Plan was amended and restated. As of
December 31, 2007, no restricted shares of Common Stock have been issued, and
100,000 of the outstanding options to purchase shares of our Common Stock have
been exercised pursuant to the 2000 Plan.  There are 13,579,896
options outstanding under the 2000 Plan as of December 31, 2008.




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




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




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




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




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









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




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




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




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




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




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




Compensation
of Directors Summary Table





DIRECTOR COMPENSATIONName
                            (a)
                          
                          Fees Earned
                            or Paid in
                            Cash
                            ($)
                          
                          
                          Stock
                            Awards ($)
                          
                          
                          Option Awards
                            ($)
                          
                          
                          Non-Equity Incentive
                            Plan Compensation
                            ($)
                          
                          
                          Non-Qualified
                            Deferred
                            Compensation
                            Earnings
                            ($)
                          
                          
                          All
                            Other
                            Compensation ($)
                          
                          
                          Total ($)Raymond
      J. Skiptunis
                          
                          $
                          12,000
                          
                          
                          
                          -
                          
                          
                          $
                          38,805
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          $
                          50,805George
      Boyadjieff
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          $
                          25,870
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          $
                          25,870Douglas
      M. Dunn
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          $
                          32,338
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          $
                          32,338Richard
      Morgan
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          $
                          25,870
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          $
                          25,870Gary
      Rado
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          $
                          32,338
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          $
                          32,338Greg
      Curahn
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -




Narrative
to Director Compensation




In
January 2008, non-employee directors received options to purchase 100,000 shares
of common stock per year for their board service, pro-rated for the quarters in
the year they served.  Employee directors do not receive compensation
for serving on the board of directors.  The Chairman of the Audit
Committee received an additional 50,000 options per year, pro-rated for the
quarters in the year he served, and $1,000 per month.  The remaining
members of the audit committee receive an additional 25,000, prorated for the
quarters in the year they served.  Depending on the anticipated
workload and organization, the board of directors may elect to increase the
compensation for committee members and/or all non-executive board
members.




Limitation
of Liability and Indemnification of Directors and Officers




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




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




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




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




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





STOCK
OWNERSHIP





The
following table sets forth information as to our shares of common stock
beneficially owned as of March 30, 2009by (i) each person known
by us to be the beneficial owner of more than five percent of our outstanding
common stock, (ii) each of our directors, (iii) each of our executive officers
named in the Summary Compensation Table and (iv) all of our directors and
executive officers as a group.




Name of
                                
                                
                                
                                
                                Percent ofTitle of Class
                                
                                Beneficial Owner(1)
                                
                                Shares Owned
                                
                                
                                Shares Owned(10)Common
      Stock
                                
                                Steven
      Strasser, CEO, Chairman of the Board
                                
                                
                                20,381,894
                                (2)
                                
                                
                                37.33
                                %Common
      Stock
                                
                                John
      (BJ) Lackland, CFO, Director
                                
                                
                                2,275,500
                                (3)
                                
                                
                                5.02
                                %Common
      Stock
                                
                                Raymond
      J. Skiptunis, Director
                                
                                
                                546,039
                                (4)
                                
                                
                                1.25
                                %Common
      Stock
                                
                                Gary
      Rado, Director
                                
                                
                                690,000
                                (5)
                                
                                
                                1.57
                                %Common
      Stock
                                
                                George
      Boyadjieff, Director
                                
                                
                                2,905,000
                                (6)
                                
                                
                                6.44
                                %Common
      Stock
                                
                                Douglas
      Dunn, Director
                                
                                
                                470,000
                                (7)
                                
                                
                                1.08
                                %Common
      Stock
                                
                                Richard
      Morgan, Director
                                
                                
                                200,000
                                (8)
                                
                                Less
      than 1%Common
      Stock
                                
                                Summit
      Energy Ventures, LLC
                                
                                
                                8,803,901
                                (2)
                                
                                
                                19.45
                                %Common
      Stock
                                
                                Sarkowski
      Family L.P.
                                
                                
                                7,356,981
                                
                                
                                
                                15.63
                                %Common
      Stock
                                
                                Ron
      Boyer
                                
                                
                                9,535,769
                                
                                
                                
                                18.90
                                %Common
      Stock
                                
                                Michael
      J. Goldfarb Enterprises
                                
                                
                                2,440,001
                                
                                
                                
                                5.46
                                %Common
      Stock
                                
                                Byron
      LeBow Family Trust
                                
                                
                                2,850,908
                                
                                
                                
                                6.34
                                %Common
      Stock
                                
                                Marathon
      Resource Partners I L.P.
                                
                                
                                4,184,107
                                
                                
                                
                                9.18
                                %Common
      Stock
                                
                                Commerce
      Gas and Electric Corp.
                                
                                
                                4,544,376
                                (9)
                                
                                
                                10.22
                                %Common
      Stock
                                
                                All
      Executive Officers and Directors as a Group (7 persons)
                                
                                
                                27,468,433
                                
                                
                                
                                45.52
                                %


________________________________




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




(2)
            Includes
      8,803,901 common shares and common shares subject to options and warrants
      exercisable within 60 days of the date hereof held by Summit, in which
      Steven Strasser is one of two members, 1,760,000 common shares subject to
      the conversion of 17,600 shares of Series B Preferred Stock, and 9,586,600
      common shares subject to options and warrants which are presently
      exercisable or will become exercisable within 60 days of the date
      hereof.  Mr. Strasser was also granted an additional
      900,000 common shares subject to options and warrants which will become
      exercisable after 60 days of the date hereof.  Mr. Strasser’s
      options and warrants expire on various dates from May, 2010 through
      November, 2015.









(3)
            Includes
      2,587,500 common shares and common shares subject to options and warrants
      presently exercisable or will become exercisable within 60 days of the
      date hereof.  Mr. Lackland was also granted an additional
      490,000 common shares subject to options which will become exercisable
      after 60 days of the date hereof.  Mr. Lackland’s options and
      warrants expire on various dates from May, 2010 through November,
      2015.




(4)
            Includes
      523,500 common shares subject to options and warrants presently
      exercisable or will become exercisable within 60 days of the date
      hereof.  Mr. Skiptunis’ options and warrants expire on various
      dates from October, 2014 through January,
2017.




(5)
            Includes
      200,000 common shares subject to the conversion of 2,000 shares of Series
      B Preferred Stock, and 450,000 common shares subject to options presently
      exercisable or will become exercisable within 60 days of the date
      hereof.  Mr. Rado’s options expire on various dates from
      September, 2015 through January,
2017.




(6)
            Includes
      400,000 common shares subject to the conversion of 4,000 shares of Series
      B Preferred Stock, and 1,425,000 common shares subject to options and
      warrants presently exercisable or will become exercisable within 60 days
      of the date hereof.  Mr. Boyadjieff’s options and warrants
      expire on various dates from April, 2010 through January,
      2017.




(7)
            Includes
      100,000 common shares subject to the conversion of 1,000 shares of Series
      B Preferred Stock, and 350,000 common shares subject to options presently
      exercisable or which will become exercisable within 60 days of the date
      hereof.  Dr. Dunn’s options expire on various dates from May
      2016 through January, 2017.




(8)
            Includes
      200,000 common shares subject to options presently exercisable or which
      will become exercisable within 60 days of the date hereof.  Mr.
      Morgan’s options expire January,
2017.




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




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





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




Relationship
with Steven Strasser and Summit




Mr.
Strasser, our CEO, owns 99.5% of Summit.  As of December 31, 2008,
Summit owned 6,803,901 shares of our common stock and 2,000,000 warrants to
purchase common stock.  In addition, Mr. Strasser owns beneficially
20,381,894 shares of common stock (including those shares beneficially owned by
Summit) issued or issuable on the exercise of options and warrants, and the
conversion of Series B Preferred Stock,  exercisable within 60 days of
December 31, 2008.




On
January 21, 2008, Mr. Strasser purchased 1,600 units, resulting in the issuance
of 1,600 shares of Series B Preferred Stock and 80,000 warrants to purchase the
Company’s common stock, for $80,000 in cash.




Relationship
with John (BJ) Lackland




Mr.
Lackland, our CFO, owns 0.5% of Summit.  Mr. Lackland owns
beneficially 2,275,500 shares of common stock, issued or issuable on the
exercise of options and warrants exercisable within 60 days of December 31,
2008.




Item
      14.
              Principal
      Accountant Fees and Services.




(1) Audit
Fees.





The
aggregate fees billed in fiscal years 2008 and 2007 for professional services
rendered by the principal registered accountant for the audit of the Company's
annual financial statements and review of financial statements included in the
Company’s Form 10-K or services that are normally provided by the accountant in
connection with statutory and regulatory filings or engagements for those fiscal
years were $51,125 and $52,390, respectively.





(2)
Audit-Related Fees.





The
aggregate fees billed in fiscal years 2008 and 2007 for assurance and related
services by the principal accountant that are reasonably related to the
performance of the audit or review of the Company's financial statements and are
not reported under Item 14(1) above were $12,000 and $12,800,
respectively.  The audit-related fees were for professional services
rendered in conjunction with SEC Registration Statement filings and amendments
thereto.









(3) Tax
Fees.





The
aggregate fees billed in fiscal years 2008 and 2007 for professional services
rendered by the principal accountant for tax compliance, tax advice, and tax
planning were $3,250 and $3,250, respectively.





(4) All
Other Fees





The
aggregate fees billed in fiscal years 2008 and 2007 for products and services
provided by the principal accountant, other than the services reported in Items
14(1) through 14(3) above were $5,000 and $0, respectively.





(5) Audit
Committee Approval





During
fiscal year 2008 and 2007, the Audit Committee pre-approved all engagements and
fees for services the principal registered accountant provided since it was
formally formed.





PART IV





Item
      15.
              Exhibits.




(a)
            Exhibits





EXHIBIT
INDEX




Description
of Document





Exhibit
                  Number
                
                Description3.1
                
                Certificate
      of Incorporation of the Company, incorporated by reference to Exhibit 3.1
      to the Company's Annual Report on Form 10-SB filed on October 20,
      2000.3.2
                
                Amendment
      to the Certificate of Incorporation of the Company dated June 5, 2002,
      incorporated by reference to Exhibit 3.1 to Company's Current Report on
      Form 8-K filed on June 18, 2002.3.3
                
                Amendment
      to the Certificate of Incorporation of the Company dated July 6, 2005,
      incorporated by reference to Exhibit 3.3 to the Company’s Form SB-2
      Registration Statement filed October 25, 2005.3.4
                
                Amendment
      to the Certificate of Incorporation of the Company dated October 13, 2005,
      incorporated by reference to Exhibit 3.4 to the Company’s Form SB-2
      Registration Statement filed October 25, 2005.3.5
                
                Amended
      and Restated By-laws of the Company dated March 23, 2004, incorporated by
      reference to Exhibit 3.1 to Company’s Quarterly Report on Form 10-QSB
      filed on May 14, 2004.3.6
                
                Certificate
      of Amendment of Certificate of Designation of Series A Convertible
      Preferred Stock of Power Efficiency Corporation, incorporated by reference
      to Exhibit 4.2 to Company's Current Report on Form 8-K filed on May 25,
      2003.3.7
                
                Certificate
      of Certificate Eliminating Reference To A Series Of Shares Of Stock From
      the Certificate of Incorporation of the Company, dated October 22, 2007,
      incorporated by reference to Exhibit 3.7 to the Company’s Amendment No. 2
      to Form S-1 filed on August 29, 2008.3.8
                
                Certificate
      of Designations of Preferences, Rights and Limitations of Series B
      Convertible Preferred Stock of Registrant dated October 23, 2007,
      incorporated by reference to Exhibit 3.8 to the Company’s Amendment No. 2
      to Form S-1 filed on August 29,
2008.







4.1
              
              Form
      of Placement Agent Warrant issued pursuant to Exhibit 10.45, incorporated
      by reference to Exhibit 3.2 to Company’s Current Report on Form 8-K Filed
      on July 19, 20054.2
              
              Form
      of Investor Warrant, incorporated by reference to Exhibit 3.1 to Company’s
      Current Report on Form 8-K filed on July 19, 20054.3
              
              Specimen
      common stock certificate of the Company, incorporated by reference to
      Exhibit 4.5 to the Company’s Form SB-2/A Registration Statement filed
      December 8, 2005.4.4
              
              Agreement
      dated April 22, 2005, between the Company and Summit Energy Ventures, LLC,
      for the issuance of preferred stock and warrants, incorporated by
      reference to Exhibit 4.6 to the Company’s Form SB-2 Registration Statement
      filed October 25, 2005.4.5
              
              Agreement
      dated April 22, 2005, between the Company and Commerce Energy Group, Inc.,
      for the issuance of preferred stock and warrants, incorporated by
      reference to Exhibit 4.7 to the Company’s Form SB-2 Registration Statement
      filed October 25, 2005.4.6
              
              Form
      of Equity Warrant, incorporated by reference to Exhibit 4.1 to the
      Company’s Current Report on Form 8-K, filed January 24,
    20074.7
              
              Form
      of Equity Warrant, incorporated by reference to Exhibit 4.1 to the
      Company’s Current Report on Form 8-K, filed March 8,
  20074.8
              
              Form
      of Warrant, issued to certain investors in the Company’s private placement
      of units on January 21, 2008, incorporated by reference to Exhibit 4.8 to
      the Company’s Amendment No. 2 to Form S-1 filed on August 29,
      2008.10.1
              
              United
      States Patent #5,821,726, incorporated by reference to Exhibit 10(g) to
      Company's Annual Report on Form 10-SB filed on October 20,
      2000.10.2
              
              1994
      Stock Option Plan, incorporated by reference to Exhibit 10(i) to Company's
      Annual Report on Form 10-SB filed on October 20, 2000.10.3
              
              Patent
      License Agreement (DN-858) with NASA, incorporated by reference to Exhibit
      10.10 to Company's Amended Annual Report on Form 10-SB/A filed on October
      26 2001.10.4
              
              Patent
      License Agreement (DE-256) with NASA incorporated by reference to Exhibit
      10.11 to Company's Amended Annual Report on Form 10-SB/A filed on October
      26 2001.10.5
              
              Settlement
      and Release Agreement with NASA incorporated by reference to Exhibit 10.12
      to Company's Amended Annual Report on Form 10-SB/A filed on October 26
      2001.10.6
              
              Modification
      No. 1 to Patent License Agreement (DE-256) with NASA, incorporated by
      reference to Exhibit 10.13 to Company's Amended Annual Report on Form
      10-SB/A filed on October 26 2001.10.7
              
              Product
      Warranty, incorporated by reference to Exhibit 10.16 to Company's Amended
      Annual Report on Form 10-SB/A filed on October 26 2001.10.8
              
              Test
      Report from Medsker Electric, Inc., incorporated by reference to Exhibit
      10.17 to Company's Amended Annual Report on Form 10-SB/A filed on October
      26 2001.10.9
              
              Test
      Report from Oak Ridge National Laboratory, incorporated by reference to
      Exhibit 10.18 to Company's Amended Annual Report on Form 10-SB/A filed on
      October 26 2001.10.10
              
              Test
      Report from Oregon State University - The Motor Systems Resource Facility,
      incorporated by reference to Exhibit 10.19 to Company's Amended Annual
      Report on Form 10-SB/A filed on October 26
2001.









10.11
                  
                  Test
      Report from Otis Elevator Co., incorporated by reference to Exhibit 10.20
      to Company's Amended Annual Report on Form 10-SB/A filed on October 26
      2001.10.12
                  
                  Certificate
      of Amendment of Warrant, incorporated by reference to Exhibit 10.4 to
      Company's Current Report on Form 8-K filed May 25,
2003.10.13
                  
                  Settlement
      Agreement and Mutual General Release with Stephen L. Shulman and Summit
      Energy Ventures, LLC dated October 3, 2003, incorporated by reference to
      Exhibit 10.5 to Company's Quarterly Report on Form 10-QSB filed November
      14, 2003.10.14
                  
                  Amendment
      to the Amended and Restated Stockholders' Agreement among Anthony Caputo,
      Nicholas Anderson, Philip Elkus, Stephen Shulamn, Performance Control,
      LLC, Summit Energy Ventures, LLC and Power Efficiency Corporation dated
      September 22, 2003, incorporated by reference to Exhibit 10.7 to Company's
      Quarterly Report on Form 10-QSB filed November 14,
2003.10.15
                  
                  Business
      Property Lease with Arens Investment Company dated November 1, 2003,
      incorporated by reference to Exhibit 10.36 to Company's Annual Report on
      Form 10-KSB filed March 10, 2004.10.16
                  
                  Letter
      agreement with Pali Capital, Inc. dated February 25, 2004, incorporated by
      reference to Exhibit 10.40 to Company's Annual Report on Form 10-KSB filed
      March 10, 2004.10.17
                  
                  Amended
      and Restated 2000 Stock Option and Restricted Stock Plan dated February
      23, 2004, incorporated by reference to Exhibit 10.41 to Company's Annual
      Report on Form 10-KSB filed March 10, 2004.10.18
                  
                  Amended
      and Restated 1994 Stock Option Plan, incorporated by reference to Exhibit
      10.42 to Company's Annual Report on Form 10-KSB filed March 10,
      2004.10.19
                  
                  Single
      Phase Licensing Agreement with Commerce Energy Group, incorporated by
      reference to Exhibit 10.1 to Company's Quarterly Report on Form 10-QSB
      filed November 15, 2004.10.20
                  
                  Business
      Property Lease Amendment involving Glenborough LLC and Northwest Power
      Management, Inc. dated February 7, 2005, incorporated by reference to
      Exhibit 10.48 to the Company's Annual Report on Form 10-KSB filed on March
      31, 2005.10.21
                  
                  Settlement
      and Consulting Agreement with Keith Collin dated September 27, 2004,
      incorporated by reference to Exhibit 10.49 to the Company's Annual Report
      on Form 10-KSB filed on March 31, 2005.10.22
                  
                  Placement
      Agency Agreement dated as of June 1, 2005, between the Company and Joseph
      Stevens & Co., Inc., incorporated by reference to Exhibit 10.51 to the
      Company’s Form SB-2 Registration Statement filed October 25,
      2005.10.24
                  
                  Consulting
      Agreement with George Boyadjieff, dated June 9, 2005, incorporated by
      reference to Exhibit 10.54 to the Company’s Form 10-KSB filed on March 31,
      200610.25
                  
                  Consulting
      Agreement with Steven Blum dated February 21, 2006, incorporated by
      reference to Exhibit 10.55 to the Company’s Form 10-KSB filed on March 31,
      200610.26
                  
                  Consulting
      Agreement with CEO Cast, Inc, dated January 2, 2006, incorporated by
      reference to Exhibit 10.56 to the Company’s Form 10-KSB filed on March 31,
      200610.27
                  
                  Letter
      Agreement with USBX Advisory Services, LLC, dated January 6, 2006,
      incorporated by reference to Exhibit 10.57 to the Company’s Form 10-KSB
      filed on March 31, 200610.28
                  
                  Employment
      Agreement with Steven Strasser dated June 1, 2005, incorporated by
      reference to Exhibit 8.1 to the Company’s Current Report of Form 8-K filed
      July 13, 2005.









10.29
              
              Employment
      Agreement with John Lackland dated June 1, 2005, incorporated by reference
      to Exhibit 8.2 to the Company’s Current Report on Form 8-K filed on July
      13, 2005.10.30
              
              Interim
      Financing Agreement with EMTUCK, LLC dated April 18, 2006, incorporated by
      reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K
      filed on April 24, 2006.10.31
              
              Promissory
      Note granted to EMTUCK, LLC dated April 19, 2006, incorporated by
      reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K
      filed on April 24, 2006.10.32
              
              Security
      Agreement with EMTUCK, LLC dated April 19, 2006, incorporated by reference
      to Exhibit 10.3 to the Company’s Current Report on Form 8-K filed on April
      24, 2006.10.33
              
              Form
      of EMTUCK Warrant, incorporated by reference to Exhibit 10.4 to the
      Company’s Current Report on Form 8-K filed on April 24,
    2006.10.34
              
              Promissory
      Note granted to EMTUCK, LLC dated May 19, 2006, incorporated by reference
      to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed on May
      26, 2006.10.35
              
              Form
      of Pali Note Extension Consent Letter dated October 23, 2006, incorporated
      by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K
      filed on October 27, 2006.10.36
              
              Form
      of Securities Purchase Agreement, dated November 30, 2006, incorporated by
      reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K
      filed on December 5, 2006.10.37
              
              Form
      of Note, dated November 30, 2006, incorporated by reference to Exhibit 4.1
      to the Company’s Current Report on Form 8-K filed on December 5,
      2006.10.38
              
              Form
      of Debt Warrant, incorporated by reference to Exhibit 4.2 to the Company’s
      Current Report on Form 8-K filed on December 5, 2006.10.39
              
              Form
      of Equity Warrant, incorporated by reference to Exhibit 4.3 to the
      Company’s Current Report on Form 8-K filed on December 5,
      2006.10.40
              
              Form
      of Securities Purchase Agreement, incorporated by reference to Exhibit
      10.1 to the Company’s Current Report on Form 8-K filed on January 24,
      2007.10.41
              
              Consulting
      Agreement amendment with George Boyadjieff, dated June 9, 2007,
      incorporated by reference to the Quarterly Report on Form 10-QSB filed on
      August 13, 2007.10.42
              
              Manufacturing
      Services Agreement, dated September 6, 2007 by and among the Company
      and Sanima-Sci Corporation, incorporated by reference to Exhibit 10.1 to
      the Company’s Current Report on Form 8-K filed on September 13,
      2007.10.43
              
              Consulting
      Agreement amendment with George Boyadjieff, dated June 9, 2007,
      incorporated by reference to Exhibit 10.1 to the Company’s Quarterly
      Report on Form 10-QSB filed on August 13, 2007.10.44
              
              Manufacturing
      Services Agreement, dated September 6, 2007 by and among the Company and
      Sanima-Sci Corporation, incorporated by reference to Exhibit 10.1 to the
      Company’s Current Report on Form 8-K filed on September 12,
      2007.10.45
              
              Securities
      Purchase Agreement, dated as of October 27, 2007 by and between the
      Company and certain Investors, incorporated by reference to Exhibit 10.45
      to the Company’s Amendment No. 2 to Form S-1 filed on August 29,
      2008.









31.1
              
              Certification
      of Steven Strasser pursuant to Section 302 of the Sarbanes-Oxley Act of
      2002; filed herewith31.2
              
              Certification
      of John Lackland pursuant to Section 302 of the Sarbanes-Oxley Act of
      2002; filed herewith32.1
              
              Certification
      of Steven Strasser pursuant to Section 906 of the Sarbanes Oxley Act of
      2002; filed herewith32.2
              
              Certification
      of John Lackland pursuant to Section 906 of the Sarbanes Oxley Act of
      2002; filed herewith









SIGNATURES




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




POWER
      EFFICIENCY CORPORATIONDated: 
      March 30, 2009
              By:
              /s/STEVEN
      STRASSERSteven
      Strasser, President and Chief
                Executive
      Officer and Chairman of the BoardDated: 
      March 30, 2009
              By:
              /s/JOHN
      LACKLANDJohn
      Lackland, Chief Financial Officer and
                Director




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





Dated: 
      March 30, 2009
              By:
              /s/Gary
      RadoGary
      Rado, DirectorDated: 
      March 30, 2009
              By:
              /s/George
      boydjieffGeorge
      Boyadjieff, DirectorDated: 
      March 30, 2009
              By:
              /s/Douglas  DunnDr.
      Douglas Dunn, DirectorDated: 
      March 30, 2009
              By:
              /s/Richard
      MorganRichard
      Morgan, DirectorDated: 
      March 30, 2009
              By:
              /s/Raymond J.
      SkiptunisRaymond
      J. Skiptunis, DirectorDated:  March
      30, 2009
              By:
              /s/Gregory
      CurhanGregory
      Curhan, Director