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SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM
10-QSB



|x | QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ---------------------------------------------------------------------------------

For the quarterly period ended: March 31, 2006

OR



| ̈ | TRANSITION REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | -----------------------------------------------------------------------------------

For the transition period from  to

Commission
File No. 0-31805

POWER EFFICIENCY CORPORATION

(Exact Name of Small Business Issuer 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, Suite 460 Las Vegas, NV 89109         |  | (702) 697-0377                                  
|(Address of Principal Executive Offices)                       |  | (Issuers Telephone Number, Including Area Code)

Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes   x    No ̈

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ̈No  x

The number of
shares outstanding of the Issuers Common Stock, $.001 Par Value, as of April 30, 2006 was 23,739,266.

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



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POWER EFFICIENCY CORPORATION

FORM 10-QSB INDEX



|                                                                                      |  |      
|------------------------------------------------------------------------------------- |  | -----
|PART I - FINANCIAL INFORMATION                                                        |  |      
|                                                                                      | 
|ITEM 1. Financial Statements                                                          |  |      
|                                                                                      | 
|Condensed Balance Sheet as of March 31, 2006                                          |  | 3    
|                                                                                      | 
|Condensed Statements of Operations for the three months ended March 31, 2006 and 2005 |  | 4    
|                                                                                      | 
|Condensed Statements of Cash Flows for the three months ended March 31, 2006 and 2005 |  | 5    
|                                                                                      | 
|Notes to Condensed Financial Statements                                               |  | 6-9  
|                                                                                      | 
|ITEM 2. Managements Discussion and Analysis Or Plan of Operation                     |  | 10-12
|                                                                                      | 
|ITEM 3. Controls and Procedures                                                       |  | 12   
|                                                                                      | 
|Part II - OTHER INFORMATION                                                           |  |      
|                                                                                      | 
|ITEM 1. Legal Proceedings                                                             |  | 13   
|                                                                                      | 
|ITEM 2. Unregistered Sales of Securities and Use of Proceeds                          |  | 13   
|                                                                                      | 
|ITEM 3. Defaults Upon Senior Securities                                               |  | 13   
|                                                                                      | 
|ITEM 4. Submission of Matters to a Vote of Security Holders                           |  | 13   
|                                                                                      | 
|ITEM 5. Other Information                                                             |  | 13   
|                                                                                      | 
|ITEM 6. Exhibits and Reports on Form 8-K                                              |  | 14   
|                                                                                      | 
|Signatures                                                                            |  | 15   
|                                                                                      | 
|Certification of Chief Executive Officer as Adopted                                   |  |      
|                                                                                      | 
|Certification of Chief Financial Officer as Adopted                                   |  |      



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PART I. FINANCIAL INFORMATION

|Item 1. | Financial Statements
|------- | --------------------

POWER EFFICIENCY CORPORATION

CONDENSED BALANCE SHEET

Unaudited



|                                                                                                                  |  |                |             |  
|----------------------------------------------------------------------------------------------------------------- |  | -------------- | ----------- | -
|                                                                                                                  |  | March 31, 2006 |            
|ASSETS                                                                                                            |  |                |             |  
|CURRENT ASSETS:                                                                                                   |  |                |             |  
|Cash                                                                                                              |  | $              | 296,675     |  
|Accounts receivable, net                                                                                          |  |                | 37,509      |  
|Accounts receivable, other                                                                                        |  |                | 17,930      |  
|Inventory, net of reserve                                                                                         |  |                | 168,598     |  
|Prepaid expenses and other current assets                                                                         |  |                | 134,979     |  
|                                                                                                                  |  |                |             |  
|Total Current Assets                                                                                              |  |                | 655,691     |  
|                                                                                                                  |  |                |             |  
|PROPERTY AND EQUIPMENT, Net                                                                                       |  |                | 76,522      |  
|                                                                                                                  |  |                |             |  
|OTHER ASSETS:                                                                                                     |  |                |             |  
|Patents, net                                                                                                      |  |                | 11,725      |  
|Goodwill                                                                                                          |  |                | 1,929,963   |  
|Website, net                                                                                                      |  |                | 1,629       |  
|Deferred financing costs, net                                                                                     |  |                | 63,280      |  
|                                                                                                                  |  |                |             |  
|Total Other Assets                                                                                                |  |                | 2,006,597   |  
|                                                                                                                  |  |                |             |  
|Total Assets                                                                                                      |  | $              | 2,738,810   |  
|                                                                                                                  |  |                |             |  
|LIABILITIES AND STOCKHOLDERS EQUITY                                                                              |  |                |             |  
|CURRENT LIABILITIES:                                                                                              |  |                |             |  
|Accounts payable and accrued expenses                                                                             |  | $              | 595,745     |  
|Accrued salaries and payroll taxes                                                                                |  |                | 32,036      |  
|Customer deposits                                                                                                 |  |                | 5,105       |  
|Notes payable  Pali Capital, net                                                                                 |  |                | 1,427,060   |  
|Notes payable  Arens Investment Company, net                                                                     |  |                | 29,235      |  
|Notes payable  former officers                                                                                   |  |                | 9,586       |  
|                                                                                                                  |  |                |             |  
|Total Current Liabilities                                                                                         |  |                | 2,098,767   |  
|                                                                                                                  |  |                |             |  
|LONG TERM LIABILITIES                                                                                             |  |                |             |  
|Notes payable  Arens Investment Company, net                                                                     |  |                | 2,778       |  
|                                                                                                                  |  |                |             |  
|                                                                                                                  |  |                | 2,101,545   |  
|                                                                                                                  |  |                |             |  
|STOCKHOLDERS EQUITY:                                                                                             |  |                |             |  
|Series A-1 Convertible Preferred Stock, $.001 par value, 10,000,000 shares authorized, none issued or outstanding |  |                |            |  
|Common stock, $.001 par value, 100,000,000 shares authorized, 23,739,266 issued and outstanding                   |  |                | 23,739      |  
|Additional paid-in capital                                                                                        |  |                | 19,639,368  |  
|Accumulated deficit                                                                                               |  |                | (19,025,842 | )
|                                                                                                                  |  |                |             |  
|Total Stockholders Equity                                                                                        |  |                | 637,265     |  
|                                                                                                                  |  |                |             |  
|Total Liabilities and Stockholders Equity                                                                        |  | $              | 2,738,810   |  
|                                                                                                                  |  |                |             |  

Accompanying notes are an integral part of the financial statements



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POWER EFFICIENCY CORPORATION

CONDENSED STATEMENTS OF OPERATIONS

Unaudited



|                                                              |  |                                      |            |   |      |   |           |  
|------------------------------------------------------------- |  | ------------------------------------ | ---------- | - | ---- | - | --------- | -
|                                                              |  | For the three months ended March 31, |           
|                                                              |  | 2006                                 |            |   | 2005 |  
|REVENUES                                                      |  | $                                    | 24,344     |   |      | $ | 51,091    |  
|                                                              |  |                                      |            |   |      |   |           |  
|COST OF SALES                                                 |  |                                      | 28,004     |   |      |   | 40,458    |  
|                                                              |  |                                      |            |   |      |   |           |  
|GROSS (LOSS) MARGIN                                           |  |                                      | (3,660     | ) |      |   | 10,633    |  
|                                                              |  |                                      |            |   |      |   |           |  
|COSTS AND EXPENSES:                                           |  |                                      |            |   |      |   |           |  
|Research and development                                      |  |                                      | 96,625     |   |      |   | 55,404    |  
|Selling, general and administrative                           |  |                                      | 889,125    |   |      |   | 191,542   |  
|Depreciation and amortization                                 |  |                                      | 6,471      |   |      |   | 20,558    |  
|                                                              |  |                                      |            |   |      |   |           |  
|Total Costs and Expenses                                      |  |                                      | 992,221    |   |      |   | 267,504   |  
|                                                              |  |                                      |            |   |      |   |           |  
|LOSS FROM OPERATIONS                                          |  |                                      | (995,881   | ) |      |   | (256,871  | )
|OTHER INCOME (EXPENSE):                                       |  |                                      |            |   |      |   |           |  
|Interest income                                               |  |                                      | 3,718      |   |      |   |          |  
|Interest expense                                              |  |                                      | (136,486   | ) |      |   | (124,745  | )
|                                                              |  |                                      |            |   |      |   |           |  
|Total Other Expenses, net                                     |  |                                      | (132,768   | ) |      |   | (124,745  | )
|                                                              |  |                                      |            |   |      |   |           |  
|NET LOSS                                                      |  | $                                    | (1,128,649 | ) |      | $ | (381,616  | )
|                                                              |  |                                      |            |   |      |   |           |  
|BASIC AND FULLY DILUTED LOSS PER COMMON SHARE                 |  | $                                    | (0.05      | ) |      | $ | (0.08     | )
|                                                              |  |                                      |            |   |      |   |           |  
|WEIGHTED AVERAGE COMMON SHARES OUTSTANDING OUTSTANDING, BASIC |  |                                      | 23,640,933 |   |      |   | 5,020,418 |  
|                                                              |  |                                      |            |   |      |   |           |  

Accompanying notes are an integral part of the financial statements



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POWER EFFICIENCY CORPORATION

CONDENSED STATEMENTS OF CASH FLOWS

Unaudited



|                                                                               |  |                                     |            |   |      |   |          |  
|------------------------------------------------------------------------------ |  | ----------------------------------- | ---------- | - | ---- | - | -------- | -
|                                                                               |  | For the three months endedMarch 31, |           
|                                                                               |  | 2006                                |            |   | 2005 |  
|CASH FLOWS FROM OPERATING ACTIVITIES:                                          |  |                                     |            |   |      |   |          |  
|Net loss                                                                       |  | $                                   | (1,128,649 | ) |      | $ | (381,616 | )
|Adjustments to reconcile net loss to net cash used for operating activities:   |  |                                     |            |   |      |   |          |  
|Depreciation and amortization                                                  |  |                                     | 6,471      |   |      |   | 20,558   |  
|Debt discount related to issuance of debt securities                           |  |                                     | 70,288     |   |      |   | 66,998   |  
|Warrants and options issued to employees and consultants                       |  |                                     | 360,490    |   |      |   |         |  
|Warrants and options issued in connection with the issuance of debt securities |  |                                     |           |   |      |   | 2,379    |  
|Common stock issued for consulting services                                    |  |                                     | 90,000     |   |      |   |         |  
|Amortization of deferred financing costs                                       |  |                                     | 18,312     |   |      |   |         |  
|Changes in assets and liabilities:                                             |  |                                     |            |   |      |   |          |  
|Accounts receivable, trade                                                     |  |                                     | 32,617     |   |      |   | 618      |  
|Accounts receivable, other                                                     |  |                                     | (17,930    | ) |      |   |         |  
|Inventory                                                                      |  |                                     | 2,741      |   |      |   | 276      |  
|Prepaid expenses and other current assets                                      |  |                                     | (49,573    | ) |      |   | 787      |  
|Restricted cash for interest escrow                                            |  |                                     |           |   |      |   | 36,180   |  
|Accounts payable and accrued expenses                                          |  |                                     | 3,162      |   |      |   | (93,279  | )
|Accrued salaries and payroll taxes                                             |  |                                     | (11,252    | ) |      |   | (62,835  | )
|                                                                               |  |                                     |            |   |      |   |          |  
|Net Cash Used for Operating Activities                                         |  |                                     | (623,323   | ) |      |   | (409,934 | )
|                                                                               |  |                                     |            |   |      |   |          |  
|CASH FLOWS FROM INVESTING ACTIVITIES                                           |  |                                     |            |   |      |   |          |  
|Purchase of property and equipment                                             |  |                                     | (65,263    | ) |      |   |         |  
|                                                                               |  |                                     |            |   |      |   |          |  
|Net Cash Used for Investing Activities                                         |  |                                     | (65,263    | ) |      |   |         |  
|                                                                               |  |                                     |            |   |      |   |          |  
|CASH FLOWS FROM FINANCING ACTIVITIES:                                          |  |                                     |            |   |      |   |          |  
|Deferred financing costs                                                       |  |                                     |           |   |      |   | (15,000  | )
|Proceeds from issuance of debt securities                                      |  |                                     |           |   |      |   | 125,000  |  
|Payments on notes payable                                                      |  |                                     | (8,333     | ) |      |   |         |  
|Payments to stockholders and former officers                                   |  |                                     | (15,526    | ) |      |   | (18,993  | )
|                                                                               |  |                                     |            |   |      |   |          |  
|Net Cash (Used for) Provided by Financing Activities                           |  |                                     | (23,859    | ) |      |   | 91,007   |  
|                                                                               |  |                                     |            |   |      |   |          |  
|Decrease in cash                                                               |  |                                     | (712,445   | ) |      |   | (318,927 | )
|Cash at beginning of period                                                    |  |                                     | 1,009,120  |   |      |   | 392,471  |  
|                                                                               |  |                                     |            |   |      |   |          |  
|Cash at end of period                                                          |  | $                                   | 296,675    |   |      | $ | 73,544   |  
|                                                                               |  |                                     |            |   |      |   |          |  

Accompanying notes are an integral part of the financial statements



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NOTE 1 - BASIS OF PRESENTATION

The accompanying financial statements have been prepared by the Company, without an audit. In
the opinion of management, all adjustments have been made, which include normal recurring adjustments necessary to present fairly the condensed financial statements. Operating results for the three months ended March 31, 2006 are not
necessarily indicative of the operating results for the full year. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of
America have been condensed or omitted. The Company believes that the disclosures provided are adequate to make the information presented not misleading. These unaudited condensed financial statements should be read in conjunction with the audited
financial statements and related notes included in the Companys Annual Report for the year ended December 31, 2005 on Form 10-KSB.

The
preparation of condensed 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 dates of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.

NOTE 2 - 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 suffered recurring losses from operations, a recurring
deficiency of cash from operations, including a cash deficiency of approximately $623,000 from operations for the three months ended March 31, 2006, and lacks sufficient liquidity to continue its operations.

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 in the long-term and raising additional capital to support existing operations for at least the next twelve months. Managements plans to achieve profitability include developing new products, obtaining new customers and
increasing sales to existing customers.



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NOTE 3 - COMMITMENTS AND CONTINGENCIES

Leases:

On February 24, 2006, the Company moved to a new office space in Las Vegas, Nevada. The lease was
originally between 3960 HHP LLC and a management company owned by the Chief Executive Officer and was signed in June 2005. The lease has since been assigned to the Company, effective February 24, 2006. The lease includes a payment of $11,292
per month, which includes all cleaning and utilities, except phone and internet service. The term of the lease is five years.

Subcontractors:

On March 15, 2006, the Company terminated its agreement with its Livonia, Michigan Subcontractor and began moving its entire inventory out of that
subcontractors warehouse to the Companys Las Vegas, Nevada subcontractor. The Company presently plans to use the Las Vegas, Nevada subcontractor as its sole manufacturer for its product. The Company owns the intellectual property rights
and all specifications to the product, and believes many manufacturers in the United States and abroad could manufacture the Companys product with little difficulty.

NOTE 4  CONSULTING AGREEMENTS

On January 2, 2006, the Company entered into a consulting agreement with an
investor relations firm. The term of the consulting agreement is for six months. The consulting agreement calls for monthly payments of $7,500 and 150,000 shares of the Companys common stock. In addition, the Company issued an additional
150,000 shares of common stock to the investor relations firm as a performance bonus on March 8, 2006. The total value of the 300,000 shares of common stock issued approximates $90,000 and is expensed in selling, general and administrative
expenses.

On January 6, 2006, the Company entered into a marketing agreement with an investment bank. The term of the agreement is for six months and
is fully cancellable at any time if either party materially breaches any provision in the agreement and fails to cure that breach within 20 days after receipt of written notice of the breech. In connection with the agreement, the Company issued
300,000 warrants to the investment bank as a retainer fee, with an exercise price of $0.25 per share, and a five year term. If the investment bank facilitates a successful transaction under the terms of the agreement, the Company shall pay the
investment bank $300,000 plus a 2% commission of transaction consideration in excess of $5,000,000 minus the value of any retainer warrants issued to the investment bank. Also, if the investment bank facilitates a strategic alliance in the form of
(i) a non-exclusive distributorship, the Company will issue 100,000 warrants to the investment bank, (ii) an exclusive distributorship, the Company will issue 300,000 warrants to the investment bank, and (iii) a licensing agreement,
the Company will issue 500,000 warrants to the investment bank. The total value of the 300,000 warrants issued to the investment bank approximates $74,430 and is expensed in selling, general and administrative expenses.

On February 21, 2006, the Company renewed a consulting agreement with an investment advisor which calls for the same duties as those set forth in the original
agreement and is for a term of 12 months. The company pays the investment advisor the amount of $4,000 per month, plus expenses approved by the Company and issued the investment advisor



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300,000 options with an exercise price of $0.26 per share. If the investment advisor is successful in closing a financing with the Company of at least
$800,000 within 60 days of the start date of the agreement, the Company shall pay the investment advisor all fees due for the third month through the sixth month of the term of the agreement, or $16,000. This agreement is fully cancellable with 30
days written notice after the first six months of the term of the agreement. The 300,000 options issued to the investment advisor approximates $14,136 and is expensed in selling, general and administrative expenses.

NOTE 5 - ACCOUNTING FOR SHARE BASED PAYMENTS

Prior to 2006, the
Company accounted for employee stock options under the intrinsic method of APB No. 25, and presented fair value disclosure as pro forma as provided by SFAS No. 123 as permitted under accounting principles generally accepted in the United States
of America. Beginning in 2006, the Company is accounting 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 for periods beginning after December 15, 2005, and applies to all outstanding and vested stock-based awards at a companys adoption date.

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 123R approximated $286,000 in additional compensation expense during the first quarter of 2006. Such
amount is included in selling, general and administrative expense on the statement of operations.

NOTE 6 - SUBSEQUENT EVENTS

On April 19, 2006, the Company entered into a financing transaction in which the Registrant issued a $1,000,000 convertible, secured note (the Note) to
EMTUCK, LLC (EMTUCK), in which the managing member is a management company wholly owned and controlled by the Registrants CEO. The Note is subject to increase up to $1,500,000 if EMTUCK makes available such increased amount. The
Note bears interest of 10.75% per annum, with interest payments due quarterly, beginning July 19, 2006. The Notes principal becomes due on January 19, 2007 (the Maturity Date). The Registrant can draw on the note, in
increments of up to $200,000, and interest is calculated on the outstanding principal drawn. The Note is secured by a first lien and security interest in all of the Companys accounts receivable and inventory now or hereafter acquired, and a
second lien and security interest in all other collateral, subordinate to the existing lien and



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security interest in favor of Pali Capital Corporation as representative of the holders of promissory notes of the Registrant in the aggregated principal
amount of $1,464,806 due October 26, 2006, and $125,000 due February 24, 2007 (the Pali Notes). In the event of default (as defined in the note), EMTUCK may upon written notice to the Registrant elect to declare the entire
principal amount of the Note then outstanding together with accrued and unpaid interest thereon due and payable. Upon receipt of such notice, the Registrant shall have 7 business days to cure the event of default and if uncured on the eighth
business day, all principal and accrued interest shall become immediately due and payable.

The members of EMTUCK were issued 2,083,334 warrants in
conjunction with the Note, with an exercise price of $0.24 per share. 1,458,334 warrants vest immediately, with the remaining 625,000 warrants vesting equally over 9 months. This transaction will result in a second quarter 2006 financing charge of
approximately $385,000. Additionally, a financing charge of approximately $17,000 per month will be recorded through January 2007 related to the remaining 625,000 warrants. The warrants have a cashless exercise provision and have a 5 year term. If
after the date of issuance of the warrants, the Registrant files a registration statement under the Securities Act of 1933, or amends an existing registration statement, in either case, the Registrant will use its best efforts to include the shares
issuable on exercise of the warrants in such registration statement or amended registration statement.

As of May 15,
2006, the Company has drawn $200,000 on the note.

On May 15, 2006, the Company terminated its Chief Technology Officer for cause and cancelled the
Chief Technology Officers 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.



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|ITEM 2. | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|------- | -------------------------------------------------------------------------------------

OVERVIEW

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

The Registrant began
generating revenues from sales of its patented Performance Controller line of motor controllers in late 1995. As of March 31, 2005, the Registrant had total stockholders equity of $637,265 primarily due to the
(i) Registrants sale of 14,500,000 shares of common stock in a private stock offering in July and August of 2005, (ii) the Registrants sale of 2,346,233 shares of Series A-1 Convertible Preferred stock to Summit Energy Ventures, LLC
in June of 2002 and (iii) 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: FOR THE THREE MONTHS ENDED MARCH 31, 2006 AND 2005.

REVENUES

Total revenues for the three months ended March 31, 2006, were approximately $24,000 compared to $51,000 for the three months ended March 31, 2005, a decrease
of $27,000 or 53%. This decrease is mainly attributable to a decrease in sales in the elevator and escalator market segment, due to changes in sales personnel and resulting disruptions to sales efforts.

COST OF SALES

Total manufacturing cost of product revenues, which
includes material and direct labor and overhead for the three months ended March 31, 2006 were approximately $28,000 compared to approximately $40,000 for the three months ended March 31, 2005, a decrease of $12,000 or 30%. As a percentage
of sales, total cost of sales increased to approximately 117% for the three months ended March 31, 2006 compared to approximately 79% for the three months ended March 31, 2005. The increase in the costs as a percentage of sales was
primarily due to extra charges to modify existing stock units for sale, as well as increased materials and direct labor costs per unit. Also, overhead costs were $2,000 for the three months ended March 31, 2006 compared to $9,000 for the three
months ended March 31, 2005. Overhead costs as a percentage of sales decreased due to the Company utilizing a turn-key manufacturer for production.

OPERATING EXPENSES

Research and Development Expenses

Research and development expenses were approximately $97,000 for the three months ended March 31, 2006, as compared to approximately $55,000 for the three months ended March 31, 2005, a $42,000 or a 76%
increase. This increase is mainly attributable



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to the Companys development of its digital controller for both its single-phase and three-phase products and payment of higher salaries to personnel,
due to significantly reduced salaries in the first quarter of 2005.

Selling, General and Administrative Expenses

Selling, general and administrative expenses were approximately $890,000 for the three months ended March 31, 2006, as compared to $192,000 for the three months
ended March 31, 2005 an increase of $698,000 or 364%. The increase in selling, general and administrative expenses over the prior year was due primarily to an increase in payroll and payroll related costs, related to the Companys adoption
of SFAS 123R (see Note 5 to the financial statements), to the increase in the Companys workforce in connection with the Companys new sales and marketing plan and higher salaries paid to personnel due to significantly reduced salaries in
the first quarter of 2005, as well as increases in the Companys investor relation expenses and professional fees.

Financial Condition, Liquidity,
and Capital Resources

Since inception, the Registrant has financed its operations primarily through the sale of its equity securities, debt securities
and using available bank lines of credit. As of March 31, 2006, the Registrant had cash of $296,675.

Cash used for operating activities for the three
months ended March 31, 2006 was $623,323, which consisted of: a net loss of $1,128,649; less depreciation and amortization of $6,471, debt discount related to the issuance of debt securities of $70,288, warrants and options issued to employees
and consultants of $360,490, common stock issued in connection with consulting services of $90,000, and amortization of deferred financing costs of $18,312, decreases in trade accounts receivable of $32,617, inventory of $2,741, and an increase in
accounts payable of $3,162; offset by increases in other accounts receivable of $17,930, prepaid expenses and other current assets of $49,573, and a decrease in accrued salaries and payroll taxes of $11,252 . Cash used for operating activities for
the three months ended March 31, 2005 was $409,934, which consisted of: a net loss of $381,616; less depreciation and amortization of $20,558, debt discount related to the issuance of debt securities of $66,998, warrants and options issued in
connection with the issuance of debt securities of $2,379, decreases in trade accounts receivable of $618, inventory of $276, prepaid expenses and other current assets of $787 and restricted cash of $36,180; offset by decreases in accounts payable
of $93,279, and accrued salaries and payroll taxes of $62,835.

Cash used in investing activities for the first quarter of fiscal 2006 was $65,263. The
amount consisted of the purchase of fixed assets.

Net cash used for financing activities for the first quarter of fiscal year 2006 was $23,859 which
consisted of repayments of notes payable of $8,333 and repayments of loans to stockholders and former officers of $15,526. Net cash provided by financing activities for the first quarter of fiscal year 2005 was $91,007, which consisted of
proceeds from the issuance of debt securities of $125,000, offset by repayments of loans to stockholders and former officers of $18,993 and deferred financing costs of $15,000.



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

Since capital resources are insufficient to satisfy the Registrants liquidity requirements, management intends to sell additional equity or debt
securities. The Registrant believes it can raise additional funds through private placements of equity or debt. However, there are no assurances that sufficient capital can be raised.

Cash Requirements and Need for Additional Funds

The Registrant
anticipates a substantial need for cash to fund its working capital requirements. In accordance with the Registrants prepared expansion plan, it is the opinion of management that approximately $2.5$3 million will be required to cover
operating expenses, including, but not limited to, the development of the Companys next generation products, marketing, sales and operations during the next twelve months. In addition, the Company has debt securities maturing in the next
twelve months.



|ITEM 3. | CONTROLS AND PROCEDURES
|------- | -----------------------

(a) Evaluation of 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 Controls. 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.



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PART II  OTHER INFORMATION



|ITEM 1. | LEGAL PROCEEDINGS
|------- | -----------------

None.



|ITEM 2. | UNREGISTERED SALES OF SECURITIES AND USE OF PROCEEDS
|------- | ----------------------------------------------------

None.



|ITEM 3. | DEFAULTS UPON SENIOR SECURITIES
|------- | -------------------------------

None.



|ITEM 4. | SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
|------- | ---------------------------------------------------

The Registrant held its 2005 Annual Meeting of Stockholders on February 16, 2006 in Las Vegas, Nevada.

At the 2005
Annual Meeting of Stockholders, the stockholders elected the following individuals as directors, to serve until the 2006 Annual Meeting of Stockholders, and until their successors are elected and qualified:



|                     |  |            |  |              
|-------------------- |  | ---------- |  | -------------
|Name                 |  | Votes For  |  | VotesWithheld
|Steven Strasser      |  | 16,549,200 |  | 670          
|John (BJ) Lackland   |  | 16,549,200 |  | 670          
|Eric Naroian         |  | 16,549,200 |  | 670          
|Gary Rado            |  | 16,549,200 |  | 670          
|Raymond J. Skiptunis |  | 16,549,200 |  | 670          

Finally, at the 2005 Annual Meeting of Stockholders, the stockholders approved the ratification of the appointment
of Sobel & Co., LLC as the Registrants independent registered public accounting firm for the year ended December 31, 2005. There were 16,549,870 votes cast for the ratification, 0 votes cast against the ratification and 0
abstentions.



|ITEM 5. | OTHER INFORMATION
|------- | -----------------

On
April 18, 2006, the Board of Directors elected Rob Murray as a Director of the Registrant.

On April 18, 2006, Eric Naroian tendered his
resignation as a Director of the Registrant to the Registrants Board of Directors.



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|ITEM 6. | EXHIBITS AND REPORTS ON FORM 8-K
|------- | --------------------------------



|(a) | Exhibits
|--- | --------



|       |  |                                                                                                                                                                                                                  |  |               
|------ |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | --------------
|Number |  | Description of Document                                                                                                                                                                                          |  | Location      
|       |  |                                                                                                                                                                                                                 
|31.1   |  | Certification by the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                                          |  | Filed herewith
|       |  |                                                                                                                                                                                                                 
|31.2   |  | Certification by the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                                          |  | Filed herewith
|       |  |                                                                                                                                                                                                                 
|32.1   |  | Certification by the Chief Executive Officer pursuant to Section 1350 of Chapter 63 of Title 18 of the United States Code (18 U.S.C. 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002. |  | Filed herewith
|       |  |                                                                                                                                                                                                                 
|32.2   |  | Certification by the Chief Financial Officer pursuant to Section 1350 of Chapter 63 of Title 18 of the United States Code (18 U.S.C. 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002. |  | Filed herewith



|(b) | Reports on Form 8-K.
|--- | --------------------

On January 18, 2006, the Company filed a
current report on Form 8-K reporting an Item 8 event. The Item 8 event involved the announcement of the record date and the date of the Companys 2005 Annual Meeting of the Stockholders. That form is incorporated herein by reference.

On April 24, 2006, the Company filed a current report on Form 8-K reporting an Item 2, an Item 3, and an Item 5 event. The Item 2
event involved the creation of a direct financial obligation in the form of a bridge note of $1,000,000. The Item 3 event involved an unregistered sale of equity securities in connection with the bridge note. The Item 5 event involved the
election of a new Director to the Companys Board of Directors.



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SIGNATURES

In accordance with the requirements of the Securities Exchange Act of 1934, the Registrant caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.



|                   |  |  |  |                                           |  |                     |  |                                                                    
|------------------ |  |  |  | ----------------------------------------- |  | ------------------- |  | -------------------------------------------------------------------
|                   |  |  |  | POWER EFFICIENCY CORPORATION (Registrant)
|                   |  |  | 
|Date: May 15, 2006 |  |  |  | By:                                       |  | /s/ Steven Strasser
|                   |  |  |  |                                           |  |                     |  | Chief Executive Officer                                            
|                   |  |  | 
|Date: May 15, 2006 |  |  |  | By:                                       |  | /s/ John Lackland  
|                   |  |  |  |                                           |  |                     |  | Chief Financial Officer (PrincipalFinancial and Accounting Officer)



15