**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: September 30, 2007
 
 OR
 
 oTRANSITION
        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**
                (State
                  or Other Jurisdiction of
                Incorporation
                  or Organization)
              
              **22-3337365**
                (I.R.S.
                  Employer Identification No.)**3960
                  Howard Hughes Pkwy, Ste 460 Las Vegas, NV 89169**
                (Address
                  of Principal Executive Offices)
              
              **(702)
                  697-0377**
                (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 Company was required to file such reports),
        and (2)
        has been subject to such filing requirements for the past 90 days.
        Yes x No  o
 
 Indicate
        by check mark whether the Company is a shell company (as defined in Rule
        12b-2
        of the Exchange Act). Yes o No x
 
 The
        number of shares outstanding of the Issuer's Common Stock, $.001 par value,
        as
        of November 12, 2007 was 40,194,483.
 
 Transitional
        Small Business Disclosure Format (check
        one):   Yes  o No  x
 
 
 
 **POWER
        EFFICIENCY CORPORATION**
 **FORM
        10-QSB INDEX**
 
 PART
                  I - FINANCIAL INFORMATION
              3ITEM
                  1. Financial Statements
              3Condensed
                  Balance Sheet as of September 30, 2007
              3Condensed
                  Statements of Operations for the three months ended September 30,
                  2007 and
                  2006 and nine
                months
                  ended September 30, 2007 and 2006.
              4Condensed
                  Statements of Cash Flows for the nine months ended September 30,
                  2007 and
                  2006
              5Notes
                  to Condensed Financial Statements
              6ITEM
                  2. Management’s Discussion and Analysis or Plan of
                  Operation
              9ITEM
                  3. Controls and Procedures
              12PART
                  II — OTHER INFORMATION
              13ITEM
                  1. Legal Proceedings
              13ITEM
                  2. Changes in Securities and Use of Proceeds
              13ITEM
                  3. Defaults Upon Senior Securities
              13ITEM
                  4. Submission of Matters to a Vote of Security Holders
              13ITEM
                  5. Other Information
              14ITEM
                  6. Exhibits and Reports on Form 8-K
              14Signatures
              15Certification
                  of Chief Executive Officer as AdoptedCertification
                  of Chief Financial Officer as Adopted





2




**PART
      I. FINANCIAL INFORMATION**





**Item
      1. Financial Statements**





**POWER
      EFFICIENCY CORPORATION**


CONDENSED
      BALANCE SHEET


Unaudited





September
                30,
              2007ASSETSCURRENT
                ASSETS:Cash
            
            $
            793,810Accounts
                receivable, net
            
            
            108,784Inventory,
                net
            
            
            96,907Prepaid
                expenses and other current assets
            
            
            25,051Total
                Current Assets
            
            
            1,024,552PROPERTY
                AND EQUIPMENT, Net
            
            
            105,131OTHER
                ASSETS:Patents,
                net
            
            
            39,994Deposits
            
            
            120,300Goodwill
            
            
            1,929,963Deferred
                financing costs, net
            
            
            1,123Total
                Other Assets
            
            
            2,091,380Total
                Assets
            
            $
            3,221,063LIABILITIES
                AND STOCKHOLDERS' EQUITYCURRENT
                LIABILITIES:Accounts
                payable and accrued expenses
            
            $
            501,554Accrued
                salaries and payroll taxes
            
            
            47,970Total
                Current Liabilities
            
            
            549,524LONG
                TERM LIABILITESNotes
                payable - 2008, net
            
            
            1,633,521Total
                Liabilities
            
            
            2,183,045STOCKHOLDERS'
                EQUITY:Preferred
                Stock, $.001 par value, 10,000,000 shares authorized,none
                issued or outstanding
            
            
            -Common
                stock, $.001 par value, 140,000,000 sharesauthorized,
                39,010,936 issued and outstanding
            
            
            39,011Additional
                paid-in capital
            
            
            26,660,060Accumulated
                deficit
            
            
            (25,661,053
            )Total
                Stockholders' Equity
            
            
            1,038,018Total
                Liabilities and Stockholders' Equity
            
            $
            3,221,063




**Accompanying
      notes are an integral part of the financial statements**





3





**POWER
      EFFICIENCY CORPORATION**


CONDENSED
      STATEMENTS OF OPERATIONS


Unaudited





**For
                the three months ended**
              **September
                30,**
            
            **For
                the nine months ended**
              **September
                30,****2007**
            
            **2006**
            
            **2007**
            
            **2006**REVENUES
            
            $
            120,742
            
            $
            79,554
            
            $
            387,552
            
            $
            148,288COST
                OF SALES
            
            
            64,123
            
            
            47,762
            
            
            252,467
            
            
            111,857GROSS
                MARGIN
            
            
            56,619
            
            
            31,792
            
            
            135,085
            
            
            36,431COSTS
                AND EXPENSES:Research
                and development
            
            
            322,117
            
            
            117,356
            
            
            554,920
            
            
            337,982Selling,
                general and administrative
            
            
            562,149
            
            
            842,351
            
            
            1,858,130
            
            
            2,488,291Depreciation
                and amortization
            
            
            12,548
            
            
            4,011
            
            
            33,134
            
            
            18,355Total
                Costs and Expenses
            
            
            896,814
            
            
            963,718
            
            
            2,446,184
            
            
            2,844,628LOSS
                FROM OPERATIONS
            
            
            (840,195
            )
            
            (931,926
            )
            
            (2,311,099
            )
            
            (2,808,197
            )OTHER
                INCOME (EXPENSE):Interest
                income
            
            
            14,002
            
            
            453
            
            
            39,122
            
            
            4,791Interest
                expense
            
            
            (157,517
            )
            
            (206,941
            )
            
            (471,108
            )
            
            (1,157,320
            )Total
                Other Expenses, net
            
            
            (143,515
            )
            
            (206,488
            )
            
            (431,986
            )
            
            (1,152,529
            )NET
                LOSS
            
            $
            (983,710
            )
            $
            (1,138,414
            )
            $
            (2,743,085
            )
            $
            (3,960,726
            )BASIC
                AND FULLY DILUTED LOSSPER
                COMMON SHARE
            
            $
            (0.03
            )
            $
            (0.05
            )
            $
            (0.07
            )
            $
            (0.17
            )WEIGHTED
                AVERAGE COMMONSHARES
                OUTSTANDING, BASIC
            
            
            38,559,934
            
            
            23,921,098
            
            
            37,953,824
            
            
            23,757,833





**Accompanying
      notes are an integral part of the financial statements**






4





**POWER
      EFFICIENCY CORPORATION**


CONDENSED
      STATEMENTS OF CASH FLOWS


Unaudited




**For
                the nine months ended September 30,****2007**
            
            **2006**CASH
                FLOWS FROM OPERATING ACTIVITIES:Net
                loss
            
            $
            (2,743,085
            )
            $
            (3,960,726
            )Adjustments
                to reconcile net loss to net cash used for operating
                activities:Depreciation
                and amortization
            
            
            33,134
            
            
            18,355Loss
                on disposal of property and equipment
            
            
            -
            
            
            586Amortization
                of deferred financing costs
            
            
            10,105
            
            
            54,935Bad
                debt expense
            
            
            -
            
            
            13,414Debt
                discount related to issuance of debt securities
            
            
            236,618
            
            
            931,929Warrants
                and options issued in connection with the issuanceof
                debt securities, and to employees and consultants
            
            
            544,195
            
            
            889,717Common
                stock issued for consulting services
            
            
            -
            
            
            90,000Changes
                in assets and liabilities:Accounts
                receivable, net
            
            
            (76,592
            )
            
            (18,021
            )Inventory
            
            
            59,945
            
            
            379Prepaid
                expenses and other assets
            
            
            45,417
            
            
            (30,830
            )Deposits
            
            
            (86,425
            )
            
            -Accounts
                payable and accrued expenses
            
            
            (35,580
            )
            
            53,362Accrued
                salaries and payroll taxes
            
            
            -
            
            
            4,681Net
                Cash Used for Operating Activities
            
            
            (2,012,268
            )
            
            (1,952,219
            )CASH
                FLOWS FROM INVESTING ACTIVITIES:Costs
                related to patents
            
            
            (6,926
            )
            
            -Purchase
                of property and equipment
            
            
            (61,465
            )
            
            (88,303
            )Net
                Cash Used for Investing Activities
            
            
            (68,391
            )
            
            (88,303
            )CASH
                FLOWS FROM FINANCING ACTIVITIES:Proceeds
                from issuance of equity securities
            
            
            1,024,796
            
            
            -Proceeds
                from exercise of warrants
            
            
            167,200
            
            
            -Payments
                on notes payable
            
            
            (11,111
            )
            
            (25,000
            )Proceeds
                from line of credit - related party
            
            
            -
            
            
            1,100,000Payments
                to former officers
            
            
            -
            
            
            (25,112
            )Net
                Cash Provided by Financing Activities
            
            
            1,180,885
            
            
            1,049,888Decrease
                in cash
            
            
            (899,774
            )
            
            (990,634
            )Cash
                at beginning of period
            
            
            1,693,584
            
            
            1,009,120Cash
                at end of period
            
            $
            793,810
            
            $
            18,486





**Accompanying
      notes are an integral part of the financial statements**





5





**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 nine months ended September
      30,
      2007 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. Certain amounts in the financial statements have
      been
      reclassified from prior period presentations. 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, 2006 on Form 10-KSB, Form SB-2, Post Effective Amendment
      No. 2 to Form SB-2 and Post Effective Amendment No. 3 to Form SB-2.





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 $2,013,000 from
      operations for the nine months ended September 30, 2007, 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.





**NOTE
      3 - NOTES PAYABLE**





On
      November 30, 2006, the Company entered into a financing transaction in which
      the
      Company issued $2,000,000, before discount, of its two year, senior, secured
      promissory notes (collectively the “Notes”, individually a “Note”). The Notes
      bear interest of 15% per annum. Interest due under the Notes is payable
      quarterly, with the principal and final quarterly interest payment becoming
      due
      November 30, 2008. The Notes have a first priority security interest in all
      of
      the assets of the Company. Upon the occurrence of an “Event of Default” (as
      defined in the Note) the holder may, upon written notice to the Company, elect
      to declare the entire principal amount of the Note then outstanding together
      with accrued unpaid interest thereon due and payable. Upon receipt of such
      notice, the Company shall have seven business days to cure the Event of Default,
      and if uncured on the eighth business day, all principal and interest shall
      become immediately due and payable. The Company also issued 2,500,000 warrants
      (the “Debt Warrants”) to purchase common stock of the Company to the holders of
      the Notes. The Debt Warrants have a per share exercise price of $0.40 and expire
      November 29, 2011. 1,250,000 of the Debt Warrants are exercisable immediately,
      with the remaining 1,250,000 Debt Warrants becoming exercisable in equal amounts
      over 24 months beginning December 29, 2006. The common stock issuable upon
      exercise of the Debt Warrants has piggyback registration rights, and can be
      included in the Company’s next registration statement. The
      Debt
      Warrants have a cashless exercise provision, but only if the registration
      statement on which the common stock issuable upon exercise of the Debt Warrants
      is not then effective.





The
      $2,000,000 loan consisted of $550,000 from Steven Strasser, the Company’s
      Chairman, Chief Executive Officer and the Company’s largest beneficial
      shareholder, $200,000 from Commerce Energy Group, Inc, the Company’s second
      largest shareholder prior to the Offering, and $1,250,000 from individual
      investors. $1,450,000 of these Notes came from the exchange of existing
      promissory notes of the Company.


The
      Company’s previously issued notes, including $1,464,306 issued on October 27,
      2004, $125,000 issued on February 24, 2005 (collectively the “Pali Notes”) and
      $1,500,000 issued to EMTUCK, were paid off and such paid off note holders no
      longer hold a security interest in the Company’s assets.




6




**NOTE
      4 - COMMITMENTS AND CONTINGENCIES**





On
      September 6, 2007, the Company entered into a Manufacturing Service Agreement
      (the “Manufaturing Agreement”) with Sanima-Sci Corporation (“Sanima-Sci”) for
      the production of digital units. Pursuant to the Manufacturing Agreement, the
      Company will purchase an amount of digital units, subject to certain minimum
      quantities, from Sanima-Sci equal to an initial firm order agreed upon by the
      Company and Sanima-Sci and subsequent nine-month requirements forecasts. The
      initial term of the contract is one year, and upon expiration of the initial
      term, the contract will continue on a year to year basis until one party gives
      notice to terminate. At the present time the Company is not able to determine
      if
      the actual purchases will be in excess of these minimum commitments, or if
      any
      potential liability will be incurred.





**NOTE
      5 - ACCOUNTING FOR SHARE BASED PAYMENTS**





In
      2006,
      the Company began 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,
      and
      applies to all outstanding and vested stock-based 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.
      The impact of applying SFAS No. 123R approximated $544,000 in additional
      compensation expense during the first, second and third quarters of 2007 and
      $889,000 during the first, second and third quarters of 2006. Such amount is
      included in selling, general and administrative expense and research and
      development expenses on the statements of operations.





7





**NOTE
      6 - SUBSEQUENT EVENTS**





On
      October 29, 2007, the Company issued and sold 113,500 units, each unit
      consisting of one share of the Company’s Series B Preferred Stock, par value
      $.001 per share, 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, in a private offering for $5,675,000 in
      cash and cancellation of indebtedness. Many of the purchasers of Units were
      either officers, directors, affiliates or pre-existing stockholders or
      noteholders of the Company.





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.





In
      connection with the offering, the Company has agreed to use its reasonable
      best
      efforts to file a 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, and must use its reasonable best efforts
      to
      have the registration statement declared effective not later than 120 days
      from
      the termination date. The offering will terminate no later than January 31,
      2008, and the Company can issue up to 140,000 units, equal to
      $7,000,000.





The
      Company paid off or converted all of its secured notes in connection with this
      offering. The Company will recognize a one time non-cash charge of approximately
      $183,000 as a result of the elimination of the debt discount associated with
      the
      secured notes.





Upon
      the
      closing of the offering and repayment of the secured notes, the Company has
      approximately $4.5 million in cash and no outstanding debt securities.





On
      November 8, 2006 the Company issued and sold an additional 5,000 units under
      the
      offering for $250,000.





8





**ITEM
      2. MANAGEMENT’S DISCUSSION AND ANALYSIS OR PLAN OF
      OPERATION**





**OVERVIEW**





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




The
      Company began generating revenues from sales of its patented line of motor
      controllers in late 1995. As of September 30, 2007, the Company had total
      stockholders’ equity of $1,038,018 primarily due to (i) 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, (ii) the Company’s sale of 14,500,000 shares of
      common stock in a private stock offering in July and August of 2005, (iii)
      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 (iv) 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 AND NINE MONTHS ENDED SEPTEMBER 30, 2007 AND
      2006**





**REVENUES**





Total
      revenues for the three months ended September 30, 2007 were approximately
      $121,000, compared to $80,000 for the three months ended September 30, 2006,
      an
      increase of $41,000, or 51%. This increase is mainly attributable to an
      increase in sales in the elevator and escalator market segment in the third
      quarter of 2007.





Total
      revenues for the nine months ended September 30, 2007 were approximately
      $388,000, compared to $148,000 for the nine months ended September 30, 2006,
      an
      increase of $240,000 or 162%.  This increase is mainly attributable to an
      increase in sales in the elevator and escalator market segment. Specifically,
      sales to a local transit authority, for the use on elevators and escalators,
      totaled approximately $154,000 during the nine months ended September 30, 2007.
      No such sales occurred during the nine months ended September 30, 2006.





**COST
      OF SALES**





Total
      cost of sales, which includes material and direct labor, and overhead costs
      for
      the three months ended September 30, 2007 were approximately $64,000 compared
      to
      $48,000 for the three months ended September 30, 2006, an increase of $16,000,
      or 33%. As a percentage of revenues, total cost of sales decreased to
      approximately 53% for the three months ended September 30, 2007, compared to
      approximately 60% for the three months ended September 30, 2006. The decrease
      in
      the costs as a percentage of revenues was primarily due to charging higher
      prices for units resulting in higher margins in 2007. Also, overhead costs
      were
      approximately $2,500 for the three months ended September 30, 2007 compared
      to
      $3,700 for the three months ended September 30, 2006, a decrease of $1,200,
      or
      32%. As a percentage of product revenues overhead costs were 2% for the three
      months ended September 30, 2007 compared to 5% for the three months ended
      September 30, 2006. Overhead
      costs as a percentage of sales decreased due to higher sales volumes in the
      second quarter of 2007. Material
      and labor costs as a percentage of product revenues decreased to 51% for the
      three months ended September 30, 2007 compared to 55% for the three months
      ended
      September 30, 2006. This decrease was largely due to charging higher prices
      for
      units resulting in higher margins.








9





Total
      cost of sales, which includes material and direct labor, and overhead costs
      for
      the nine months ended September 30, 2007 were approximately $252,000 compared
      to
      approximately $112,000 for the nine months ended September 30, 2006, an increase
      of $140,000, or 125%. As a percentage of revenues, total costs of sales
      decreased to approximately 65% for the nine months ended September 30, 2007
      compared to approximately 75% for the nine months ended September 30, 2006.
      The
      decrease in the costs as a percentage of revenues was primarily due to charging
      higher prices for units resulting in higher margins. Also, allocated costs
      were
      approximately $8,200 for the nine months ended September 30, 2007 compared
      to
      approximately $9,400 for the nine months ended September 30, 2006, a decrease
      of
      $1,200 or 13%. As a percentage of revenues, overhead costs were 2% for the
      nine
      months ended September 30, 2007 compared to 6% for the nine months ended nine
      months of 2007.





**OPERATING
      EXPENSES**





**Research
      and Development Expenses**





Research
      and development expenses were approximately $322,000 for the three months ended
      September 30, 2007, as compared to approximately $117,000 for the three months
      ended September 30, 2006, an increase of $205,000 or 175%.  This increase
      is mainly attributable to the Company’s continued research and development
      efforts on its digital controller for both its single-phase and three-phase
      products, including additional personnel in the Company’s research and
      development department, which resulted in higher salaries and related payroll
      costs.





Research
      and development expenses were approximately $555,000 for the nine months ended
      September 30, 2007, as compared to approximately $338,000 for the nine months
      ended September 30, 2006, an increase of $217,000 or 64%. This increase is
      mainly attributable to the Company’s continued research and development efforts
      on its digital controller for both its single-phase and three-phase products,
      including additional personnel in the Company’s research and development
      department, which resulted in higher salaries and related payroll
      costs.





**Selling,
      General and Administrative Expenses**





Selling,
      general and administrative expenses were approximately $562,000 for the three
      months ended September 30, 2007, as compared to $842,000 for the three months
      ended September 30, 2006, a decrease of $280,000 or 33%. The decrease in
      selling, general and administrative expenses over the prior year was due
      primarily to a decrease in payroll and payroll related costs, including SFAS
      123R expenses (see Note 5 to the condensed financial statements), and to
      decreases in financing costs.





Selling,
      general and administrative expenses were approximately $1,858,000 for the nine
      months ended September 30, 2007, as compared to $2,488,000 for the nine months
      ended September 30, 2006 a decrease of $630,000 or 25%. The decrease in selling,
      general and administrative expenses over the prior year was due primarily to
      a
      decrease in payroll and payroll related costs, including SFAS 123R expenses
      (see
      Note 5 to the condensed financial statements), and to decreases in financing
      costs.





Interest
      expense, net was approximately $144,000 for the three months ended September
      30,
      2007, as compared to $206,000 for the three months ended September 30, 2006,
      a
      decrease of $62,000 or 30%. The decrease in interest expense is primarily
      related to a non-cash finance charge related to the value of stock warrants
      issued in connection with a line of credit, recorded in 2006. Total non-cash
      interest expense for the three months ended September 30, 2007 and 2006 was
      approximately $82,000 and $121,000, respectively.





Interest
      expense, net was approximately $432,000 for the nine months ended September
      30,
      2007, as compared to $1,153,000 for the nine months ended September 30, 2006,
      a
      decrease of $721,000 or 63%. The decrease in interest expense is primarily
      related to a non-cash finance charge related to the value of stock warrants
      issued in connection with a line of credit, recorded in 2006. Total non-cash
      interest expense for the nine months ended September 30, 2007 and 2006 was
      approximately $243,000 and $942,000, respectively.





10




**Financial
      Condition, Liquidity, and Capital Resources: For the Nine Months Ended September
      30, 2007**





Since
      inception, the Company has financed its operations primarily through the sale
      of
      its equity securities, debt securities and using available bank lines of credit.
      As of September 30, 2007, the Company had cash of $793,810.





Cash
      used
      for operating activities for the nine months ended September 30, 2007 was
      $2,012,268 which consisted of: a net loss of $2,743,085, less depreciation
      and
      amortization of $33,134, amortization of deferred financing costs of $10,105,
      amortization of debt discount related to issuance of debt securities of
      $236,618, warrants and options issued in connection with the issuance of debt
      securities, and to employees and consultants of $544,195; offset by increases
      in
      accounts receivable of $76,592, and deposits of $30,830, and decreases in
      inventory of $59,945, prepaid expenses and other assets of $45,417, and accounts
      payable and accrued expenses of $35,580.





Cash
      used
      for operating activities for the nine months ended September 30, 2006 was
      $1,952,219 which consisted of: a net loss of $3,960,726, less depreciation
      and
      amortization of $18,355, amortization of deferred financing costs of $54,935,
      bad debt expenses of $13,414, loss on disposal of fixed assets of $586,
      amortization of debt discount related to issuance of debt securities of
      $931,929, warrants and options issued in connection with the issuance of debt
      securities, and to employees and consultants of $889,717, and common stock
      issued for consulting services of $90,000; offset by increases in accounts
      receivable of $18,021, prepaid expenses and other current assets of $30,830,
      accounts payable and accrued expenses of $53,362, accrued salaries and payroll
      taxes of $4,681 and a decrease in inventory of $379.





Cash
      used
      in investing activities for the nine months ended September 30, 2007 was
      $68,391, compared with $88,303 in the nine months ended September 30,
      2006.  The amount for 2007 consisted of the purchase of fixed assets of
      $61,465 and costs related to patents of $6,926.  The
      amount for 2006 consisted of the purchase of fixed assets.





Net
      cash
      provided by financing activities for the nine months ended September 30, 2007
      was $1,180,885 which consisted of proceeds from the issuance of equity
      securities of $1,024,796, proceeds from the exercise of common stock warrants
      of
      $167,200, offset by repayments of notes payable of $11,111.





Net
      cash
      provided by financing activities for the nine months ended September 30, 2006
      was $1,049,888 which consisted of proceeds from a line of credit from a related
      party of $1,100,000, partially offset by repayments of notes payable of $25,000
      and loans to former officers of $25,112.





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





Since
      capital resources are insufficient to satisfy the Company’s liquidity
      requirements, management intends to sell additional equity or debt
      securities.  The Company 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
      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 development, and operations during the next twelve months.





When
      its
      operations require additional financing, if the Company is unable to obtain
      it
      on reasonable terms, the Company will be forced to restructure, file for
      bankruptcy or cease 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. However, there
      are
      no assurances that sufficient capital will be raised.




11





**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.









12





**PART
      II — OTHER INFORMATION**





**ITEM
      1. LEGAL PROCEEDINGS**





None.





**ITEM
      2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF
      PROCEEDS**




None.





**ITEM
      3. DEFAULTS UPON SENIOR SECURITIES**





None.





**ITEM
      4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS**




None.








13





**ITEM
      5. OTHER INFORMATION**





None





**ITEM
      6. EXHIBITS**





(a)
      Exhibits





Number
            
            Description
                of Document10.1
            
            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 Form 8-K filed on September 12, 2007. *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.





*
      Confidential treatment is requested for certain portions of thei exhibit
      pursuant to 17 C.F.R. Sections 200.85(b)(4) and 240.24b-2.




14





**SIGNATURES**





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





POWER
                EFFICIENCY CORPORATIONDate:  November
                14, 2007
            By:
            /s/ 
                Steven StrasserChief
                Executive OfficerDate:  November
                14, 2007
            By:
            /s/ 
                John LacklandChief
                Financial Officer (Principal
              Financial and
                Accounting Officer)











15