SECURITIES
AND EXCHANGE COMMISSION




Washington,
D.C. 20549




FORM
10-Q




x
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)


OF THE
SECURITIES EXCHANGE ACT OF 1934




For the
quarterly period ended: September 30, 2009




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 Registrant 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, Suite 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 xNo
 ̈




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





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




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




The
number of shares of common stock outstanding as of November 16, 2009 was
43,274,222.




Transitional Small Business Disclosure
Format (check one):   Yes ̈Nox




Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Website, if any, every Interactive Date File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files).


Yes oNo o





POWER
EFFICIENCY CORPORATION


FORM
10-Q INDEX




PART
      I - FINANCIAL INFORMATIONITEM
      1. Financial StatementsCondensed
      Balance Sheets as of September 30, 2009 and December 31,
    2008
                3Condensed
      Statements of Operations for the three and nine months ended September 30,
      2009 and 2008
                4Condensed
      Statements of Cash Flows for the nine months ended September 30, 2009 and
      2008
                5Notes
      to Condensed Financial Statements
                6-12ITEM
      2. Management's Discussion and Analysis Of Financial Condition and Results
      of Operations
                13-24ITEM
      3. Quantitative and Qualitative Disclosure About Market
    Risk
                24ITEM
      4T. Controls and Procedures
                24-25Part
      II — OTHER INFORMATIONITEM
      1. Legal Proceedings
                26ITEM
      2. Unregistered Sales of Equity Securities and Use of
    Proceeds
                26ITEM
      3. Defaults Upon Senior Securities
                26ITEM
      4. Submission of Matters to a Vote of Security Holders
                26-27ITEM
      5. Other Information
                27ITEM
      6. Exhibits
                27Signatures
                28Certification
      of Chief Executive Officer as Adopted
                29Certification
      of Chief Financial Officer as Adopted
                30


2


PART
I. FINANCIAL INFORMATION


Item
1. Financial Statements





POWER
EFFICIENCY CORPORATION


CONDENSED
BALANCE SHEETS


Unaudited


September 30, 2009
                          
                          
                          December 31, 2008ASSETSCURRENT
      ASSETS:Cash
                          
                          $
                          531,810
                          
                          
                          $
                          2,100,013Accounts
      receivable, net
                          
                          
                          52,315
                          
                          
                          
                          44,159Inventory
                          
                          
                          311,170
                          
                          
                          
                          246,020Prepaid
      expenses and other current assets
                          
                          
                          57,111
                          
                          
                          
                          47,165Total
      Current Assets
                          
                          
                          952,406
                          
                          
                          
                          2,437,357PROPERTY
      AND EQUIPMENT, Net
                          
                          
                          105,073
                          
                          
                          
                          144,967OTHER
      ASSETS:Patents,
      net
                          
                          
                          70,695
                          
                          
                          
                          64,711Deposits
                          
                          
                          26,914
                          
                          
                          
                          38,206Goodwill
                          
                          
                          1,929,963
                          
                          
                          
                          1,929,963Total
      Other Assets
                          
                          
                          2,027,572
                          
                          
                          
                          2,032,880Total
      Assets
                          
                          $
                          3,085,051
                          
                          
                          $
                          4,615,204LIABILITIES
      AND STOCKHOLDERS' EQUITYCURRENT
      LIABILITIES:Accounts
      payable and accrued expenses
                          
                          $
                          534,429
                          
                          
                          $
                          555,789Warrant
      liability
                          
                          
                          1,135,678
                          
                          
                          
                          -Dividends
      payable
                          
                          
                          518,614
                          
                          
                          
                          -Total
      Current Liabilities
                          
                          
                          2,188,721
                          
                          
                          
                          555,789LONG
      TERM LIABILITIESDeferred
      rent
                          
                          
                          9,861
                          
                          
                          
                          12,668Total
      Long Term Liabilities
                          
                          
                          9,861
                          
                          
                          
                          12,668Total
      Liabilities
                          
                          
                          2,198,582
                          
                          
                          
                          568,457STOCKHOLDERS'
      EQUITY:Series
      B and Series C Convertible Preferred  Stock,$.001
      par value,10,000,000 shares authorized,160,875
      issued or outstanding as of September30,
      2009 and 140,000 as of December 31, 2008
                          
                          
                          161
                          
                          
                          
                          140Common
      stock, $.001 par value, 140,000,000 sharesauthorized,
      43,255,441 issued and outstandingas
      of September 30, 2009 and December 30, 2008
                          
                          
                          43,256
                          
                          
                          
                          43,256Additional
      paid-in capital
                          
                          
                          35,476,994
                          
                          
                          
                          35,307,119Accumulated
      deficit
                          
                          
                          (34,633,942
                          )
                          
                          
                          (31,303,768
                          )Total
      Stockholders' Equity
                          
                          
                          886,469
                          
                          
                          
                          4,046,747Total
      Liabilities and Stockholders' Equity
                          
                          $
                          3,085,051
                          
                          
                          $
                          4,615,204





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
      30,2009
                    
                    
                    2008
                    
                    
                    2009
                    
                    
                    2008REVENUES
                    
                    $
                    63,130
                    
                    
                    $
                    108,607
                    
                    
                    $
                    185,575
                    
                    
                    $
                    406,946COST
      OF REVENUESMaterials,
      labor and overhead
                    
                    
                    49,703
                    
                    
                    
                    69,471
                    
                    
                    
                    127,306
                    
                    
                    
                    299,922Inventory
      obsolescence
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    24,577Total
      Cost of Revenues
                    
                    
                    49,703
                    
                    
                    
                    69,471
                    
                    
                    
                    127,306
                    
                    
                    
                    324,499GROSS
      PROFIT
                    
                    
                    13,427
                    
                    
                    
                    39,139
                    
                    
                    
                    58,269
                    
                    
                    
                    82,447COSTS
      AND EXPENSES:Research
      and development
                    
                    
                    222,833
                    
                    
                    
                    305,436
                    
                    
                    
                    737,039
                    
                    
                    
                    731,575Selling,
      general and administrative
                    
                    
                    701,902
                    
                    
                    
                    727,277
                    
                    
                    
                    1,898,624
                    
                    
                    
                    2,315,813Depreciation
      and amortization
                    
                    
                    15,677
                    
                    
                    
                    19,512
                    
                    
                    
                    51,405
                    
                    
                    
                    52,572Total
      Costs and Expenses
                    
                    
                    940,412
                    
                    
                    
                    1,052,225
                    
                    
                    
                    2,687,068
                    
                    
                    
                    3,099,960LOSS
      FROM OPERATIONS
                    
                    
                    (926,985
                    )
                    
                    
                    (1,013,089
                    )
                    
                    
                    (2,628,799
                    )
                    
                    
                    (3,017,513
                    )OTHER
      INCOME (LOSS):Interest
      income
                    
                    
                    1,938
                    
                    
                    
                    20,604
                    
                    
                    
                    14,909
                    
                    
                    
                    89,698Fair
      market value adjustment on warrant liability
                    
                    
                    (334,390
                    )
                    
                    
                    -
                    
                    
                    
                    27,914
                    
                    
                    
                    -Total
      Other Income (Loss)
                    
                    
                    (332,452
                    )
                    
                    
                    20,604
                    
                    
                    
                    42,823
                    
                    
                    
                    89,698NET
      LOSS
                    
                    
                    (1,259,437
                    )
                    
                    
                    (992,485
                    )
                    
                    
                    (2,585,976
                    )
                    
                    
                    (2,927,815
                    )DIVIDENDS
      PAID OR PAYABLE ON SERIES B AND C PREFERED STOCK
                    
                    
                    145,281
                    
                    
                    
                    140,000
                    
                    
                    
                    518,614
                    
                    
                    
                    463,760NET
      LOSS ATTRIBUTABLE TO COMMON SHAREHOLDERS
                    
                    $
                    (1,404,718
                    )
                    
                    $
                    (1,132,485
                    )
                    
                    $
                    (3,104,590
                    )
                    
                    $
                    (3,391,575
                    )BASIC
      AND FULLY DILUTED LOSSPER
      COMMON SHARE
                    
                    $
                    (0.03
                    )
                    
                    $
                    (0.03
                    )
                    
                    $
                    (0.07
                    )
                    
                    $
                    (0.08
                    )WEIGHTED
      AVERAGE COMMONSHARES
      OUTSTANDING, BASIC
                    
                    
                    43,255,441
                    
                    
                    
                    40,486,411
                    
                    
                    
                    43,255,441
                    
                    
                    
                    40,430,640





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 30,2009
                  
                  
                  2008CASH
      FLOWS FROM OPERATING ACTIVITIES:Net
      loss
                  
                  $
                  (2,585,976
                  )
                  
                  $
                  (2,927,815
                  )Adjustments
      to reconcile net loss to net cash used in operating
      activities:Depreciation
      and amortization
                  
                  
                  51,405
                  
                  
                  
                  52,572Compensation
      expense for warrants and options issued to employees and
      consultants
                  
                  
                  298,335
                  
                  
                  
                  562,335Fair
      market value adjustment for warrants issued to investors
                  
                  
                  (27,914
                  )
                  
                  
                  -Provision
      for bad debt
                  
                  
                  (11,342
                  )
                  
                  
                  -Changes
      in assets and liabilities:Accounts
      receivable
                  
                  
                  3,186
                  
                  
                  
                  (21,785
                  )Inventory
                  
                  
                  (65,150
                  )
                  
                  
                  (136,116
                  )Prepaid
      expenses and other current assets
                  
                  
                  (9,946
                  )
                  
                  
                  (31,297
                  )Deposits
                  
                  
                  11,292
                  
                  
                  
                  84,057Accounts
      payable and accrued expenses
                  
                  
                  (21,360
                  )
                  
                  
                  (5,709
                  )Customer
      deposits
                  
                  
                  -
                  
                  
                  
                  (1,605
                  )Deferred
      rent
                  
                  
                  (2,807
                  )
                  
                  
                  468Net
      Cash Used in Operating Activities
                  
                  
                  (2,360,277
                  )
                  
                  
                  (2,424,895
                  )CASH
      FLOWS FROM INVESTING ACTIVITIESCosts
      related to patent applications
                  
                  
                  (7,892
                  )
                  
                  
                  (24,655
                  )Purchases
      of property and equipment
                  
                  
                  (9,603
                  )
                  
                  
                  (100,170
                  )Net
      Cash Used in Investing Activities
                  
                  
                  (17,495
                  )
                  
                  
                  (124,825
                  )CASH
      FLOWS FROM FINANCING ACTIVITIES:Proceeds
      from issuance of equity securities
                  
                  
                  809,569
                  
                  
                  
                  251,863Net
      Cash Provided by Financing Activities
                  
                  
                  809,569
                  
                  
                  
                  251,863Decrease
      in cash
                  
                  
                  (1,568,203
                  )
                  
                  
                  (2,297,857
                  )Cash
      at beginning of period
                  
                  
                  2,100,013
                  
                  
                  
                  5,086,378Cash
      at end of period
                  
                  $
                  531,810
                  
                  
                  $
                  2,788,521SUPLEMENTAL
      NONCASH ITEMSIncrease
      in dividends payable
                  
                  $
                  518,614
                  
                  
                  
                  463,760




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 management of Power
Efficiency Corporation, (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 and nine months ended September 30, 2009 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, 2008 on Form 10-K
filed on March 31, 2009 and Form S-1 last amended on June 30, 2009.




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 materially
from those estimates.




Certain
reclassifications have been made to the 2008 financial statements in order for
them to conform to the 2009 financial statement presentation.




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, and a recurring deficiency of
cash from operations, including a cash deficiency of approximately $2,360,000
from operations for the nine months ended September 30, 2009, and lacks
sufficient liquidity to continue its operations.




These
factors raise substantial doubt about the Company's ability to continue as a
going concern.  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. 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.




NOTE
3 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES





Except as
disclosed in Note 10 below, there were no significant changes to the Company’s
significant accounting policies as disclosed in Note 2 of the Company’s
financial statements included in the Company’s Annual Report of Form 10-K for
the year ended December 31, 2008.


6


New
Accounting Pronouncements:





FASB ASC
815-10, Derivatives and
Hedging(Prior
authoritative literature:FASB SFAS No. 161, Disclosures about Derivative
Instruments and Hedging Activities, issued March 2008 (“SFAS 161”), an amendment of FASB
Statement No. 133). FASB ASC 815-10 (SFAS 161) requires enhanced
disclosures related to derivative and hedging activities and thereby seeks to
improve the transparency of financial reporting. Under FASB ASC 815-10 (SFAS
161), entities are required to provide enhanced disclosure related to
(i) how and why an entity uses derivative instruments (ii) how derivative
instruments and related hedge items are accounted for under SFAS No. 133,
Accounting for Derivative
Instruments and Hedging Activities(“SFAS. 133”), and its
related interpretations; and (iii) how derivative instruments and related
hedged items affect an entity’s financial position, financial performance, and
cash flows. FASB ASC 815-10 (SFAS 161)must be applied prospectively to all
derivative instruments and non-derivative instruments that are designated and
qualify as hedging instruments and related hedged items accounted for under SFAS
No. 133 for all financial statements issued for fiscal years and interim
periods beginning after November 15, 2008 with early application
encouraged. The adoption of FASB ASC 815-10 (SFAS 161) had no impact on the
Company’s condensed financial statements.





FASB ASC
105-10, Generally Accepted
Accounting Principles(Prior authoritative literature:FASB SFAS No. 165, Subsequent Events (“SFAS 165”),issued May 28, 2009), which establishes general standards of accounting
for, and disclosure of, events that occur after the balance sheet date but
before financial statements are issued or are available to be
issued.  FASB ASC 105-10 (SFAS 165) is effective for interim or annual
financial periods ending after June 15, 2009.  The adoption of FASB
ASC 105-10 (SFAS 165) did not have a material effect on the company’s financial
position or results of operations.  The Company evaluates subsequent
events through the date the accompanying financial statements were issued, which
was November 16, 2009.





FASB ASC
105-10-65, The FASB Accounting
Standards Codification and the Hierarchy of Generally Accepted Accounting
Principles (Prior authoritative literature: FASB SFAS No. 168, The FASB Accounting Standards
Codification and the Hierarchy of Generally Accepted Accounting Principles
(“SFAS 168”), issued June 2009), establishes the FASB Accounting
Standards Codification (the “Codification”) as the single source of
authoritative nongovernmental U.S. GAAP. The Codification is effective for
interim and annual periods ending after September 15, 2009. The adoption of FASB
ASC 105-10-65 (SFAS 168) did not have a material impact on the Company’s
consolidated financial statements.





NOTE
4 – INVENTORIES





Inventories
are valued at the lower of cost (first-in, first-out) or market.  The
Company reviews inventory for impairments to net realizable value whenever
circumstances arise.  Such circumstances may include, but are not
limited to, the discontinuation of a product line or re-engineering certain
components making certain parts obsolete.  Management has determined
that a reserve for inventory obsolescence was not necessary at September 30,
2009 or December 31, 2008.


7


Inventories
are comprised as follows:





September
                  30, 2009
                
                
                December
                  31, 2008Raw
      materials
                
                $
                145,762
                
                
                $
                178,698Finished
      Goods
                
                
                165,408
                
                
                
                67,322Inventories
                
                $
                311,170
                
                
                $
                246,020





NOTE
5 – GOODWILL





In
accordance with FASB ASC 350, Goodwill and Other Intangible
Assets (Prior
authoritative literature:FASB SFAS No. 142, Goodwill and Other Intangible
Assets (“SFAS 142”), previously recognized intangible assets deemed to
have indefinite useful lives were tested by management for impairment during
fiscal 2009 and 2008 utilizing a two-step test.  At a minimum, an
annual goodwill impairment test is required, or when certain events indicate a
possible impairment.





The first
part of the test is to compare the Company’s fair market value (the number of
the Company’s common shares outstanding multiplied by the closing stock price on
the date of the test), to the book value of the Company (the Company’s total
stockholders’ equity, as of the date of the test).  If the fair market
value of the Company is greater than the book value, no impairment exists as of
the date of the test.  However, if the book value exceeds fair market
value, the Company must perform part two of the test, which involves
recalculating the implied goodwill by repeating the acquisition analysis that
was originally used to calculate goodwill, using purchase accounting as if the
acquisition happened on the date of the test, to calculate the implied goodwill
as of the date of the test.





The
Company’s most recent impairment analysis was performed on September 30, 2009,
on the Company’s single reporting unit, as a result of the Company’s recurring
operating losses.  As of September 30, 2009, the Company’s market cap
was $9,083,643, and the Company’s book value was $1,024,675.  As of
December 31, 2008, the Company’s market cap was $8,651,088, and the Company’s
book value was $4,046,747.  Based on this, management concluded that
no impairment exists as of September 30, 2009 or December 31, 2008.





Circumstances
may arise in which the Company will perform an impairment test in addition to
its annual and quarterly analyses.  An example of one of these
circumstances would be a sudden sharp drop in the Company’s stock price not as a
result of market conditions.





NOTE
6 – EARNINGS PER SHARE





The
Company accounts for its earnings per share in accordance with FASB ASC 260-10
(SFAS 128), which requires presentation of basic and diluted earnings per
share.  Basic earnings per share is computed by dividing income or loss
attributable to common shareholders by the weighted average number of common
shares outstanding for the reporting period.  Diluted earnings per
share reflect the potential dilution that could occur if securities or other
contracts, such as stock options, to issue common stock were exercised or
converted into common stock.


8





Nine
      Months
                  Ended
                  September
      30,
                  2009
                
                
                Nine
      Months
                  Ended
                  September
      30,
                  2008Net
      loss attributable to common shareholders, as reported
                
                $
                (3,104,590
                )
                
                $
                (2,927,815
                )Basic
      weighted average number of common shares outstanding, as
      reported
                
                
                43,255,441
                
                
                
                40,430,640Dilutive
      effect of stock options, as reported
                
                
                -
                
                
                
                -Diluted
      weighted average number of common shares outstanding, as
      reported
                
                
                43,255,441
                
                
                
                40,430,640Basic
      and diluted loss per share, as reported
                
                $
                (0.07
                )
                
                $
                (0.07
                )





For the
nine months ended September 30, 2009, warrants and options to purchase
49,539,426 shares of common stock at per share exercise prices ranging from
$0.11 to $19.25 were not included in the computation of diluted loss per share
because inclusion would have been anti-dilutive. For the nine months ended
September 30, 2008, warrants and options to purchase 43,624,676 shares of common
stock at per share exercise prices ranging from $0.20 to $19.25 were not
included in the computation of diluted loss per share because inclusion would
have been anti-dilutive.




NOTE
8 – STOCK-BASED COMPENSATION





At
September 30, 2009, the Company had two stock-based compensation
plans.  Readers should refer to Note 12 of the Company’s financial
statements, which are included in the Company’s Annual Report on Form 10-K
for the year ended December 31, 2008, for additional information related to
these stock-based compensation plans. There were 2,278,750 warrants and
4,000,000 options granted during the nine months ended September 30, 2009. 
The fair value of these warrants and options was approximately $333,000 and
$797,000 at issuance, respectively.  There were 1,280,000 warrants and
911,000 options granted during the nine months ended September 30, 2008. 
The fair value of these warrants and options was approximately $90,000 and
$439,000 at issuance, respectively.  No stock options were exercised
during the periods ending September 30, 2009 and 2008.  The Company
accounts for stock option grants in accordance with FASB ASC 718, Share-Based Payments (Prior
authoritative literature: FASB SFAS No. 123(R), Share-Based Payments (“SFAS
123(R)”). Compensation costs related to share-based payments recognized
in the Condensed Statements of Income were $298,335 and $562,335 for the nine
month periods ended September 30, 2009 and 2008, respectively.





NOTE
9 – MATERIAL AGREEMENTS





In 2007,
the Company entered into a manufacturing service agreement with Sanmina-Sci
Corporation (“Sanmina-Sci”) for the production of digital units and digital
circuit boards.  Pursuant to this agreement, the Company will purchase
an amount of digital units, subject to certain minimum quantities, from
Sanmina-Sci equal to an initial firm order agreed upon by the Company and
Sanmina-Sci and subsequent nine-month requirements forecasts.  The
initial term of the contract was one year, and upon expiration of the initial
term, the contract continues on a year to year basis until one party gives
notice to terminate.  As of September 30, 2009, the Company has
committed to purchase approximately an additional $160,000 under this
contract.


9


On March
11, 2009, the Company entered into a consulting agreement with one of the
Company’s directors, Greg Curhan.  The agreement is for a term of 12
months and calls for Mr. Curhan to provide investment and marketing related
services for the Company.  Mr. Curhan will receive $3,000 per month
and 360,000 warrants to purchase the Company’s common stock, at an exercise
price of $0.11 per share, under the terms of this agreement.  The
warrants vest equally over the term of the agreement.





On August
17, 2009, the Company entered into a consulting agreement with an investor
relations consulting firm.  This agreement calls for the consultant to
perform investor relations and public relations services for the
Company.  For its services, the Company has agreed to pay the
consultant a monthly retainer of $10,000, plus 450,000 warrants to purchase the
Company’s common stock, at an exercise price of $0.19 per share.  The
term of the consulting agreement is initially for 12 months, can be extended at
the end of the term, and can be terminated immediately upon written notice by
either party.  The warrants vest equally over the term of the
agreement





NOTE
10 – WARRANT LIABILITY




On
January 1, 2009, the Company adopted FASB ASC 815, Determining Whether an Instrument
(or Embedded Feature) Is Indexed to an Entity’s Own Stock (Prior authoritative
literature: FASB EITF 07-5, Determining Whether an Instrument
(or Embedded Feature) Is Indexed to an Entity’s Own Stock (“EITF
07-5”).The Company determined that some of its warrants
contained an anti-dilution provision.  As a result, the Company
reclassified 5,696,591 of its common stock warrants to warrant liability, under
current liabilities, and resulting in a cumulative adjustment to accumulated
deficit as of January 1, 2009 of $225,585.
 
 On August
12, 2009, in connection with its Series C Preferred Stock offering (see Note
12), the Company issued 731,250 warrants to purchase shares of the Company’s
common stock which contained an anti-dilution provision.  As a result,
the Company recorded these warrants as a liability, resulting in an addition of
$138,206 to warrant liability.


The
Company accounts for its warrant liability in accordance with FASB ASC 820-10,
Fair Value Measurements and
Disclosures(Prior
authoritative literature:FASB SFAS No. 157, Fair Value Measurements (“SFAS
157”),issued September 2006).  FASB ASC 820-10 (SFAS 157)
emphasizes that fair value is a market-based measurement, not an entity-specific
measurement. Therefore, a fair value measurement should be determined based on
the assumptions that market participants would use in pricing the asset or
liability. As a basis for considering market participant assumptions in fair
value measurements, FASB ASC 820-10 (SFAS 157) establishes a fair value
hierarchy that distinguishes between market participant assumptions based on
market data obtained from sources independent of the reporting entity
(observable inputs that are classified within Levels 1 and 2 of the hierarchy)
and the reporting entity’s own assumptions about market participant assumptions
(unobservable inputs classified within Level 3 of the hierarchy).





The
Company has valued its warrant liability using a Black-Scholes model (Level 3
inputs) containing the following assumptions:  volatility 349%,
risk-free rate 1.78%, term 10 months.  The Company recorded a non-cash
gain related to these warrants of $27,914 for the nine months ended September
30, 2009, which was recorded in other income.


10


The
following reconciles the warrant liability for the nine months ended September
30, 2009:




Beginning
      balance, January 1, 2009
              
              $
              1,025,386Additions
      to warrant liability
              
              
              138,206Unrealized
      gain on derivative liability
              
              
              (27,914
              )Ending
      balance, September 30, 2009
              
              $
              1,135,678




NOTE
11 – INCOME TAXES





The
Company utilizes the asset and liability method of accounting for income taxes
pursuant to FASB ASC 740 Accounting for Income Taxes (Prior
authoritative literatureFASB SFAS No. 109, Accounting for Income Taxes (“SFAS
109”).  FASB ASC 740 (SFAS 109) requires the recognition of
deferred tax assets and liabilities for both the expected future tax impact of
differences between the financial statement and tax basis of assets and
liabilities, and for the expected future tax benefit to be derived from tax loss
and tax credit carryforwards.  FASB ASC 740 (SFAS 109) additionally
requires the establishment of a valuation allowance to reflect the likelihood of
realization of deferred tax assets.  The Company has evaluated the net
deferred tax asset taking into consideration operating results and determined
that a full valuation allowance should be maintained.





FASB ASC
740-10-25-10 Definition of
Settlement in FASB Interpretation No. 48 (Prior authoritative literatureFIN 48-1 Definition of
Settlement in FASB Interpretation No. 48 (“FIN 48-1”) issued May
2007)provides
guidance on how to determine whether a tax position is effectively settled for
the purpose of recognizing previously unrecognized tax benefits.  FASB
ASC 740-10-25-10 (FIN 48-1) is effective retroactively to January 1,
2007.  Under FASB ASC 740 (FIN 48), the impact of an uncertain tax
position taken or expected to be taken on an income tax return must be
recognized in the financial statements at the amount that is more likely than
not to be sustained upon audit by the relevant taxing authority. An uncertain
income tax position will not be recognized in the financial statements unless it
is more likely than not of being sustained. The implementation of FASB ASC 740
(FIN 48) and FASB ASC 740-10-25-10 (FIN 48-1) did not have a material impact on
the Company’s financial position, results of operations or cash
flows.





NOTE
12 – ISSUANCE OF SERIES C CONVERTIBLE PREFERRED STOCK





On August
12, 2009, the Company issued and sold 20,875 units, each unit consisting of one
share of the Company’s Series C Preferred Stock, par value $.001 per share, and
50 warrants to purchase shares of the Company’s common stock at an exercise
price of $0.40 per share, resulting in the sale and issuance of an aggregate of
20,875 shares of Series C Preferred Stock and warrants to purchase, initially,
up to 1,043,750 shares of the Company’s common stock, in a private offering for
$835,000 in cash, and is recorded as a component of Stockholders’
Equity.  The securities were issued pursuant to Regulation D of the
Securities Act of 1933. All of the purchasers of Units were either officers,
directors or pre-existing stockholders of the Company.  Each of these
purchasers represented that they were an “accredited investor” as such term is
defined in Regulation D of the Securities Act.  In this transaction,
Steven Strasser, the Company’s CEO, purchased 6,250 units for $250,000 in cash,
Kenneth Dickey, a Director of the Company, purchased 1,250 for $50,000 in cash,
and Scott Johnson, the Company’s COO, purchased 1,250 units for $50,000 in
cash.


11


Each
share of Series C Preferred Stock is initially convertible into 100 shares of
the Company’s common stock, subject to adjustment under certain
circumstances.  The Series C Preferred Stock is convertible at the
option of the holder at any time.  The Series C 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.  In addition, the Series C Preferred stockholders
have the option to exchange their Series C Preferred Stock for units of a
subsequent financing of the Company through December 30, 2009, at no additional
cost.  The Series C Preferred Stock has an 8% dividend, payable
annually in cash or stock, at the discretion of the Company’s board of
directors.





NOTE
13 – SUBSEQUENT EVENTS





On
October 5, 2009, the Company issued and sold an additional 2,500 units,
resulting in the sale and issuance of an aggregate of 2,500 shares of Series C
Preferred Stock and warrants to purchase up to 125,000 shares of the Company’s
common stock for $100,000 in cash under the above referenced financing
transaction.


12


ITEM
2.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS





FORWARD
LOOKING STATEMENTS





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




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




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


13


OVERVIEW




The
Company generates revenues from a single business segment: the design,
development, marketing and sale of proprietary energy efficiency technologies
and products for electric motors.  The Company’s products, called
Motor Efficiency Controllers (“MEC”), save up to 35 percent of the electricity
used by a motor in appropriate applications.  The Company’s patented
technology platform, called E-Save Technology®, saves energy when a constant
speed alternating current induction motor is operating in a lightly loaded
condition.  Target applications for the Company’s three-phase MECs
include escalators, MG set elevators, grinders, crushers, saws, stamping
presses, and many other types of industrial equipment.  The Company
has also developed a single-phase MEC targeted at smaller motors, such as those
found in clothes washers, dryers, and other appliances and light commercial
equipment.  The Company has one existing patent and three patents
pending on E-Save Technology®.





Analog
Three-phase MEC


The
Company began generating revenues from sales of its patented analog three-phase
MEC line of motor controllers in late 1995.  The Company sold this
product from 1995 through the second quarter of 2009.





Digital
Three-phase MEC


In 2005,
the Company began development of a digital version of its three-phase MEC so
that the product would be capable of high volume sales through existing
distribution channels for motor controls.  The digital version is much
smaller in size and easier to install than the analog product, is driven by a
powerful microprocessor and digital signal processor. The digital MEC is a
complete motor control device, meaning is can start, stop, soft start and
protect a motor, and is therefore capable of replacing standard motor starters
and soft starts that do not save energy. The product can be installed by
original equipment manufacturers (OEMs) at their factories or it can be
retrofitted on to existing equipment.





In 2008,
the Company launched limited sales of the digital three-phase MEC and initiated
testing if the digital product by several OEMs, primarily in the
elevator/escalator industry.  In the summer of 2009, the Company
announced its first OEM agreements and that it had received Underwriters’
Laboratories (“UL”) certification on a full line of the Company’s digital
three-phase products.  UL certification enables the Company to sell
its digital three-phase products to industrial markets.  The Company
is developing a network of independent sales representatives to penetrate the
industrial markets.





Digital
Single-phase MEC


In 2006,
the Company began development on its digital single-phase
product.  The digital single phase MEC is targeted at appliances, such
as clothes washers and dryers.  The company has one patent pending on
its digital single-phase MEC.


14


Capitalization


As of
September 30, 2009, the Company had total stockholders’ equity of $886,469
primarily due to (i) the Company’s sale of 20,875 shares of Series C Convertible
Preferred Stock in a private offering in August of 2009, (ii) the Company’s sale
of 140,000 shares of Series B Convertible Preferred Stock in a private offering
from October of 2007 through January of 2008, (iii) 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, (iv) the Company’s sale of 14,500,000 shares of
common stock in a private stock offering in July and August of 2005, (v) 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 (vi) 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.  All of the Company’s
Series A-1 Convertible Preferred Stock was converted into the Company’s common
stock in 2005.


Because
of the nature of our business, the Company makes significant investments in
research and development for new products and enhancements to existing
products.  Historically, the Company has funded its research and
development efforts through cash flow primarily generated from debt and equity
financings.  Management anticipates that future expenditures in
research and development will continue at current levels.





The
Company’s results of operations for the quarter and nine months ended September
30, 2009 were marked by a significant decrease in revenues and an increase in
losses from operations that are more fully discussed in the following section
“Results of Operations for the Three and Nine Months Ended September 30, 2009
and 2008”.  Sales cycles for our products are generally lengthy and
can range from less than a month to well over one year, depending on customer
profile.  Larger original equipment manufacturer (“OEM”) deals and
sales to larger end users generally take a longer period of time, whereas sales
through channel partners may be closed within a few weeks.  Because of
the complexity of this sales process, a number of factors that are beyond the
control of the Company can delay the closing of transactions.


15


RESULTS
OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2009 AND
2008.





The
following table sets forth certain line items in our condensed statement of
operations as a percentage of total revenues for the periods
indicated:





Nine
      Months
                  Ended
                  September
      30,
                  2009
                
                
                Nine
      Months
                  Ended
                  September
      30,
                  2008Revenues
                
                
                100.0
                %
                
                
                100.0
                %Cost
      of revenues
                
                
                68.6
                
                
                
                79.7Gross
      profit
                
                
                31.4
                
                
                
                20.3Costs
      and expenses:Research
      and development
                
                
                397.2
                
                
                
                179.7Selling,
      general and administrative
                
                
                1,023.1
                
                
                
                569.1Depreciation
      and amortization
                
                
                27.7
                
                
                
                12.9Total
      expenses
                
                
                1,448.0
                
                
                
                761.7Loss
      from operations
                
                
                (1,416.6
                )
                
                
                (741.5
                )Other
      income
                
                
                23.1
                
                
                
                22.0Net
      loss
                
                
                (1,393.5
                )
                
                
                (719.5
                )Dividends
      paid or payable on Series B Preferred Stock
                
                
                229.2
                
                
                
                -Net
      loss attributable to common shareholders
                
                
                (1,622.7
                )
                
                
                (719.5
                )




REVENUES




Total
revenues for the three months ended September 30, 2009 were approximately
$63,000, compared to $109,000 for the three months ended September 30, 2008,
resulting in a decrease of $46,000 or 42%. This decrease is mainly
attributable to an overall decrease in sales in the industrial market in the
third quarter of 2009, caused by a fall in industrial sales to approximately
$9,000 for the three months ended September 30, 2009, from $59,000 for the three
months ended September 30, 2008.  Industrial sales decreased primarily
because the Company has focused on building a network of independent reps,
instead of direct sales to end users during the three months ended September 30,
2009.  Management believes that developing this independent rep
network will lead to a higher volume of sales to industrial companies,
industrial distributors, and OEMs of industrial equipment.  Escalator
manufacturer and service provider sales decreased approximately $1,000 for the
three months ended September 30, 2009 to approximately $53,000, from $54,000 for
the three months ended September 30, 2008.  Sales of the Company’s
single-phase product, which is for use on small appliances, totaled
approximately $1,000 for the three months ended September 30,
2009.  There were no comparable sales of the single-phase product in
2008.  For the three months ended September 30, 2009, industrial sales
were approximately 14% of total revenues, escalator and elevator sales were
approximately 84% of total revenues, and sales of the single-phase product were
approximately 2% of total revenues.  For the three months ended
September 30, 2008, industrial and other sales, which consisted of a mix of
digital units and analog units, were approximately 49% of total revenues, and
escalator and elevator sales, which consisted of a mix of digital units and
analog units, were approximately 51% of total revenues.


16





Total
revenues for the nine months ended September 30, 2009 were approximately
$186,000, compared to $407,000 for the nine months ended September 30, 2008,
resulting in a decrease of $221,000 or 54%.  This decrease is mainly
attributable to a decrease in sales in the elevator and escalator market during
the nine months ended September 30, 2009. Specifically, escalator manufacturer
and service provider sales fell to approximately $113,000 for the nine months
ended September 30, 2009, from $326,000 for the nine months ended September 30,
2008.  Sales of the analog product to one escalator manufacturer and
service provider, which is one of the Company’s largest customers, slowed very
significantly during this period in anticipation of release of their private
label version of our digital product.  The digital product has been
tested and approved for use on a retrofit and OEM basis by this customer, and a
supply agreement was signed during the second quarter of 2009, and the
customer’s private label version of our digital product was launched at the end
of the second quarter of 2009.  The digital product offers greater
features and functionality compared to the analog product, making it more
attractive as an OEM product.  Furthermore, industrial sales fell to
approximately $71,000 for the nine months ended September 30, 2009, from
approximately $81,000 for the nine months ended September 30,
2008.  Sales of the Company’s single-phase product, which is for use
on small appliances, totaled approximately $2,000 for the nine months ended
September 30, 2009.  There were no comparable sales of the
single-phase product in 2008.  For the nine months ended September 30,
2009, industrial and other sales, of which all but one sale consisted of digital
units, were approximately 38% of total revenues, escalator and elevator sales,
which consisted of a mix of digital units and analog units, were approximately
61% of total revenues, and sales of our single-phase product were approximately
1% of total revenues.  For the nine months ended September 30, 2008,
industrial and other sales, which consisted of a mix of digital units and analog
units, were approximately 20% on total revenues, and escalator and elevator
sales, which consisted of a mix of digital units and analog units, were
approximately 80% of total revenues.





COST
OF REVENUES




Total
cost of revenues, which includes material, direct labor and overhead, for the
three months ended September 30, 2009, was approximately $50,000, compared to
approximately $69,000 for the three months ended September 30, 2008, resulting
in a decrease of $19,000 or 27%.  This decrease is mainly attributable
to a decrease in sales in the industrial market in the third quarter of
2009.  As a percentage of revenue, total cost of revenues increased to
approximately 79% for the three months ended September 30, 2009 compared to
approximately 64% for the three months ended September 30, 2008.  The
increase in the costs as a percentage of sales was primarily due to the
Company’s decrease in sales in both the elevator and escalator and the
industrial markets during the third quarter of 2009.


17


Total
cost of revenues, which includes material, direct labor and overhead, for the
nine months ended September 30, 2009, was approximately $127,000, compared to
approximately $325,000 for the nine months ended September 30, 2008, resulting
in a decrease of $198,000 or 61%. This decrease is mainly attributable to a
decrease in sales in both the elevator and escalator and the industrial markets
during the nine months ended September 30, 2009.  Also, the Company
recorded an inventory obsolescence charge of approximately $25,000 during the
nine months ended September 30, 2008 and no comparable charge was recorded
during the nine months ended September 30, 2009.  As a percentage of
sales, total cost of revenues decreased to approximately 69% for the nine months
ended September 30, 2009, compared to approximately 80% for the nine months
ended September 30, 2008.  The decrease in the costs as a percentage
of sales was primarily due to the Company increasing its prices on certain
units, which resulted in higher margins during the nine months ended September
30, 2009, and an increase in the sale of digital units, which have higher
average margins than analog units, as well as no inventory obsolescence charges
during 2009.





GROSS
PROFIT





Gross
profit for the three months ended September 30, 2009 was approximately $13,000
compared to approximately $39,000 for the three months ended September 30, 2008,
resulting in a decrease of $26,000 or 67%.  This decrease is mainly
attributable to a decrease in sales, resulting in relatively higher fixed costs
spread over a lower amount of sales, during the three months ended September 30,
2009.  Furthermore, the Company had relatively higher sales in the
elevator and escalator market, for the three months ended September 30,
2009.  Elevator and escalator market sales tend to have lower overall
gross margins than sales to the industrial market.  As a percentage of
revenue, gross profit decreased to approximately 21% for the three months ended
September 30, 2009, compared to approximately 31% for the three months ended
September 30, 2008.





Gross
profit for the nine months ended September 30, 2009 was approximately $58,000
compared to approximately $82,000 for the nine months ended September 30, 2008,
resulting in a decrease of $24,000 or 29%. This decrease is mainly attributable
to a decrease in sales in both the elevator and escalator and the industrial
markets during the nine months ended September 30, 2009, partially offset by the
inventory obsolescence charge recorded by the Company during the nine months
ended September 30, 2008, as described above. As a percentage of revenue, gross
profit increased to approximately 31% for the nine months ended September 30,
2009, compared to approximately 30% for the nine months ended September 30,
2008.





OPERATING
EXPENSES




Research
and Development Expenses




Research
and development expenses were approximately $223,000 for the three months ended
September 30, 2009, as compared to approximately $305,000 for the three months
ended September 30, 2008, resulting in a decrease of $82,000 or 26%.  This
decrease is mainly attributable to a decrease in the Company’s product
development and certification costs related to the Company’s digital controller
for both its single-phase and three-phase products during the three months ended
September 30, 2009.





Research
and development expenses were approximately $737,000 for the nine months ended
September 30, 2009, as compared to approximately $732,000 for the nine months
ended September 30, 2008, resulting in a marginal increase of $5,000 or less
than 1%. This increase is mainly attributable to the Company’s continued
research and development efforts on its digital controller for both its
single-phase and three-phase products. Specifically, the increased costs include
additional personnel in the Company’s research and development department, which
resulted in higher salaries and related payroll costs, as well as the opening of
a research and development center, and new product certification expenses during
the nine months ended September 30, 2009.


18


Selling,
General and Administrative Expenses




Selling,
general and administrative expenses were approximately $702,000 for the three
months ended September 30, 2009, as compared to approximately $727,000 for the
three months ended September 30, 2008, resulting in a decrease of $25,000 or 3%.
The decrease in selling, general and administrative expenses compared to the
prior year was primarily due to a decrease in salaries and payroll related
costs, consulting fees, and a decrease in costs related to FASB ASC 718 (SFAS
123(R)).  These decreases were partially offset by increases in legal
and professional fees, related to the Company’s patent attorneys, litigation
(see Part II – Other Information), a change in the Company’s independent
registered accounting firm, and an increase in the Company’s public and
shareholder relations expenses.





Selling,
general and administrative expenses were approximately $1,899,000 for the nine
months ended September 30, 2009, as compared to approximately $2,316,000 for the
nine months ended September 30, 2008, resulting in a decrease of $417,000 or
18%. The decrease in selling, general and administrative expenses compared to
the prior year was primarily due to a decrease in salaries and payroll related
costs, consulting fees, and a decrease in costs related to FASB ASC 718 (SFAS
123(R)).  These decreases were partially offset by increases in legal
and professional fees, related to the Company’s patent attorneys, litigation
(see Part II – Other Information), a change in the Company’s independent
registered accounting firm and an increase in the Company’s public and
shareholder relations expenses.





Other
Income (Loss)





Other
income and loss was a loss of approximately $332,000 for the three months ended
September 30, 2009, as compared to income of approximately $21,000 for the three
months ended September 30, 2008, resulting in a decrease of $353,000, or
1,686%.  This decrease is primarily due to the Company’s adoption of
FASB ASC 815 (EITF 07-5), which resulted in the Company recording an additional
non-cash loss of approximately $334,000 during the three months ending September
30, 2009.  No such gain was recorded during the three months ending
September 30, 2008.





Other
income and loss was income approximately $43,000 for the nine months ended
September 30, 2009, as compared to approximately $90,000 for the nine months
ended September 30, 2008, resulting in a decrease of $47,000, or
52%.  This decrease is primarily due to a decrease in interest income
during the nine months ended September 30, 2009.  This decrease is
partially offset by the Company’s adoption of FASB ASC 815 (EITF 07-5), which
resulted in the Company recording an additional non-cash gain of approximately
$28,000 during the nine months ending September 30, 2009.  No such
gain was recorded during the nine months ending September 30,
2008.


19





Financial
Condition, Liquidity and Capital Resources





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, and a recurring deficiency of
cash from operations, including a cash deficiency of approximately $2,360,000
from operations, for the nine months ended September 30, 2009, and lacks
sufficient liquidity to continue its operations.




These
factors raise substantial doubt about the Company's ability to continue as a
going concern.  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.  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.




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, 2009, the Company had cash of $531,810.





Cash used
in operating activities for the nine months ended September 30, 2009 was
$2,360,277, which consisted of a net loss of $2,585,976; less depreciation and
amortization of $51,405, warrants and options issued to employees and
consultants of $298,335, a decrease in accounts receivable of $3,186, and a
decrease in deposits of $11,292; offset by a fair market value adjustment to
warrants issued to investors of $27,914, increases in inventory of $65,150,
prepaid expenses and other current assets of $9,946, and decreases in accounts
payable of $21,360, provision for bad debt of $11,342 and deferred rent of
$2,807.





Cash used
for operating activities for the nine months ended September 30, 2008 was
$2,424,895, which consisted of: a net loss of $2,927,815; less depreciation and
amortization of $52,572, and warrants and options issued in connection with the
issuance of debt securities, and to employees and consultants of $562,335;
offset by increases in accounts receivable of $21,785, inventory of $136,116,
prepaid expenses of $31,297, and deferred rent of $468, and decreases in
deposits of $84,057, accounts payable of $5,709, and customer deposits of
$1,605.





Net cash
used in investing activities for the nine months ended September 30, 2009 was
$17,495, compared to $125,825 for the nine months ended September 30, 2008. The
total amount for the first three quarters of 2009 consisted of the purchase of
property and equipment of $9,603, and capitalized costs related to patent
applications of $7,892.  The amount for the first three quarters of 2008
consisted of the purchase of property and equipment of $100,170, and capitalized
costs related to patent applications of $24,655.





Net cash
provided by financing activities for the nine months ended September 30, 2009
was $806,569, which consisted solely of net proceeds from the issuance of equity
securities.  Net cash provided by financing activities for the nine
months ended September 30, 2008 was $251,863, which consisted solely of proceeds
from the issuance of equity securities.


20





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




Cash
Requirements and Need for Additional Funds




The
Company anticipates a substantial need for cash to fund its working capital
requirements.  In accordance with the Company’s prepared expansion
plan, it is the opinion of management that approximately $2.5 to $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.  If the Company is unable to
obtain funding on reasonable terms or finance its needs through current
operations, the Company may be forced to restructure, file for bankruptcy or
cease operations.





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





Critical
Accounting Policies and Estimates





Management’s
discussion and analysis of Power Efficiency Corporation’s financial condition
and results of operations are based upon the condensed financial statements
contained in this Quarterly Report on Form 10-Q, which have been prepared in
accordance with accounting principles generally accepted in the United
States.  The preparation of these financial statements requires
management to make estimates and judgments that affect the reported amounts of
assets, liabilities, revenues and expenses, and disclosure of contingent assets
and liabilities.  On an on-going basis, management evaluates
estimates, including those related to the valuation of inventory and the
allowance for uncollectible accounts receivable.  We base our
estimates on historical experience and on various other assumptions that
management believes to be reasonable under the circumstances, the results of
which form the basis for making judgments about the carrying values of assets
and liabilities that are not readily apparent from other
sources.  Actual results may differ materially from these estimates
under different assumptions or conditions.  We believe the following
critical accounting policies affect our more significant judgments and estimates
used in the preparation of our condensed financial statements.





Inventories





Inventories
are valued at the lower of cost (first-in, first-out) or market.  The
Company reviews inventory for impairments to net realizable value whenever
circumstances arise.  Such circumstances may include, but are not
limited to, the discontinuation of a product line or re-engineering certain
components making certain parts obsolete.  Management has determined a
reserve for inventory obsolescence is not necessary at September 30, 2009 or
2008.


21


Accounts
Receivable





The
Company carries its accounts receivable at cost less an allowance for doubtful
accounts and returns.  On a periodic basis, the Company evaluates its
accounts receivable and establishes an allowance for doubtful accounts, based on
a history of past write-offs and collections and current credit
conditions.  Change in customer liquidity or financial condition could
affect the collectability of that account, resulting in the adjustment upward or
downward in the provision for bad debts, with a corresponding impact to our
results of operations.





Revenue
Recognition





Revenue
from product sales is recognized at the time of shipment, when all services are
complete.  Returns and other sales adjustments (warranty accruals,
discounts and shipping credits) are provided for in the same period the related
sales are recorded.





Accounting
for Stock Based Compensation





The
Company accounts for employee stock options as compensation expense, in
accordance with FASB ASC 718 (SFAS 123(R)).FASB ASC 718 (SFAS
123(R)) requires companies to expense the value of employee stock options
and similar awards, and applies to all outstanding and vested stock-based
awards.





In
computing the impact, the fair value of each option is estimated on the date of
grant based on the Black-Scholes options-pricing model utilizing certain
assumptions for a risk free interest rate; volatility; and expected remaining
lives of the awards.  The assumptions used in calculating the fair
value of share-based payment awards represent management's best estimates, but
these estimates involve inherent uncertainties and the application of
management’s 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 FASB ASC 718 (SFAS 123(R))approximated $298,000
and $562,000 in additional compensation expense during the periods ended
September 30, 2009 and 2008, respectively.  Such amounts are included
in research and development expenses and selling, general and administrative
expense on the statement of operations.


22





Product
Warranties





The
Company typically warrants its products for two years.  Estimated
product warranty expenses are accrued in cost of sales at the time the related
sale is recognized. Estimates of warranty expenses are based primarily on
historical warranty claim experience. Warranty expenses include accruals for
basic warranties for products sold.   While management believes
our estimates are reasonable, an increase or decrease in submitted warranty
claims could affect warranty expense and the related current and future
liability.





Provision
for Income Taxes





The
Company utilizes the asset and liability method of accounting for income taxes
pursuant to FASB ASC 740 Accounting for Income Taxes (Prior
authoritative literatureFASB SFAS No. 109, Accounting for Income Taxes (“SFAS
109”)requires the recognition of deferred tax assets and liabilities for
both the expected future tax impact of differences between the financial
statement and tax basis of assets and liabilities, and for the expected future
tax benefit to be derived from tax loss and tax credit
carryforwards.  FASB ASC 740 (SFAS 109) additionally requires the
establishment of a valuation allowance to reflect the likelihood of realization
of deferred tax assets.  We have reported net operating losses for
consecutive years, and do not have projected taxable income in the near
future.  This significant evidence causes our management to believe a
full valuation allowance should be recorded against the deferred tax
assets.





FASB ASC
740-10-25-10 Definition of
Settlement in FASB Interpretation No. 48 (Prior authoritative literatureFIN 48-1 Definition of
Settlement in FASB Interpretation No. 48 (“FIN 48-1”) issued May
2007)provides
guidance on how to determine whether a tax position is effectively settled for
the purpose of recognizing previously unrecognized tax benefits.  FASB
ASC 740-10-25-10 (FIN 48-1) is effective retroactively to January 1,
2007.  Under FASB ASC 740 (FIN 48), the impact of an uncertain tax
position taken or expected to be taken on an income tax return must be
recognized in the financial statements at the amount that is more likely than
not to be sustained upon audit by the relevant taxing authority. An uncertain
income tax position will not be recognized in the financial statements unless it
is more likely than not of being sustained. The implementation of FASB ASC 740
(FIN 48) and FASB ASC 740-10-25-10 (FIN 48-1) did not have a material impact on
the Company’s financial position, results of operations or cash
flows.





The
provision for taxes represents state franchise taxes, interest and penalties,
and is recorded as a component of selling, general and administrative
expenses.





Goodwill:





FASB ASC
350, Goodwill and Other
Intangible Assets (Prior authoritative literature:FASB SFAS No. 142, Goodwill and Other Intangible
Assets (“SFAS 142”) requires that goodwill shall no longer be
amortized.  At a minimum, goodwill is tested by the Company, for
impairment on an annual basis or when certain events indicate a possible
impairment, utilizing a two-step test, as described in FASB ASC 350 (SFAS
142).


23





New
Accounting Pronouncements:





FASB ASC
815-10, Derivatives and
Hedging(Prior
authoritative literature:FASB SFAS No. 161, Disclosures about Derivative
Instruments and Hedging Activities, issued March 2008 (“SFAS 161”), an amendment of FASB
Statement No. 133). FASB ASC 815-10 (SFAS 161) requires enhanced
disclosures related to derivative and hedging activities and thereby seeks to
improve the transparency of financial reporting. Under FASB ASC 815-10 (SFAS
161), entities are required to provide enhanced disclosure related to
(i) how and why an entity uses derivative instruments (ii) how derivative
instruments and related hedge items are accounted for under SFAS No. 133,
Accounting for Derivative
Instruments and Hedging Activities(“SFAS. 133”), and its
related interpretations; and (iii) how derivative instruments and related
hedged items affect an entity’s financial position, financial performance, and
cash flows. FASB ASC 815-10 (SFAS 161) must be applied prospectively to all
derivative instruments and non-derivative instruments that are designated and
qualify as hedging instruments and related hedged items accounted for under SFAS
No. 133 for all financial statements issued for fiscal years and interim
periods beginning after November 15, 2008 with early application
encouraged. The adoption of FASB ASC 815-10 (SFAS 161) had no impact on the
Company’s condensed financial statements.





FASB ASC
105-10, Generally Accepted
Accounting Principle(Prior authoritative literature:FASB SFAS No. 165, Subsequent Events (“SFAS 165”),issued May 28, 2009), which establishes general standards of accounting
for, and disclosure of, events that occur after the balance sheet date but
before financial statements are issued or are available to be
issued.  FASB ASC 105-10 (SFAS 165) is effective for interim or annual
financial periods ending after June 15, 2009.  The adoption of FASB
ASC 105-10 (SFAS 165) did not have a material effect on the Company’s financial
position or results of operations.  The Company evaluates subsequent
events through the date the accompanying financial statements were issued, which
was November 16, 2009.





FASB ASC
105-10-65, The FASB Accounting
Standards Codification and the Hierarchy of Generally Accepted Accounting
Principles (Prior authoritative literature: FASB SFAS No. 168, The FASB Accounting Standards
Codification and the Hierarchy of Generally Accepted Accounting Principles
(“SFAS 168”), issued June 2009), establishes the FASB Accounting
Standards Codification (the “Codification”) as the single source of
authoritative nongovernmental U.S. GAAP. The Codification is effective for
interim and annual periods ending after September 15, 2009. The adoption of FASB
ASC 105-10-65 (SFAS 168) did not have a material impact on the Company’s
consolidated financial statements.





ITEM
3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.





The
information in this Item is not being disclosed by Smaller Reporting Companies
pursuant to Regulation S-K.




ITEM
4T. 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, as amended (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.


24


(b) Changes in Internal
Controls. There were no material changes in the Company’s internal
control over financial reporting as of the end of the period covered by this
report as such term is defined in Rule 13a-15(f) of the Exchange
Act.


25




PART
II — OTHER INFORMATION




ITEM
1. LEGAL PROCEEDINGS




The
Company is currently involved in a lawsuit against a former director and the
company at which he is currently CEO (collectively, the
“Defendants”).  The Company filed this action against the Defendants
for misappropriation of trade secrets, false advertising, defamation/libel and
other claims primarily arising from the Defendants’ use of the Company’s
confidential and proprietary information in the development and marketing of
motor control products.  The Company seeks a temporary restraining
order, preliminary injunction, permanent injunction, damages, exemplary damages,
attorneys’ fees and costs against the Defendants.  The Company’s
complaint was filed on August 6, 2009 in the U.S. District Court, District of
Nevada.




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




On August
12, 2009, the Company issued and sold 20,875 units, each unit consisting of one
share of the Company’s Series C Preferred Stock, par value $.001 per share, and
50 warrants to purchase shares of the Company’s common stock at an exercise
price of $0.40 per share, resulting in the sale and issuance of an aggregate of
20,875 shares of Series C Preferred Stock and warrants to purchase, initially,
up to 1,043,750 shares of the Company’s common stock, in a private offering for
$835,000 in cash.  The securities were issued pursuant to Regulation D
of the Securities Act of 1933. All of the purchasers of units were either
officers, directors or pre-existing stockholders of the Company.  Each
of these purchasers represented that they were an “accredited investor” as such
term is defined in Regulation D of the Securities Act.





Each
share of Series C Preferred Stock is initially convertible into 100 shares of
the Company’s common stock, subject to adjustment under certain
circumstances.  The Series C Preferred Stock is convertible at the
option of the holder at any time.  The Series C 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 C Preferred Stock has an 8% dividend,
payable annually in cash or stock, at the discretion of the Company’s board of
directors.  Management has not evaluated the accounting for the unit
sale.




ITEM
3. DEFAULTS UPON SENIOR SECURITIES




None.




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




The
Company held its 2009 Annual Meeting of Stockholders on July 16, 2009 in Las
Vegas, Nevada.





At the
2009 Annual Meeting of Stockholders, the stockholders elected the following
individuals as directors, to serve until the 2009 Annual Meeting of
Stockholders, and until their successors are elected and
qualified:


26





Name
                  
                  Votes For
                  
                  
                  Votes WithheldSteven
      Strasser
                  
                  
                  40,588,358
                  
                  
                  
                  14,142John
      (BJ) Lackland
                  
                  
                  39,386,424
                  
                  
                  
                  1,216,076George
      Boyadjieff
                  
                  
                  40,588,358
                  
                  
                  
                  14,142Douglas
      M. Dunn
                  
                  
                  40,588,644
                  
                  
                  
                  13,856Richard
      Morgan
                  
                  
                  40,588,644
                  
                  
                  
                  13,856Gary
      Rado
                  
                  
                  40,588,644
                  
                  
                  
                  13,856Gregory
      Curhan
                  
                  
                  40,588,358
                  
                  
                  
                  14,142Kenneth
      Dickey
                  
                  
                  40,588,644
                  
                  
                  
                  13,856





Also, at
the 2009 Annual Meeting of Stockholders the stockholders:





·
            Approved
      the ratification of the appointment of BDO Seidman, LLP as the Company’s
      independent registered public accounting firm for the year ended December
      31, 2008. There were 40,578,577 votes cast for the ratification, 15,295
      votes cast against the ratification and 8,628
  abstentions.


·
            Approved
      the amendment of the Company’s 2000 Stock Option and Restricted Stock Plan
      to increase the total number of shares of common stock reserved and
      available for distribution under the plan from 20,000,000 shares to
      25,000,000 shares.  There were 28,970,100 votes cast for the
      amendment, 333,245 votes cast against the amendment, and 10,000
      abstentions





ITEM
5. OTHER INFORMATION





None.





ITEM
6. EXHIBITS





31.1
                
                Certification
      by the Chief Executive Officer pursuant to Section 302 of the
      Sarbanes-Oxley Act of 2002.31.2
                
                Certification
      by the Chief Financial Officer pursuant to Section 302 of the
      Sarbanes-Oxley Act of 2002.32.1
                
                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 2002.32.2
                
                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 2002.99.1
                
                Press
      Release, dated November 16, 2009, announcing third quarter 2009
      results.


27




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 CORPORATION(Company)Date:  November
      16, 2009
              By:
              /s/  Steven
StrasserChief
      Executive OfficerDate:  November
      16, 2009
              By:
              /s/  John LacklandChief
      Financial Officer (Principal
                Financial and
      Accounting Officer)


28