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: June 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 August 14, 2009 was
43,255,441.




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  ̈ No    ̈







POWER
EFFICIENCY CORPORATION


FORM
10-Q INDEX




PART
      I - FINANCIAL INFORMATIONITEM
      1. Financial StatementsCondensed
      Balance Sheet as of June 30, 2009 and December 31, 2008
                        3Condensed
      Statements of Operations for the three and six monthsended
      June 30, 2009 and 2008
                        4Condensed
      Statements of Cash Flows for the six monthsended
      June 30, 2009 and 2008
                        5Notes
      to Condensed Financial Statements
                        6-12ITEM
      2. Management's Discussion and Analysis Of Financial Condition and Results
      of Operations
                        13-22ITEM
      3. Quantitative and QualitativeDisclosure
      About Market Risk
                        23ITEM
      4T. Controls and Procedures
                        23Part
      II — OTHER INFORMATIONITEM
      1. Legal Proceedings
                        24ITEM
      2. Unregistered Sales of Equity Securities and Use of
    Proceeds
                        24ITEM
      3. Defaults Upon Senior Securities
                        24ITEM
      4. Submission of Matters to a Vote of Security Holders
                        24ITEM
      5. Other Information
                        25ITEM
      6. Exhibits
                        25Signatures
                        26Certification
      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





June 30, 2009
                                  
                                  
                                  December 31, 2008ASSETSCURRENT
      ASSETS:Cash
                                  
                                  $
                                  505,726
                                  
                                  
                                  $
                                  2,100,013Accounts
      receivable, net
                                  
                                  
                                  52,349
                                  
                                  
                                  
                                  44,159Inventory
                                  
                                  
                                  342,203
                                  
                                  
                                  
                                  246,020Prepaid
      expenses and other current assets
                                  
                                  
                                  78,846
                                  
                                  
                                  
                                  47,165Total
      Current Assets
                                  
                                  
                                  979,124
                                  
                                  
                                  
                                  2,437,357PROPERTY
      AND EQUIPMENT, Net
                                  
                                  
                                  120,114
                                  
                                  
                                  
                                  144,967OTHER
      ASSETS:Patents,
      net
                                  
                                  
                                  63,439
                                  
                                  
                                  
                                  64,711Deposits
                                  
                                  
                                  38,206
                                  
                                  
                                  
                                  38,206Goodwill
                                  
                                  
                                  1,929,963
                                  
                                  
                                  
                                  1,929,963Total
      Other Assets
                                  
                                  
                                  2,031,608
                                  
                                  
                                  
                                  2,032,880Total
      Assets
                                  
                                  $
                                  3,130,846
                                  
                                  
                                  $
                                  4,615,204LIABILITIES
      AND STOCKHOLDERS' EQUITYCURRENT
      LIABILITIES:Accounts
      payable and accrued expenses
                                  
                                  $
                                  590,319
                                  
                                  
                                  $
                                  555,789Warrant
      liability
                                  
                                  
                                  663,083
                                  
                                  
                                  
                                  -Dividends
      payable
                                  
                                  
                                  373,333
                                  
                                  
                                  
                                  -Total
      Current Liabilities
                                  
                                  
                                  1,626,735
                                  
                                  
                                  
                                  555,789LONG
      TERM LIABILITIESDeferred
      rent
                                  
                                  
                                  10,803
                                  
                                  
                                  
                                  12,668Total
      Long Term Liabilities
                                  
                                  
                                  10,803
                                  
                                  
                                  
                                  12,668Total
      Liabilities
                                  
                                  
                                  1,637,538
                                  
                                  
                                  
                                  568,457STOCKHOLDERS'
      EQUITY:Series
      B Convertible Preferred  Stock, $.001 par value,10,000,000
      shares authorized, 140,000issued
      or outstanding in 2009 and 2008
                                  
                                  
                                  140
                                  
                                  
                                  
                                  140Common
      stock, $.001 par value, 140,000,000 sharesauthorized,
      43,255,441 issued and outstanding
                                  
                                  
                                  43,255
                                  
                                  
                                  
                                  43,255in
      2009 and 2008Additional
      paid-in capital
                                  
                                  
                                  34,686,610
                                  
                                  
                                  
                                  35,307,119Accumulated
      deficit
                                  
                                  
                                  (33,236,697
                                  )
                                  
                                  
                                  (31,303,767
                                  )Total
      Stockholders' Equity
                                  
                                  
                                  1,493,308
                                  
                                  
                                  
                                  4,046,747Total
      Liabilities and Stockholders' Equity
                                  
                                  $
                                  3,130,846
                                  
                                  
                                  $
                                  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
                            June 30,
                          
                          
                          For the six months ended
                            June 30,2009
                          
                          
                          2008
                          
                          
                          2009
                          
                          
                          2008REVENUES
                          
                          $
                          75,393
                          
                          
                          $
                          164,644
                          
                          
                          $
                          122,540
                          
                          
                          $
                          298,339COMPONENTS
      OF COST OF REVENUESMaterials,
      labor and overhead
                          
                          
                          49,556
                          
                          
                          
                          132,288
                          
                          
                          
                          77,670
                          
                          
                          
                          230,451Inventory
      obsolescence
                          
                          
                          -
                          
                          
                          
                          24,577
                          
                          
                          
                          -
                          
                          
                          
                          24,577Total
      Cost of Revenues
                          
                          
                          49,556
                          
                          
                          
                          156,865
                          
                          
                          
                          77,670
                          
                          
                          
                          255,028GROSS
      PROFIT
                          
                          
                          25,837
                          
                          
                          
                          7,779
                          
                          
                          
                          44,870
                          
                          
                          
                          43,311COSTS
      AND EXPENSES:Research
      and development
                          
                          
                          267,161
                          
                          
                          
                          264,741
                          
                          
                          
                          514,206
                          
                          
                          
                          426,139Selling,
      general and administrative
                          
                          
                          632,737
                          
                          
                          
                          798,964
                          
                          
                          
                          1,204,222
                          
                          
                          
                          1,588,536Depreciation
      and amortization
                          
                          
                          16,412
                          
                          
                          
                          18,213
                          
                          
                          
                          35,727
                          
                          
                          
                          33,060Total
      Costs and Expenses
                          
                          
                          916,310
                          
                          
                          
                          1,081,918
                          
                          
                          
                          1,754,155
                          
                          
                          
                          2,047,735LOSS
      FROM OPERATIONS
                          
                          
                          (890,473
                          )
                          
                          
                          (1,074,139
                          )
                          
                          
                          (1,709,285
                          )
                          
                          
                          (2,004,424
                          )OTHER
      INCOME:Interest
      income
                          
                          
                          3,886
                          
                          
                          
                          26,964
                          
                          
                          
                          12,970
                          
                          
                          
                          69,094Fair
      market value adjustment on warrant liability
                          
                          
                          848,222
                          
                          
                          
                          -
                          
                          
                          
                          362,303
                          
                          
                          
                          -Total
      Other Income
                          
                          
                          852,108
                          
                          
                          
                          26,964
                          
                          
                          
                          375,273
                          
                          
                          
                          69,094NET
      LOSS
                          
                          
                          (38,365
                          )
                          
                          
                          (1,047,175
                          )
                          
                          
                          (1,334,012
                          )
                          
                          
                          (1,935,330
                          )DIVIDENDS
      PAID OR PAYABLE ON SERIES B PREFERED STOCK
                          
                          
                          140,000
                          
                          
                          
                          -
                          
                          
                          
                          280,000
                          
                          
                          
                          -NET
      LOSS ATTRIBUTABLE TO COMMON SHAREHOLDERS
                          
                          $
                          (178,365
                          )
                          
                          $
                          (1,047,175
                          )
                          
                          $
                          (1,614,012
                          )
                          
                          $
                          (1,935,330
                          )BASIC
      AND FULLY DILUTED LOSSPER
      COMMON SHARE
                          
                          $
                          (0.00
                          )
                          
                          $
                          (0.03
                          )
                          
                          $
                          (0.04
                          )
                          
                          $
                          (0.05
                          )WEIGHTED
      AVERAGE COMMONSHARES
      OUTSTANDING, BASIC
                          
                          
                          43,255,441
                          
                          
                          
                          40,411,858
                          
                          
                          
                          43,255,441
                          
                          
                          
                          40,402,433





Accompanying
notes are an integral part of the financial statements


4


POWER
EFFICIENCY CORPORATION


CONDENSED
STATEMENTS OF CASH FLOWS


Unaudited





For the six months ended June 30,2009
                  
                  
                  2008CASH
      FLOWS FROM OPERATING ACTIVITIES:Net
      loss
                  
                  $
                  (1,334,012
                  )
                  
                  $
                  (1,935,330
                  )Adjustments
      to reconcile net loss to net cash used in operating
      activities:Depreciation
      and amortization
                  
                  
                  35,727
                  
                  
                  
                  33,060Compensation
      expense for warrants and options issued to employees and
      consultants
                  
                  
                  179,292
                  
                  
                  
                  389,342Fair
      market value adjustment for warrants issued to investors
                  
                  
                  (362,303
                  )
                  
                  
                  -Provision
      for bad debt
                  
                  
                  (11,342
                  )
                  
                  
                  -Changes
      in assets and liabilities:Accounts
      receivable
                  
                  
                  3,152
                  
                  
                  
                  (23,504
                  )Inventory
                  
                  
                  (96,183
                  )
                  
                  
                  (86,941
                  )Prepaid
      expenses and other current assets
                  
                  
                  (31,681
                  )
                  
                  
                  (34,922
                  )Deposits
                  
                  
                  -
                  
                  
                  
                  74,039Accounts
      payable and accrued expenses
                  
                  
                  34,530
                  
                  
                  
                  (43,795
                  )Customer
      deposits
                  
                  
                  -
                  
                  
                  
                  (1,605
                  )Deferred
      rent
                  
                  
                  (1,865
                  )
                  
                  
                  312Net
      Cash Used in Operating Activities
                  
                  
                  (1,584,685
                  )
                  
                  
                  (1,629,344
                  )CASH
      FLOWS FROM INVESTING ACTIVITIESCosts
      related to patent applications
                  
                  
                  -
                  
                  
                  
                  (24,655
                  )Purchases
      of property and equipment
                  
                  
                  (9,602
                  )
                  
                  
                  (90,156
                  )Net
      Cash Used in Investing Activities
                  
                  
                  (9,602
                  )
                  
                  
                  (114,811
                  )CASH
      FLOWS FROM FINANCING ACTIVITIES:Proceeds
      from issuance of equity securities
                  
                  
                  -
                  
                  
                  
                  260,645Net
      Cash Provided by Financing Activities
                  
                  
                  -
                  
                  
                  
                  260,645Decrease
      in cash
                  
                  
                  (1,594,287
                  )
                  
                  
                  (1,483,510
                  )Cash
      at beginning of period
                  
                  
                  2,100,013
                  
                  
                  
                  5,086,378Cash
      at end of period
                  
                  $
                  505,726
                  
                  
                  $
                  3,602,868




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 six months ended June 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 $1,585,000
from operations, for the six months ended June 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.  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 – 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:





In
February 2007, the Financial Accounting Standards Board (“FASB”) issued
Statement of Financial Accounting Standards (“SFAS”) No. 159, The Fair Value Option for Financial
Assets and Financial Liabilities(“SFAS 159”), which provides companies
with an option to report selected financial assets and liabilities at fair
value. The objective of SFAS No. 159 is to reduce both complexity in
accounting for financial instruments and the volatility in earnings caused by
measuring related assets and liabilities differently. SFAS No. 159 also
establishes presentation and disclosure requirements designed to facilitate
comparisons between companies that choose different measurement attributes for
similar types of assets and liabilities. SFAS 159 is effective for the
Company as of January 1, 2008.  The adoption of SFAS 159 did not
have a material effect on our operating results or financial
position.





In
December 2007, the FASB issued SFAS No. 141R, Business Combinations(“SFAS
141R”), which replaces SFAS 141.SFAS 141R, among other
things, establishes principles and requirements for how an acquirer entity
recognizes and measures in its financial statements the identifiable assets
acquired (including intangibles), the liabilities assumed and any noncontrolling
interest in the acquired entity. Additionally, SFAS 141R requires that all
transaction costs will be expensed as incurred and is effective for financial
statements issued for fiscal years beginning after December 15, 2008. The
adoption of SFAS 141R had no impact on the Company’s condensed financial
statements.





In
December 2007, the FASB issued Statement of Financial Accounting Standards
No. 160, Noncontrolling
Interests in Consolidated Financial Statements—an amendment of ARB No. 51(“SFAS 160”). This Statement amends ARB 51 to establish accounting and
reporting standards for the noncontrolling interest in a subsidiary and for the
deconsolidation of a subsidiary. It clarifies that a noncontrolling interest in
a subsidiary is an ownership interest in the consolidated entity that should be
reported as equity in the consolidated financial statements. In addition to the
amendments to ARB 51, this Statement amends SFAS 128, Earnings per Share;so that
earnings-per-share data will continue to be calculated the same way those data
were calculated before this Statement was issued. This Statement is effective
for fiscal years, and interim periods within those fiscal years, beginning on or
after December 15, 2008. The Company will apply the provisions of SFAS 160
to any noncontrolling interests acquired after the effective date.





In
March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative
Instruments and Hedging Activities — an amendment of FASB Statement No. 133(“SFAS 161”). SFAS 161 requires enhanced disclosures related to
derivative and hedging activities and thereby seeks to improve the transparency
of financial reporting. Under 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. 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
SFAS No. 161 had no impact on the Company’s condensed financial
statements.


7


In May
2009, the FASB issued SFAS No. 165, Subsequent Events(“SFAS
165”), 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.  SFAS 165 is effective for
interim or annual financial periods ending after June 15, 2009.  The
adoption of 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 August 14, 2009.





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 is not necessary at June 30, 2009 or
December 31, 2008.





Inventories
are comprised as follows:





June 30,
                      2009
                    
                    
                    December
                      31, 2008Raw
      materials
                    
                    $
                    149,083
                    
                    
                    $
                    178,698Finished
      Goods
                    
                    
                    193,120
                    
                    
                    
                    67,322Inventories
                    
                    $
                    342,203
                    
                    
                    $
                    246,020





NOTE
5 – GOODWILL





In
accordance with 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 by, 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.


8


The
Company’s most recent impairment analysis was performed on June 30, 2009, on the
Company’s single reporting unit, as a result of the Company’s recurring
operating losses.  As of June 30, 2009, the Company’s market cap was
$6,488,316, and the Company’s book value was $1,493,308.  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 June 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 SFAS No.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.





Six Months
                  Ended June
                  30, 2009
                
                
                Six Months
                  Ended June
                  30, 2008Net
      loss attributable to common shareholders, as reported
                
                $
                (1,614,012
                )
                
                $
                (1,935,330
                )Basic
      weighted average number of common shares outstanding, as
      reported
                
                
                43,255,441
                
                
                
                40,402,433Dilutive
      effect of stock options, as reported
                
                
                -
                
                
                
                -Diluted
      weighted average number of common shares outstanding, as
      reported
                
                
                43,255,441
                
                
                
                40,402,433Basic
      and diluted loss per share, as reported
                
                $
                (0.04
                )
                
                $
                (0.05
                )





For the
six months ended June 30, 2009, warrants and options to purchase 46,209,676
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 six months ended June 30, 2008, warrants
and options to purchase 43,589,864 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 June
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 635,000 warrants and 2,000,000 options granted
during the six months ended June 30, 2009.  The fair value of these
warrants and options was approximately $103,000 and $357,000 at issuance,
respectively.  There were 780,000 warrants and 750,000 options granted
during the six months ended June 30, 2008.  The fair value of these
warrants and options was approximately $90,000 and $191,000 at issuance,
respectively.  No stock options were exercised during the periods
ending June 30, 2009 and 2008.  The Company accounts for stock option
grants in accordance with FASB Statement 123(R), Share-Based Payment.
Compensation costs related to share-based payments recognized in the Condensed
Statements of Income were $179,292 and $389,342 for the periods ended June 30,
2009 and 2008, respectively.


9


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.  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.





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.





NOTE
10 – WARRANT LIABILITY





On
January 1, 2009, the Company adopted EITF 07-5, Determining Whether an Instrument
(or Embedded Feature) Is Indexed to an Entity’s Own Stock.  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 long term liabilities, and
resulting in a cumulative adjustment to accumulated deficit as of January 1,
2009 of $225,585.





The
Company accounts for its warrant liability in accordance with SFAS 157, Fair Value
Measurements.  SFAS No. 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, SFAS
No. 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).


10


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 12 months.  The Company recorded a non-cash
gain related to these warrants of $362,303 for the six months ended June 30,
2009, which was recorded in other income.





The
following reconciles the warrant liability for the six months ended June 30,
2009:





Beginning
      balance, January 1, 2009
                  
                  $
                  1,025,386Unrealized
      gain on derivative liability
                  
                  
                  (362,303
                  )Ending
      balance, June 30, 2009
                  
                  $
                  663,083





NOTE
11 – INCOME TAXES





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





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





NOTE
12 – SUBSEQUENT EVENTS





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.


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.  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.


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 solid state electrical components
designed to reduce energy consumption in alternating current induction
motors.




The
Company began generating revenues from sales of its patented Motor Efficiency
Controller (“MEC”) line of motor controllers in late 1995. As of June 30, 2009,
the Company had total stockholders’ equity of $1,493,308 primarily due to (i)
the Company’s sale of 140,000 shares of Series B Convertible Preferred Stock in
a private offering from October of 2007 through January of 2008, (ii) the
Company’s sale of 12,950,016 shares of common stock in a private stock offering
from November of 2006 through March of 2007, (iii) the Company’s sale of
14,500,000 shares of common stock in a private stock offering in July and August
of 2005, (iv) the Company’s sale of 2,346,233 shares of Series A-1 Convertible
Preferred stock to Summit Energy Ventures, LLC in June of 2002 and (v) the
conversion of notes payable of approximately $1,047,000 into 982,504 shares of
Series A-1 Convertible Preferred Stock in October of 2003.  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 ended June 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 Six Months Ended June 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.


14


RESULTS
OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 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:





Six Months
                  Ended June
                  30, 2009
                
                
                Six Months
                  Ended June
                  30, 2008Revenues
                
                
                100.0
                %
                
                
                100.0
                %Cost
      of revenues
                
                
                63.4
                
                
                
                85.5Gross
      profit
                
                
                36.6
                
                
                
                14.5Costs
      and expenses:Research
      and development
                
                
                419.6
                
                
                
                142.8Selling,
      general and administrative
                
                
                982.7
                
                
                
                532.5Depreciation
      and amortization
                
                
                29.2
                
                
                
                11.1Total
      expenses
                
                
                1,431.5
                
                
                
                686.4Loss
      from operations
                
                
                (1,394.9
                )
                
                
                (671.9
                )Other
      income
                
                
                306.3
                
                
                
                23.2Net
      loss
                
                
                (1,088.6
                )
                
                
                (648.7
                )Dividends
      paid or payable on Series B Preferred Stock
                
                
                228.5
                
                
                
                -Net
      loss attributable to common shareholders
                
                
                (1,317.1
                )
                
                
                (648.7
                )




REVENUES




Total
revenues for the three months ended June 30, 2009 were approximately $75,000
compared to $165,000 for the three months ended June 30, 2008, resulting in a
decrease of $90,000 or 55%. This decrease is mainly attributable to a
decrease in sales in the elevator and escalator market in the second quarter of
2009.  Specifically, escalator manufacturer and service provider sales
fell to approximately $31,000 for the three months ended June 30, 2009, from
$147,000 for the three months ended June 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.  For the three months ended June 30, 2009, industrial and
other sales, which entirely consisted of digital units, were approximately 61%
of total sales, and escalator and elevator sales, which consisted of a mix of
digital units and analog units, were approximately 39% of total
sales.  For the three months ended June 30, 2008, industrial and other
sales, which consisted of a mix of digital units and analog units, were
approximately 10% of total sales, and escalator and elevator sales, which
consisted of a mix of digital units and analog units, were approximately 90% of
total sales.


15


Total
revenues for the six months ended June 30, 2009 were approximately $123,000,
compared to $298,000 for the six months ended June 30, 2008, resulting in a
decrease of $175,000 or 59%.  This decrease is mainly attributable to a
decrease in sales in the elevator and escalator market due to the same factors
as described above.  Specifically, escalator manufacturer and service
provider sales fell to approximately $66,000 for the six months ended June 30,
2009, from $274,000 for the six months ended June 30, 2008.  For the
six months ended June 30, 2009, industrial and other sales, of which all but one
sale consisted of digital units, were approximately 49% of total sales, and
escalator and elevator sales, which consisted of a mix of digital units and
analog units, were approximately 51% of total sales.  For the six
months ended June 30, 2008, industrial and other sales, which consisted of a mix
of digital units and analog units, were approximately 7% on total sales, and
escalator and elevator sales, which consisted of a mix of digital units and
analog units, were approximately 93% of total sales.





COST
OF REVENUES




Total
cost of revenues, which includes material and direct labor and overhead for the
three months ended June 30, 2009 was approximately $50,000 compared to
approximately $157,000 for the three months ended June 30, 2008, resulting in a
decrease of $107,000 or 68%.  This decrease is mainly attributable to
a decrease in sales in the elevator and escalator market in the second quarter
of 2009.  Also, the Company recorded an inventory obsolescence charge
of approximately $25,000 during the three months ended June 30, 2008 and no
comparable charge was recorded during the three months ended June 30,
2009.  As a percentage of revenue, total cost of sales decreased to
approximately 66% for the three months ended June 30, 2009 compared to
approximately 95% for the three months ended June 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 second quarter of 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.





Total
cost of revenues, which includes material and direct labor and overhead for the
six months ended June 30, 2009 were approximately $78,000 compared to
approximately $255,000 for the six months ended June 30, 2008, resulting in a
decrease of $177,000 or 63%.  As a percentage of sales, total cost of
revenues decreased to approximately 63% for the six months ended June 30, 2009,
compared to approximately 86% for the six months ended June 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 second quarter of 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 June 30, 2009 was approximately $26,000
compared to approximately $8,000 for the three months ended June 30, 2008,
resulting in an increase of $18,000 or 225%.  This increase is mainly
attributable to an inventory obsolescence charge of approximately $25,000 that
the Company recorded during the three months ended June 30, 2008 and no
comparable charge was recorded during the three months ended June 30,
2009.  As a percentage of revenue, gross profit increased to
approximately 34% for the three months ended June 30, 2009, compared to
approximately 5% for the three months ended June 30, 2008.


16


Gross
profit for the six months ended June 30, 2009 was approximately $45,000 compared
to approximately $43,000 for the six months ended June 30, 2008, resulting in an
increase of $2,000 or 5%.  This increase was primarily due to the
inventory obsolescence charge recorded by the Company during the six months
ended June 30, 2008, as described above.





OPERATING
EXPENSES




Research
and Development Expenses




Research
and development expenses were approximately $267,000 for the three months ended
June 30, 2009, as compared to approximately $265,000 for the three months ended
June 30, 2008, resulting in an increase of $2,000 or 1%.  This marginal
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, as well as new product testing and certification
expenses.





Research
and development expenses were approximately $514,000 for the six months ended
June 30, 2009, as compared to approximately $426,000 for the six months ended
June 30, 2008, resulting in an increase of $88,000 or 21%. 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.





Selling,
General and Administrative Expenses




Selling,
general and administrative expenses were approximately $633,000 for the three
months ended June 30, 2009, as compared to approximately $790,000 for the three
months ended June 30, 2008, resulting in a decrease of $157,000 or 20%. 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 SFAS 123R.  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), and change in the Company’s independent registered accounting
firm.





Selling,
general and administrative expenses were approximately $1,204,000 for the six
months ended June 30, 2009, as compared to approximately $1,588,000 for the six
months ended June 30, 2008, resulting in a decrease of $384,000 or 24%. 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 SFAS 123R.  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), and change in the Company’s independent registered accounting
firm.


17





Other
Income





Other
income was approximately $852,000 for the three months ended June 30, 2009, as
compared to approximately $27,000 for the three months ended June 30, 2008,
resulting in an increase of $825,000, or 3,056%.  This increase is
primarily due to the Company’s adoption of EITF 05-7, which resulted in the
Company recording an additional non-cash gain of approximately $848,000 during
the three months ending June 30, 2009.  No such expenses were recorded
during the three months ending June 30, 2008.  This increase was
partially offset by a decrease in interest income.





Other
income was approximately $375,000 for the six months ended June 30, 2009, as
compared to approximately $69,000 for the six months ended June 30, 2008,
resulting in an increase of $306,000, or 444%.  This increase is
primarily due to the Company’s adoption of EITF 05-7, which resulted in the
Company recording an additional non-cash gain of approximately $362,000 during
the six months ending June 30, 2009.  No such expenses were recorded
during the three months ending June 30, 2008.  This increase was
partially offset by a decrease in interest income.





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 $1,585,000
from operations, for the six months ended June 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.  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.




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 June 30, 2009, the Company had cash of $505,726.





Cash used
in operating activities for the six months ended June 30, 2009 was $1,584,685,
which consisted of a net loss of $1,334,012; less depreciation and amortization
of $35,727, warrants and options issued to employees and consultants of
$179,292, a decrease in accounts receivable of $3,152, and an increase in
accounts payable of $34,530, offset by a fair market value adjustment to
warrants issued to investors of $362,303, increases in inventory of $96,183,
prepaid expenses and other current assets of $31,681, and decreases in provision
for bad debt of $11,342 and deferred rent of $1,865.


18





Cash used
in operating activities for the six months ended June 30, 2008 was $1,629,344,
which consisted of: a net loss of $1,935,330; less depreciation and amortization
of $33,060, and warrants and options issued in connection with the issuance of
debt securities, and to employees and consultants of $389,342; offset by
increases in accounts receivable of $23,504, inventory of $86,941, prepaid
expenses of $34,922, and deferred rent of $312, and decreases in deposits of
$74,039, accounts payable of $43,795, and customer deposits of
$1,605.





Net cash
used in investing activities for the six months ended June 30, 2009 was $9,602,
compared to $114,811 for the six months ended June 30, 2008. The total amount
for the first two quarters of 2009 consisted of the purchase of property and
equipment.  The amount for the first two quarters of 2008 consisted of the
purchase of property and equipment of $90,156, and capitalized costs related to
patent applications of $24,655.





There was
no cash provided by or used for financing activities for the six months ended
June 30, 2009.  Net cash provided by financing activities for the six
months ended June 30, 2008 was $260,645, which consisted solely of proceeds from
the issuance of equity securities.




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.


19


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 June 30, 2009 or
2008.





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 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.





In
computing the impact, the fair value of each option is estimated on the date of
grant based on the Black-Scholes options-pricing model utilizing certain
assumptions for a risk free interest rate; volatility; and expected remaining
lives of the awards.  The assumptions used in calculating the fair
value of share-based payment awards represent management's best estimates, but
these estimates involve inherent uncertainties and the application of management
judgment.  As a result, if factors change and the Company uses
different assumptions, the Company’s stock-based compensation expense could be
materially different in the future. In addition, the Company is required to
estimate the expected forfeiture rate and only recognize expense for those
shares expected to vest.  In estimating the Company’s forfeiture rate,
the Company analyzed its historical forfeiture rate, the remaining lives of
unvested options, and the amount of vested options as a percentage of total
options outstanding.  If the Company’s actual forfeiture rate is
materially different from its estimate, or if the Company reevaluates the
forfeiture rate in the future, the stock-based compensation expense could be
significantly different from what we have recorded in the current
period.  The impact of applying SFAS No. 123R approximated $179,000
and $389,000 in additional compensation expense during the periods ended June
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.


20


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 SFAS No. 109, Accounting for Income
Taxes.  SFAS No. 109 requires the recognition of deferred tax
assets and liabilities for both the expected future tax impact of differences
between the financial statement and tax basis of assets and liabilities, and for
the expected future tax benefit to be derived from tax loss and tax credit
carryforwards.  SFAS No. 109 additionally requires the establishment
of a valuation allowance to reflect the likelihood of realization of deferred
tax assets.  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.





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





The
provision for taxes represents state franchise taxes, interest and
penalties.





Goodwill:





SFAS No.
142, Goodwill and Other
Intangible Assetsrequires 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 SFAS
142.


21





New
Accounting Pronouncements:





In
February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial
Assets and Financial Liabilities, which provides companies with an option
to report selected financial assets and liabilities at fair value. The objective
of SFAS 159 is to reduce both complexity in accounting for financial instruments
and the volatility in earnings caused by measuring related assets and
liabilities differently. SFAS 159 also establishes presentation and disclosure
requirements designed to facilitate comparisons between companies that choose
different measurement attributes for similar types of assets and liabilities.
SFAS 159 is effective for the Company as of January 1, 2008.  The
adoption of SFAS 159 did not have a material effect on our operating results or
financial position.





In
December 2007, the FASB issued SFAS No. 141R, Business Combinations, which
replaces SFAS No. 141.SFAS 141R, among other things, establishes principles and requirements
for how an acquirer entity recognizes and measures in its financial statements
the identifiable assets acquired (including intangibles), the liabilities
assumed and any noncontrolling interest in the acquired entity. Additionally,
SFAS 141R requires that all transaction costs will be expensed as incurred and
is effective for financial statements issued for fiscal years beginning after
December 15, 2008. The adoption of SFAS 141R had no material impact on the
Company’s consolidated financial statements.





In
December 2007, the FASB issued Statement of Financial Accounting Standards
No. 160, Noncontrolling
Interests in Consolidated Financial Statements—an amendment of ARB
No. 51.This Statement amends ARB 51 to establish
accounting and reporting standards for the noncontrolling interest in a
subsidiary and for the deconsolidation of a subsidiary. It clarifies that a
noncontrolling interest in a subsidiary is an ownership interest in the
consolidated entity that should be reported as equity in the consolidated
financial statements. In addition to the amendments to ARB 51, this Statement
amends SFAS 128, Earnings per
Share;so that earnings-per-share data will continue to be calculated the
same way those data were calculated before this Statement was issued. This
Statement is effective for fiscal years, and interim periods within those fiscal
years, beginning on or after December 15, 2008. The Company will apply the
provisions of SFAS 160 to any noncontrolling interests acquired after the
effective date.





In
March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative
Instruments and Hedging Activities — an amendment of FASB Statement
No. 133. SFAS 161 requires enhanced disclosures related to
derivative and hedging activities and thereby seeks to improve the transparency
of financial reporting. Under 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. 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 133 for all
financial statements issued for fiscal years and interim periods beginning after
November 15, 2008 with early application encouraged. The adoption of SFAS
161 had no material impact on the Company’s consolidated financial
statements.


22





In May
2009, the FASB issued SFAS No. 165, Subsequent Events(“SFAS
165”), 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.  SFAS 165 is effective for
interim or annual financial periods ending after June 15, 2009.  The
adoption of 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 August 14, 2009.





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.




(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.


23




PART
II — OTHER INFORMATION




ITEM
1. LEGAL PROCEEDINGS




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




ITEM
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.




24


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:





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 August 14, 2009, announcing second quarter 2009
      results.


25


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:  August
      14, 2009
              By:
              /s/  Steven
StrasserChief
      Executive OfficerDate:  August
      14, 2009
              By:
              /s/  John LacklandChief
      Financial Officer (Principal Financial and Accounting
      Officer)




26