<PAGE>

                       SECURITIES AND EXCHANGE COMMISSION

                             WASHINGTON, D.C. 20549

                                   FORM 10-QSB


             [X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
                 OF THE SECURITIES EXCHANGE ACT OF 1934

                  For the quarterly period ended: June 30, 2004
                                                       OR
             [ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d)
                 OF THE SECURITIES EXCHANGE ACT OF 1934

            For the transition period from ___________ to ___________

                           Commission File No. 0-31805

                          POWER EFFICIENCY CORPORATION
        (Exact Name of Small Business Issuer as Specified in its Charter)

             DELAWARE                                  22-3337365
 (State or Other Jurisdiction of          (I.R.S. Employer Identification No.)
  Incorporation or Organization)


          35432 INDUSTRIAL ROAD                         (734) 464-6711
            LIVONIA, MI 48150                    (Issuer's Telephone Number,
 (Address of Principal Executive Offices)            Including Area Code)

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

The number of shares outstanding of the Issuer's Common Stock, $.001 Par Value,
as of August 13, 2004 was 5,020,418.

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


                                       1
<PAGE>

                          POWER EFFICIENCY CORPORATION
                                FORM 10-QSB INDEX

PART I - FINANCIAL INFORMATION

ITEM 1. Financial Statements

  Condensed Balance Sheet as of June 30, 2004.....................     3

  Condensed Statements of Operations for the three months ended
   June 30, 2004 and 2003 and six months ended
   June 30, 2004 and 2003.........................................     4

  Condensed Statements of Cash Flows for the six months ended
   June 30, 2004 and 2003.........................................     5

  Notes to Condensed Financial Statements.........................    6-9

ITEM 2. Management's Discussion and Analysis
                       Or Plan of Operation ......................   10-13

ITEM 3. Controls and Procedures ...................................    13

Part II-- OTHER INFORMATION

ITEM 1. Legal Proceedings..........................................    14

ITEM 2. Changes in Securities and Use of Proceeds..................  14-16

ITEM 3. Defaults Upon Senior Securities.............................   16

ITEM 4. Submission of Matters to a Vote of Security Holders.........   16

ITEM 5. Other Information...........................................   16

ITEM 6. Exhibits and Reports on Form 8-K ...........................   17

Signatures..........................................................   18

Certification of Chief Executive Officer as Adopted.................   19

Certification of Chief Financial Officer as Adopted.................   20

Certification pursuant to Section 906 of Sarbanes-Oxley Act
 of 2002............................................................ 21-22


                                       2
<PAGE>

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

                          POWER EFFICIENCY CORPORATION
                             CONDENSED BALANCE SHEET
                                    Unaudited

<TABLE>
<CAPTION>
                                                                       June 30, 2004
                                                                       --------------
<S>                                                                    <C>
ASSETS
CURRENT ASSETS:
   Cash and cash equivalents                                           $     16,140
   Accounts receivable, net                                                  29,071
   Inventory, net of reserve                                                303,013
   Prepaid expenses and other current assets                                 76,117
                                                                       ------------
         Total Current Assets                                               424,341
                                                                       ------------

PROPERTY AND EQUIPMENT, Net                                                  84,157

OTHER ASSETS:
   Deposits                                                                  12,647
   Patents, net                                                              13,506
   Goodwill                                                               1,929,963
   Customer manuals and sales literature, net                                20,436
   Website, net                                                              13,033
                                                                       ------------
         Total Other Assets                                               1,989,585
                                                                       ------------
Total Assets                                                           $  2,498,083
                                                                       ============

LIABILITIES AND STOCKHOLDERS' EQUITY

CURRENT LIABILITIES:
   Accounts payable and accrued expenses                                    643,692
   Accrued salaries and payroll taxes                                       176,675
   Customer deposits                                                         20,907
   Note payable-line of  credit                                             300,000
   Notes payable- former officer                                            105,000
                                                                       ------------

         Total Current Liabilities                                        1,246,274
                                                                       ------------
         Total Liabilities                                                1,246,274
                                                                       ------------

STOCKHOLDERS' EQUITY:
    Preferred Stock, $.001 par value, 10,000,000 shares
           authorized, 3,328,737 shares issued and outstanding                3,329
    Common stock, $.001 par value, 7,142,857 shares authorized,
               5,020,418 issued and outstanding                               5,020
    Additional paid-in capital                                           15,257,830
    Accumulated deficit                                                 (14,014,370)
                                                                       ------------
         Total Stockholders' Equity                                       1,251,809
                                                                       ------------
Total Liabilities and Stockholders' Equity                             $  2,498,083
                                                                       ============
</TABLE>


      ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS


                                       3
<PAGE>

                          POWER EFFICIENCY CORPORATION
                       CONDENSED STATEMENTS OF OPERATIONS
                                    Unaudited

<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------
                                     FOR THE THREE MONTHS ENDED JUNE 30,        FOR THE SIX MONTHS ENDED JUNE 30,
                                           2004                 2003               2004               2003
                                  -------------------------------------------------------------------------------

<S>                                     <C>                <C>                <C>                <C>
REVENUES

  Product                               $    57,131        $    95,283        $   141,419        $   256,126
  Miscellaneous                               7,475               --               12,725               --
                                        -----------        -----------        -----------        -----------
   Total Revenues                       $    64,606        $    95,283        $   154,144        $   256,126


COMPONENTS OF COST OF PRODUCT
REVENUES:
   Material and labor                        26,614             43,556             67,794            118,265
   Allocated costs                           12,596             24,120             36,529             45,327
   Inventory obsolescence and
   other write-offs                            --               15,000             29,484             15,000
                                        -----------        -----------        -----------        -----------
         Total Cost of Revenues              39,210             82,676            133,807            178,592
                                        -----------        -----------        -----------        -----------
GROSS MARGIN                                 25,396             12,607             20,337             77,534

COSTS AND EXPENSES:
   Research and development                  94,103             99,712            208,297            212,100
   Selling, general and
     administration                         472,258            518,657            920,298            872,415
   Depreciation and amortization             18,982             30,825             37,502             64,410
                                        -----------        -----------        -----------        -----------
      Total costs and expenses              585,343            649,194          1,166,097          1,148,925
                                        -----------        -----------        -----------        -----------

LOSS FROM OPERATIONS                       (559,947)          (636,587)        (1,145,760)        (1,071,391)
                                        -----------        -----------        -----------        -----------
OTHER EXPENSE
   Interest expense                          (6,273)           (14,493)            (7,597)           (19,181)
                                        -----------        -----------        -----------        -----------
      Total Other Expenses                   (6,273)           (14,493)            (7,597)           (19,181)
                                        -----------        -----------        -----------        -----------
NET LOSS                                $  (566,220)       $  (651,080)       $(1,153,357)       $(1,090,572)
                                        -----------        -----------        -----------        -----------
BASIC LOSS PER COMMON SHARE             $      (.11)       $      (.64)       $      (.28)       $     (1.12)
                                        -----------        -----------        -----------        -----------
   WEIGHTED AVERAGE COMMON SHARES
     OUTSTANDING

                                          5,018,926          1,014,399          4,170,612            974,027
                                        -----------        -----------        -----------        -----------
</TABLE>


      ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS


                                       4
<PAGE>

                          POWER EFFICIENCY CORPORATION
                       CONDENSED STATEMENTS OF CASH FLOWS
                                    Unaudited
<TABLE>
<CAPTION>
                                                                                   FOR THE SIX MONTHS ENDED JUNE 30,
                                                                                      2004                    2003
                                                                                      ----                    ----
<S>                                                                                <C>                <C>
CASH FLOWS FROM OPERATING ACTIVITIES:

Net loss                                                                           $(1,153,357)       $(1,090,572)
Adjustments to reconcile net loss to net cash used for operating activities:

     Depreciation and amortization                                                      37,502             64,410
     Compensation expense                                                                 --               33,158
     Bad debt expense                                                                    5,493               --
     Inventory obsolescence reserve and other write-offs                                29,484               --
     Changes in assets and liabilities:
          (Increase) Decrease:
          Accounts receivable, net                                                       3,079             10,213
          Inventory                                                                     28,457             92,064
          Prepaid expenses and other current assets                                       (761)           (51,740)
          Increase (Decrease):
          Accounts payable and accrued expenses                                        144,564           (133,619)
          Customer deposits                                                             20,907               --
          Accrued salaries and payroll taxes                                           162,040             43,627
                                                                                   -----------        -----------
Net Cash Used for Operating Activities                                                (722,592)        (1,032,459)
                                                                                   -----------        -----------

CASH FLOWS FROM INVESTING ACTIVITIES
          Purchase of fixed assets                                                     (21,576)            (6,160)
                                                                                   -----------        -----------
Net Cash Used for Investing Activities                                                 (21,576)            (6,160)
                                                                                   -----------        -----------

CASH FLOWS FROM FINANCING ACTIVITIES:
          Proceeds from line of credit                                                 300,000            450,000
          Proceeds from issuance of equity securities, net of costs                    184,800            538,560
          Loans from (payments to) stockholders and former officers                    (10,000)            10,375
                                                                                   -----------        -----------
Net Cash Provided by Financing Activities                                              474,800            998,935
                                                                                   -----------        -----------

Decrease in cash and cash equivalents                                                 (269,368)           (39,684)

Cash and cash equivalents at beginning of period                                       285,508            257,708
                                                                                   -----------        -----------
Cash and cash equivalents at end of period                                         $    16,140        $   218,024
                                                                                   ===========        ===========

NON-CASH FINANCING TRANSACTIONS- Common stock issued in conjunction with
   the settlement of accounts payable and accrued salaries\ payroll\other
   expenses                                                                        $    37,400        $      --
                                                                                   ===========        ===========
</TABLE>


      ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS


                                       5
<PAGE>

                          POWER EFFICIENCY CORPORATION
                   NOTES TO THE CONDENSED FINANCIAL STATEMENTS
                                   (UNAUDITED)


NOTE 1 - BASIS OF PRESENTATION

The accompanying financial statements have been prepared by the Company, without
an audit. In the opinion of management, all adjustments have been made, which
include normal recurring adjustments necessary to present fairly the condensed
financial statements. Operating results for the six months ended June 30, 2004
are not necessarily indicative of the operating results for the full year.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with accounting principles generally accepted
in the United States of America have been condensed or omitted. The Company
believes that the disclosures provided are adequate to make the information
presented not misleading. Certain amounts in the financial statements have been
reclassified from prior period presentations. These unaudited condensed
financial statements should be read in conjunction with the audited consolidated
financial statements and related notes included in the Company's Annual Report
for the year ended December 31, 2003 on Form 10-KSB. The prior period per share
amounts and weighted average number of shares have been adjusted for the
one-for-seven reverse stock split effective March 1, 2004.

The preparation of condensed financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the dates of the financial
statements and the reported amounts of revenue and expenses during the reporting
period. Actual results could differ from those estimates.

NOTE 2 - GOING CONCERN

The accompanying financial statements have been prepared assuming the Company is
a going concern, which assumption contemplates the realization of assets and
satisfaction of liabilities in the normal course of business. The Company
suffered recurring losses from operations, a recurring deficiency of cash from
operations, including a cash deficiency of approximately $723,000 from
operations for the six months ended June 30, 2004, and lacks sufficient
liquidity to continue its operations. During June of 2004, the Company suspended
substantially all payments to employees and vendors until such time as
additional financing can be raised.

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.

                                       6
<PAGE>

                          POWER EFFICIENCY CORPORATION
                   NOTES TO THE CONDENSED FINANCIAL STATEMENTS
                                   (UNAUDITED)


On February 25, 2004, the Company signed a formal letter of agreement with an
investment banker. Under this letter, the Company appointed the investment
banker as its exclusive representative through June 24, 2004, in an attempt to
raise additional capital through equity issuance, debt financing or other types
of financing for the Company. While the formal letter agreement has expired, the
investment banker continues to represent the company under the same terms as the
original agreement. However, there are no assurances that sufficient capital can
be raised.

NOTE 3 -- NET LOSS PER SHARE

Basic per share amounts are computed by dividing the net loss available to
common stockholders by the weighted average number of common shares outstanding
during the year. Diluted per share amounts incorporate the incremental shares
issuable upon the assumed exercise of the Company's stock options and warrants
and assumed conversion of convertible securities. Such incremental amounts have
been excluded from the calculation since their effect would be anti-dilutive.
Such stock options, warrants and conversions could potentially dilute earnings
per share in the future.

NOTE 4 -LINE OF CREDIT AGREEMENT

On April 20, 2004, the Company executed a $300,000 Note and related Security
Agreement (the "Financing") with Summit Energy Ventures, LLC, the Company's
controlling shareholder.

Pursuant to the terms of the Note, the Registrant received a $300,000 line of
credit from Summit, all of which was drawn down during the quarter ended June
30, 2004. The outstanding balance of the Note was originally due on the earlier
of (i) May 31, 2004, or (ii) at such time that the Borrower closed on a debt or
equity financing of at least $300,000. The note has been subsequently amended so
that it is due on the earlier of (i) August 31, 2004, or (ii) at such time that
the Borrower closes on a debt or equity financing of at least $300,000. This
line of credit is intended to be a bridge to additional outside financing which
may be in the form of debt or equity (See Note 2).

During June, 2004, this note was assigned to Commonwealth Energy Corporation, a
former member of Summit Energy Ventures LLC (see Note 7).

NOTE 5 -STOCK OPTION PLAN


In June of 2004 the Board of Directors of the Company approved a modification to
the 2000 Stock Option and Restricted Plan ("2000 Plan"). The modified 2000 Plan
increases the number of authorized shares from 614,286 to 5,000,000. The
increase in options will be used as compensation and incentives for employees
and non-employee directors.


                                       7
<PAGE>

                          POWER EFFICIENCY CORPORATION
                   NOTES TO THE CONDENSED FINANCIAL STATEMENTS
                                   (UNAUDITED)


NOTE 6 -STOCKHOLDERS' EQUITY

During January and February 2004, the Company received approximately $162,800,
net of fees, for the issuance of shares of Common Stock that were subscribed for
prior to January 1, 2004. In January 2004, the Company received approximately
$22,000, net of fees, for the issuance of shares of Common Stock that were
subscribed for during January 2004.

On various dates during the six months ended June 30, 2004, the Company issued
to the Chief Executive Officer shares of common stock totaling 18,001 for
settlement related to deferred compensation and certain reimbursable expenses
amounting to $29,000.

During February 2004, the Company issued 20,000 shares of common stock valued at
$8,400 as part of a contract with an outside vendor.


NOTE 7  -  ISSUANCE OF SERIES A-1 CONVERTIBLE PREFERRED STOCK

On June 7, 2004 Summit Energy Ventures notified the Company that it had
transferred 1,747,587 of the Company's preferred stock and 1,645,404 of the
Company's common stock to Commonwealth Energy Corporation a former member of
Summit Energy Ventures LLC.

NOTE 8- SUBSEQUENT EVENTS

Subsequent to June 30, 2004, the Chief Executive Officer, Chief Financial
Officer, Chief Technology Officer, and the Vice President of Governmental
Operations entered into individual modifications to their existing employment
agreements with the Company. The Vice President of Operations also entered an
agreement to modify his existing employment relationship with the Company. Under
the terms of the new agreements, each individual ("Executive") agrees to reduce
their current compensation levels and the Vice President of Finance, Vice
President of Governmental Operations, and Vice President of Operations agrees to
suspend the Division Incentive Plan, in exchange for additional stock options to
be issued under the 2000 Plan (See Note 5). The total stock options to be issued
to an Executive is based on a Compensation Reduction component and an Employee
Incentive component. The number of stock options issued to an Executive under
the Compensation Reduction component is calculated by multiplying five by the
amount that their annual salary is reduced. These stock options vest ratably
over a twelve month period. The number of stock options issued to an Executive
under the Incentive Plan component equals 450,000 for the Chief Executive
Officer and 200,000 for the other Executives. These stock options vest ratably
over five years. All stock options issued have a ten year life and a strike
price of $1.30 per share. The modified agreements resulted in an aggregate
reduction of compensation totaling $418,200 and new options to be issued
totaling 3,341,000.


                                       8
<PAGE>

                          POWER EFFICIENCY CORPORATION
                   NOTES TO THE CONDENSED FINANCIAL STATEMENTS
                                   (UNAUDITED)


The Board of Directors of the Company also approved an unconditional granting of
an additional 305,000 stock options to non-executive employees. All current
employees will receive stock options. The number issued to non-executives varies
by position and ranges from 100,000 stock options to 10,000 stock options. These
stock options vest ratably over five years, have a ten year life, and a strike
price of $1.30 per share.







                                       9
<PAGE>


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

OVERVIEW

The Registrant generates revenues from a single business segment: the design,
development, marketing and sale of proprietary solid state electrical components
designed to reduce energy consumption in alternating current induction motors.
The Registrant began generating revenues from sales of its patented Power
Commander(R) line of motor controllers in late 1995.

RESULTS OF OPERATIONS: FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2004
AND 2003.

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

We may, in discussions of our future plans, objectives and expected performance
in periodic reports filed by us with the Securities and Exchange Commission (or
documents incorporated by reference therein) and written and oral presentations
made by us, include projections or other forward-looking statements within the
meaning of Section 27A of the Securities Exchange Act of 1933 or Section 21E of
the Securities Act of 1934, as amended. Such projections and forward-looking
statements are based on assumptions, which we believe are reasonable but are, by
their nature, inherently uncertain. In all cases, results could differ
materially from those projected. Some of the important factors that could cause
actual results to differ from any such projections or other forward-looking
statements are discussed below, and in other reports filed by us under the
Securities Exchange Act of 1934, including under the caption "Risk Factors" in
our Annual Report on Form 10-KSB. Our forward looking statements are based on
information available to us today, and except as required by law, we undertake
no obligation to update any forward looking statement, whether as a result of
new information, future events or otherwise.

REVENUES

Total revenues for the three months ended June 30, 2004, were approximately
$65,000 compared to $95,000 for the three months ended June 30, 2003, a decrease
of $30,000 or 32%. This decrease is mainly attributable to a decrease in sales
in the elevator and escalator market segment, due to delays in closing several
government installations. The decrease in elevator and escalator sales are
partially off-set by sales to new international distributors and revenue from a
government grant. Sales to two new international distributors totaled
approximately $8,400 during the three months ended June 30, 2004. Revenue of
$7,475 was recognized for a government grant received associated with
development expenses related to a medium voltage product application during the
three months ended June 30, 2004.

Total revenues for the six months ended June 30, 2004, were approximately
$154,000 compared to $256,000 for the six months ended June 30, 2003, a decrease
of $102,000 or 40%. This decrease is mainly attributable to a decrease in sales
in the elevator and escalator market segment, due to delays in closing several
government installations. The decrease in elevator and escalator sales are
partially off-set by sales to new international distributors and revenue from a
government grant. Sales to three new international distributors totaled
approximately $39,500 during the six months ended June 30, 2004. Revenue of
$12,725 was recognized for a government grant received associated with
development expenses related to a medium voltage product application during the
six months ended June 30, 2004.


                                       10
<PAGE>

COST OF PRODUCT REVENUES

Total cost of product revenues, which includes material and direct labor,
allocated costs, and inventory obsolescence and other write-offs for the three
months ended June 30, 2004 were approximately $39,000 compared to approximately
$83,000 for the three months ended June 30, 2003, a decrease of $44,000 or 53%.
As a percentage of product revenues, total costs of product revenues decreased
to approximately 69% for the three months ended June 30, 2004 compared to
approximately 87% for the three months ended June 30, 2003. The decrease in the
costs as a percentage of product revenues was primarily due to a charge to
inventory for obsolescence and other write-offs of approximately $15,000 for the
three months ended June 30, 2003.

Total cost of product revenues, which includes material and direct labor,
allocated costs, and inventory obsolescence and other write-offs for the six
months ended June 30, 2004 were approximately $134,000 compared to approximately
$179,000 for the six months ended June 30, 2003, a decrease of $45,000 or 25%.
As a percentage of product revenues, total costs of product revenues increased
to approximately 95% for the six months ended June 30, 2004 compared to
approximately 70% for the six months ended June 30, 2003. The increase in the
costs as a percentage of product revenues was primarily due to charges to
inventory for obsolescence and other write-offs of approximately $30,000 for the
six months ended June 30, 2004 compared to $15,000 for the six months ended June
30, 2003. Also, allocated costs were $37,000 for the six months ended June 30,
2004 compared to $45,000 for the six months ended June 30, 2003, a decrease of
$8,000 or 18%. However, as a percentage of product revenue allocated costs were
26% for the six month ended June 30, 2004 compared to 18% for the six months
ended June 30, 2003. The allocated costs as a percentage of product revenues
increased as the allocated costs were absorbed by a lower amount of product
revenues.


OPERATING EXPENSES

RESEARCH AND DEVELOPMENT EXPENSES

Research and development expenses were approximately $94,000 for the three
months ended June 30, 2004, as compared to approximately $100,000 for the three
months ended June 30, 2003, a decrease of $6,000 or 6%. This decrease is mainly
attributable to closing the New York facility and a cost reduction program
implemented in the second half 2003, offset by a $26,000 charge during the three
months ended June 30, 2004, related to laboratory testing done for further
product development.

Research and development expenses were approximately $208,000 for the six months
ended June 30, 2004, as compared to approximately $212,000 for the six months
ended June 30, 2003, a $4,000 or a 2% decrease. This decrease is mainly
attributable to closing the New York facility and a cost reduction program
implemented in the second half 2003, offset by a $26,000 charge during the six
months ended June 30, 2004, related to laboratory testing done for further
product development.


                                       11
<PAGE>

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES

Selling, general and administrative expenses were approximately $472,000 for the
three months ended June 30, 2004, as compared to $519,000 for the three months
ended June 30, 2003 a decrease of $47,000 or 9%. The decrease in selling,
general and administrative expenses over the prior year was due primarily to a
decrease in sales consulting and travel related expenses.

Selling, general and administrative expenses were approximately $920,000 for the
six months ended June 30, 2004, as compared to $872,000 for the six months ended
June 30, 2003 an increase of $48,000 or 6%. The increase in selling, general and
administrative expenses over the prior year was due primarily to an increase in
payroll and payroll related costs related to hiring additional sales staff and
consulting fees related to the investment banking agreement with Pali Capital.


FINANCIAL CONDITION, LIQUIDITY, AND CAPITAL RESOURCES: FOR THE SIX MONTHS ENDED
JUNE 30, 2004

Since inception, the Registrant has financed its operations primarily through
the sale of its equity securities and using available lines of credit. As of
June 30, 2004, the Registrant had cash and cash equivalents of $16,140.

Cash used for operating activities for the six months ended June 30, 2004 was
$722,592, which consisted of: a net loss of $1,153,357; less depreciation and
amortization of $37,502, bad debt expense of $5,493, inventory obsolescence
reserve of $29,484, decreases in accounts receivable of $3,079, inventory of
$28,457, increases in accounts payable and accrued expenses of $144,564,
customer deposits of $20,907, accrued salaries and payroll taxes of $162,040. In
addition, these amounts were partially offset by an increase in prepaid expenses
of $761.

Net cash used for operating activities for the six months ended June 30, 2003
was $1,032,459, which consisted of: a net loss of $1,090,572; less depreciation
and amortization of $64,410, compensation expense of $33,158, decreases in
accounts receivable of $10,213, inventory of $92,064, and an increase in accrued
salaries and payroll taxes of $43,627. In addition, these amounts were partially
offset by increases in prepaid expenses and other current assets of $51,740 and
decreases in accounts payable and accrued expenses of $133,619.

Cash used in investing activities for the six months ended June 30, 2004 was
$21,576 compared with $6,160 in the six months ended June 30,2003. The amounts
for both years consisted of the purchase of fixed assets.

Net cash provided by financing activities for the six months ended June 30, 2004
was $474,800, which primarily consisted of proceeds of $184,800 from the
issuance of equity securities related to the Company's Reg "S" stock offering
and $300,000 of proceeds from the Summit Energy Ventures line of credit. During
the six months ended June 30, 2003, net cash provided from financing activities
was $998,935, which primarily consisted of proceeds of $538,560 from the
exercise of stock warrants and the issuance of equity securities and $450,000 of
proceeds from the Summit Energy Ventures line of credit.

                                       12
<PAGE>


The Registrant expects to experience a reduction in overall expense during the
next twelve months as compared to the prior twelve month period. The reduction
is a result of cost cutting initiatives that include eliminating four positions
and salary reductions of the Chief Executive Officer and four other senior
executives. The salary reductions will be effective for a twelve month period
beginning in August of 2004, and will aggregate to approximately $418,000.
However, the registrant anticipates that operating expenses will continue to
exceed anticipated revenues over the next twelve months, and therefore
constitute a material use of any cash resources.

Since capital resources are insufficient to satisfy the Registrant's liquidity
requirements, management intends to sell additional equity or debt securities or
obtain debt financing. The Registrant is also currently meeting with many
different potential investors in an attempt to raise additional funds through
private placements of equity or debt. However, there are no assurances that
sufficient capital or debt can be raised.


CASH REQUIREMENTS AND NEED FOR ADDITIONAL FUNDS

The Registrant anticipates a substantial need for cash to fund its working
capital requirements. In accordance with the Registrant's prepared expansion
plan, it is the opinion of management that approximately $1.5 million will be
required to cover operating expenses, including, but not limited to, marketing,
sales and operations during the next twelve months based on the current sales
activity.

ITEM 3. CONTROLS AND PROCEDURES

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

(B) CHANGES IN INTERNAL CONTROLS. There were no significant changes in the
Company's internal controls or in other factors that could significantly affect
these controls subsequent to the date of their evaluation, nor were there any
significant deficiencies or material weaknesses in the Company's internal
controls. Accordingly, no corrective actions were required or undertaken.


                                       13
<PAGE>

PART II -- OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

The Company is not involved in any material pending legal proceedings.

ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS

RECENT SALES OF UNREGISTERED SECURITIES -

Sales Made to Summit Energy Ventures
The following details several different sales of unregistered securities the
Registrant made to Summit Energy Ventures, LLC, a private equity firm
specializing in energy related technologies ("Summit"). All of the sales were
exempt from registration under the Securities Act of 1933, as amended (the
"Securities Act"), pursuant to section 4(2) of the Securities Act.

On June 14, 2002, the Registrant sold 2,346,233 shares of Series A-1 Convertible
Preferred Stock, $.001 par value per share, for $2,500,000. The shares were
convertible into common stock at an initial rate of 2 for 1. The conversion
price was subject to anti-dilution provisions and was lowered when the
Registrant issued common stock at less than $3.7296 per share. In connection
with the above described transaction, Summit also received a stock purchase
warrant (the "Summit Warrant") that was exercisable after January 1, 2004 and
prior to June 14, 2012, to purchase such number of shares of Series A-2
Convertible Preferred Stock, $.001 par value per share, or common stock, $.001
par value per share, of the Registrant that would result in Summit owning 51% of
the Registrant's fully diluted equity. By the terms of the Summit Warrant, the
number of shares issuable upon exercise of the Summit Warrant adjusted with the
number of shares of the Registrant outstanding and the number of shares issuable
pursuant to options and warrants. The exercise price of the Summit Warrant was a
function of the Registrant's earnings and was zero when the Summit Warrant was
later exercised.

On May 8, 2003, the Registrant closed on a line of credit from Summit. Pursuant
to the terms of the revolving credit note entered into between the Registrant
and Summit (the "Note"), the Registrant received a $1 million line of credit
from Summit. Summit had the ability at any time to give the Registrant notice of
its desire to convert any portion of the balance of the Note and interest into
Series A-1 Convertible Preferred Stock at the price of $1.0655 per share. At
that time, the Registrant would have seven days to repay Summit the amount
Summit had indicated it desired to convert. In the event that the amount was not
repaid in seven days, Summit would receive Series A-1 Convertible Preferred
Stock. Upon conversion, the warrant the Registrant issued to Summit in June of
2002 would be expanded. According to the original terms of the Summit Warrant,
Summit had the right to purchase such number of shares of stock in the
Registrant that would give Summit a 51% interest in the Registrant. Upon
conversion of the Note, the Summit Warrant would be expanded to give Summit the
right to purchase an approximately 60% interest in the Registrant. As
consideration for the line of credit, the Registrant paid Summit a $50,000 fee
which was paid with the proceeds of the Registrant's first draw under the Note.
The outstanding balance on the Note accrued interest at 15%.

                                       14
<PAGE>

On October 30, 2003, Summit notified the Company that it desired to convert all
of the outstanding principal and interest on the note ($1,046,896) into 982,504
shares of Series A-1 Convertible Preferred Stock. The Company did not have the
ability to pay off the outstanding balance. As a result, the Company issued
982,504 shares of Series A-1 Convertible Preferred Stock to Summit. As a result
of the conversion, the Summit Warrant thereafter gave Summit the right to
purchase such number of shares that, when combined with the 2,346,233 shares of
Series A-1 Preferred Stock purchased by Summit in June of 2002 but excluding the
other shares held by Summit, would give Summit a 60.53% interest in the Company,
on a fully diluted basis. The Summit Warrant became exercisable on January 1,
2004 and had an expiration date of June 14, 2012. The conversion of the note
also caused the conversion price of the 3,328,737 shares of Series A-1
Convertible Preferred Stock to be lowered to $1.281. As a result, the 3,328,737
outstanding shares of Series A-1 Convertible Preferred Stock are currently
convertible into 2,768,849 shares of common stock.

On February 18, 2004, Summit gave notice to exercise the Summit Warrant for
shares of the Company's common stock. The number of shares of common stock the
Summit Warrant was exercisable for on the date of the notice was 3,461,285.
According to the terms of the Summit Warrant, the calculation of the number of
shares outstanding on a fully diluted basis includes all shares authorized under
the Company's stock option plans and all warrants issued by the Company that are
still outstanding. Because not all of the shares authorized under the Company's
stock option plans were issued, and because certain options and warrants issued
by the Company had strike prices that were considerably higher than the current
market price, Summit volunteered to reduce the number of shares it was entitled
to under the Summit Warrant. The Company and Summit believe that because these
options and warrants were significantly "out of the money", they are unlikely to
be exercised. After negotiation between the Company and Summit and an
examination of how many options and warrants were significantly "out of the
money", the Company and Summit executed a Warrant Agreement, dated February 26,
2004 (see Exhibit 10.34) to exercise the Summit Warrant for 3,134,102 shares of
common stock as full performance under the Summit Warrant.

In June 2004 Summit transferred 1,747,587 of the Company's Preferred Stock and
1,645,404 of the Company's Common Stock to Commonwealth Energy Corporation a
former member of Summit Energy Ventures LLC.

Sales Made to Purchasers Other than Summit Energy Ventures

On February 26, 2004, the Company issued 174 shares of common stock to Leonard
Bellezza. The shares were issued in exchange for the cancellation of debt owed
to Mr. Bellezza in the amount of $800. The issuance was exempt from registration
under the Securities Act pursuant to Regulation D. Mr. Bellezza is a director of
the Company.

On January 8, 2004, the Company issued 15,397 shares of common stock to Raymond
Skiptunis. The shares were issued in exchange for the cancellation of debt owed
to Mr. Skiptunis in the amount of $71,130. The issuance was exempt from
registration under the Securities Act pursuant to Regulation D. Mr. Skiptunis is
a director of the Company.

                                       15
<PAGE>

On various dates from January 1, 2004 to June 30, 2004, the Company issued
18,001 shares of common stock to Richard Koch. The shares were issued in
exchange for the cancellation of debt owed to Mr. Koch in the amount of $29,000.
The issuances were exempt from registration under the Securities Act pursuant to
Regulation D. Mr. Koch is the Chief Executive Officer and a director of the
Company.

During February 2004, the Company issued 20,000 shares of common stock valued at
$8,400 as part of a contract with an outside vendor. The issuance was exempt
from registration under the Securities Act pursuant to Regulation D.

During the first fiscal quarter, the Company issued 17,034 shares of its Common
Stock to foreigners for approximately $23,000 in private placement transactions.
The sales were made to foreign investors and were exempt from registration under
the Securities Act pursuant to Regulation S. The Company issued 1,193 warrants
and paid approximately $1,669 as commission associated with this issuance and
issued them at a 70% discount to market.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

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

None

ITEM 5. OTHER INFORMATION

None

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a) Exhibits

<TABLE>
<CAPTION>
 Nunber    Description of Document                                                        Location
 ------    -----------------------                                                        --------

<S>                                                                <C> <C>
 3.1       Amended and Restated By-laws of the Company dated March 23, 2004.              Filed herewith
 31.1      Certification by the Chief Executive Officer pursuant to Section 302 of the    Filed herewith
           Sarbanes-Oxley Act of 2002.
 31.2      Certification by the Chief Financial Officer pursuant to Section 302 of the    Filed herewith
           Sarbanes-Oxley Act of 2002.
 32.1      Certification by the Chief Executive Officer pursuant to Section 1350
           of Filed herewith 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          Filed herewith
           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.
</TABLE>


                                       16
<PAGE>


(b) Reports on Form 8-K.

No 8-K reports were filed during the second quarter of 2004.















                                       17
<PAGE>

                                   SIGNATURES

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

                                 POWER EFFICIENCY CORPORATION
                                 (Registrant)


Date:  August 16, 2004           By: /s/  Richard Koch
                                     -----------------
                                      President and Chief Executive Officer


Date:  August 16, 2004           By: /s/  Keith G. Collin
                                     --------------------
                                      Chief Financial Officer (Principal
                                      Financial and Accounting Officer)




                                       18