Document:

PRIVATE PLACEMENT MEMORANDUM                                            No._____

                          POWER EFFICIENCY CORPORATION

                          40 Units at $25,000 per Unit

   Each Unit Comprised of 25,00 Shares of Common Stock at $1.00 per Share and
        a Warrant to Purchase an Additional 25,000 Shares of Common Stock
                            Minimum Purchase One Unit

All 2,000,000  shares of common stock,  par value $.001 per share,  contained in
the Units (the  "Shares")  offered  hereby,  are being  issued and sold by Power
Efficiency Corporation.,  a Delaware corporation (the "Company").  Prior to this
offering  (the  "Offering'),  there has been a  limited  public  market  for the
Company's common stock.  The Offering price has been  arbitrarily  determined by
the Company. The Offering will begin on the date of this Memorandum and continue
for 60 days, subject to a the sale of a minimum of 12 Units. See "Summary of the
Offering".

                The Units offered hereby involve a high degree of
                  risk and immediate substantial dilution - See
                          the Risk Factors on Page 13.

NEITHER THE SECURITIES AND EXCHANGE  COMMISSION ("SEC") NOR ANY STATE SECURITIES
COMMISSION  HAS  PASSED  UPON THE  MERITS  OF,  OR GIVE ITS  APPROVAL  TO,  THIS
OFFERING.  NOR HAS THE SEC NOR ANY STATE SECURITIES  COMMISSION  PASSED UPON THE
ACCURACY OR  COMPLETENESS OF THIS  MEMORANDUM OR OTHER SELLING  LITERATURE.  ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.

                  Price to Public            Selling                 Proceeds to
                                             Commissions/1           Company/2

Per Unit                $25,000               $2,500                  $22,500
Minimum                 $300,000              $30,000                 $270,000
Maximum                 $1,000,000            $100,000                $900,000

1.  The  Offering  is  being  made  directly  by  the  Company  on  a  "12  Unit
$300,000-or-none-best   efforts"  basis  through  its  directors,  officers  and
employees who shall serve without  compensation.  However,  the Company reserves
the right to engage registered broker/dealers in the sale of the Units to assist
in this  Offering for which the Company will pay  brokerage  commissions  not to
exceed 10% on such sales.  All proceeds will be held in escrow until the sale of
12 Units. See "Summary of the Offering".

2.  After  deducting  commissions  but  before  deducting  the  expenses  of the
offering, which are estimated to be $10,000.

Any  representation or warranty that may be made by anyone regarding the Company
other than as contained herein is unauthorized and invalid.  The Units are being
offered  under and pursuant to Rule 506 of  Regulation  D solely to  "Accredited
Investors"  as that term is defined  in Rule  501(a) of  Regulation  D under the
Securities Act of 1933, as amended (the "Act").

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           ----------------------------------------------------------

                          POWER EFFICIENCY CORPORATION
                           4220 Varsity Drive, Suite E
                               Ann Arbor, MI 48108
                                  201-488-4040
           ----------------------------------------------------------

                   The date of this Memorandum is May 16, 2000

                          POWER EFFICIENCY CORPORATION
                 LIMITED OFFERING SOLELY TO ACCREDITED INVESTORS

THE INFORMATION  CONTAINED  HEREIN IS DEEMED  CONFIDENTIAL  BY POWER  EFFICIENCY
CORPORATION,  (HEREINAFTER  THE "COMPANY"),  HAS NOT  NECESSARILY  BEEN RELEASED
PUBLICLY,  AND IS DISCLOSED  FOR THE SOLE PURPOSE OF  EVALUATION  BY A POTENTIAL
PURCHASER OF THE UNITS BEING OFFERED HEREBY.  SO LONG AS THIS INFORMATION IS NOT
PUBLICLY  AVAILABLE  AND BEARS ON THE VALUE OF AN  INVESTMENT  IN THE  COMPANY'S
SECURITIES,  NO PERSON TO WHOM IT HAS BEEN MADE AVAILABLE MAY PARTICIPATE IN ANY
PUBLIC TRADING  INVOLVING  SECURITIES OF THE COMPANY BASED UPON THE  INFORMATION
CONTAINED IN THIS PRIVATE PLACEMENT MEMORANDUM.  ANY SUCH TRADING BY A RECIPIENT
OF THIS  MEMORANDUM,  OR BY A PERSON WHO IS  INFORMED  BY THE  RECIPIENT  OF THE
CONTENTS OF THIS MEMORANDUM, COULD RESULT IN CIVIL OR CRIMINAL LIABILITY TO SUCH
RECIPIENT FOR VIOLATION OF FEDERAL OR STATE SECURITIES LAWS.

THE UNITS REFERRED TO HEREIN ARE NOT BEING  REGISTERED  UNDER THE SECURITIES ACT
OF 1933,  AS AMENDED,  IN RELIANCE  UPON THE  EXEMPTION  FROM  REGISTRATION  FOR
TRANSACTIONS  BY AN ISSUER NOT  INVOLVING ANY PUBLIC  OFFERING.  THESE UNITS ARE
BEING  OFFERED  ONLY TO  INVESTORS  WHOM THE COMPANY  BELIEVES  ARE  "ACCREDITED
INVESTORS"  AS THAT  TERM IS  DEFINED  IN RULE  501(A)  OF  REGULATION  D OF THE
SECURITIES ACT OF 1933, AS AMENDED.

THE UNITS OFFERED  HEREBY HAVE NOT BEEN  REGISTERED  UNDER THE SECURITIES ACT OF
1933 AS AMENDED OR UNDER APPLICABLE STATE SECURITIES LAWS NOR HAS THE SECURITIES
AND  EXCHANGE  COMMISSION  OR ANY STATE  SECURITIES  COMMISSION  PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS MEMORANDUM OR ENDORSED THE MERITS OF THIS OFFERING.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.

THIS MEMORANDUM DOES NOT CONSTITUTE AN OFFER OR SOLICITATION IN ANY STATE OR ANY
JURISDICTION  TO ANY  PERSON  TO  WHOM IT IS  UNLAWFUL  TO MAKE  SUCH  OFFER  OR
SOLICITATION  IN SUCH  STATE  OR  JURISDICTION.  NEITHER  THE  DELIVERY  OF THIS
MEMORANDUM NOR ANY SALE HEREUNDER  SHALL CREATE ANY  IMPLICATION  THAT THERE HAS
BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY OR THE FACTS HEREIN SET FORTH SINCE
THE DATE HEREOF.

PROSPECTIVE  INVESTORS ARE NOT TO CONSTRUE AS BEING LEGAL ADVICE THE CONTENTS OF
THIS  MEMORANDUM  OR ANY OTHER  COMMUNICATIONS  FROM THE  COMPANY  OR ANY OF ITS
RESPECTIVE AFFILIATES,  RELATED PARTIES, OFFICERS, OR EMPLOYEES. EACH RESPECTIVE
INVESTOR  SHOULD  CONSULT  HIS OWN  COUNSEL,  ACCOUNTANT,  OR  BUSINESS  ADVISOR
CONCERNING INVESTMENT IN THE UNITS OFFERED HEREBY.

PRIOR TO THE CONSUMMATION OF THE TRANSACTIONS  CONTEMPLATED  HEREIN, THE COMPANY
WILL MAKE AVAILABLE TO PROSPECTIVE  INVESTORS AND/OR THEIR  REPRESENTATIVES  AND
ADVISORS,  THE  OPPORTUNITY  TO ASK QUESTIONS OF, AND RECEIVE  ANSWERS FROM, THE
COMPANY  OR FROM ANY  PERSON  ACTING  ON ITS  BEHALF  CONCERNING  THE  TERMS AND
CONDITIONS OF THIS  OFFERING AND TO OBTAIN ANY  ADDITIONAL  INFORMATION,  TO THE
EXTENT  THAT THE COMPANY  POSSESSES  SUCH  INFORMATION  OR CAN OBTAIN IT WITHOUT
UNREASONABLE  EFFORT  OR  EXPENSE,  NECESSARY  TO  VERIFY  THE  ACCURACY  OF THE
INFORMATION CONTAINED IN THIS MEMORANDUM.  NO PERSON HAS BEEN AUTHORIZED TO GIVE
INFORMATION OR TO MAKE ANY REPRESENTATIONS CONCERNING THIS TRANSACTION WHICH ARE
NOT CONTAINED

                                        2

<PAGE>

IN THIS MEMORANDUM,  AND ANY SUCH OTHER INFORMATION OR REPRESENTATIONS  MUST NOT
BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY.

ANY  REPRODUCTION OR DISTRIBUTION OF THIS MEMORANDUM IN WHOLE OR IN PART, OR THE
DIVULGENCE OF ANY OF ITS  CONTENTS,  TO ANY PERSON OTHER THAN THE PERSON TO WHOM
THIS MEMORANDUM IS DELIVERED, IS PROHIBITED WITHOUT THE PRIOR WRITTEN CONSENT OF
THE COMPANY. BY ACCEPTING THIS MEMORANDUM,  THE RECIPIENT AGREES TO RETURN IT TO
THE COMPANY IF HE/SHE DOES NOT PURCHASE ANY OF THE UNITS OFFERED HEREBY.

EACH INVESTOR MUST CONFIRM AND REPRESENT  THAT THE UNITS ARE BEING  ACQUIRED FOR
LONG TERM  INVESTMENT  WITHOUT  ANY  PRESENT  OR  FORESEEABLE  NEED TO  CONSIDER
DISPOSITION OF THE UNITS.

EACH INVESTOR WILL BE REQUIRED TO MAKE CERTAIN  REPRESENTATIONS  TO THE COMPANY,
INCLUDING (BUT NOT LIMITED TO)  REPRESENTATIONS AS TO INVESTMENT INTENT,  DEGREE
OF SOPHISTICATION,  ACCESS TO INFORMATION  CONCERNING THE COMPANY AND ABILITY TO
BEAR THE ECONOMIC RISK OF THE INVESTMENT.

INVESTMENT  ADVISORS  AND OTHER  MANAGERS  OF  INVESTMENT  ACCOUNTS  SHOULD  NOT
CONSIDER  THIS   INVESTMENT   FOR  ANY  INVESTOR  WHO  DOES  NOT  POSSESS  THESE
QUALIFICATIONS AND SHOULD NOT TRANSMIT THIS MEMORANDUM TO ANY SUCH INVESTOR.

THE UNITS OFFERED HEREBY HAVE NOT BEEN APPROVED OR DISAPPROVED BY ANY FEDERAL OR
STATE GOVERNMENTAL AUTHORITY NOR HAS ANY SUCH AUTHORITY PASSED UPON THE ACCURACY
OR ADEQUACY OF THIS MEMORANDUM. ANY REPRESENTATION TO THE CONTRARY IS UNLAWFUL.

NO OFFERING LITERATURE OR ADVERTISING IN WHATEVER FORM SHALL BE EMPLOYED IN THIS
OFFERING  EXCEPT  FOR  THIS  MEMORANDUM,  STATEMENTS  CONTAINED  HEREIN  AND THE
EXHIBITS   ATTACHED   HERETO.   NO  PERSON  HAS  BEEN  AUTHORIZED  TO  MAKE  ANY
REPRESENTATIONS OR GIVE ANY INFORMATION WITH RESPECT TO THIS OFFERING OTHER THAN
THE  INFORMATION  CONTAINED  HEREIN,  AND IF  GIVEN  OR  MADE,  ANY  SUCH  OTHER
INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED
BY THE COMPANY.

THIS  CONFIDENTIAL  PRIVATE PLACEMENT  MEMORANDUM  PROVIDES A DESCRIPTION OF THE
UNITS  OFFERED  HEREBY AS WELL AS A SUMMARY  OF THE  DOCUMENTS  PURPORTED  TO BE
SUMMARIZED  HEREIN.  HOWEVER,  THIS  MEMORANDUM  IS A SUMMARY  ONLY AND DOES NOT
PURPORT  TO BE  COMPLETE.  ACCORDINGLY,  REFERENCE  IS  MADE  TO  THE  OPERATIVE
AGREEMENTS AND OTHER  DOCUMENT,  COPIES OF WHICH ARE ATTACHED AS EXHIBITS HERETO
OR WILL BE SUPPLIED UPON  REQUEST,  FOR THE EXACT TERMS OF SUCH  AGREEMENTS  AND
DOCUMENTS TO WHICH REFERENCE IS MADE HEREIN.

THE COMPANY HAS THE RIGHT IN ITS SOLE DISCRETION TO REJECT ANY  SUBSCRIPTION FOR
ANY REASON WHATSOEVER.  THE COMPANY IS NOT OBLIGATED TO NOTIFY THE RECIPIENTS OF
THIS  MEMORANDUM  THAT ALL OF THE UNITS OFFERED HEREBY HAVE BEEN SOLD.  ASSUMING
THAT ALL OF THE SUBSCRIPTION  DOCUMENTS ARE IN ORDER AND THAT A SUBSCRIBER MEETS
THE SUITABILITY  STANDARDS AND SUCH OTHER STANDARDS AS THE COMPANY SHALL, IN ITS
DISCRETION,  FROM TIME TO TIME  ESTABLISH  FOR THE  PURCHASE OF THE UNITS,  SUCH
SUBSCRIBERS  WILL BE  ACCEPTED  ON A FIRST-  COME  BASIS  AND  SUBJECT  TO PRIOR
SUBSCRIPTIONS   AND  THE  RIGHT  OF  THE   COMPANY   TO  ACCEPT  OR  REJECT  ANY
SUBSCRIPTIONS.

                                        3

<PAGE>

THESE SECURITIES ARE SUBJECT TO RESTRICTIONS ON  TRANSFERABILITY  AND RESALE AND
MAY NOT BE TRANSFERRED OR RESOLD EXCEPT AS PERMITTED UNDER THE SECURITIES ACT OF
1933,  AS  AMENDED,  AND THE  APPLICABLE  STATE  SECURITIES  LAWS,  PURSUANT  TO
REGISTRATION OR EXEMPTION THEREFROM. INVESTORS SHOULD BE AWARE THAT THEY WILL BE
REQUIRED TO BEAR THE FINANCIAL RISK OF THIS INVESTMENT FOR AN INDEFINITE  PERIOD
OF TIME.

THIS  CONFIDENTIAL  PRIVATE PLACEMENT  MEMORANDUM  PROVIDES A DESCRIPTION OF THE
UNITS  OFFERED  HEREBY AS WELL AS A SUMMARY  OF THE  DOCUMENTS  PURPORTED  TO BE
SUMMARIZED  HEREIN.  HOWEVER,  THIS  MEMORANDUM  IS A SUMMARY  ONLY AND DOES NOT
PURPORT  TO BE  COMPLETE.  ACCORDINGLY,  REFERENCE  IS  MADE  TO  THE  OPERATIVE
AGREEMENTS AND OTHER DOCUMENTS,  COPIES OF WHICH ARE ATTACHED AS EXHIBITS HERETO
OR WILL BE SUPPLIED UPON  REQUEST,  FOR THE EXACT TERMS OF SUCH  AGREEMENTS  AND
DOCUMENTS TO WHICH REFERENCE IS MADE HEREIN.

SEE THE SECTION  ENTITLED "STATE LAW LEGENDS"  ANNEXED HERETO AS EXHIBIT "J" AND
HEREBY INCORPORATED HEREIN BY REFERENCE, FOR CERTAIN INFORMATION RELATING TO THE
VARIOUS BLUE SKY LAW  REQUIREMENTS  APPLICABLE  TO  RESIDENTS OF CERTAIN  STATES
WHERE THE OFFER MAY BE MADE.

Forward Looking Statements

When used in this  Memorandum,  the words "may,"  "will,"expect,"  "anticipate,"
"continue," "estimate," "project," "intend" and similar expressions are intended
to identify forward- looking statements within the meaning of Section 27A of the
Securities  Act of 1933 and Section 21E of the  Securities  Exchange Act of 1934
regarding events,  conditions and financial trends that may affect the Company's
future plans of operations,  business strategy,  operating results and financial
position.   Shareholders  and  prospective  investors  are  cautioned  that  any
forward-looking  statements  are not  guarantees of future  performance  and are
subject to risks and uncertainties and that actual results may differ materially
from those included within the forward-looking statements as a result of various
factors. Such factors are described herein under the heading "Risk Factors."

                                        4

<PAGE>

                                                 TABLE OF CONTENTS

Summary of the Offering................................................... 6

Accredited Investor Subscription Agreement................................ 11

                                    EXHIBITS

EXHIBIT A:    Form of Escrow Agreement

EXHIBIT B:    Form of Common Stock Purchase Warrant

EXHIBIT C:    Definition of Accredited Investor

EXHIBIT D:    Form of Investment Letter

EXHIBIT E:    May 8, 2000 Term Sheet with Performance Control LLC

EXHIBIT F:    Agreement with R.Scott Caputo dated September 29, 1999

EXHIBIT G:    Reprint of Article From the April 2000 Edition of Energy User News

EXHIBIT H:    Unaudited Financial Statements of the Company for the Fiscal year
              Ended December 31, 1998

EXHIBIT I:    United States Patent No. 5821726 and NASA License

EXHIBIT J:    State Notice Requirements

                                        5

<PAGE>

                             SUMMARY OF THE OFFERING

The following  summary of the Offering  memorialized  in this private  placement
memorandum  (the  "Memorandum")  describes the numerous  aspects of the Offering
believed by the Company to be material to investors. This summary, together with
the unaudited  management financial statements referred to herein should be read
in their entirety by prospective investors. The following summary is, therefore,
qualified in its entirety by reference to full text of the  accredited  investor
subscription agreement following this summary (the "Subscription Agreement") and
to the exhibits attached hereto.

The Company ........The  Company  was  organized  under the laws of the state of
                    Delaware in October 1994. The Company's  temporary executive
                    offices  are  located at 4220  Varsity  Drive,  Suite E, Ann
                    Arbor,  MI 48108.  The  telephone  number of the  Company is
                    (201) 488-4040

                    Until 1997, the Company was a development  stage entity that
                    sought  to  become  engaged  in  the  design,   development,
                    marketing  and sale of  proprietary  solid state  electrical
                    components designed to effectively reduce energy consumption
                    in alternating current induction motors. Alternating current
                    induction   motors  are  commonly   found   industrial   and
                    commercial facilities throughout the world.

                    Commencing in 1997, the Company  commenced the sale of Power
                    Commander(TM),  its principal and proprietary product, which
                    results in reduced energy consumption in alternating current
                    induction motors in industrial applications of approximately
                    25 to 35  percent.  In  addition,  the  Power  Commander(TM)
                    extends motor life, minimizes maintenance, results in cooler
                    running,  reduced stress and strain on the motor and reduces
                    stress and strain on accompanying  electrical and mechanical
                    systems.  The Company's Power  Commander(TM) was the subject
                    of a United  States  Patent  granted in 1997.  A copy of the
                    patent is  annexed  hereto as Exhibit  "I" and  incorporated
                    herein  by   reference.   The   Company   offers  the  Power
                    Commander(TM) in two versions, each of which is a distinctly
                    different   product,   marketed   and   sold  to   different
                    applications using different techniques.  These two products
                    are the Three Phase Power  Commander(TM)  used in industrial
                    and  commercial  applications  and the  Single  Phase  Power
                    Commander(TM)  used in  consumer  applications  such as home
                    appliances and the like.

Term Sheet .........On May 8, 2000,  the  Company  entered  into a written  term
                    sheet (the "Term Sheet") with Performance  Control,  LLC, an
                    affiliated   privately  owned  Michigan  limited   liability
                    company  ("Control").  The Term  Sheet was  executed  by the
                    Company,  Control,  the  officers,  directors  and principle
                    stockholders of the Company, and the

                                        6

<PAGE>

                    principle members and manager of Control. The Term Sheet set
                    forth the  agreement  and  understanding  of the Company and
                    Control  as to  the  parameters  of a  business  combination
                    between the Company and Control and a reorganization  of the
                    Company.  The  Company  intends  to utilize a portion of the
                    proceeds  from the  Offering to  implement  the  transaction
                    memorialized  by  the  Term  Sheet  and  consisting  of  the
                    following:  (i) a change of the Company's Board of Directors
                    and   management   including  the  execution  of  employment
                    agreements; (ii) the acquisition of the assets of Control in
                    consideration  of an aggregate of 1,112,245  authorized  but
                    unissued   shares  of  the   Company's   common  stock  (the
                    "Acquisition Shares");  (iii) the repayment or restructuring
                    of a $100,000  working  capital loan made on  September  29,
                    1999;  (iv) the filing of a Form 10SB with the SEC;  (v) the
                    issuance of 50,000 common stock purchase  warrants to a non-
                    affiliated consultant; and (vi) the extension of outstanding
                    underwriter's  warrants to purchase an  aggregate  of 36,720
                    shares of the Company's common stock at $5.50 per share. The
                    foregoing are collectively referred to as the "Transaction".
                    Additional  information  concerning  the  Transaction is set
                    forth in the enclosed Subscription Agreement.

The Company's

Obligations ........In order for the business combination with Control to close,
                    and in addition to other  conditions  contained  in the Term
                    Sheet,  the Company will be required to sell a minimum of 12
                    Units offered  hereby  within 60 days from May 8, 2000.  The
                    sale of units in the  Company's  May 12,  2000  bridge  loan
                    offering  comprised  of  $50,000  principal  amount  of  12%
                    convertible  promissory  notes  convertible into Units shall
                    qualify towards the sale of the minimum number of Units.

The  Units .........Each Unit is  comprised  of 25,000  authorized  but unissued
                    shares of the Company's  Common  Stock,  $.001 par value per
                    share, offered at $1.00 per Share (the "Unit Shares"), and a
                    five year warrant to purchase  25,000  additional  shares of
                    the Company's  Common Stock,  $.001 par value per share (the
                    "Warrant  Shares")  at $3.00 per  Warrant  Share  during the
                    first year of the term of this Warrant expiring on the first
                    anniversary  of the date  hereof,  $4.00 per  Warrant  Share
                    during the second year expiring on the second anniversary of
                    the date  hereof,  and $5.00 per  Warrant  Share  during the
                    third year  expiring  on the third  anniversary  of the date
                    hereof (the "Warrant").  A form of Warrant is annexed hereto
                    as Exhibit "B" and hereby  incorporated herein by reference.
                    The Unit Shares and the Warrant  Shares will be  "restricted
                    securities" as that term is defined under Rule 144 under the
                    Act and ineligible for public sale for a period of 12 months
                    from the date of issuance.

                                        7

<PAGE>

The Offering

        Number of Offered Units

             Minimum                                         12
             Maximum                                         40
        Price per Unit                                       $25,000
        Type of Offering                                     $300,000-or-none
        Shares authorized

             Common Stock,    $.001 par                      9,000,000
             Preferred Stock, $.001 par                      1,000,000
        Shares outstanding prior to Offering                 4,383,600 (1)(2)
        Shares outstanding after Offering
             Minimum                                         4,683,600
             Maximum                                         5,383,600 (1)(2)
        Equity ownership by Subscribers before
        the Acquisition of the assets of Control
             Minimum                                         6.4
             Maximum                                         18.6% (1)(2)
        Equity ownership by Subscribers after
        the acquisition of the assets of Control
            Mimimum                                          5.2

             Maximum                                         15.3% (1)(2)
         Equity ownership by existing stockholders
         of the Company before the acquisition of
         the assets of Control

             Minimum                                         93.6%
             Maximum                                         81.4% (1)(2)
          Equity ownership by existing stockholders
          of the Company after the acquisition of
          the assets of Control
             Minimum                                         75.6% (1)(2)
             Maximum                                         67.4% (1)(2)
                          ---------------

          (1)  Prior to the  issuance  of a minimum of 300,000  and a maximum of
               1,000,000 Warrant Shares upon exercise of the Warrants.

          (2)  Prior  to the  exercise  of five  year  options  to  purchase  an
               aggregate  of 500,000  shares of the  Company's  common  stock at
               $5.00 per  share  (463,640  shares)  and  $5.50  (36,360  shares)
               granted on November 6, 1996 under the  Company's  1994  Incentive
               Option Plan.

                                        8

<PAGE>

Use of  Proceeds    The Company intends to utilize the proceeds from the sale of
                    the  Units to  implement  the  Transaction  and for  working
                    capital purposes.

Control ............Control is engaged in the assembly and distribution of motor
                    controller products and energy management related electrical
                    components  since 1996.  The principals of Control have been
                    involved in the energy management business for approximately
                    ten years and have developed several  significant  strategic
                    relationships,   in  a  number   of   industries   including
                    manufacturing,    refrigeration,   petroleum,   lumber   and
                    automotive.  Since  1996,  and  pursuant  to the  terms  and
                    conditions  of  a  Product   Assembly  and   Distributorship
                    Agreement and a License Agreement with the Company,  Control
                    has  been   principally   engaged   in  the   assembly   and
                    distribution    of   the   Company's   Three   Phase   Power
                    Commander(TM)   and  the   Company's   Single   Phase  Power
                    Commander(TM).

Risk Factors........The  Units are  speculative  securities  and  involve a high
                    degree  of  risk  and  immediate  dilution,  and  should  be
                    purchased  only by persons  who can afford the loss of their
                    entire investment.

Method of
Distribution .......The  Units  are  being   offered   by  the   Company   on  a
                    best-efforts-12 Unit ($300,000)-or-none  basis. In the event
                    that a minimum  of 12 Units are not sold and paid for within
                    60 days from the date of this Memorandum, all funds received
                    from  subscribers  will be returned without interest thereon
                    or deduction therefrom.  Pending the sale of a minimum of 12
                    Units,  all checks  representing  an investment in the Units
                    will be deposited in an attorneys escrow account  maintained
                    by  Lester  Yudenfriend,  Esq.,  securities  counsel  to the
                    Company  at  the   European   American   Bank  (the  "Escrow
                    Account").  In the event that a minimum of $3000,000 has not
                    been  deposited  into the Escrow Account within 60 days from
                    May 8, 2000 (the "Termination  Date"), all proceeds received
                    from subscribers  will be promptly  returned to them without
                    interest  thereon  or  deduction  therefrom.  In the event a
                    minimum  of  $300,000  has been  deposited  into the  Escrow
                    Account by the Termination Date, the Company may continue to
                    sell the  remaining  Units until the  expiration of 120 days
                    from May 8, 2000, the date of the Term Sheet.

                    The Units are being offered by the officers and directors of
                    the  Company  without  compensation.  The  Units may also be
                    offered on a best-efforts basis by registered broker dealers
                    that are members of the National  Association  of Securities
                    Dealers,  Inc.  ("Selling  Agents").  In the event  that the
                    services of Selling  Agents are used,  the Company may pay a
                    10% commission on all such sales.

                                        9

<PAGE>

Method of
Subscriptions ......In order to subscribe  for the Units being  offered  hereby,
                    each   investor   must   complete  and   execute:   (i)  the
                    subscription   agreement,  a  form  of  which  follows  this
                    Summary.  (the  "Subscription  Agreement");  (ii) the escrow
                    agreement,  a form of which is annexed hereto as Exhibit "A"
                    and hereby  incorporated  herein by  reference  (the "Escrow
                    Agreement");  and (iii)  the  investment  letter,  a form of
                    which  is  annexed   hereto  as   Exhibit   "D"  and  hereby
                    incorporated herein by reference(the  "Investment  Letter").
                    The Company has reserved the  discretionary  right to reject
                    all or any  portion of any  subscription  and to abandon the
                    Offering  at any time  prior  to a  closing  on the  minimum
                    amount of Units.

                    Investors  purchasing Units will make payment in full at the
                    time of subscription.

                    Executed  Subscription  Agreements,  Escrow  Agreements  and
                    Investment Letters shall be delivered to the Company,  along
                    with the investor's  check or money order payable to "Lester
                    Yudenfriend,  Esq. as Escrowee"  The Company shall give each
                    investor notice of the acceptance or rejection of his or her
                    subscription.

Terms of
Offering ...........The  Company is offering  the Units  pursuant to Rule 506 of
                    Regulation D under the Act. The Units are being offered only
                    to Accredited  Investors as that term is defined in Rule 501
                    of  Regulation D under the Act and as defined in Exhibit "C"
                    annexed hereto.

Absence of
Current
Audited
Financial
Statements........  The only financial information being supplied to Subscribers
is the  Company's  unaudited  financial  statements  for the  fiscal  year ended
December 31, 1998 (the "98 Financials"). A copy of the 98 Financials are annexed
hereto as Exhibit "I" and hereby incorporated  herein by reference.  The Company
has yet to complete  the audit of the 1998  Financials  much less the  financial
statements for the fiscal year ended December 31, 1999 (the "99  Financials") or
the three  months ended March 31,  2000.  There can be no assurance  that the 98
Financials  will not be  materially  adjusted if and when the same are  audited.
Similarly,  there can be no assurance  that the Company's 99 Financials  will be
audited.  A failure to audit the 98 and/or  the 99  Financials  will  materially
adversely  effect the Company's  ability to file the Form 10 and to complete the
Transaction.

                                       10

<PAGE>

                          POWER EFFICIENCY CORPORATION
                   ACCREDITED INVESTOR SUBSCRIPTION AGREEMENT

         SUBSCRIPTION  AGREEMENT  (the  "Agreement")  Between  Power  Efficiency
Corporation,  a publicly owned Delaware  corporation with temporary  offices c/o
4220  Varsity  Drive,  Suite E, Ann  Arbor,  MI 48108  (the  "Company")  and the
individual, firm or entity executing this Agreement on the last page hereof (the
"Subscriber").  The  Offering  (as that term is  hereinafter  defined)  shall be
offered only to and  consummated  strictly with  "Accredited  Investors" as that
term is defined in Rule 501(a) of Regulation D under the Securities Act of 1933,
as  amended  (the  "Act")and  set forth on Exhibit  "C" and hereby  incorporated
herein by  reference.  This  Agreement  sets  forth the  terms  under  which the
Subscriber will invest in the Company.

         1.  Description  of the Offering.  This  Agreement sets forth the terms
under which the Subscriber will invest in the Company.  This subscription is for
a minimum  of 12 and a maximum of 40 units at a  purchase  price of $25,000  per
unit (the  "Units").  Each Unit is comprised of 25,000  authorized  but unissued
shares of the  Company's  Common  Stock,  $.001 par value per share,  offered at
$1.00 per Share (the "Unit Shares"), and a three year warrant to purchase 25,000
additional shares of the Company's Common Stock,  $.001 par value per share (the
"Warrant  Shares") at $3.00 per Warrant  Share during the first year of the term
of this Warrant expiring on the first anniversary of the date hereof,  $4.00 per
Warrant Share during the second year expiring on the second  anniversary  of the
date hereof,  and $5.00 per Warrant  Share during the third year expiring on the
third  anniversary  of the date  hereof  (the  "Warrant").  The Unit  Shares and
Warrant  Shares will be  "restricted  securities"  as that term is defined under
Rule 144 under the Act and  ineligible for public sale for a period of 12 months
from the date of issuance.  As a condition precedent to the issuance of the Unit
Shares,  the Subscriber shall be required to sign the investment  letter annexed
hereto as Exhibit "D" and hereby incorporated herein by reference. The Units are
being  offered under and pursuant to Rule 506 of Regulation D (the "Rule") under
the Act for a  period  of 60  days.  This  offering  (the  "Offering")  is being
conducted  solely to  "Accredited  Investors"  as that term is  defined  in Rule
501(a) of  Regulation  D under the Act The Offering is being  conducted  for the
purpose of  providing  the working  capital  necessary to put the Company in the
position  to  implement  the  Company's   proposed   business   combination  and
reorganization  of the Company  with  Performance  Control,  LLC, an  affiliated
Michigan limited liability company ("Control")  pursuant to a written term sheet
dated May 8, 2000 executed by the Company, Control, the officers,  directors and
principle  stockholders of the Company, and the principle members and manager of
Control,  a true copy of which is  annexed  hereto  as  Exhibit  "E" and  hereby
incorporated  herein by  reference.  (the "Term  Sheet").  The  entire  Offering
consists of an aggregate of 1,000,000 Unit Shares and 1,000,000 Warrant Shares.

         The  business  combination  and  reorganization  of the  Company  shall
consist of and the Company shall utilize a portion of the proceeds  derived from
the Offering to implement the following:  (i) a change of the Company's Board of
Directors and management  including the execution of two employment  agreements;
(ii) the acquisition of the assets of Control in  consideration  of an aggregate
of 1,112,245 authorized but unissued shares of the

                                       11

<PAGE>

Company's  common  stock (the  "Acquisition  Shares");  (iii) the  repayment  or
restructuring  of a $100,000  working  capital loan made on September  29, 1999;
(iv) the filing of a Form 10SB with the SEC; (v) the  issuance of 50,000  common
stock purchase warrants to a non- affiliated consultant;  and (vi) the extension
of outstanding  underwriter's warrants to purchase an aggregate of 36,720 shares
of the Company's  common stock at $5.50 per share  (collectively  referred to as
the "Transaction"). The parameters of the Transaction are enumerated in the Term
Sheet, a copy of which is annexed hereto as Exhibit "E".

         The following is a brief description of the constituent elements of the
Transaction as set forth in the Term Sheet:

         The Change of  Management.  As soon as  practicable,  Anthony C. Caputo
shall  resign as a director  of the Company for  personal  reasons.  The vacancy
created  by  Mr.  Caputo's  resignation  shall  be  filled  by  Steven  Shulman.
Thereafter,  Gerard S.  DiFiore  shall  resign as a director  of the Company for
personal  reasons.  The vacancy created by Mr.  DiFiore's  resignation  shall be
filled by a duly qualified  representative  of the group of private investors in
the  Financing  (the  "Nominee").  The new Board of  Directors  shall  elect new
interim  executive  officers  of the Company to serve at the  discretion  of the
group of private investors  financing the transaction (the  "Investors")  and/or
the investment  bank, joint venture or industry partner intended to be recruited
by the Investors to finance the subsequent round of capital raising as follows:

       President and Chief Sales Officer       -      Stephen Shulman
       Chief Operating Officer                 -      Nicholas Anderson
       Chief Financial Officer                 -      the Nominee

An integral part of the change of management shall be the Company's  preparation
and execution of five year  employment  agreements  with  Nicholas  Anderson and
Steven Shulman as executive  officers.  These agreements shall provide for first
year base salaries of $120,000.  The salaries for the second through fifth years
shall be $120,000 plus annual increases or bonuses tied to both the level of the
Company's  gross  revenues and amount of net after tax  profits.  In addition to
offering  comprehensive health benefits and the inclusion of customary vacation,
expense reimbursement,  confidentiality, non-compete, and disability provisions,
the  agreements  shall offer  Shulman  incentive  stock options to purchase such
number of shares of the Company's  common stock as shall be mutually agreed upon
between the individuals and the Company's  investment  banker up to a maximum of
500,000 shares.

         The Business Combination.  As soon as practicable but in no event later
than 60 days from May 8, 2000,  the  Company  shall  enter into a written  asset
purchase agreement with Control (the "Acquisition  Agreement").  Pursuant to the
Acquisition  Agreement,  the Company  shall acquire all of the assets of Control
solely in exchange for an aggregate of 1,112,245  Acquisition Shares valued, for
the purposes of the Acquisition  Agreement,  at $.50 per  Acquisition  Share(the
"Acquisition").  The  Acquisition  Agreement  shall  provide that Control  shall
utilize an aggregate of 28,500

                                       12

<PAGE>

Acquisition  Shares to satisfy  $114,000  in notes  payable  to  members  and an
aggregate of 73,745  Acquisition  Shares to satisfy $294,978 in accrued salaries
payable to members  and  employees  of Control.  In  addition,  the  Acquisition
Agreement shall provide that the Company will assume the approximately  $450,000
of accrued  labilities  of Control.  The  Acquisition  Shares will  represent an
approximate  20.4%  equity  interest  in the  Company as of the date of the Term
Sheet prior to: (i) the original issuance of the Unit Shares;  (ii) the exercise
of the Warrants or the  original  issuance of the Warrant  Shares;  or (iii) the
exercise of five year options to purchase an aggregate of 500,000  shares of the
Company's  common stock at $5.00 per share  (463,640  shares) and $5.50  (36,360
shares)  granted on November 6, 1996 under the Company's 1994  Incentive  Option
Plan (the "Options").  The Acquisition Shares will be "restricted securities" as
that term is defined in Rule  144(a)(3)  under the Act. The officers,  directors
and  principal  stockholders  of the  Company  and  Control  shall agree that if
required  by the  Company's  investment/merchant  banker  in the  next  round of
financing,  if any, they will enter into identical  voluntary lock up agreements
with the  Company  with  respect  to the  Acquisition  Shares.  The  Acquisition
Agreement  shall provide for the mutual  release of liability  arising under the
disputed  December  31, 1998 Asset  Purchase  Agreement  between the Company and
Control.  The Company and Control  shall  negotiate  in good faith and use their
best  efforts  to arrive at a  mutually  acceptable  Acquisition  Agreement  for
approval,  execution and delivery at the earliest reasonably practical date, but
in no event later than 60 days from May 8, 2000.  The  Company and Control  will
thereupon  use their best  efforts to effect a closing  and to proceed  with the
transactions  contemplated  by  the  Acquisition  Agreement  as  promptly  as is
reasonably practicable.  In the event a minimum of $300,000 has not been sold by
the Company within the aforesaid 60 days, Control has retained the right, on ten
days prior written notice to the Company, to terminate the Acquisition Agreement
with the Company.

         The Debt  Restructuring.  As soon as  practicable,  the  Company and R.
Scott Caputo  ("RSC") shall amend their written loan agreement  dated  September
29,  1999,  a true copy of which is  annexed  hereto as  Exhibit  "F" and hereby
incorporated  herein by  reference,  wherein RSC lent the sum of $100,000 to the
Company (the "RSC Agreement").  The amendment to the RSC Agreement shall provide
that in the event the  Company is  successful  in the sale of all 40 Units,  the
Company will repay its  $100,000  obligation  to RSC  together  with all accrued
interest  (the "RSC Loan").  In the event the Company  sells less than 40 Units,
the Company and RSC shall  renegotiate the terms and conditions of the RSC Loan.
In either event the RSC  Agreement  shall be modified to release the lien on the
200,000 shares of the Company's  common stock being held as collateral  security
for the RSC Loan and owned of record by Nicholas Anderson,  an executive officer
and director of the Company.

                                       13

<PAGE>

         The Form 10-SB.  As soon as practicable  following:  (i) the closing of
the  Financing;  (ii)  the  change  in  management;  (iii)  the  closing  of the
acquisition  of the assets of  Control;  and (iv) the  restructuring  of the RSC
Loan; the Company shall file with the Securities  and Exchange  Commission  (the
"SEC") a registration statement on Form 10-SB (the "Form 10"). The Form 10 shall
be  accompanied by audited  financial  statements for the two fiscal years ended
December 31, 1999 and unaudited financial statements as required by Rule 3-12 of
Regulation S-X.

         The Warrant  Issuance.  As soon as  practicable  after May 8, 2000, the
Company  shall  issue to a  non-affiliated  third party  consultant  a five year
warrant to purchase 50,000 restricted shares of the Company's common stock at an
exercise  price equal to the fair market  value  thereof in the over the counter
market on the date the warrant is issued.

         Warrant  Extension.  As soon as  practicable  after  May 8,  2000,  the
Company  shall  extend the exercise  date of the warrant  issued to a registered
broker  dealer on July 15, 1996 to purchase an aggregate of 36,720 shares of the
Company's  common stock at $5.50 per share.  The term of this  warrant  shall be
extended until the close of business on October 15, 2002.

         2. Terms of the Offering.  The Company is offering the Units on 12 Unit
($300,000)  minimum,  best efforts basis for a period of 60 days by its officers
and directors who will serve in this capacity without compensation. However, the
Company reserves the right to utilize the services of participating  NASD member
broker-dealers  or registered  representatives  (the "Selling  Agents").  In the
event Selling Agents are utilized, the Company will pay sales commissions to the
Selling  Agents up to a maximum of 10% of the gross  Offering  proceeds  sold by
such  Selling  Agents.  As  provided  in the  escrow  agreement  annexed to this
Agreement  as  Exhibit  "A" and hereby  incorporated  herein by  reference  (the
"Escrow  Agreement"),  shares of the Company's common stock comprising the Units
will  be  deposited  in  an  attorney's  escrow  account  maintained  by  Lester
Yudenfriend,  Esq., securities counsel to the Company (the "Escrow Account"). In
the event that a minimum of  $3000,000  has not been  deposited  into the Escrow
Account within 60 days from May 8, 2000 (the "Termination  Date"),  all proceeds
received from  subscribers  will be promptly  returned to them without  interest
thereon or  deduction  therefrom.  In the event a minimum of  $300,000  has been
deposited  into the Escrow  Account by the  Termination  Date,  the  Company may
continue to sell the remaining  Units until the  expiration of 120 days from the
date of the  Term  Sheet.  The  Unit  Shares  and  the  Warrant  Shares  will be
unregistered  securities  as that  term is  defined  under  the Act and  will be
ineligible  for public  sale for a period of 12 months from the date of issuance
or the exercise of the Warrants.  Accordingly, all certificates representing the
Unit Shares and the Warrant Shares will bear a restrictive  legend on their face
and will be subject  to a stop  transfer  order on the books and  records of the
Company and/or the Company's transfer agent.

         Certificates  representing the Unit Shares and the Warrant Shares shall
be  registered in the name(s) of the  beneficial  owner(s) as they appear on the
last page of this  Agreement  and  thereafter  mailed to the  address  appearing
therein as soon as possible

                                       14

<PAGE>

following the date the  Subscriber's  funds clear  collection.  The execution of
this Agreement is a condition  precedent to a valid  subscription  to the Units.
Execution of this  Agreement  shall  constitute  an offer by the  Subscriber  to
subscribe  to the Units in the amount  and on the terms  specified  herein.  The
Company  reserves the right,  in its sole  discretion,  to reject in whole or in
part, any subscription offer. If the Subscriber's offer is accepted, the Company
will  execute  a copy  of this  Agreement  and  return  it to  Subscriber.  Upon
execution  of this  Agreement,  the Company  will  deliver to the  Subscriber  a
certificate  representing the number of Unit Shares purchased and a Warrant duly
executed by the President and Secretary of the Company.

         3.  Subscription  Payment.  Subscription  to the Units  requires a cash
investment of $25,000 per Unit. The  subscription  price will be payable in cash
in full on subscription.

         4.  Brief  Description  of the  Company.  A  brief  description  of the
Company's business is set forth below. The Subscriber hereby represents that the
Subscriber  has  read  the  same  prior to the  signing  of this  Agreement.  In
addition,  and simultaneously  with the delivery of this Agreement,  the Company
has afforded the  Subscriber  the  opportunity  to ask  questions of and receive
answers from  management of the Company  concerning  the  information  disclosed
below.

Until 1997,  the Company was a  development  stage  entity that sought to become
engaged in the design,  development,  marketing  and sale of  proprietary  solid
state electrical components designed to effectively reduce energy consumption in
alternating  current induction motors.  Alternating current induction motors are
commonly found industrial and commercial facilities throughout the world.

Commencing in 1997, the Company commenced the sale of Power  Commander(TM),  its
principal and proprietary  product,  which results in reduced energy consumption
in  alternating   current   induction  motors  in  industrial   applications  of
approximately 25 to 35 percent.  In addition,  the Power  Commander(TM)  extends
motor life, minimizes maintenance, results in cooler running, reduced stress and
strain on the motor and reduces stress and strain on accompanying electrical and
mechanical  systems.  The  Company's  Power  Commander(TM)  was the subject of a
United States Patent granted in 1997. A copy of this patent is annexed hereto as
Exhibit "I" and incorporated  herein by reference.  The Company offers the Power
Commander(TM) in two versions,  each of which is a distinctly different product,
marketed and sold to different  applications using different  techniques.  These
two  products are the Three Phase Power  Commander(TM)  used in  industrial  and
commercial  applications  and  the  Single  Phase  Power  Commander(TM)  used in
consumer applications such as home appliances and the like.

The Company intends to utilize the proceeds from this Offering to consummate the
Transaction and thereafter to penetrate the new and retrofit alternating current
induction  motor market.  Management  estimates  that there are over one billion
alternating  current  induction  motors  currently in operation and almost three
hundred  million  new  motors are  purchased  each year as  replacements  or new
applications.  Many of these motors are  candidates to be  retrofitted  with the
Power Commander(TM),  especially in the four industries in which the Company has
concentrated its initial efforts: the elevator and escalator

                                       15

<PAGE>

industry; plastics granulators;  machine tools; and pump jacks for the petroleum
industry.

As of the date of this Memorandum,  more than 2,500 units of the Company's motor
controller  products  have been  installed at facilities  throughout  the United
States.  In most  cases,  these  units have  demonstrated  the ability to reduce
energy  consumption of  alternating  current  induction  motors by an average of
approximately  25%.  The  Company's  management  believes  that these  tests and
additional  successful testing results from nationally  accredited  laboratories
and  Fortune 500  companies  will  maximize  product  acceptance  in the various
compatible industries.

In 1997, the Company was granted a United States Patent  covering  various motor
controller aspects of its Power  Commander(TM).  In addition,  the Company is an
exclusive  licensee  pursuant to a patent  license  agreement  of certain  Power
Factor  Controller  Technology owned by the United States, as represented by the
National Aeronautics and Space Administration  ("NASA"). This license agreement,
which  expires  on July  31,  2001,  covers  the USA  and  its  territories  and
possessions  and  requires  the  Company  to pay  certain  royalties  to NASA in
connection with the Company's sale of products  employing  technology  utilizing
the licensed group of patents.  The government's  patents covers various systems
employed by motor controllers.  The Company's rights under the agreement are non
transferable  and may not be sublicensed  without NASA's consent.  The agreement
terminates on July 31, 2001 upon the expiration of all of the licensed  patents,
unless  reissuance of the patents occur. The agreement is terminable by NASA for
various  reasons  including,  among other things,  the Company's  default in the
payment of  royalties,  default in making of  required  reports,  the failure to
market products employing the invention, or under other circumstances.

         5.       Risk Factors Associated With an Investment in the Units.

An  investment  in the  Units  involves  a high  degree  of risk and  should  be
considered  only by  Subscribers  who can  sustain  the  loss  of  their  entire
investment.  Accordingly,  the Subscriber  hereby represents that the Subscriber
has read the following risk factors prior to the signing of this  Agreement.  In
addition,  the Subscriber  acknowledges that simultaneously with the delivery of
this  Agreement,  the Company has afforded the Subscriber the opportunity to ask
questions of and receive answers from  management of the Company  concerning the
risk factors disclosed below.

         No  Assurance  of  Return  to  the  Bulletin   Board;   Volatility   of
Price.Commencing  on May 24, 2000, the shares of the Company's common stock will
be  delisted  from the OTC  Bulletin  Board  and will only be traded in the pink
sheets  published by the National  Quotation  Bureau,  Inc. (the "Pink Sheets").
Until and unless the Company is successful in finalizing the  acquisition of the
assets of Control and filing and causing the Form 10 to become  effective  under
the  Securities  Exchange Act of 1934, of which there can be no  assurance,  the
Company's common stock will continue to trade in the Pink Sheets.  Following the
closing of this Offering,  the Company intends to renew or seek a new listing in
Standard  & Poor's  Corporation  Records.  There  can be no  assurance  that the
Company  will  be  successful  in  its  efforts  and,  even  if the  Company  is
successful,  there can be no  assurance  that a regular  trading  market for the
Company's common stock will

                                       16

<PAGE>

develop,  continue or be  sustained.  The Pink Sheets offer  significantly  less
trading  liquidity than the OTC Bulletin Board.  Price quotations for securities
traded in the Pink Sheets are not available in newspapers.  Therefore, this lack
of readily  available price  information may impair the ability of purchasers of
the Units to sell them at or near their original offering price or at any price.
Furthermore, it is unlikely that a lending institution will accept the Company's
securities  as pledged  collateral  for loans even if a regular  trading  market
develops or continues.  In addition,  the trading price of the Company's  common
stock could be subject to wide fluctuations in response to quarterly  variations
in the  Company's  operating  results,  announcements  by the Company or others,
developments  affecting the Company,  and other factors or events.  In addition,
the stock market has experienced extreme price and volume fluctuations in recent
months. These fluctuations have had a substantial effect on the market price for
many companies, often unrelated to operating performance,  and these factors may
adversely affect the market price of the Company's common stock.

                  Control's  Right of  Termination.  The Term  Sheet  contains a
provision  whereby in the event a minimum of  $300,000  has not been sold by the
Company in the  Private  Offering  within the  aforesaid  60 days,  Control  has
retained  the  right,  on ten days  prior  written  notice  to the  Company,  to
terminate  the  Acquisition  Agreement  with the  Company.  In the  event of the
termination  by  Control as a result of the  failure of the  Company to meet its
minimum  obligations  under the Private  Offering,  the Subscribers to the Units
will in all likelihood lose their entire investment.

                  Financial Statement Risk. The only financial information being
supplied to Subscribers is the Company's unaudited financial  statements for the
fiscal  year ended  December  31, 1998 (the "98  Financials").  A copy of the 98
Financials are annexed hereto as Exhibit "H" and hereby  incorporated  herein by
reference. The Company has yet to complete the audit of the 1998 Financials much
less the financial  statements  for the fiscal year ended December 31, 1999 (the
"99  Financials")  or the three  months  ended March 31,  2000.  There can be no
assurance that the 98 Financials will not be materially adjusted if and when the
same are audited.  There can be no assurance  that the  Company's 99  Financials
will be audited. A failure to audit the 99 Financials will materially  adversely
effect the Company's ability to file the Form 10 or to complete the Transaction.

                  Limited  Capitalization.  Prior to the date of this  Offering,
the Company  had limited  working  capital  and will be  dependent  upon the net
proceeds  from  this  Offering  for  the  consummation  of the  Transaction.  In
addition,  and even if this Offering is successfully  completed with the sale of
all offered Units,  the Company may be required to seek additional  financing if
anticipated levels of revenue are not realized, if higher than anticipated costs
are incurred in the manufacture and marketing of the Company's  products,  or if
product  demand  exceeds  expected  levels.  There can be no assurance  that any
additional financing thereby necessitated will be available on acceptable terms,
if at all.  Currently,  the Company has no existing credit facilities or similar
bank borrowing  arrangements but may seek to secure such arrangements  following
consummation  of this  Offering.  No  assurances  can be  given  that  any  such
arrangements will be secured.

                                       17

<PAGE>

         Limited Operating History, Manufacturing and Distribution Arrangements.
To date, and  principally  attributable  to a lack of working capital and longer
than  anticipated  research  and  development  time and expense,  the  Company's
operations  have been  limited in scale.  Although  the  Company  has a contract
manufacturing arrangement with an automated production facility, has established
relationships  with  suppliers,  and received  contracts for its  products,  the
Company  may  experience   difficulties   in  production   scale-up,   inventory
management,  product  distribution  and working  capital  until such time as the
Company's operations have been scaled-up to normal commercial levels.

                  Company's   License  From  NASA  Not   Exclusive.   The  basic
technology upon which the Company's  products are based is derived from a patent
license  agreement by and between the Company and NASA.  The  Company's  license
from NASA is not exclusive, although the Company is one of only two licensees of
NASA's Power  Factor  Controller  Technology.  The Company has also made certain
improvements  to the basic  technology  covered by the NASA  license,  which may
place the Company in a competitively superior position to the other licensee. No
assurance  can be  given,  however,  that the  other  licensee  will not seek to
improve the basic technology in the way that the Company has.

                  Supplier  Dependence.  Although the Company believes that most
of the key components  required for the production of its products are currently
available in sufficient production  quantities from multiple sources,  there can
be no assurance that they will remain so readily available.  It is possible that
other components  required in the future may necessitate  custom  fabrication in
accordance  with  specifications  developed  or to be  developed by the Company.
Also, in the event that the Company, or its contract manufacturer as applicable,
is unable to develop or acquire  components in a timely  fashion,  the Company's
ability to achieve production yields,  revenues and net income will be adversely
affected.

                  Sales  and  Marketing  Risks.   The  Company's   products  are
currently  distributed  through  the  network  of  contacts  established  by the
Company's  principal  stockholders,  which  contacts were developed out of other
business  enterprises  conducted  by  them.  The  Company's  future  growth  and
profitability  will depend upon the  successful  development  of a  distribution
network  and upon their  ability to  penetrate  the  market  with the  Company's
products.

                  Competition;  Rapid Technological Change. The Company competes
against a number of companies,  many of which have longer  operating  histories,
established  markets  and  far  greater  financial,  advertising,  research  and
development,  manufacturing,  marketing,  personnel and other resources than the
Company  currently has or may reasonably be expected to have in the  foreseeable
future.  This  competition  may have an  adverse  effect on the  ability  of the
Company to expand its  operations  or operate  profitability.  The motor control
industry is highly competitive and characterized by rapid technological  change.
The Company's  future  performance will depend in large part upon its ability to
become and remain competitive and to develop,  manufacture and market acceptable
products  in  these  markets.   Competitive   pressures  may  necessitate  price
reductions  which can adversely  affect revenues and profits.  If the Company is
not competitive in its ongoing  research and development  efforts,  its products
may become

                                       18

<PAGE>

obsolete,  or be priced above competitive  levels.  Although management believes
that,  based upon  their  performance  and price,  the  Company's  products  are
attractive to customers,  there can be no assurance  that  competitors  will not
introduce comparable or technologically  superior products which are priced more
favorably than the Company's products.

                  No Cash dividends on Common Stock. The Company has not paid or
declared any  dividends on its common  stock and does not  anticipate  paying or
declaring any cash dividends on its common stock in the foreseeable future.

                  Possible  Resales  Under  Rule 144.  All of the  approximately
3,000,000 shares of the Company's  common stock held by the Company's  officers,
directors  and  principal  (10%)  stockholders  and all  shares of common  stock
issuable upon exercise of  outstanding  stock options which have been and mat be
granted under the Company's incentive stock option plan have not been registered
under the Act, but may,  under  certain  circumstances,  be available for public
sale by means of ordinary brokerage  transactions in the open market pursuant to
Rule 144, promulgated under the Act, subject to certain limitations. In general,
under Rule 144, a person  (or  persons  whose  shares  are  aggregated)  who has
satisfied a one-year  holding  period may,  under  certain  circumstances,  sell
within any three-month  period a number of securities  which does not exceed the
greater  of 1% of the then  outstanding  shares of common  stock or the  average
weekly  trading volume of the class during the four calendar weeks prior to such
sale.  Rule  144  also  permits,  under  certain  circumstances,   the  sale  of
securities,  without any limitation,  by a person who is not an affiliate of the
Company and who has satisfied a two-year holding period. Any substantial sale of
the Company's  common stock  pursuant to Rule 144 may have an adverse  effect on
the market price of the Unit Shares.

                  Potential  Effect of Penny Stock Rules on Liquidity of Shares.
If the Company's  securities  are not listed on NASDAQ or certain other national
securities  exchanges and the price thereof falls below $5.00,  then  subsequent
purchases of such  securities  will be subject to the  requirements of the penny
stock rules absent the  availability of another  exemption.  The SEC has adopted
rules that regulate  broker-dealer  practices in connection with transactions in
"penny  stocks." Penny stocks  generally are equity  securities  with a price of
less than $5.00 (other than securities registered on certain national securities
exchanges  or quoted on the NASDAQ  system).  The penny  stock  rules  require a
broker-dealer to deliver a standardized risk disclosure document required by the
SEC, to provide the customer with current bid and offer quotations for the penny
stock,  the  compensation  of  the  broker-dealer  and  its  salesperson  in the
transaction,  monthly account  statements showing the market value of each penny
stock held in the customer's  account,  to make a special written  determination
that the penny stock is a suitable  investment for the purchaser and receive the
purchaser's written agreement to the transaction.  These disclosure requirements
may have the effect of reducing the level of trading  activity in the  secondary
market  for a stock  that  becomes  subject  to the penny  stock  rules.  If the
Company's securities become subject to the penny stock rules,  investors in this
Offering may find it more difficult to sell their  securities.  If the Company's
securities were subject to the existing or proposed regulations on penny stocks,
the  market  liquidity  for the  Company's  securities  could  be  severely  and
adversely affected by limits on the ability of

                                       19

<PAGE>

broker/dealers to sell the Company's securities and the ability of purchasers in
this Offering to sell their securities in the secondary market.

                  Limitation  on  Directors'  Liabilities  under  Delaware  Law.
Pursuant to the Company's  Certificate of Incorporation  and under Delaware law,
directors of the Company are not liable to the Company or its  stockholders  for
monetary  damages  for  breach  of  fiduciary  duty,  except  for  liability  in
connection  with a breach of duty of loyalty,  for acts or omissions not in good
faith or which involve intentional misconduct or a knowing violation of law, for
dividend  payments  or  stock  repurchases  illegal  under  Delaware  law or any
transaction in which a director has derived an improper personal benefit.

                  Authorization and  Discretionary  Issuance of Preferred Stock.
The Company's  Certificate  of  Incorporation  authorizes the issuance of "blank
check" preferred stock with such designations,  rights and preferences as may be
determined from time to time by the Board of Directors.  Accordingly,  the Board
of Directors is empowered,  without  stockholder  approval,  to issue  preferred
stock with  dividends,  liquidation,  conversion,  voting or other  rights which
could adversely  affect the relative voting power or other rights of the holders
of the Company's  common stock.  In the event of issuance,  the preferred  stock
could  be used,  under  certain  circumstances,  as a  method  of  discouraging,
delaying or preventing a change in control of the Company,  which could have the
effect of  discouraging  bids for the Company and thereby  prevent  stockholders
from  receiving the maximum value for their shares.  Although the Company has no
present  intention to issue any shares of its preferred  stock,  there can be no
assurance that the Company will not do so in the future.

         6.  The Company's Representations and Warranties.  The Company hereby
represents and warrants to the Subscriber as follows:

                  (a) The Company is a corporation duly formed, validly existing
and in good standing under the laws of the State of Delaware with full power and
authority to conduct its business;

                  (b) The Company has the  corporate  power to execute,  deliver
and perform this  Agreement in the time and manner  contemplated,  and has taken
all  requisite  corporate  action to issue and  deliver  the Unit Shares and the
Warrant to the Subscriber and to execute and perform the Escrow Agreement; and

                  (c) The Unit  Shares  and the  Warrant  Shares  will be,  upon
issuance and delivery to the Subscriber, duly and validly issued, fully paid and
non-assessable with no personal liability attaching to the ownership thereof.

         7.  Subscriber's   Representations,   Warranties  and  Covenants.   The
Subscriber  hereby  represents and warrants to and covenants with the Company as
follows:

                  (a) The  Subscriber:  (i) is  over  the  age of 21;  (ii)  has
adequate  means of providing  for the  Subscriber's  current  needs and possible
contingencies,  and the Subscriber has no need for liquidity of the Subscriber's
investment  in the  Company;  (iii) can bear the  economic  risk of  losing  the
Subscriber's entire investment in the Units; (iv)

                                       20

<PAGE>

has such  knowledge and  experience  in business and financial  matters that the
Subscriber  is  capable  of  evaluating  the  relative  risks and  merits of the
Subscriber's  investment  in the  Units;  (v) has  reviewed  the  definition  of
"Accredited  Investor"  under the Act as set forth on Exhibit "C" annexed hereto
and  incorporated  herein by  reference  and affirms that the  Subscriber  is an
"Accredited  Investor";  (vi)  has  not  relied  upon  any  oral  statements  or
representations  by the Company or its  principals;  and (vii)  understands  the
undercapitalized and speculative nature of the Company's business as well as the
uncertainty  attendant upon the Company's ability to reach profitability  within
the foreseeable future;

                  (b) The  Subscriber has had an opportunity to ask questions of
and  receive  answers  from the  Company  or a person or  persons  acting on its
behalf,  concerning the terms and conditions of this  investment and the content
of the exhibits annexed hereto;

                  (c) The Subscriber's  compliance with the terms and conditions
of this Agreement will not conflict with any instrument or agreement  pertaining
to the Units or the transactions  contemplated herein; and will not conflict in,
result in a breach of, or constitute a default under any instrument to which the
Subscriber is a party or the Units are the subject;

                  (d) The Subscriber will seek the  Subscriber's  own legal, tax
and investment advice concerning tax implications attendant upon the purchase of
the Units and  understands  and accepts  that the  Company is relying  upon this
representation  insofar as disclosure of legal,  tax and  investment  matters is
concerned;

                  (e) The Subscriber acknowledges, accepts and understands that:
(i) the Unit Shares and the Warrant  Shares will be  'restricted  securities' as
that term is defined  under the Act; (ii) the  Subscriber  will be acquiring the
Units  (as  well as the Unit  Shares  and the  Warrant  Shares)  solely  for the
Subscriber's own account, for investment purposes and without a view towards the
resale or distribution  thereof;  (iii) the Subscriber will hold the Unit Shares
and the Warrant Shares for the applicable one year holding period  proscribed by
Rule 144 under the Act; and (iv) any sale of the Unit Shares  and/or the Warrant
Shares will be  accomplished  only in  accordance  with the Act or the rules and
regulations of the SEC adopted  thereunder.  In addition,  the Subscriber hereby
consents  to the  imprinting  of a standard  form of  restrictive  legend on all
certificates  representing the Unit Shares and the Warrant Shares as well as the
imposition of a standard form of stop transfer order against the Unit Shares and
the Warrant Shares on the books and records of the Company's transfer agent;

                  (f) The  Subscriber  understands  that the Company is under no
obligation to register the Unit Shares or the Warrant Shares under the Act or to
comply  with  the  requirements  for any  exemption  which  might  otherwise  be
available,  or to supply the Subscriber with any information necessary to enable
the  Subscriber  to make  routine  sales of the Unit  Shares  and/or the Warrant
Shares under Rule 144 or any other rule of the Rules and  Regulations of the SEC
adopted under the Act; and

                                       21

<PAGE>

                  (g) If the Subscriber is a corporation,  partnership, trust or
any  unincorporatedassociation:  (i) the person executing this Agreement does so
with full right,  power and  authority to make this  investment;  (ii) that such
entity was not formed for the specific  purpose of making an  investment  in the
Company;  and (iii) that all further  representations and warranties made herein
are true and correct with respect to such  corporation,  partnership,  trust and
unincorporated association.

         The foregoing  representations  and warranties are true and accurate as
of the date hereof and shall be true and  accurate as of the date of delivery of
the  subscription  to the Company and shall  survive such  delivery.  If, in any
respect, such representations and warranties shall not be true and accurate, the
Subscriber  shall give written  notice of such fact to the  Company,  specifying
which  representations  and warranties are not true and accurate and the reasons
therefor.

         8. Responsibility.  The Company or its officers and directors shall not
be liable,  responsible or accountable in damages or otherwise to Subscriber for
any act or omission  performed  or omitted by them in good faith and in a manner
reasonably  believed by them to be within the scope of the authority  granted to
them by this  Agreement and in the best  interests of the Company  provided they
were not guilty of gross negligence,  willful or wanton  misconduct,  fraud, bad
faith or any  other  breach  of  fiduciary  duty  with  respect  to such acts or
omissions.

         9.  Registration of the Warrant  Shares.  The Company has undertaken to
utilize its best efforts to include the Warrant Shares in the first registration
statement  filed by the  Company  with the SEC  under  the Act.  The  terms  and
conditions of the Company's undertaking are set forth in the Warrant.

         10.  Miscellaneous.

         (a) This  Agreement  shall be  deemed to have been made in and shall be
governed by and  interpreted  under and  construed in all respects in accordance
with the laws of the State of New Jersey,  irrespective of the place of domicile
or residence of any Subscriber. In the event of a controversy arising out of the
interpretation,  construction,  performance  or  breach of this  Agreement,  the
Company and the  Subscriber  hereby  agree and consent to the  jurisdiction  and
venue of the United  States  District  Court for the  Northern  District  of New
Jersey;  and further agree and consent that  personal  service or process in any
such action or  proceeding  outside of the State of New Jersey and Essex  County
shall be tantamount to service in person  within Essex County,  New Jersey,  and
will confer personal jurisdiction and venue on the aforesaid Court;

                  (b) The Company and the Subscriber  hereby  covenant that this
Agreement  is  intended  to  and  does  contain  and  embody  herein  all of the
understandings  and  Agreements,  both  written or oral,  of the Company and the
Subscriber with respect to the subject matter of this Agreement,  and that there
exists no oral agreement or understanding, express or implied liability, whereby
the absolute,  final and  unconditional  character and nature of this  Agreement
shall  be  in  any  way  invalidated,   empowered  or  affected.  There  are  no
representations or warranties other than those set forth herein;

                                       22

<PAGE>

                  (c)  The  headings  of  this   Agreement  are  for  convenient
reference only and they shall not limit or otherwise  affect the  interpretation
or effect of any terms or provisions hereof;

                  (d) This Agreement  shall not be changed or terminated  orally
except as set forth herein.  All of the terms and  provisions of this  Agreement
shall be  binding  upon and inure to the  benefit of and be  enforceable  by and
against the  successors  and  assigns of the  Company and the heirs,  executors,
administrators and assigns of the Subscriber; and

                  (e) A modification  or waiver of any of the provisions of this
Agreement  shall be effective only if made in writing and executed with the same
formality as this Agreement. The failure of either the Company or the Subscriber
to insist upon strict  performance  of any of the  provisions of this  Agreement
shall not be  construed  as a waiver of any  subsequent  default  of the same or
similar nature, or of any other nature or kind.

            [the rest of this page has intentionally been left blank]

                                       23

<PAGE>

12.  Subscription  Application.  The  Subscriber  hereby  offers to purchase and
subscribe  to______  Units;  and  encloses  payment  of  $25,000  for each  Unit
subscribed for herein.

                                       SIGNATURE PAGE

                                       For Individuals

                                       ----------------------------------
                                       Signature of Individual Subscriber

                                       ----------------------------------
                                       Name of Subscriber (please print)

                                       ----------------------------------
                                       Street Address - Residence (please print)

                                       ----------------------------------
                                       City, State and Zip Code (please print)

                                       Social Security Number

                                       -----------------------------------

                                       AGREED TO AND ACCEPTED:

                                       Power Efficiency Corporation

                                       BY:
                                       -----------------------------------
                                       Nicholas Anderson, President

                                       24

<PAGE>

12.  Application for Partnership  Subscribers.  The Subscriber  hereby offers to
purchase and subscribe  to______ Units; and encloses payment of $25,000 for each
Unit subscribed for herein.

                                  SIGNATURE PAGE

                                  For Partnership

                                  ----------------------------------
                                  Name of Partnership (please print)

                                  BY:_______________________________
                                        Signature of General Partner

                                  --------------------------------
                                  Name and Title of Authorized
                                  Signatory (please print)

                                  ---------------------------------
                                  Business Address (please print)

                                  ----------------------------------
                                  City, State and Zip Code (please print)

                                  Tax Identification Number

                                  -----------------------------------

                                  AGREED TO AND ACCEPTED:

                                  Power Efficiency Corporation

                                  BY:
                                  -----------------------------------
                                   Nicholas Anderson, President

                                       25

<PAGE>

         12. Application for Corporate Subscribers. The Subscriber hereby offers
to purchase and subscribe  to______ Units;  and encloses  payment of $25,000 for
each Unit subscribed for herein.

                                    SIGNATURE PAGE

                                    For Corporation

                                    ----------------------------------
                                    Name of Corporation

                                    BY:_______________________________
                                      Signature of Executive Officer

                                    --------------------------------
                                     Name and Title of Authorized
                                     Signatory (please print)

                                    ---------------------------------
                                    Business Address (please print)

                                    ----------------------------------
                                     City, State and Zip Code (please print)

                                    Tax Identification Number

                                    -----------------------------------

                                    AGREED TO AND ACCEPTED:

                                    Power Efficiency Corporation

                                    BY:
                                    -----------------------------------
                                         Nicholas Anderson, President

                                       26

<PAGE>

                                   EXHIBIT "A"

                                ESCROW AGREEMENT

                                       27

<PAGE>

ESCROW  AGREEMENT  made  this  ___  day of May  2000  between  Power  Efficiency
Corporation.,  a publicly owned Delaware  corporation  with temporary  principal
offices c/o 4220 Varsity Drive,  Suite E, Ann Arbor,  MI 48108 (the  "Company"),
the individual, firm or entity indicated on the last page of this Agreement (the
"Investor") and Lester  Yudenfriend,  Esq., with office at 1133 Broadway,  Suite
321, New York, New York 10010 (the  "Escrowee").  The Company,  the Investor and
the Escrowee are sometimes collectively referred to as the "Parties".

                              W I T N E S S E T H :

         WHEREAS,  the Company intends to conduct a private offering  consisting
of a minimum of 12 and a maximum of 40 units at a purchase  price of $25,000 per
unit (the "Units").  Each Unit to be comprised of 25,000 authorized but unissued
shares of the  Company's  Common  Stock,  $.001 par value per share,  offered at
$1.00 per Share, and a five year warrant to purchase 25,000 additional shares of
the Company's Common Stock, $.001 par value per share at $3.00 per Warrant Share
during  the  first  year of the  term  of this  Warrant  expiring  on the  first
anniversary  of the date hereof,  $4.00 per Warrant Share during the second year
expiring on the second  anniversary  of the date  hereof,  and $5.00 per Warrant
Share during the third year expiring on the third anniversary of the date hereof
during the first year,  $4.00 per Warrant Share during the second year and $5.00
per Warrant Share during the third year (the "Warrant"); and

         WHEREAS, the sale of the Units shall be offered buy the Company only to
and consummated strictly with "Accredited  Investors" as that term is defined in
Rule 501(a) of  Regulation D under the  Securities  Act of 1933, as amended (the
"Offering"); and

         WHEREAS,  the Company is  conducting  the  Offering  on a best  efforts
basis, with a minimum $300,000 and a maximum of $1,000,000 to be invested in the
Units; and

         WHEREAS, in accordance with the terms and conditions  enumerated in the
Company's  Private  Placement  Memorandum  dated  May  16,  2000 to  which  this
agreement (the "Escrow Agreement") is attached as an exhibit (the "Memorandum"),
the Company proposes to establish an escrow arrangement with the Escrowee; and

         WHEREAS,  the Escrowee has agreed to act as escrow agent in  connection
with the deposit by the Company  with the  Escrowee of the funds  received  from
subscribers  to the  Offering  (the  "Funds")  on the terms and  subject  to the
conditions hereinafter set forth.

         NOW, THEREFORE, it is agreed as follows:

         1. Establishment of Escrow. By virtue of their respective  execution of
this Escrow  Agreement,  the Company's  causing the delivery of the Funds to the
Escrowee,  and the Escrowee's acceptance of the Funds, the Parties hereby create
the escrow  made the  subject of this Escrow  Agreement  and the Company  hereby
authorizes  the  Escrowee  to  utilize,  transfer  and  disburse  the  Funds  as
hereinafter provided.

                                       28

<PAGE>

         2. Terms of the Escrow.  Commencing  with the  execution of this Escrow
Agreement  and until  the sale of a  minimum  of 12 Units or 60 days from May 8,
2000 (unless  extended by mutual  consent of the Company and Control)  whichever
sooner occurs (the "Termination  Date"), the Escrowee shall act as escrow agent.
The Escrowee agrees to receive and disburse the Documents  (hereinafter defined)
and the proceeds  from the sale of the Units in  accordance  with the  following
conditions:

                  A. All monies  received in  connection  with the sale of Units
shall be deposited in an attorney's  escrow account to be  established  for this
purpose by the Escrowee at the European American Bank, 1107 Broadway,  New York,
New York  10010  in  accordance  with  applicable  New  York  law  (the  "Escrow
Account").  Prior to the making of each  deposit,  the Company shall have caused
each subscriber  (whether an individual,  a firm or an entity) to the Units (the
"Subscribers")  to deliver to the Escrowee:  (i) a copy of the signature page of
the Company's  subscription  agreement  duly executed by the  Subscriber and the
Company;  and (ii) a copy of the  signature  page of the Escrow  Agreement  duly
executed by the Subscriber and the Company (hereinafter collectively referred to
as the  "Documentation").  Thereafter,  and  upon  the  deposit  of Funds in the
minimum  sum of  $300,000,  the  Escrowee  shall  deliver to the  Company a list
containing  the name,  address and amount  received from each  Subscriber to the
Units and  number of Units or part  thereof to which  said  individual,  firm or
entity has subscribed. The Company shall then, as soon as practicable, return to
the Escrowee: (i) a stock certificate duly signed by the President and Secretary
of the Company;  and (ii) a Warrant duly signed by the  President of the Company
(hereinafter  collectively referred to as the "Final  Documentation").  Promptly
upon  receipt of the Final  Documentation,  the  Escrowee  shall cause the Final
Documentation to be duly delivered to the Subscribers via certified mail, return
receipt requested or overnight package deliver service.

                  b. In the event that a minimum of  $300,000,  representing  an
aggregate of 12 Units shall have been sold and the monies  corresponding to such
sales shall have been deposited in the Escrow  Account,  together with the Final
Documentation  on or before the Termination  Date, then the initial terms of the
escrow created hereby shall be deemed to have been  satisfied.  Thereafter,  the
Escrowee shall be authorized and directed to disburse the Funds and the Units as
hereinafter enumerated.

                  c. At such time as minimum of $300,000  shall be  deposited in
the Escrow  Account,  the  Escrowee  shall:  (i) pay to the  Escrowee the sum of
$1,500  together  with such  disbursements  as shall have been  incurred  by the
Escrowee (the "Escrow  Costs");  and (ii) cause the due issuance and delivery to
each  Subscriber of his, her or its Unit(s) . After  disbursing the Escrow Costs
and issuing the Units to the  Subscribers,  the Escrowee shall pay the remainder
of the  Funds to the  Company  via a check  drawn  on the  Escrow  Account.  The
foregoing is hereinafter referred to as the (the "Initial Closing"). Thereafter,
upon receipt of additional Funds totaling  $700,000 or at least every two weeks,
the Escrowee  shall issue Units to new  Subscribers  and  disburse  Funds to the
Company ("Subsequent Closings").

                                       29

<PAGE>

                  d. In the event that a minimum of  $300,000,  representing  an
aggregate of 12 Units, shall not have been sold and the monies  corresponding to
such sales shall not have been  deposited in the Escrow  Account,  together with
the Final  Documentation on or before the Termination Date, then the Escrowee is
hereby  authorized  promptly,  after  the  Termination  Date,  to  return to the
Subscribers the amounts  theretofore  paid by them to the Escrowee and deposited
in the Escrow  Account.  Such return is to be made without  interest  thereon or
deduction therefrom.

                  e. Upon the  happening  of either of the  events as  specified
above, (a) namely,  that a minimum of $300,000,  representing an aggregate of 12
Units shall have been sold,  the monies  corresponding  to such sales shall have
been deposited in the Escrow Account together with the Final Documentation on or
before the  Termination  Date, the holding of the Initial Closing and Subsequent
Closings and the  disbursement of the Funds and the issuance and delivery of the
Units as hereinabove set forth in Sections 2b and 2c, or, in the alterative, (b)
that a minimum of $300,000, representing an aggregate of 12 Units shall not have
been sold before the  Termination  Date, the repayment to the Subscribers of the
amounts  theretofore paid by them to the Escrowee (as provided in paragraph 2d),
then the Escrowee shall be relieved of all  liabilities  in connection  with the
Funds;  the Escrowee  shall be  automatically  discharged  without notice to the
Company, and this Escrow Agreement shall forthwith terminate and become null and
void.

         3.  Indemnification.  The Company and the Subscriber(s)  hereby jointly
and severally agree to indemnify and hold harmless the Escrowee from and against
any and all liability,  cost, expense, damage, action or other charges which may
be imposed upon or incurred by Escrowee in connection  with the  performance  of
its duties hereunder (which performance shall be at no expense to the Escrowee),
except with respect to any liability, costs, expenses, damages, actions or other
charges  incurred as a result of the Escrowee's bad faith,  gross  negligence or
willful  disregard  of the  provisions  of this Escrow  Agreement.  Before being
required to take any action, which in its reasonable opinion might subject it to
liability  or expense,  the  Escrowee  may  require  that it be  furnished  with
indemnity  reasonably  satisfactory  to it and  that  the  amount  of  any  such
reasonable expenses be advanced to it by the Company.

         4. Reliance Upon  Documentation.  The Escrowee shall incur no liability
for any action taken or suffered in good faith.  The  Escrowee may  conclusively
rely upon and shall be  protected in acting upon the  Documentation,  and/or the
Final Documentation including any notice, request, consent, instruction or other
instrument  believed by the Escrowee in good faith to be genuine or to be signed
by or presented by the proper person,  or duly  authorized or properly made. The
Escrowee shall not be responsible for any of the  representations  or agreements
contained  in either the  subscription  agreement  between  the  Company and the
Subscriber  (the  "Subscription  Agreement"),  the Note,  the Warrant or for the
performance  of any  other  similar  agreement(s),  except  the  performance  of
Escrowee's  express  duties as set forth herein;  and the Escrowee  shall not be
required to take any action other than in accordance  with the terms hereof.  No
amendment or modification of the Subscription Agreement, the Note or the Warrant
[or any collateral

                                       30

<PAGE>

documents]  shall affect the rights and duties of the Escrowee without its prior
written consent.

         5. Engagement of Counsel.  If the Escrowee is in doubt as to any action
which it should  take under the terms  hereof,  it may employ  legal  counsel to
render an opinion  on any or all  questions  it may have and may take  action on
such  opinion  without  being  liable  for  damages  to the  Company  and/or the
Subscribers,  or  their  legal  representatives,  successors  and  assigns.  The
reasonable  cost of  employment  of counsel by the Escrow Agent for such opinion
shall be borne jointly and severally by the Company and the  Subscriber(s).  The
Escrowee,  being a law firm, shall have the right to advise and represent itself
and, in such event, the value of its services, calculated in accordance with its
then  current  hourly  billing  rates,  shall  be  paid by the  Company  and the
Subscriber(s).  The obligation of the Company and the  Subscriber(s) for payment
of such fees and  disbursements  shall be joint and several.  The Escrowee shall
also,  in such  instances,  be entitled to refrain  from taking any action other
than to keep safely the Funds until the Escrowee  shall be instructed  otherwise
by both the Company and the  Subscriber(s),  or by final  judgment of a court of
competent jurisdiction.

         6. Resignation.  The Escrowee serving under this Escrow Agreement shall
have the right to resign as  Escrowee at any time by  notifying  the Company and
any Subscriber(s)  with respect to which the Escrowee is still holding Funds, in
writing.  Such resignation shall become effective upon the first to occur of (i)
thirty  (30)  days  after  the  date of such  written  resignation,  or (ii) the
designation of a qualified  replacement Escrowee and its acceptance of the terms
and conditions of this Escrow  Agreement.  A duly licensed  member of the bar of
the State of New York shall be deemed a qualified replacement.

         7. Discharge.  Upon dispensing of the escrowed Funds in accordance with
the provisions of this Escrow  Agreement,  the Escrowee shall  automatically  be
relieved and discharged of all claims and liabilities  relating to said escrowed
Subscriptions  and shall not be  subject to claims or  surcharges  made by or on
behalf of either the Company or the Subscriber(s).

         8. Representations and Warranties.  In order to implement the operation
of this Escrow Agreement,  the Parties hereby jointly and severally represent as
follows:

                  a. The  execution,  delivery  and  performance  of this Escrow
Agreement,  in the time and manner  herein  specified,  will not conflict  with,
result in a breach of, or  constitute a default  under any  existing  agreement,
indenture,  or other instrument to which either the Company or the Escrowee is a
party or by which any such entity may be bound or affected;

                  b. Both the Company or the Escrowee have full legal  authority
to enter into this  Escrow  Agreement  and to  perform  the same in the time and
manner contemplated;

                  c. This Escrow  Agreement has been submitted to,  ratified and
approved

                                       31

<PAGE>

by the Board of Directors of  the Company: and

                  d. The Company will cause all checks received from subscribers
to the Offering and  representing the Funds to be deposited with the Escrowee in
the Escrow Account.

         9.   Amendment.  This Escrow Agreement may not be amended except by an
instrument in writing signed on behalf of each of the Parties hereto.

         10.  Waiver.  At any time prior to the  Termination  Date,  the Parties
hereto,  may: (i) extend the time for the  performance of any Party;  (ii) waive
any inaccuracies in the  representations  and warranties  contained herein or in
any document  delivered  pursuant hereto; and (iii) waive compliance with any of
the  agreements  or  conditions  contained  herein.  The failure of any Party to
insist upon strict performance of any of the provisions of this Escrow Agreement
shall not be  construed  as a waiver of any  subsequent  default  of the same or
similar nature or of any of provision, term, condition, warranty, representation
or guaranty contained herein.

         11.  Binding  Effect.  All of the terms and  provisions  of the  Escrow
Agreement  shall be binding upon and inure to the benefit of and be  enforceable
by and against the Parties hereto and their respective  successors.  This Escrow
Agreement shall not be assignable under any circumstances.

         12. Entire Agreement.  Each of the Parties hereto,  covenants that this
Escrow  Agreement is intended to and does  contain and embody  herein all of the
understandings and agreements, both written and oral, of the Parties hereby with
respect to the subject matter of this Escrow  Agreement and that there exists no
oral agreement or understanding express or implied,  whereby the absolute, final
and unconditional  character and nature of this Escrow Agreement shall be in any
way invalidated, impaired or affected.

         13.  Governing  Law.  This  Escrow  Agreement  shall be governed by and
interpreted  under and construed in all respects in accordance  with the laws of
the State of New York, irrespective of the place of domicile or residence of any
Party.

         14.  Arbitration.  The parties agree that in the event of a controversy
arising out of the  interpretation,  construction,  performance or breach of the
Escrow  Agreement,  any and all claims arising out of or relating to this Escrow
Agreement   shall  be  settled  by  arbitration   according  to  the  Commercial
Arbitration Rules of the American  Arbitration  Association  located in New York
City before a single  arbitrator,  except as provided below. The decision of the
arbitrator(s)  will be enforceable in any court of competent  jurisdiction.  The
Parties hereby agree and consent that service of process in any such arbitration
proceeding outside the City of New York shall be tantamount to service in person
within New York, New York and shall confer personal jurisdiction on the American
Arbitration  Association.  In any dispute  where a Party  seeks  Fifty  Thousand
Dollars ($50,000.00) or more in damages, three (3) arbitrators will be employed.
In resolving all disputes between

                                       32

<PAGE>

the Parties, the arbitrators will apply the law of the State of New York, except
as may be modified by this Escrow Agreement. The arbitrators are, by this Escrow
Agreement,  directed to conduct the arbitration  hearing no later than three (3)
months from the  service of the  statement  of claim and demand for  arbitration
unless  good cause is shown  establishing  that the  hearing  cannot  fairly and
practically be so convened.  The arbitrators will resolve any discovery disputes
by such  prehearing  conferences  as may be needed.  The Parties  agree that the
arbitrators  and any counsel of record to the proceeding  will have the power of
subpoena process as provided by law. Notwithstanding the foregoing, if a dispute
arises out of or related to this Escrow Agreement, or the breach thereof, before
resorting to arbitration  the Parties agree first to try in good faith to settle
the dispute by mediation  under the Commercial  Mediation  Rules of the American
Arbitration  Association.  The  costs  and  fees of  arbitration  levied  by the
American   Arbitration   Association  shall  be  assessed  as  directed  by  the
arbitrator(s).

         15.  Originals.  This Escrow  Agreement may be executed in counterparts
each of which so executed shall be deemed an original and constitute one and the
same agreement.

         16.  Addresses of the  Parties.  Each Party shall at all times keep the
other Party  informed of its principal  place of business if different from that
stated herein, and promptly notify the other of any change of address.

         17.  Notices.  Any  notice  required  or  contemplated  by this  Escrow
Agreement  shall  be  deemed   sufficiently  given  when  delivered  in  person,
transmitted  by  facsimile  (if  followed  by a copy by mail  within  three  (3)
business  days) or sent by  registered or certified  mail or priority  overnight
package  delivery  service  to the  address of the Party  entitled  to notice as
appearing on the first page of this Escrow Agreement or at such other address as
the same may designate in a notice for that purpose. All notices shall be deemed
to have  been made  upon  receipt,  in the case of mail,  personal  delivery  or
facsimile,  or on the  next  business  day,  in the case of  priority  overnight
package delivery service.

                  IN WITNESS  WHEREOF,  the Parties  have  executed  this Escrow
Agreement as of the day and year first above written.

Power Efficiency Corporation

By:
-------------------------------------------
      Nicholas  Anderson, President

-------------------------------------------
Lester Yudenfriend, Esq., as Escrowee Only

                                       33

<PAGE>

                        ESCROW AGREEMENT SIGNATURE PAGE:

FOR INDIVIDUAL INVESTORS:

-------------------------------------------
Signature

-------------------------------------------
Print name

-------------------------------------------
Print Street Address

-------------------------------------------
Print City, State and Zip Code

FOR CORPORATE INVESTORS:

Name of Corporation

BY:
-------------------------------------------
      Signature of Executive Officer or Manager

-------------------------------------------
Print Name and Title of Authorized Signatory

-------------------------------------------
Print Business Address

-------------------------------------------
Print City, State and Zip Code

                                       34

<PAGE>

                                    EXHIBIT B

                          COMMON STOCK PURCHASE WARRANT

                                       35

<PAGE>

THE WARRANT  EVIDENCED BY THIS  CERTIFICATE  AND THE COMMON STOCK  ISSUABLE UPON
EXERCISE  HEREOF HAVE NOT BEEN  REGISTERED  UNDER THE SECURITIES ACT OF 1933, AS
AMENDED (THE "ACT"),  OR UNDER ANY STATE  SECURITIES LAWS. THE WARRANT OR SHARES
OF SUCH  COMMON  STOCK  MAY NOT BE  SOLD,  TRANSFERRED,  ASSIGNED  OR  OTHERWISE
DISPOSED OF UNLESS A  REGISTRATION  STATEMENT  UNDER THE ACT AND ANY  APPLICABLE
STATE  SECURITIES  LAWS WITH  RESPECT TO SUCH  DISPOSITION  IS THEN IN EFFECT OR
UNLESS THE PERSON PROPOSING TO MAKE THE DISPOSITION SHALL FURNISH,  WITH RESPECT
TO SUCH  DISPOSITION,  AN OPINION OF COUNSEL  SATISFACTORY  TO POWER  EFFICIENCY
CORPORATION  TO THE  EFFECT  THAT  SUCH  SALE,  TRANSFER,  ASSIGNMENT  OR  OTHER
DISPOSITION WILL NOT INVOLVE ANY VIOLATION OF THE REGISTRATION PROVISIONS OF THE
ACT (OR ANY SUPERSEDING STATUTE) OR ANY APPLICABLE STATE SECURITIES LAWS.

                          POWER EFFICIENCY CORPORATION
                             STOCK PURCHASE WARRANT

                                  COMMON STOCK

Warrant No. PEC-1                                  No. of Shares - Up to 25,000

                    This certifies that, for value received,

                         ------------------------------
                             Name of Warrant holder

or his, her or its assigns (the "Holder"), is entitled, subject to the terms and
conditions  hereinafter  set forth at any time  after  the date of the  Exercise
Event  Notice (as that term is  hereinafter  defined  in  Section 1 hereof)  but
before 5:00 o'clock p.m., New York time, on the third anniversary of the date of
this warrant (the  "Warrant") but not thereafter  (the  "Expiration  Date"),  to
purchase up to 25,000 shares of common stock, $.001 par value per share("Warrant
Shares"), of Power Efficiency Corporation, a Delaware corporation with temporary
offices  c/o 4220  Varsity  Drive,  Suite  E, Ann  Arbor,  Michigan  48108  (the
"Company"),  such number of Warrant Shares being subject to adjustment  upon the
occurrence of the contingencies set forth in this Warrant. This Warrant shall be
exercisable  at a price of $3.00 per Warrant  Share during the first year of the
term of this Warrant expiring on the first anniversary of the date hereof, $4.00
per Warrant Share during the second year expiring on the second  anniversary  of
the date hereof,  and $5.00 per Warrant  Share during the third year expiring on
the third anniversary of the date hereof (the "Exercise Price").

         Upon delivery of this Warrant duly  executed,  together with payment of
the Exercise Price for the Warrant  Shares thereby at 4220 Varsity Drive,  Suite
E, Ann Arbor,  Michigan  48108,  or at such other  address  as the  Company  may
designate by notice in writing to the Holder of the Warrant Shares so purchased.
All Warrant  Shares which may be issued upon the exercise of this Warrant  will,
upon issuance,  be fully paid and non-assessable and free from any taxes, liens,
and charges with respect thereto.

                                       36

<PAGE>

         This Warrant is subject to the following terms and conditions:

         1. Exercise of The Warrant. This Warrant may be exercised by the Holder
furnishing the Company with written notice of the Holder's intent to exercise at
any time after issuance and delivery  hereof and prior to 5:00 o'clock p.m., New
York time, on the Expiration Date but not  thereafter,  as to all or any part of
the number of whole Warrant Shares then subject hereto (the "Exercise  Notice").
In case of any partial  exercise of this Warrant,  the Company shall execute and
deliver a new  Warrant  of like tenor and date for the  balance  of the  Warrant
Shares purchasable  hereunder.  The Exercise Notice shall set a closing date not
more than ten days thereafter but not later than the Expiration  Date, where the
Holder's  purchase of the of the Warrant  Shares shall take place (the  "Closing
Date"). On the Closing Date, the purchase of the Warrant Shares shall take place
at the offices of the Holder's  attorneys,  Lester  Yudenfriend,  1133 Broadway,
Suite 321, New York, NY 10010.  The Exercise Price shall be paid in lawful funds
of the United States of America payable in cash or by certified or official bank
check,  said amount being  subject to  adjustments  upon the  occurrence  of the
contingencies  set  forth in this  Warrant.  In the event  the  Holder  fails to
exercise  the Warrant and set a Closing  Date before the  Expiration  Date,  the
Warrant shall expire, become non-exercisable and be of no further validity.

         2.  Adjustment of Exercise  Price and the Number of Shares  Purchasable
Hereunder.  The  Exercise  Price and the  number of Warrant  Shares  purchasable
hereunder shall, upon the prior occurrence of an event enumerated in (a) and (b)
of this  Section  2 or an event  numerated  in  Section  3 below  (an  "Exercise
Event"),  be  subject to  adjustment  from time to time in  accordance  with the
following provisions:

                  (a) In the  event  of any  payment  of any  cash  dividend  or
distribution  of property by the Company  otherwise than out of earned  surplus,
either tangible or intangible (other than  distributions of the Warrant Shares),
to the holders of the Company's common stock, the Exercise Price for the Warrant
Shares then subject to this Warrant  shall be reduced by the per share amount of
such dividend or  distribution  when the Exercise Price is equal to the then par
value of the common stock.  If and when the Exercise  Price is equal to the then
par  value of the  common  stock,  the  Holder  shall be  entitled  to  receive,
concurrently with the holder of the common stock then outstanding, the per share
amount of any such  dividend  or  distribution  with  respect  to the  number of
Warrant Shares then  receivable upon exercise of this Warrant in the same manner
and to the same  extent as if the Holder were then the  registered  owner of the
Warrant  Shares then subject  hereto.  For purposes of this  paragraph,  the per
share  amount of any  distribution  of property  shall be the fair market  value
thereof as determined  by the Company's  Board of Directors in good faith in the
resolutions authorizing any such distribution.

                  (b) In the  event  the  Company  shall at any time  issue  any
shares of its common stock as a stock  dividend,  the  Exercise  Price in effect
immediately prior to such subdivision shall be proportionately decreased, and in
the case the Company  shall at any time  combine the  outstanding  shares of its
common stock, the Exercise Price in effect immediately prior to such combination
shall be proportionately increased,  effective from and after the record date of
such subdivision or combination, as the case may be.

                                       37

<PAGE>

                  (c) No adjustment of the Exercise Price shall be made upon the
subsequent  issuance of any  additional  shares of the  Company's  common  stock
pursuant to the exercise of any such warrants,  options or other subscription or
purchase rights or pursuant to the exercise of any conversion or exchange rights
in any convertible securities.

         3. Reorganization, Reclassification, Consolidation or Merger. If at any
time while this  Warrant is  outstanding  there shall be any  reorganization  or
reclassification of the common stock of the Company (other than a subdivision or
combination of shares provided for in paragraph 2 above) or any consolidation or
merger of the Company with another corporation, or the sale, lease or conveyance
of the property of the Company as an entirely or  substantially  as an entirety,
the holder of this Warrant shall  thereafter be entitled to receive,  during the
term  hereof and upon  payment of the  Exercise  Price,  the number of shares of
stock or  other  securities  or  property  of the  Company  or of the  successor
corporation  resulting from such consolidation or merger, as the case may be, to
which a holder of the common stock of the Company, deliverable upon the exercise
of  this  Warrant,   would  have  been   entitled   upon  such   reorganization,
reclassification,  consolidation,  merger, sale, lease or conveyance; and in any
such case,  appropriate  adjustment  (as determined by agreement of the Board of
Directors of the Company)  shall be made in the  application  of the  provisions
herein set forth with  respect to the  rights  and  interest  thereafter  of the
holder  of  this  Warrant  to the end  that  the  provisions  set  forth  herein
(including the adjustment of the Exercise Price) shall thereafter be applicable,
as property thereafter deliverable upon the exercise hereof.

         4. Notice of  Adjustments.  Upon any  adjustment of the Exercise  Price
upon the exercise of this  Warrant,  then,  and in each such case,  the Company,
within thirty days, may give written notice thereof to the Holder at the address
of such holder as shown on the books of the  Company,  which  notice shall state
the Exercise Price as adjusted upon the exercise of this Warrant,  setting forth
in reasonable detail the facts and method of calculation of each.

         5.  Charges,  Taxes and  Expenses.  The  issuance of  certificates  for
Warrant  Shares upon any exercise of this Warrant  shall be made with charges to
the holder  hereof for any tax or other  expense in respect to the  issuance  of
such certificates,  all of which taxes and expenses shall be paid by the Warrant
holder, and such certificates shall be issued in the name of, or in such name or
names as may be directed  by , the holder of this  Warrant;  provided,  however,
that in the event that certificate for Warrant Shares are to be issued in a name
other than the name of the holder of this Warrant, this Warrant when surrendered
for  exercise  shall be duly  executed  by the holder  hereof in person or by an
attorney duly authorized in writing.

         6. Certain Obligations of the Company.  The Company agrees that it will
take any corporate action which may, in the opinion of its counsel, be necessary
in  order  that the  Company  may  validly  and  legally  issue  fully-paid  and
non-assessable Warrant Shares at the Exercise Price as so adjusted.

                                       38

<PAGE>

     7. Restrictions on Transfer.  The Warrant Shares issuable upon any exercise
of this Warrant shall be restricted securities as that term is defined under the
Act. In this regard, the Holder represents to the Company that upon the Holder's
exercise of the Warrant the Holder: (i) will be acquiring the Warrant Shares for
the Holder's own account for the purpose of investment and not with a view to or
for resale in connection with any distribution  thereof;  (ii) will not offer to
sell or otherwise  transfer  any of the Warrant  Shares in violation of the Act;
and (iii) agrees that the certificates  representing the Warrant Shares shall be
the subject of a stop transfer  order on the books and records of the Company or
its transfer agent and shall bear a standard form of restrictive legend.

         8. Notice to Warrant  Holder.  So long as this Warrant is  outstanding:
(i) if the  Company  shall pay any  dividend or make any  distribution  upon the
Company's common stock; or (ii) if the Company shall offer to the holders of its
common  stock for  subscription  or  purchase  by them any share of stock of any
class  or any  other  rights;  or  (iii) if any  capital  reorganization  of the
Company,  reclassification of the capital stock of the Company, consolidation or
merger of the Company with or into any  corporation,  sale, lease or transfer of
all or  substantially  all of the  property and assets of the Company to another
corporation or voluntary or involuntary  dissolution,  liquidation or winding up
of the Company shall be effected,  then, in any such case, the Company may cause
to be mailed by certified mail to the Holder, at least 15 days prior to the date
specified in (x) or (y) below,  as the case may be, a notice  containing a brief
description of the proposed action and stating the date on which (x) a record is
to be taken for the purpose of such  dividend,  distribution  or rights,  or (y)
such  reorganization,  reclassification,  consolidation,  merger,  sale,  lease,
transfer, dissolution,  liquidation or winding up to take place and the date, if
any is to be fixed,  as of which the holders of common  stock of record shall be
entitled to exchange  their  Warrant  Shares for  securities  or other  property
deliverable upon such reorganization,  reclassification,  consolidation, merger,
sale, lease, transfer, dissolution, liquidation or winding up.

     9.  Miscellaneous.  (a) The  Company  covenants  that it will at all  times
reserve and keep  available,  solely for the purpose of issue upon the  exercise
hereof, a sufficient number of shares of its common stock to permit the exercise
of the Warrant in full.

                  (b) The terms of this Warrant  shall be binding upon and shall
inure to the benefit of any successors or assigns of the Company and the Holder.

                  (c) Prior to the due  exercise  of this  Warrant,  the  Holder
shall not be  entitled  to vote or  receive  dividends  (except as  provided  in
paragraph  2(a) hereof) or be deemed to be a shareholder  of the Company for any
purpose.

                  (d)  This  Warrant  may  be  divided  into  separate  Warrants
covering a minimum of 10,000  shares of the common  stock or any whole  multiple
thereof,  for the total number of Warrant Shares then subject to this Warrant at
any time, or from time to time, upon the request of the Holder and the surrender
of the same to the Company for such purpose.  Such subdivided  Warrants shall be
issued  promptly by the Company  following  any such request and shall be of the
same form and tenor as this Warrant, except for any requested change in the name
of the Holder.

                                       39

<PAGE>

                  (e) Except as otherwise provided herein,  this Warrant and all
rights hereunder are transferrable by the Holder in person or by duly authorized
attorneys on the books of the Company upon  surrender of this Warrant,  properly
endorsed,  to the Company. The Company may deem and treat the Holder at any time
as the  absolute  owner hereof for all purposes and shall not be affected by any
notice to the contrary.

                  (f) Upon receipt by the Company of evidence satisfactory to it
of the loss, theft,  destruction or mutilation of this Warrant, and (in the case
of loss, theft or destruction) of reasonably satisfactory  indemnification,  and
upon surrender and cancellation of this Warrant, if mutilated,  the Company will
execute and deliver a new Warrant of like tenor and date.

         IN WITNESS WHEREOF, the Company has caused this Warrant to be signed by
its duly authorized officers and its corporate seal to be affixed hereof.

May   , 2000

Power Efficiency Corporation

By:
    --------------------------------------------
     Nicholas Anderson, Chief Operating Officer

                                       40

<PAGE>

                               FORM OF AS SIGNMENT

             (Subject to the restrictions set forth in the Warrant.)

         FOR VALUE RECEIVED, the undersigned hereby sells, assigns and transfers
unto  __________________________  the  right  represented  by  this  Warrant  to
purchase  __________  Shares of the Common  Stock,  $.001 par value per share of
Power  Efficiency  Corporation  to which  this  Warrant  relates,  and  appoints
_______________,   attorney  to  transfer  said  right  on  the  books  of  said
Corporation, with full power of substitution in the premises.

Dated:________________________                _____________________________
                                              (Signature must conform in all
                                               respects to name of holder as
                                               specified on the face of the
                                               Warrant)

                                       41

<PAGE>

                              FORM OF SUBSCRIPTION

                (To be signed only upon exercise of the Warrant.)

                        To: Power Efficiency Corporation

         The undersigned,  the holder of this Warrant, hereby irrevocably elects
to exercise the purchase rights represented by this Warrant for, and to purchase
thereunder,  pursuant  to and in  accordance  with the  terms  of this  Warrant,
___________  shares  of  common  stock,  $.001  par  value  per  share  of Power
Efficiency  Corporation,  and herewith makes payment of $_______  therefor,  and
requests that the  certificates  for such Shares be issued in the name of and be
delivered to ________________,  whose address is ______________________________,
and if such Shares shall not be all of the shares purchasable thereunder, that a
new Warrant or like tenor for the balance of the shares purchasable hereunder be
delivered to the undersigned.

Dated:________________________        _____________________________
                                      (Signature must conform in all
                                       respects to name of holder as
                                       specified on the face of the Warrant)

                                       42

<PAGE>

                                    EXHIBIT C

                        DEFINITION OF ACCREDITED INVESTOR

                                       43

<PAGE>

Rule 501(a) of  Regulation D under the  Securities  Act of 1933, as amended (the
"Act")  defines an  "Accredited  Investor" as any person who comes within any of
the following categories, or who the issuer reasonably believes comes within any
of the fol owing  categories,  at the time of the sale of the securities to that
person:

     (i)  Any bank or  savings  and loan  association  as  defined  in  Sections
          3(a)(2) and 3(a)(5)(A),  respectively, of the Act acting either in its
          individual or fiduciary capacity;

     (ii) Any broker dealer registered  pursuant to Section 15 of the Securities
          Exchange Act ;

     (iii) Any insurance company as defined in Section 2(13) of the Act;

     (iv) Any investment  company registered under the Investment Company Act of
          1940 or a business  development company as defined in Section 2(a)(48)
          of that Act;

     (v)  Any Small  Business  Investment  Company  licensed  by the U.S.  Small
          Business  Administration  under  Section  301(c)  or (d) of the  Small
          Business Investment Act of 1958;

     (vi) Any  employee  benefit  plan  within  the  meaning  of  Title I of the
          Employee Retirement Income Security Act of 1974 and):

          (a)  The investment  decision is made by a plan fiduciary,  as defined
               in Section 3(21) of such Act, which is either a bank, savings and
               loan association,  insurance  company,  or registered  investment
               adviser; or

          (b)  The  employee   benefit  plan  has  total  assets  in  excess  of
               $5,000,000; or

          (c)  The plan is a self-directed  plan with investment  decisions made
               solely by persons who are "Accredited Investors" as defined under
               the 1933 Act.

     (vii)Any  private  business  development  company  as  defined  in  Section
          202(a)(22) of the Investment Advisers Act of 1940;

   (viii) Any entity that has total  assets in excess of  $5,000,000,  was not
          formed for the specific purpose of acquiring shares of the Company and
          is one or more of the following:

                                       44

<PAGE>

          (a)  an  organization  described in Section  501(c)(3) of the Internal
               Revenue Code; or

          (b)  a corporation; or

          (c)  a Massachusetts or similar business trust; or

          (d)  a partnership.

     (ix) Any trust with total assets exceeding $5,000,000, which was not formed
          for the specific  purpose of acquiring shares of the Company and whose
          purchase is directed by a person who has such knowledge and experience
          in financial and business matters that he is capable of evaluating the
          merits and risks of the investment in the shares;

     (x)  Any natural person who, together with the person's spouse,  have a net
          worth of at least $1,000,000 or the person, individually,  has had net
          income  of not less  than  $200,000  during  the last two  years,  and
          reasonably anticipates that the person will have an income of at least
          $200,000 during the present year and the next year.

                                       45

<PAGE>

                                    EXHIBIT D

                                INVESTMENT LETTER

                                       46

<PAGE>

Board of Directors
Power Efficiency Corporation
4220 Varsity Drive, Suite E

Ann Arbor, MI 48108

Gentlemen:

         In connection with the purchase by the undersigned as of May , 2000 for
one or more of the  units  being  offered  by Power  Efficiency  Corporation,  a
Delaware  corporation  (the  "Company")  and  delivery to the  undersigned  (the
"Units") and comprised of 25,000 authorized but unissued shares of the Company's
Common Stock, $.001 par value per share ("Unit Shares"), and a five year warrant
to purchase 25,000  additional  shares of the Company's common stock,  $.001 par
value per share (the "Warrant Shares"), the undersigned for himself/itself,  and
his/its  heirs,  representatives,   executors,  administrators,  successors  and
assigns,  represents,  warrants  and agrees  with the  Company  as follows  with
respect to the Units:

         1. The  undersigned  will be acquiring  the Unit Shares and the Warrant
Shares  comprising  the  Units  for  investment  and  not  with  a  view  to the
distribution thereof and is familiar with the meaning of such representation and
covenants and  understands  the  restrictions  which are imposed  thereby.  More
specifically,  but without limitation,  the undersigned  understands that in the
view of the Securities and Exchange Commission,  one who acquires securities for
investment is not exempt from the  registration  requirements  of the Securities
Act of 1933, as amended (the "Act"),  if he merely  acquires such securities for
resale upon the occurrence or non-occurrence of some predetermined  event or for
holding for a fixed or determinable period in the future.

         2. The  undersigned  will be acquiring  the Unit Shares and the Warrant
Shares  comprising  the Units  solely for the  undersigned's  own account and no
other  person or entity  has any  direct or  indirect  beneficial  ownership  or
interest therein.

         3. The  Undersigned  hereby  represents  and warrants that he has a net
worth substantially in excess of the cost of the Units to the undersigned and in
the  event  the  undersigned  shall  incur a loss in the  Units,  it  would  not
materially affect the undersigned's financial condition.

         4.  The   undersigned   has  been  advised  that  in  reliance  on  the
representations,  warranties and agreements herein made by the undersigned,  the
issuance,  and delivery of the Unit Shares and the Warrant Shares comprising the
Units to the undersigned will not be registered under the Act on the ground that
the  issuance  thereof is exempt from  registration  by virtue of Sections  4(2)
and/or 3(b) thereof.

         5. The  undersigned  represents to the Company that the undersigned has
such  knowledge  and  experience  in  financial  and  business  matters that the
undersigned is

                                       47

<PAGE>

capable of evaluating and  understanding the merits and risks attendant upon the
investment in the Company represented by the acquisition of the Units.

         6. The  undersigned  represents  and  warrants to the Company  that the
investment in the Company represented by the purchase of the Units came about as
a result of direct communications  between the Company and the undersigned,  and
did not result  from any form of  general  advertising  or general  solicitation
including  but  not  limited  to,  advertisements  or  other  communications  in
newspapers,  magazines,  or other  media;  broadcasts  on  radio or  television,
seminars  or  promotional  meetings or any  letter,  circular  or other  written
communication.

         7. The  undersigned  will hold the Unit Shares and the  Warrant  Shares
comprising the Units for 12 months before any sale thereof under Rule 144.

                                           Very truly yours,

                                           -------------------------------------
                                           Signature of Subscriber

                                           -------------------------------------
                                           (Print) Name of Subscriber

                                           -------------------------------------
                                           (Print) Title of Authorized Signatory

                                       48ESCROW AGREEMENT (the "Agreement") made this 4th day of August, 2000 among Power
Efficiency  Corporation,  a Delaware  corporation with temporary offices at 4220
Varsity  Drive,  Suite E, Ann  Arbor,  MI 48108,  (the  "Company"),  Performance
Control,  LLC, a  Michigan  limited  liability  company  having an address  4220
Varsity Drive,  Suite E, Ann Arbor, MI 48108  ("Percon") and  Continental  Stock
Transfer & Trust Company, with an office at 2 Broadway, 9th Floor, New York, New
York 10004 (the "Escrowee").  The Company, Percon and the Escrowee are sometimes
collectively referred to as the "Parties" and individually as a "Party".

                              W I T N E S S E T H :

     WHEREAS,  the Company and Percon are party to an Asset  Purchase  Agreement
(the " Asset  Agreement")  dated July 28, 2000, a true copy of which is attached
hereto as Exhibit "A" and incorporated herein by reference; and

     WHEREAS,  the Asset Agreement  provide for an aggregate of 50,000 shares of
the Company's  Common  Stock,  $.001 par value per share (the  "Shares"),  to be
delivered  into  escrow in the event of a Claim (as that term is  defined in the
Asset Agreement); and

     WHEREAS,  Section  17 of the Asset  Agreement  sets  forth  the  conditions
precedent  to the  obligation  of the  Escrowee  to  deliver  the  Shares to the
Company; and

     WHEREAS,  the  capitalized  terms in this Agreement  shall have the meaning
ascribed thereto in the Asset Agreement; and

     WHEREAS, the Parties desire to set forth the terms and conditions governing
the release of the Shares by the Escrowee.

     NOW,  THEREFORE,  in  consideration  of the premises  and mutual  covenants
hereinafter set forth,  the Parties hereby  incorporate  the foregoing  recitals
into this Agreement and agree as follows:

         1. Creation of Escrow. By virtue of the execution of this Agreement and
the delivery of a certificate  or  certificates  representing  the Shares to the
Escrowee,  the Company and Percon  hereby  create the escrow made the subject of
this  Agreement  and hereby  authorize  the  Escrowee  to deliver  the Shares as
hereinafter  provided.  The Shares shall be delivered to the Escrowee registered
in the name of Percon and  accompanied  by a stock power  endorsed in blank with
Medallion signature guaranteed by a bank or brokerage firm.

         2. Terms of Escrow. The following terms shall apply:

                  (a). Duties of the Escrowee under the Asset Agreement.

                      (i) In The Event of No Claim.  The  Parties  hereby  agree
that the Escrowee  shall accept  delivery of and hold the Shares until the first
anniversary of the execution of this Agreement  (the"Expiration  Date").  In the
event  no  Claim  is made  on or  before  5:00pm  Eastern  Daylight  Time on the
Expiration  Date, the Escrowee shall return the Shares to Percon and furnish the
Company with written notice of such return. Thereafter this

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Agreement  shall  automatically  terminate and the Escrowee  shall be discharged
without  further action on behalf of any Party and without further notice to the
Company or Percon.

                      (ii) In the  Event  of a  Claim.  (ii) In the  Event  of a
Claim. In the event that, at any time prior to the Expiration  Date, the Company
shall claim that Percon has breached any of its  representations,  warranties or
covenants under the Asset Agreement, or any claim is made against the Company by
a creditor  of Percon  with  respect to a  liability  of Percon or the  Business
accruing  prior to the  Expiration  Date other than with  respect to the Assumed
Liabilities,  or if the Company shall incur any Cost, as that term is defined in
Paragraph 12.1(iii) of the Asset Agreement  (collectively,  a "Claim"), it shall
provide  notice  thereof  to Percon,  with a copy to the  Escrowee  (the  "Claim
Notice").  The Claim Notice shall set forth with  particularity the specifics of
any such Claim. Percon shall have the right to cure the Claim in accordance with
the provisions of Paragraph 17.2 of the Asset Agreement or to dispute or contest
any such  Claim.  In the event that  Percon does not dispute or contest any such
Claim  and/or  fails  to cure  same  pursuant  to  Paragraph  17.2 of the  Asset
Agreement,  the Company may thereafter furnish to the Escrowee and Percon a duly
executed and notarized  affidavit  setting forth the specifics of any such Claim
(the "Default Notice").  The Default Notice, shall include,  without limitation,
the  amount of the Claim and  basis  therefor,  the date of the Claim  Notice to
Percon and a  certification  by an executive  officer of the Company that Percon
has not  disputed or  contested  the Claim or has failed to cure the same within
the time  provided for herein (the  "Certification").  Unless Percon has paid to
the  Company  the  amount of such Claim  within  ten (10) days after  receipt by
Escrowee and Percon of the Default  Notice and the  Certification,  the Escrowee
shall on the 10th day after  receipt  thereof,  promptly  deliver to the Company
such number of Shares as shall equal the amount of such Claim divided by $2.50.

                      (b). In the event,  however,  that  Percon  shall elect to
dispute or contest any such Claim, it shall be required, within ten (10) days of
the Claim Notice, to provide notice to the Company, with a copy to the Escrowee,
which  notice  shall set forth  with  particularity  the  specifics  of any such
dispute  or  contest  as  between  the  parties  hereto or their  successors  or
representatives (the "Dispute Notice"). In the event of the sending of a Dispute
Notice,  the Company and Percon hereby  covenant and agree that any such dispute
or contest  made the subject of the Dispute  Notice shall be settled in the City
of New York, by a single arbitrator  appointed in accordance with the commercial
rules then in force of the American Arbitration Association. The decision of the
arbitrator  shall be deemed to be final, and judgment upon any award or decision
rendered  thereby may be entered in any court having  jurisdiction  thereof (the
"Award").  A copy  of the  arbitrator's  decision  as well  as the  Award  shall
promptly be  furnished  to the Escrowee by the  victorious  Party.  The Escrowee
shall  retain the portion of the Shares  covered by any such  dispute  until its
receipt of a certified copy of any such Award.

                      The  Escrowee  shall then convert the Award into Shares by
dividing the Award by $2.50. The resultant number of Shares shall,  upon written
notice to the Percon,  returned to the Company for restoration to authorized but
unissued status or to be held as treasury stock.

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                      Thereafter, and in the event no additional Claims are made
before the Expiration  Date, any remaining  Shares held by the Escrowee shall be
returned to Percon with notice of such return to the  Company.  Thereafter  this
Agreement  shall  automatically  terminate and the Escrowee  shall be discharged
without  further action on behalf of any Party and without further notice to the
Company or Percon.

                      (c)  Compensation.  The  Escrowee  shall  receive a fee of
$100.00 per month for each month it serves as Escrowee and the reimbursement for
disbursements in connection with its time and expense incurred in fulfilling its
obligation pursuant to this Agreement. The Company agrees to pay the agreed upon
fee and disbursements to the Escrowee.

                      (d) Notice of Default or Dispute.  If the  Escrowee  shall
receive a Default  Notice or a Dispute  Notice,  the  Escrowee  may, at its sole
discretion,  notify the Parties and cease its activities as Escrowee and deposit
the Shares being held pursuant to this Agreement  with the American  Arbitration
Association,  at its offices in the City of New York.  Upon such  deposit or the
delivery of the Shares  pursuant to this  Paragraph  2(d),  the  Escrowee  shall
automatically  be relieved and fully  discharged of all further  obligations and
responsibilities  hereunder. The Parties acknowledge that the Escrowee is acting
solely in its capacity as Escrowee at their  request and for their  convenience,
that the  Escrowee  shall not be deemed to be the agent of either of the Parties
nor shall he be  liable  for any act or  omission  on its part  unless  taken or
suffered in bad faith, in willful disregard of this Agreement or involving gross
negligence.  The  Company  and  Percon  hereby  agree to jointly  and  severally
indemnify and hold the Escrowee harmless from and against all costs,  claims and
expenses,  including reasonable attorney's fees, incurred in connection with the
performance of the Escrowee's duties  hereunder,  except with respect to actions
or  omissions  taken or  suffered  by the  Escrowee  in bad  faith,  in  willful
disregard of this  Agreement or involving  gross  negligence  on the part of the
Escrowee.  The Parties hereby further agree that the  arbitration  provisions of
the Agreement shall supersede and control the  jurisdiction and venue provisions
of the Asset Agreement.

                      (e)  Reliance.  The Escrowee  shall be protected in acting
upon any written notice, request, consent, certificate,  receipt,  authorization
or other paper or document which the Escrowee believes to be genuine and what it
purports to be;

                      (f) Counsel. The Escrowee may confer with legal counsel in
the  event of any  dispute  or  question  as to the  construction  of any of the
provisions hereof, or its duties hereunder,  and it shall incur no liability and
it shall be fully  protected  in  acting in  accordance  with the  opinions  and
instructions  of such  counsel.  The Parties  hereby  authorize  the Escrowee to
utilize  the Shares for the payment of any of the  Escrowee's  legal fees unless
the same are paid by the  Parties,  who shall be jointly  and  severally  liable
therefore.

                      (g)   Remedies  of   Escrowee.   The  Escrowee  is  hereby
authorized  in the event of any doubt as to the course of action he should  take
under this Agreement,  to petition the American  Arbitration  Association in the
City of New York only, for instructions or to interplead the Shares. The Parties
agree to the  jurisdiction of the American  Arbitration  Association  over their
persons as well as the Shares held by the Escrowee, waive personal

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service of process,  and agree that service of process by certified mail, return
receipt  requested,  to the address set forth herein shall  constitute  adequate
notice of  service  hereunder  and shall  confer  personal  jurisdiction  on the
American  Arbitration  Association  in the City of New York.  The Parties hereby
agree to indemnify  and hold the Escrowee  harmless from any liability or losses
occasioned  thereby and to pay any and all of its cost,  expense and  attorneys'
fees incurred in any such action and agree that on such petition or interpleader
action that the Escrowee or its employees will be relieved of further liability.
The  Escrowee is hereby given a lien upon,  and security  interest in the Shares
deposited  pursuant to this Agreement to secure the Escrowee's rights to payment
or reimbursement.

                      (h)  Resignation.  The Escrowee may resign for any reason,
upon thirty (30) days written notice to the Parties to this Agreement.  Upon the
expiration  of such thirty (30) day period,  the Escrowee may deliver the Shares
in its possession  under this Agreement to any successor  Escrowee  appointed by
the other Parties hereto, or if no successor Escrowee has been appointed, to the
American   Arbitration   Association  in  the  City  of  Pittsburgh,   State  of
Pennsylvania.  Upon either such delivery,  the Escrowee shall  automatically  be
released from any and all liability under this Agreement. Termination under this
Paragraph  shall  in no way  change  the  terms  of  this  Agreement  concerning
reimbursement of expenses, indemnity and fees of the Escrowee.

                  3.  Representations and Warranties of the Company. The Company
hereby  represents  and  warrants  to Percon  and the  Escrowee  that all of the
representations,  warranties and covenants  contained in the Asset Agreement are
true and correct and the same are hereby incorporated herein by this reference.

                  4.  Representations,  Warrants and Covenants of Percon. Percon
hereby  represents  and warrants to the Company and the Escrowee that all of the
representations,  warranties and covenants  contained in the Asset Agreement (as
limited  therein)  are true and  correct  and the same are  hereby  incorporated
herein by this reference.

                  5.  Expenses.  Each of the Parties hereby agrees to pay and be
solely  responsible  for its own legal fees incurred by it in connection  with a
Claim made under this Agreement.

                  6.  Dividends.  So long as the Shares  remain in  escrow,  all
dividends  upon the Shares shall belong to Percon.  However,  the Escrowee shall
hold any and all dividends in escrow for  disbursement  in  accordance  with the
terms of Paragraph 2 of this Agreement.

                  7.  Voting.  So long as the Shares  remain in  escrow,  Percon
shall vote the Shares.

                  8.  Assignments  and  Successors.  This Agreement shall not be
assigned by the Company or Percon without the prior written consent of the other
Party, the delivery of written notice to the Escrowee and the written  agreement
by any assignee to be bound by the terms of this Agreement. All of the terms and
provisions of this Agreement shall

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be binding  upon and inure to the benefit of and be  enforceable  by and against
the successors and assigns of the Parties hereto.

                  9. Additional Instruments. Each of the Parties shall from time
to time, at the request of the others,  execute,  acknowledge and deliver to the
other any and all further  instruments  that may be reasonably  required to give
full effect and force to the provisions of this Agreement.

                 10. Entire Agreement. Each of the Parties hereby covenants that
this  Agreement  is  intended to and does  contain and embody  herein all of the
understandings and agreements,  both written or oral, of the Parties hereby with
respect to the subject matter of this  Agreement,  and that there exists no oral
agreement or understanding,  express or implied liability, whereby the absolute,
final and  unconditional  character and nature of this Agreement shall be in any
way invalidated, empowered or affected. There are no representations, warranties
or covenants other than those set forth herein.

                  11.  Laws of the State of New York.  This  Agreement  shall be
governed by and  interpreted  under and  construed in all respects in accordance
with the laws of the State of New York, irrespective of the place of domicile or
residence of the Parties.

                  12. Originals.  This Agreement may be executed in counterparts
each of which so executed shall be deemed an original and constitute one and the
same agreement.

                  13. Address of Parties. Each Party shall at all times keep the
other  Party and the  Escrowee  informed of its  principal  place of business if
different from that stated herein, and shall promptly notify the other Party and
the Escrowee in writing of any change,  giving the address of the new  principal
place of business.

                  14.  Notices.  All notices  that are  required to be or may be
sent  pursuant to the  provision  of this  Agreement  shall be sent by certified
mail, return receipt requested, or via overnight courier, to each of the Parties
and the Escrowee at the  following  addresses,  and shall count from the date of
receipt as shown on the return receipt mailing or the date after the date of the
airbill:

                         Performance Control, LLC
                         4220 Varsity Drive, Suite E
                         Ann Arbor, MI 48108

                         With a copy to:

                         Seyburn, Kahn, Ginn, Bess and Serlin
                         2000 Town Center, Suite 1500
                         Southfield, Michigan 48075-1195
                         Attn: Bruce  H. Seyburn, Esq.

                         Power Efficiency Corporation

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                         4220 Varsity Drive, Suite E
                         Ann Arbor, MI 48108

                         With a copy to:

                         Lester Yudenfriend, Esq.
                         1133 Broadway, Suite 321
                         New York, New York 10010

                  15.  Modification  and Waiver. A modification or waiver of any
of the provisions of this  Agreement  shall be effective only if made in writing
and executed with the same formality as this Agreement. The failure of any Party
to insist upon strict  performance  of any of the  provisions of this  Agreement
shall not be  construed  as a waiver of any  subsequent  default  of the same or
similar nature or of any other nature or kind.

         IN WITNESS WHEREOF,  the undersigned have executed this Agreement as of
the day and year first above written.

Power Efficiency Corporation

BY:
   ----------------------------------
     Nicholas Anderson, President

Performance Control LLC

By:
   ----------------------------------
     Philip Elkus, Manager

Continental Stock Transfer & Trust Company
As Escrowee Only

By:
   ----------------------------------
     Roger Bernhammer, Vice President

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