UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549



FORM 10-K



|[X]   | ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|----- | ------------------------------------------------------------------------------
|      |                                                                               
|      | For the fiscal year ended February 28, 2011                                   
|      |                                                                               
|[   ] | TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT    
|      |                                                                               
|      | For the transition period from _________ to ________                          
|      |                                                                               
|      | Commission file number: 333-91191                                             



|XZERES Corp.                                                  
|--------------------------------------------------------------
|(Exact name of registrant as specified in its charter)        
|                                                              
|Nevada                                                        
|(State or other jurisdiction of incorporation or organization)
|                                                              
|9025 SW Hillman Court, Suite 3126, Wilsonville, OR            
|(Address of principal executive offices)                      
|Registrant’s telephone number: 503-388-7350                   



|Securities registered under Section 12(b) of
        the Exchange Act:
|----------------------------------------------------------------------
|Title of each class                                                   
|none                                                                  
|Securities registered under Section 12(g) of
        the Exchange Act:
|Title of class                                                        
|none                                                                  



Indicate by check mark if the registrant is
a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes [ ] No [ X ]



Indicate by check mark if the registrant is
not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes [ X ] No [ ]



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



Indicate by check mark whether the registrant
has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted
and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such
shorter period that the registrant was required to submit and post such files). Yes [ ] No [X]




Table of Contents


Indicate by check mark if disclosure of delinquent
filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained,
to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III
of this Form 10-K or any amendment to this Form 10-K. [X]



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



Large accelerated filer [ ] Accelerated
filer [ ] Non-accelerated filer [ ] Smaller reporting company [X]



Indicate by check mark whether the registrant
is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X]



State the aggregate market value of the voting
and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold,
or the average bid and asked price of such common equity, as of the last business day of the registrant’s most recently completed
second fiscal quarter. Not available



Indicate the number of shares outstanding of
each of the registrant’s classes of common stock, as of the latest practicable date. 18,821,327 as of May 20, 2011.

2


Table of Contents




|TABLE OF CONTENTS
|-----------------
|                 
|PART I           
|Item 1.          
|Item 2.          
|Item 3.          
|PART II          
|Item 5.          
|Item 7.          
|Item 8.          
|Item 9.          
|Item 9A.         
|Item 9B.         
|PART III         
|Item 10.         
|Item 11.         
|Item 12.         
|Item 13.         
|Item 14.         
|PART IV          
|Item 15.         



3


Table of Contents


PART I



Item 1. Business



Company Overview



XZERES Corp. (“Xzeres” and the
“Company”) was originally incorporated in New Mexico in 1984. We re-domiciled in Nevada in 2008. We were in the development
stage from October 3, 2008 to May 31, 2010. The fiscal year ending February 28, 2011, is the first fiscal year during which we
are considered an operating company and are no longer in the development stage. Beginning during the fiscal quarter ended May 31,
2010, we have been engaged in the small wind turbine business.



Our principal offices are located at 9025 SW
Hillman, Suite 3126, Wilsonville, OR 97070. Our phone number is (503) 388-7350.



Our Business



We are in the business of designing, developing,
and marketing distributed generation, wind power systems for the small wind (2.5kW-100kW) market.  Our grid-connected
and off grid wind turbine systems, which consist of our 2.5kW and 10kW devices and related equipment, are utilized for electrical
power generation for applications and markets such as residential, micro-grid based rural electrification, agricultural, small
business, rural electric utility systems, as well as other private, corporate infrastructure and government applications.  Our
wind power systems are focused on distributed energy, where a specific machine's energy output is largely or entirely used on-site
where the equipment is installed, as well as grid connected applications.  We employ proprietary technology, including
power electronics, alternator design, and blade design to increase performance and reliability.  While many of our customers
take advantage of their local net-metering rules within the United States and Feed In Tariffs that are often available in Europe
and Internationally to sell power back to the grid, our wind power systems are not dependent on transmission needs to carry the
energy produced to another location.



Our products integrate with currently available
complementary products from other manufacturers, such as inverters, lightning protection equipment and towers.  We do
not have any written agreements with these other manufacturers. Our systems comprise several major components including the turbine
sub-system (which converts wind energy into electricity), the tower (which holds the turbine high in the wind), a turbine controller
(which controls the turbine subsystem and contains monitoring hardware and software), and an inverter (which converts the electricity
generated from DC to AC to connect to a customer’s electrical load or to the grid). We currently design and engineer the
turbine and controller, but contract the manufacturing of the turbine and controller through outside parties. The tower, while
designed to specifications suitable to our turbine requirements, is made and sold by separate companies depending on the style
that the customer orders.  Similarly, the inverter, which converts the energy generated to a form suitable to connect
into the electric grid, is manufactured by another company and is a commercial off-the-shelf product.  We sell a “system”
with all of these parts included in the selling price.  The system will not operate as designed without these complementary
products.  In the case of the inverter, there are other commercially available products that will integrate with our
components, but we perform the system integration design to sell the entire system as a package to the customer.  Going
forward, we intend to develop new equipment, designed for ease of installation and to certification standards which cover standard
testing procedures, power ratings, and structural designs of small wind systems.

4


Table of Contents


We take a system integrator approach to our
business combined with a service-centric vertical integration program in order to provide complete solutions to our customers.
We design, develop, manufacture, test, assemble and market our systems. In addition, we provide site assessment, customer financing,
assistance with government-based financial incentives and local permitting, application engineering, installation, support and
maintenance. And now we offer “tip-to-tower” insurance to our wind turbine customers to enable them to protect their
valuable investment over the 20 year useful life of their system.



Shortly after the fiscal year end, on April
25, 2011, we acquired the assets of Rochester Power Saver Inc. Rochester made a family of power efficiency products which are designed
to improve the "power factor" and reduce the amount of reactive power being drawn at a location. This acquisition expands
our product offering beyond small wind power generation into the realm of power management and power efficiency solutions. The
addition of this complementary and diversified family of products enables us to offer both business and residential customers,
in urban and rural locations, the ability to reduce their power consumption, extend the life of their electrical equipment and
electronics via central surge suppression, reduce their carbon footprint, and depending upon the type of customer and the application,
provide significant energy savings. As a result of this acquisition, we intend to introduce a new power efficiency product line
for the upcoming fiscal year, 2012.



Wind Power



The demand for alternative means of electricity
generation has increased due to the rising cost of energy and consumer awareness of environmental issues. According to the American
Wind Energy Association (“AWEA”), wind power is second only to natural gas in terms of new capacity added and was the
most rapidly growing means of alternative electricity generation at the turn of the 21st century. State and federal incentives
have significantly reduced barriers to wind power development as well as the payback period for investments in small wind turbines
for homeowners and small businesses.



Such incentives take the form of significant
tax breaks or even cash incentives to purchasers of wind power systems. As a result of such incentives, the effective price or
cost to the user is greatly reduced making the return on investment much more attractive and lowers the time period it takes to
generate enough energy to recover the total cost of the system. While many customers are attracted to renewable energy for the
positive environmental attributes, the ultimate decision often centers on a cost/benefit and investment return analysis. Governmental
incentives play an important role by lowering the effective cost to the end user of and wind power system and thereby making a
purchase more attractive.



Wind is a form of solar energy. Winds are caused
by the uneven heating of the atmosphere by the sun, the irregularities of the earth's surface, and rotation of the earth. Wind
flow patterns are modified by the earth's terrain, bodies of water, and vegetation.



The terms wind energy or wind power, describe
the process by which the wind is used to generate mechanical power or electricity. Wind turbines convert the kinetic energy in
the wind into mechanical power. A generator can convert this mechanical power into electricity.



Modern wind turbines fall into two basic groups:
the horizontal-axis variety and the vertical-axis design. Horizontal-axis wind turbines typically either have two or three blades.
These three-bladed wind turbines are operated "upwind," with the blades facing into the wind.



Single small turbines, below 100 kilowatts,
are used for homes, telecommunications dishes, or water pumping. Small turbines are sometimes used in connection with diesel generators,
batteries, and photovoltaic systems. These systems are called hybrid wind systems and are typically used in remote, off-grid locations,
where a connection to the utility grid is not available.

5


Table of Contents


Wind Power Industry



The U.S. Department of Energy's Wind and Hydropower
Technologies Program is working with wind industry partners to develop clean, domestic, innovative wind energy technologies that
can compete with conventional fuel sources. Program efforts have culminated in some of the industry's leading products today and
have contributed to record-breaking industry growth.



For the past four years, the U.S. has led the
world in new wind capacity, overtaking Germany in cumulative wind capacity installations, according to the AWEA’s U.S. Wind
Industry Annual Market Report, Year Ending 2009.



Much of the Wind Industry to date is made up
of large, utility-scale turbines. However, small wind turbines (<100kW) are now benefitting from many of the same high-growth
factors driving large turbines, which include:



§Persistent, high energy costs;



§Improved technology leading to significantly more efficient turbines;



§Incentive programs; and



§General improvement in attitudes toward alternative energy solutions.



The U.S. and Europe contain approximately 71%
of the planet’s existing wind power installations. The U.S., Germany, Spain, India and Denmark have made the largest investments
in wind-generated electricity according to the World Wind Energy Association. The World Wind Energy Association expected that by
2010, 190GW of capacity would be installed worldwide, up from 121.2 GW at the end of 2008, implying an anticipated net growth rate
of more than 25% per year.



The U.S. continues to lead the world as one
of the fastest-growing wind power markets, according to a report from the U.S. Department of Energy (DOE) by Lawrence Berkeley
National Laboratory (LBNL). The States with the most wind production are Texas, California, Iowa, Minnesota, and Oklahoma.



A new assessment from the National Renewable
Energy Laboratory showed U.S. wind resources are larger than previously estimated. Highlights of the analysis reveal Onshore U.S.
wind resources could generate nearly 37,000,000 gigawatt hours (GWh) annually, more than nine times the current total U.S. electricity
consumption.



In 2008, the U.S. Department of Energy (DOE)
published a report that examined the technical feasibility of using wind energy to generate 20% of the nation’s electricity
demand by 2030. The report, "20% Wind Energy by 2030: Increasing Wind Energy's Contribution to U.S. Electricity Supply,"
includes contributions from DOE and its national laboratories, the wind industry, electric utilities, and other groups. The report
examines the costs, major impacts, and challenges associated with producing 20% wind energy or 300 GW of wind generating capacity
by 2030.

6


Table of Contents


The report's conclusions include:



§Reaching 20% wind energy will require enhanced transmission infrastructure, streamlined siting
and permitting regimes, improved reliability and operability of wind systems, and increased U.S. wind manufacturing capacity.



§Achieving 20% wind energy will require the number of annual turbine installations to increase
nearly 3-fold by 2017.



§Integrating 20% wind energy into the grid can be done reliably for less than 0.5 cents per
kWh.



§Achieving 20 percent wind energy is not limited by the availability of raw materials.



§Addressing transmission challenges such as siting and cost allocation of new transmission
lines to access the Nation's best wind resources will be required to achieve 20% wind energy.



Apart from regulatory issues and externalities,
decisions to invest in wind energy generally depend on the cost of alternative sources of energy. Natural gas, oil and coal prices,
and the main production technologies with significant fuel costs are often determinants in the choice of the level of wind energy.



Our Market



U.S. wind power capacity grew by 15% to 40.2GW
in 2010, representing 26% of all new electric generating capacity added that year, according to the Department of Energy. The average
output of one megawatt of wind power is equivalent to the average electricity consumption of about 250 American households. According
to the AWEA, wind generated enough electricity approximately 1.5% (4.5 million households) of total electricity demands in the
U.S., up from less than 0.1% in 1999. U.S. Department of Energy studies have concluded that onshore wind resources in the U.S.
could generate nearly 37,000,000 gigawatt-hours, more than nine times current total U.S. electricity consumption.



According to an AWEA survey for 2009, small
wind turbine sales for U.S. manufacturers increased from $42 million in 2007 to $189 million in 2009. Total capacity more than
doubled in 2009 to 42.5 MW, up from 20.3 MW in 2008. Despite the severe economic challenges in 2009, according to the AWEA the
small wind industry continued to grow,



As payback periods continue to be reduced,
we expect that the market for small wind products will continue to grow, even re-accelerating from the 2010 pace (which was affected
by the severe economic recession). Several developments are contributing to the industry's growth. We feel that the small wind
industry is approaching a tipping point, where increased performance, better incentives, and higher energy costs will combine to
make wind-generated energy cheaper than utility energy. If this occurs, small wind turbine systems will become a smart investment
for the ordinary rural resident. Additionally, we anticipate that rapid growth will make established companies in this industry
attractive acquisition targets for larger companies.



We expect that our typical customer will have
one or more acres of property that consistently experiences at least an average wind speed in the range of 9.8 to 11.5 mph, which
is known as a Class 2 Wind. According to AWEA's 2009 report on "Small Wind Global Market Study", 25.2 million homes in
the U.S. have an acre or more of property and 35% of those homes have Class 2 Winds or better, generating a potential market of
12 million units in 2010 that AWEA expects to grow to 13.9 million homes by 2020.

7


Table of Contents


The foregoing market and industry data was
collected from the 2009 American Wind Energy Association (AWEA) annual report, publicly available on the AWEA website. We did not
pay for the report and it was not prepared for our use. The AWEA allows the data to be used with proper attribution.



Thus far we have focused on the small business
market, farms and ranches. During the course of the next fiscal year, in addition to these markets, we intend to begin to pursue
the federal and state governments as customers, including civil and military opportunities. While contracts for sales to these
markets possess long lead times, sales are often for multiple unit quantities and therefore relatively large as compared to non-project
based sales. We further intend to expand our international sales efforts.



Our Products



The wind turbine systems we acquired and now
offer for sale are comprised of our own, proprietary design (that uses both standard third party engineered components and our
own internally engineered components integrated into a single system). Leveraging an outsourced manufacturing model, we currently
assemble these wind turbine systems from component parts manufactured by third-party suppliers at our leased facility at 9026 SW
Hillman in Wilsonville, Oregon. We sell the assembled wind turbine systems, the towers on which the turbines are mounted, and related
components and accessories.



We currently assemble and offer for sale two
wind turbine systems, a 2.5kW system we have branded as the XZERES 110, and a 10kW system we have branded as the XZERES 442SR.
Both systems are tower mounted and generate electrical output for use on site where installed and can also be connected to the
electrical grid. When connected to the electrical grid, a configuration referred to as an on-grid application, our wind turbine
system is integrated into the site’s existing electrical power connection to the main grid. This configuration allows a customer
to draw electrical power from either the wind turbine system or the main grid or both, depending upon the customer’s need
and the wind turbine system’s current output. In many jurisdictions, power generated by the wind turbine system in excess
of the customer’s current needs can be sent back into the main grid and the customer can receive a credit from their utility
provider. Credit is not universally available, however, and specific net-metering rules for local area jurisdictions vary widely.



In addition, both our 2.5kW and 10kW systems
can be further configured to link to a battery system that will store electrical power generated by the wind turbine system in
excess of the customer’s current demands. That stored power can then be drawn from the battery system by the customer when
needed.



We also offer both our wind turbine systems
in a configuration suitable for marine applications. Here the system receives marine-grade protective coatings and components designed
to withstand high salinity and high humidity conditions as typically found in coastal environments.



Our wind power systems are installed on towers,
which can range from 45 feet to 140 feet tall, depending on the specific site characteristics. We source towers from third party
tower manufacturers. All towers we offer, whether 3rd party solutions or our own, are commercially available today. All the towers
that we provide to customer are designed and built to our specifications by our 3rd party tower suppliers.



We also offer for sale, but do not manufacture,
other products that work with our wind turbine systems and provide value to our customers, including devices to protect our wind
turbine systems from lightning strikes and equipment needed to connect our wind turbine systems to the main electrical grid or
to battery storage systems.

8


Table of Contents


At present, our wind turbine systems integrate
with standard off-the-shelf equipment needed to connect our systems to the main electrical grid, including those from SMA America,
LLC and Outback Power and are provided as part of our overall solution to our customers. Standard off-the-shelf equipment means
stock merchandise that is readily available through vendors in the industry.



In addition, our 10 kW product allows remote
access data monitoring of the wind turbine. This allows our customers and us to have an easier time of troubleshooting any problems
that may arise with the various systems we sell. We recently introduced this new feature with the launch of our 442SR version in
January 2011.



We discontinued building our 442 system and
began taking orders for our newer 442SR model in February 2011. The newer 442SR provides up to a 20% increase in output over the
previous generation 442.  This gain in energy producing capability comes through a combination of two changes. First, we changed
the original furling tail design to a fixed tail, thereby eliminating the energy loss that occurred in the previous model’s
furling conditions. Second, we upgraded the turbine wind controller so that the speed control previously provided by the furling
type tail is now provided by the new controller.



Our current products compare as technology
leaders in this market, and we will work to advance this leadership position through the continual development of performance improvements.
For example, the power curve, which is a measure of performance of a system, on our 10kW system exceeds the claimed power curves
on similar sized machines from competitors in the field. Every manufacturer states the specifications on performance of its turbines,
known as a “power curve” which plots power output verses wind speed, based on product testing. Those specifications
are published by each manufacturer in much of the same way a manufacturer details the specifications of an automobile. We are then
able to compare the specifications of other manufactured turbines to our own turbines. Our power curve for our Model 442 has been
independently validated by the National Renewable Energy Laboratory, while many manufacturer curves are only based on internal
testing. Using this published data, we can plot our curve on the same graph as competitor curves and can show that our products
produce more power at a given wind speed than some other competitors with the same nominal rating. We can also use the same data
to predict the annual energy production of competing machines assuming a standard distribution of wind resource availability. This
energy production, calculated based on published power curves by multiple manufacturers, is used in conjunction with published
pricing of competing machines to show that our product has a superior return on investment. Much of the published data comes from
Home Power Magazine which has an annual buyer’s guide issue showing specifications of many of the competing products available
on the market.



There can be no assurance that we will be able
to maintain any technological leadership or successfully exploit that leadership position to the benefit of our shareholders.



Beginning in fiscal year 2012, we also intend
to introduce a new product line in the power efficiency category, as a result of our recent acquisition of Rochester Power Saver,
Inc. While the product line is complementary and will be offered as part of a solution to our existing turbine customers, it will
also be sold standalone. These power efficiency products are designed to improve the "power factor" and reduce the amount
of reactive power being drawn at a location. By making this improvement, these power management devices can enhance the efficiency
of inductive motors by reducing the amperage needed. The significance of power factor lies in the fact that utility companies supply
customers with volt-amperes but bill them for watts. Power factors below 1.0 require a utility to generate more than the minimum
volt-amperes necessary to supply the real power (watts). This increases generation and transmission costs. Utilities typically
charge additional costs to business customers who have a power factor below some limit.

9


Table of Contents


Distribution of Products



We now sell our products directly to consumers
as well as through dealers and distributors. We currently maintain a sales force of 12 people, who focus on direct and indirect
channels within their assigned territories.



Our dealers can range from small, 1-2 person
operations to larger, regional or national companies. At present, our dealer network consists of smaller companies only and we
have not established agreements with any larger, regional or national dealers. We are working to establish agreements with dealers
already familiar with our products as well as to bring in new dealers. At present we have signed agreements with a limited number
of initial dealers, 50 as of May 15, 2010. There can be no assurance that we will be successful in establishing a viable dealer
network on favorable terms. We are not dependent upon any one or more particular dealers.



Dealers are often contractors who provide various
construction services for small business and homeowners and have experience with installing renewable energy systems, such as wind
and solar. They provide a vital link to potential end users of renewable energy equipment and alleviate manufacturers from having
to provide large field service operations for conducting sales and service. Thus, part of our sales and marketing effort is designed
to support, educate, and provide training seminars for dealers.



We employ an additional four personnel assigned
to building, maintaining, and enhancing our sophisticated website which we use for marketing and sales purposes and lead generation.



Ireland-Based Wholly-Owned Subsidiary



In November 2010, we established a wholly-owned
subsidiary in Dublin, Ireland in an effort to support sales and marketing activities in Europe and specifically the United Kingdom.
In March of 2011, we received MCS Certification of our 10kW system for the UK marketplace. The MCS certification is important in
that it allows our equipment to be eligible for the UK Feed-In-Tariff. We expect to begin delivering initial product to customers
in the U.K. in fiscal year 2012.



Competition



We will compete with a number of established
manufacturers, importers, and distributors who sell wind turbine systems and related equipment. These companies enjoy brand recognition
which exceeds that of our brand name. We will compete with several manufacturers, importers, and distributors who have significantly
greater financial, distribution, advertising, and marketing resources than we do. We have only recently begun selling our wind
turbine systems and, at present, represent an insignificant portion of the total number of small wind turbine systems being sold
into the target market.



Our primary competitors of similarly sized,
horizontal access wind turbines that compete in our market and sell 2.5 to 10 kilowatt systems are:



§Bergey WindPower (“Bergey”) - The XL.1 (1 kW) is mass-produced in China and is
smaller than any of our models. The Excel (10kW) is built in Oklahoma; it is a 25 year old design. Bergey sells to its own network
of dealers/installers and directly to consumers.



§Southwest Windpower (“SWWP”) - The Whisper 200 (900 W) and the Whisper 500 (3
kW) are inexpensive wind turbines manufactured in the U.S. The new Skystream (1.8 kW) wind turbine began shipping last year. SWWP
sells through RE distributors such as Conergy and GroSolar.



§Proven Energy, Ltd. – A European (Scotland-based) company that installed its first turbine
in 1982. The company provides four different products (3.2kW, 6kW and two separate 15kW machines).

10


Table of Contents


Over the past 24 months, new companies have
entered the small wind marketplace, many of which are focused on vertical-access system designs. Most of these newer companies
have yet to demonstrate field-tested, proven equipment.



Developing successful products for the small
wind market requires, among other things, industry knowledge and expertise, which we believe provides a significant barrier to
entry. In addition, having proven, field-tested equipment is perhaps the most important factor in customer purchase decisions and
an even greater barrier to entry. While numerous small wind providers have emerged more recently, very few meet this requirement
of equipment out in the field that has been running for an extended period of time and delivered on the promised energy output.
Thus, we believe there are relatively few companies that meet the necessary customer/dealer standards to currently compete in the
small wind industry.



We expect to compete primarily on the basis
of quality, technology advantages, ability to timely deliver product, field-proven experience and price (on a per kWh basis). We
believe that our success will depend upon our ability to remain competitive in our product areas.



In addition to direct competition from other
manufacturers of small wind turbine systems, we face indirect competition from other sources of energy, including both traditional
delivery of electrical power over the grid and other sources of small renewable energy, such as small solar panel systems. Generally
speaking, the strength of one technology over another in a particular instance is a function of the specific application, location,
and total cost/benefit characteristics. Whatever technology solution can provide the best electrical output at the lowest cost
in a particular environment will tend to be favored.



Principal Suppliers



We have elected to outsource the manufacturing
on most of the various system components and then conduct assembly and final test internally at our facility in Oregon. Our key
suppliers include our alternator, controller, and blade suppliers. We have standard NDA (Non-Disclosure) and IP (intellectual-property)
rights agreements in place with each supplier used. There are no written supply agreements in place with any of our key suppliers.
We purchase necessary components on a purchase order basis.



Intellectual Property



We own the rights to three applications filed
in the United States for patent protection on key technology innovations and five applications for trademark registrations. We
do not currently hold any patents or registered trademarks. We will also apply for copyright protection in the United States and
other jurisdictions where appropriate. We also may elect to avoid filing for patent protection on other aspects of our systems
because of difficulty protecting the patent or disclosure of proprietary information that would result from the patent process,
which is determined to be better remaining as trade secrets. There can be no assurance that we will receive any patents in the
United States or elsewhere. Further, even if we receive patents, there can be no assurance that the patents will be enforceable.



We will continue to obtain confidentiality
agreements where necessary from our various suppliers. We will also seek confidentiality agreements with any consultants that we
use.



We intend to assert our rights under trade
secret, unfair competition, trademark and copyright laws to protect our intellectual property, including product design, proprietary
manufacturing processes and technologies, product research and concepts and recognized trademarks. These rights will be protected
through the acquisition of patents and trademark registrations, the maintenance of trade secrets, the development of trade dress,
and, where appropriate, litigation against those who are, in our opinion, infringing these rights.

11


Table of Contents


While there can be no assurance that patents,
copyrights, registered trademarks or other measures will protect our proprietary information, subject to our financial, legal and
business constraints, we intend to assert our intellectual property rights against infringers.



We estimate we will spend approximately $50,000
on counsel and filing fees in the next twelve months on intellectual property protection regarding the designs for our residential
wind turbine systems and related equipment.



Regulatory Matters and Government Incentives



Many state and local governments have implemented
a diverse set of initiatives and incentive programs for wind equipment purchases. State incentives can take the form of net metering,
rebates, tax credits, and feed in tariffs:



§Net metering allows customers to connect renewable generation equipment to their utility power
system. The utility takes any excess energy produced and credits it back to the customer on a net basis. The utility in essence
banks your energy for free. There are 43 states that have net metering in all or part of the state.



§Rebates are cash payments that are usually given to the installer, who must wait until the
project is completed and inspected to get paid. The rebate is deducted from the project cost billed to the customer. Rebates can
be based on rated power, swept area, blade length, installed cost, or projected energy generation.



§Tax credits can be based on project cost or per kW of rated capacity. Some tax credit programs
have caps on maximum dollars per project or year. Some must be taken over several years and some are transferable.



§Feed in tariffs, or production incentives as they are often called, are above-market payments
for energy generated from renewable energy. These are common in Europe and interest levels are growing in the United States. There
are 18 states with some form of feed-in tariff on the utility- or state-level. Seven of these states are covered by a feed in tariff
offered by the Tennessee Valley Authority which pays $1,000 plus $0.12/kWh. California offers a state-level feed in tariff, but
utilities are required to have it approved by the CA Public Utilities Commission. Hawaii, Maine, Washington and Nevada have a feed
in tariff as well on the state level.



As of May 2011, 42 states
have tax or other financial incentives of some type, such as credits, sales tax exemption, property tax exemption, productivity
incentives such as grants or rebates, loan programs, or other subsidies to support wind energy development and use. Newer incentive
programs such as New York’s, Wisconsin's and Massachusetts’ are designed so they favor higher production machines such
as our 2.5kW and 10kW systems. Many states continue to streamline permitting processes and incentive programs.



Under present law, a federal-level investment
tax credit (ITC) is available to help consumers purchase small wind turbines for home, farm, or business use. Owners of small wind
systems with 100 kilowatts (kW) of capacity or less can receive a credit for 30% of the total installed cost of the system.



The ITC, written into law through the Emergency
Economic Stabilization Act of 2008, is available for equipment installed from October 3, 2008 through December 31, 2016. The value
of the credit is now uncapped, through the American Recovery and Reinvestment Act of 2009.

12


Table of Contents


The Energy Independence and Security Act of
2007, passed in December 2007, contained benefits for renewable energy systems in general, of which wind power systems would qualify.
Those provisions included Technical Assistance Grants, Renewable Energy Construction Grants, and Express Loans for Renewable Energy
and Energy Efficiency (Small Businesses). Each of those programs could further benefit customers that install a wind power system.
We view such policy initiatives as generally positive for the wind industry and the company, but do not expect that this particular
piece of legislation is immediately material to our business prospects. The ITC is the government program that has the greatest
impact on our domestic sales.



State Regulations Governing Power Produced



Each state is responsible for regulating the
sale, installation and interconnection of alternative energy within their state. Currently, there is no Federal-level regulation
that specifically controls the sale, distribution and installation of small wind turbines beyond general small business regulations.
The Public Utility Regulatory Policies Act of 1978 or PURPA, requires utilities to interconnect and purchase energy from small
wind systems. Individual utilities are permitted to regulate that process.



Local Regulations Surrounding Small Wind
Turbine Use



Individuals and small businesses interested
in small wind turbine use are subject to local regulations and involve Public utility companies, inspectors, permits, site evaluation
for placement, tower height and aesthetic concerns, and restrictions regarding professional versus do-it-yourself installation.
The AWEA offers a Model Zoning Ordinance to help local officials update ordinances governing small wind turbine installations.
However, states often have unique subsidies or other programs designed to encourage on-site electricity generation. Existing state
laws and local regulations continue to evolve in order to encourage and maintain safe, effective and efficient use of small wind
energy systems.



Environmental Studies and Regulations



Overall, studies have shown wind energy has
a low impact on the environment and does not generate air, or water pollution, global warming pollutants or waste. According to
the American Wind Energy Association, although wind turbines have positive impacts, there are a few studies indicating negative
impacts on the environment.



Wind turbines and energy plants are generally
known to be quiet, unobtrusive and non-threatening to both humans and wildlife. Recent studies that indicate negative impacts on
humans and wildlife include: birds and bats colliding with wind turbines, noticeable “whooshing” or low frequency sounds
and shadow flicker. Shadow flicker occurs when the blades of a turbine pass in front of the sun to create a recurring shadow on
an object.



The wind energy industry is partnering with
conservation groups and government agencies and conducts ongoing land use and avian studies at wind sites across the country. Pre-
and post-construction efforts to protect land and wildlife include wildlife consultants, surveys, and various state, federal land
use, fish and wildlife agencies.



We have not incurred and do not anticipate
incurring any expenses associated with environmental laws. In addition, many of the above mentioned environmental concerns are
more applicable to large, utility-scale turbines, rather than small wind turbines.

13


Table of Contents


Research and Development Expenditures



We incurred significant research and development
expense in the fiscal year ended Feb 28, 2011. We did not incur any research and development expenses in the prior fiscal year.
Our research and development expense of $1,480,585 incurred in the fiscal year ended Feb 28, 2011, as well as the anticipated costs
over the next twelve months will continue to be largely associated with compensation paid to our engineering staff. We expect these
costs to remain significant as we focus on improving our existing products as well as designing and developing new wind turbine
systems. We expect that our research and development expense over the next twelve months will approximate $1.5 million, none of
which will be borne directly by our customers.



Subsidiaries



We currently have two, wholly-owned, subsidiaries.
Our XZERES Wind Europe Ltd., headquartered in Dublin, Ireland was established to support sales and marketing activities throughout
Europe. XZERES Energy Services Corp., our domestic subsidiary, was established to support our direct-sales efforts in the U.S.
market where we participate in the project management and coordination of the system installation for the customer.



Employees



We commenced active operations during the first
quarter of fiscal year 2011 and added a number of employees throughout the year to execute on our business plan. As of May 20,
2011, we have 38 full time employees, including 8 technical and engineering personnel, 10 sales and marketing personnel, and the
balance in executive, manufacturing or general administration. Additional individuals have been and may continue to be engaged
as outside consultants to provide additional assistance in our operations on an as-needed basis.



At present, we have one independent contractor
providing services. On April 7, 2010, we retained the services of TRD Associates, LLC to provide technical assistance, design,
consultation, and review services as directed, which include power engineering, electronic design, component engineering, manufacturability,
engineering process, documentation, quality systems, software systems design development and testing. The agreement is terminable
by written notice to the other party on 30 days’ written notice. We have agreed to compensate TRD Associates $175 per hour
with discounts rates available for projects that take longer than a week.



We may further expand our current management
team and employee headcount in the future to retain skilled directors, officers, and employees with experience relevant to our
business focus. Specifically, we are actively seeking to hire additional personnel for both sales and for technical and engineering.
On August 25, 2010, we appointed a new CEO with significant industry experience, Frank Greco.



Item 2. Properties



We maintain our corporate office at 9026 SW
Hillman, Suite 3126, Wilsonville, OR 97070.



On April 27, 2010, we entered in to a three
(3) year, three (3) month lease agreement with BIT Holdings Fifty-Seven-Inc., a Maryland corporation, for the use of approximately
13,558 square feet located at 9025 SW Hillman Court, Bldg. 31, Suites #3126 and 3122 in Wilsonville, Oregon. We use approximately
3,960 square feet as office space and the balance, approximately 9,598 square feet, as shop floor space to conduct final testing
of components, product assembly, and shipping and receiving.

14


Table of Contents


Our lease includes an option to extend for
an additional three (3) year term. Our rent starts at $2,500 per month for suite 3126 and $940 per month for suite 3122. We presently
occupy and pay rent on both suites. The rent doubles to $5,000 per month and $1,880 per month for the suites, respectively, in
month seven and then escalates every six months thereafter until the final six months of the term. The final monthly rent for the
two suites is $5,463 and $2,054, respectively. We have paid a security deposit of $2,500. We are also responsible for our proportionate
share of the CAM and real property taxes attributable to the building.



The tenant improvement portion of the lease
is guaranteed by one of our shareholders, Core Fund, L.P. Although we are not required to do so, we have agreed to replace this
guarantee with a bank letter of credit, but we have not done so as of May 20, 2011. We expect to replace the guarantee with a letter
of credit by the end of the July 2011.



Item 3. Legal Proceedings



We are not a party to any pending legal proceeding.
We are not aware of any pending legal proceeding to which any of our officers, directors, or any beneficial holders of 5% or more
of our voting securities are adverse to us or have a material interest adverse to us.

15


Table of Contents


PART II



Item 5. Market for Registrant’s Common
Equity and Related Stockholder Matters and Issuer Purchases of Equity Securities



Market Information



Our common stock is currently eligible to be
quoted on the Financial Industry Regulatory Authority’s Over the Counter Bulletin Board (“OTCBB”) under the symbol
“XPWR.” At present there is a very limited public market for our common stock.



The following table sets forth the range of
high and low bid quotations for our common stock for each of the periods indicated as reported by the OTCBB. These quotations reflect
inter-dealer prices, without retail mark-up, mark-down or commission and may not necessarily represent actual transactions.





|Fiscal Year Ending February 28, 2011
|------------------------------------
|Quarter Ended                       
|February 28, 2011                   
|November 30, 2010                   
|August 31, 2010                     
|May 31, 2010                        





|Fiscal Year Ending February 28, 2010
|------------------------------------
|Quarter Ended                       
|February 28, 2010                   
|November 30, 2009                   
|August 31, 2009                     
|May 31, 2009                        



Penny Stock



The SEC has adopted rules that regulate broker-dealer
practices in connection with transactions in penny stocks. Penny stocks are generally equity securities with a market price of
less than $5.00, other than securities registered on certain national securities exchanges or quoted on the NASDAQ system, provided
that current price and volume information with respect to transactions in such securities is provided by the exchange or system.
The penny stock rules require a broker-dealer, prior to a transaction in a penny stock, to deliver a standardized risk disclosure
document prepared by the SEC, that: (a) contains a description of the nature and level of risk in the market for penny stocks in
both public offerings and secondary trading; (b) contains a description of the broker's or dealer's duties to the customer and
of the rights and remedies available to the customer with respect to a violation of such duties or other requirements of the securities
laws; (c) contains a brief, clear, narrative description of a dealer market, including bid and ask prices for penny stocks and
the significance of the spread between the bid and ask price; (d) contains a toll-free telephone number for inquiries on disciplinary
actions; (e) defines significant terms in the disclosure document or in the conduct of trading in penny stocks; and (f) contains
such other information and is in such form, including language, type size and format, as the SEC shall require by rule or regulation.

16


Table of Contents


The broker-dealer also must provide, prior
to effecting any transaction in a penny stock, the customer with (a) bid and offer quotations for the penny stock; (b) the compensation
of the broker-dealer and its salesperson in the transaction; (c) the number of shares to which such bid and ask prices apply, or
other comparable information relating to the depth and liquidity of the market for such stock; and (d) a monthly account statement
showing the market value of each penny stock held in the customer's account.



In addition, the penny stock rules require
that prior to a transaction in a penny stock not otherwise exempt from those rules, the broker-dealer must make a special written
determination that the penny stock is a suitable investment for the purchaser and receive the purchaser's written acknowledgment
of the receipt of a risk disclosure statement, a written agreement as to transactions involving penny stocks, and a signed and
dated copy of a written suitability statement.



These disclosure requirements may have the
effect of reducing the trading activity for our common stock. Therefore, stockholders may have difficulty selling our securities.



Outstanding Options, Warrants or Convertible Debt



As of May 20, 2011, we have issued warrants
to purchase a total of 4,558,794 shares of our common stock. 1,775,225 of the warrants have a strike price of $1.25 per share and
expire on May 14, 2013. The balance of the warrants have a $1.50 per share strike price and expire March 18, 2016. The exercise
price will be adjusted for any stock splits and, in the case of the warrants that expire on May 14, 2013, the subsequent issuance
of convertible securities with a strike price below $1.25 per share or the issuance of common stock at less than $1.00 per share
while the warrants remain outstanding.



As of May 25, 2011, we have also issued a total
of 2,342,500 options to employees with an average strike price of $1.12 per share.



Holders of Our Common Stock



As of May 20, 2011, there were 18,821,327 shares
of our common stock issued and outstanding held by 381 stockholders of record. We have not issued any shares of preferred stock.



Dividends



There are no restrictions in our articles of
incorporation or bylaws that prevent us from declaring dividends.  The Nevada Revised Statutes, however, do prohibit
us from declaring dividends where after giving effect to the distribution of the dividend:



|1. | we would not be able to pay our debts as they become due in the usual course of business, or;                                                                                                                             
|-- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|2. | our total assets would be less than the sum of our total liabilities plus the amount that would be needed to satisfy the rights of shareholders who have preferential rights superior to those receiving the distribution.



We did not declare any dividends in the fiscal
year ended February 28, 2011, and we do not plan to declare any dividends in the foreseeable future.

17


Table of Contents


Securities Authorized for Issuance under
Equity Compensation Plans



On May 25, 2011, we updated our existing stock
option plan to provide for both qualified and non-qualified stock options equal to a maximum of fifteen percent (15%) of our total
issued and outstanding shares of common stock as of May 20, 2011, which is equal to 2,823,199 total shares available to be optioned.
Previously, the options available under our Plan were calculated as fifteen percent (15%) of our shares issued and outstanding
as of July 1, 2010. As of May 25, 2011, we have granted a total of 2,342,500 options under the Plan.



Item 7. Management’s Discussion and
Analysis of Financial Condition and Results of Operations



Forward-Looking Statements



Certain statements, other than purely historical
information, including estimates, projections, statements relating to our business plans, objectives, and expected operating results,
and the assumptions upon which those statements are based, are “forward-looking statements” within the meaning of the
Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange
Act of 1934. These forward-looking statements generally are identified by the words “believes,” “project,”
“expects,” “anticipates,” “estimates,” “intends,” “strategy,” “plan,”
“may,” “will,” “would,” “will be,” “will continue,” “will likely
result,” and similar expressions. We intend such forward-looking statements to be covered by the safe-harbor provisions for
forward-looking statements contained in the Private Securities Litigation Reform Act of 1995, and are including this statement
for purposes of complying with those safe-harbor provisions. Forward-looking statements are based on current expectations and assumptions
that are subject to risks and uncertainties which may cause actual results to differ materially from the forward-looking statements.
Our ability to predict results or the actual effect of future plans or strategies is inherently uncertain. Factors which could
have a material adverse affect on our operations and future prospects on a consolidated basis include, but are not limited to:
changes in economic conditions, legislative/regulatory changes, availability of capital, interest rates, competition, and generally
accepted accounting principles. These risks and uncertainties should also be considered in evaluating forward-looking statements
and undue reliance should not be placed on such statements. We undertake no obligation to update or revise publicly any forward-looking
statements, whether as a result of new information, future events or otherwise. Further information concerning our business, including
additional factors that could materially affect our financial results, is included herein and in our other filings with the SEC.



Results of Operations for the Years Ended
February 28, 2011 and February 28, 2010



Fiscal year 2011 represented the Company’s
first year of operations within the wind industry. We acquired our initial wind products at the beginning of the year and began
efforts to properly capitalize the company, hire the necessary personnel, and build the infrastructure required to successfully
manufacture and sell. On May 14, 2010, we closed on our first private offering of common stock and warrants with total gross proceeds
to us of $4,010,500, which capital allowed us to commence operations of our wind turbine business during the fiscal quarter ended
May 31, 2010 by providing us with initial working capital. Upon closing the May financing, we began to aggressively expand operations,
including the hiring of sales and marketing personnel to begin selling our products.  Such sales and marketing efforts
enabled us to generate initial revenue during the quarter ended August 31, 2010, which expanded by 30% in the November 30, 2010
quarter and another 38% in the fourth and final quarter, culminating to a first year sales volume of $1.48 million.

18


Table of Contents


During the fiscal year, the company
has also announced key strategic initiatives that included new selling methods, such as direct-to-end users, and its new Micro-Generation
utility sales model.  The results of these new selling efforts has already resulted in initial direct sales and contracts
under the micro-generation model. Revenue by channel for the year end was 18.3% direct and 81.7% indirect and for the fourth quarter
was 32.8% direct and 67.2% indirect, reflecting a trend towards direct sales that we expect to continue. In addition, we were recently
awarded MCS certification in the United Kingdom market for our 10kW turbine. We are only 1 of 6 small wind companies to have received
this important certification and have received initial orders that we expect to begin deliveries against early in the new fiscal
year. We believe the U.K. market to be a significant opportunity given its attractive feed-in-tariff rates and substantial wind
resources throughout the country.

Toward the end of the fiscal year, we
initiated a second private offering of common stock and warrants, which was completed shortly after the year end, on March 29,
2011. The additional capital provides the necessary working capital to continue our efforts to rapidly expand the business.

With the combination of the additional sales
channels and a larger number of sales personnel, the company is experiencing a rapid increase in both completed sales and the pipeline
of potential customers.  We will also continue to initiate key marketing efforts such as promotion of our new website,
the creation of online user tools, and targeted email campaigns.  While it can be difficult to predict when a potential
customer may purchase one of our turbine systems or when a newly closed customer will have their site ready for product delivery,
we believe that the growing sales backlog and potential pipeline along with the greater overall interest in our products may contribute
to higher revenues in fiscal year 2012.  Potential risks to this outlook include: closed customers taking longer to prepare
their sites for installation, since we do not recognize revenue until we deliver the system to the customer; negative changes in
available federal and state incentives for renewable energy such as tax credits, rebates, etc.; increased restrictions on obtaining
permits; and a reduction in sentiment toward wind energy.  While we are unaware of any significant changes to any of
these factors, if such were to occur, it could have a material impact on our current growth opportunities.



Income. We recorded $1,489,061 in revenues
for the year ended February 28, 2011, compared with $-0- in revenues for the year ended February 28, 2010. Our revenue during fiscal
year 2011 was attributable to our efforts to begin selling our wind turbine systems.  Our initial selling efforts began
toward the end of our first quarter (ending May 31, 2010) and resulted in completed sales during the second, third and fourth quarters.
Our income for the quarter ending February 28, 2011, was $647,551, compared with $-0- for the fourth quarter of 2010, and $471,534
for our third quarter, ending November 30, 2010.



Operating Expenses and Net Loss. Our
Operating Expenses during fiscal year 2011 equaled $5,439,341, consisting of $629,580 in sales expense, $172,158 in marketing costs,
$1,480,585 in R&D/Engineering expenses,  and $3,157,018 in general and administrative expenses. Our total operating
expenses included $917,239 of non-cash expenses in the form of expensed employee options and shares issued to consultants during
the year for various services provided. We had other expenses of $47,904 for the period.  Therefore, we recorded a net
loss of $5,097,640 for the fiscal year ended February, 2011. Our Operating Expenses during the fiscal year ended February 28, 2010
equaled $70,607, consisting solely of general and administrative costs. We reported income from discontinued operations of $2,229
for the year ended February 28, 2010. We therefore, recorded a net loss of $68,378 for the fiscal year ended February 28, 2010.  The
substantial increase in our net loss for the period ended February 28, 2011 over the same period in 2010 is attributable to the
costs attributable to commencing our business operations as a small wind turbine manufacturing and sales company.  By
contrast, we did not have any active business operations in the fiscal year ended February, 2010.The largest component of expense
items for last fiscal year was professional fees incurred to meet our reporting obligations as a public company.



We expect further net losses in the near future
as a result of increased operating expenses until we are able to increase the sale of our products and achieve higher revenues.

19


Table of Contents


Liquidity and Capital Resources



At February 28, 2011, we had $1,650,632 in
current assets, consisting primarily of $364,068 in cash and cash equivalents, $633,669 in accounts receivable, $502,548 in inventories,
and $110,281 in prepaid expenses. Our total current liabilities as of February 28, 2011 were $970,057. Thus, we have working capital
of $680,575.   As of February 28, 2011 we had total assets of $3,382,405.



Cash Flows from Operating Activities.
Operating activities used $5,003,529 in cash for the fiscal year ended February 28, 2011. Our net loss of $5,097,640, our inventory
purchasing of $502,548, an increase in accounts receivable of $633,669, and a decrease in accrued expenses of $147,920 were the
primary components of our negative operating cash flow for the period. Operating activities generated cash of $105,878 in the prior
fiscal year, due primarily to an increase in accrued expenses, partially offset by the net loss for the period.



Cash Flows from Financing Activities.
Investing Activities used $400,988 in cash during the fiscal year ended February 28, 2011, as a result of the purchase of computer,
machinery and equipment.  Investing activities did not use or generate cash in the prior fiscal year.



Cash Flows from Financing Activities.
Financing Activities generated $5,572,595 and $85,905 in cash for the fiscal year ended February 28, 2011 and 2010, respectively,
consisting entirely of proceeds from the issuance of new common shares and related party notes payable.



As of February 28, 2011, the ability to continue
the implementation of our business plan over the next twelve months is contingent upon us either generating sufficient revenues
from our ongoing operations to fund our business, obtaining additional financing, or some combination of revenues and additional
financing. At year end, we did in fact have a private offering of common shares and warrants open, which some proceeds were raised
prior to year end. Subsequent to the fiscal year end, we completed that private offering, raising total gross proceeds of $5,136,405
in the offering. The offering closed on March 29, 2011, which we reported on a Form 8K filed March 29, 2011. While the business
is now expanding rapidly, the recent equity raise may or may not be sufficient over the next 12 months. Given the rapid growth,
our strategy also involves establishing traditional bank lines for helping to fund receivable and inventories in order to facilitate
the expanded growth. If we are not able to secure such additional funding, the implementation of our business plan could be impaired.
There can be no assurance that such additional financing will be available to us on acceptable terms or at all.  Our
plan is that, in time, the primary source of capital for our business model will be revenue from product sales.



We do not anticipate paying dividends into
the foreseeable future.



Off Balance Sheet Arrangements



As of May 25, 2011, there were no off balance
sheet arrangements.



Going Concern



Our financial statements have been prepared
assuming that we will continue as a going concern which contemplates the realization of assets and satisfaction of liabilities
in the normal course of business. We have incurred cumulative losses of $5,097,640 for the fiscal period 2011, and expect to incur
further losses in the development of our business and have been dependent on funding operations through the issuance of convertible
debt and private sale of equity securities. These conditions raise substantial doubt about our ability to continue as a going concern.
Management’s plans include continuing to finance operations through the private or public placement of debt and/or equity
securities and the reduction of expenditures. However, no assurance can be given at this time as to whether we will be able to
achieve these objectives. The financial statements do not include any adjustment relating to the recoverability and classification
of recorded asset amounts or the amounts and classification of liabilities that might be necessary should we be unable to continue
as a going concern.

20


Table of Contents


Critical Accounting Policies



In December 2001, the SEC requested that all
registrants list their most “critical accounting polices” in the Management Discussion and Analysis. The SEC indicated
that a “critical accounting policy” is one which is both important to the portrayal of a company’s financial
condition and results, and requires management’s most difficult, subjective or complex judgments, often as a result of the
need to make estimates about the effect of matters that are inherently uncertain.



Warranty Reserve – We currently reserve
2% on all new sales to cover potential future warranty claims. There can be no assurance that such provision for estimated product
warranty expenses will be sufficient to cover our warranty exposure in the future. We cannot ensure that our efforts to reduce
our risk through warranty disclaimers will effectively limit our liability. Any significant incurrence of warranty expense in excess
of estimates could have a material adverse effect on our business, including our operating results, financial condition and cash
flow. In addition, if our warranty reserve is understated, it would affect (overstate) net income.



Revenue Recognition - The Company recognizes
revenue when products are shipped from the factory and collection is reasonably assured. XZERES sells wind turbines to dealers
and end users directly. Dealers are required to sign an agreement with XZERES that requires the dealer to sell one unit the first
year and three units per year, thereafter. Dealers receive dealer pricing, a discount to the suggested retail price of the product.
Products sold directly to end users are sold at the retail price. To date, the Company has not offered any other price concessions
to its dealers, and has no post shipment obligations other than the warranty it provides.



Intellectual Property - Intellectual property
consists of product designs with an infinite life. The Company annually evaluates the fair value of the intellectual property to
determine whether events and circumstances warrant a revision to the fair value of these assets. If the intellectual property requires
an impairment adjustment, it would affect the balance sheet and statement of operations as assets would be overstated and income
would be either overstated or understated depending on a negative or positive adjustment.



Fair Value - Stock-based compensation is accounted
for at fair value in accordance with SFAS No. 123 and 123 (R) (ASC 718). The Company’s financial instruments consist of cash
and cash equivalents, loans to a related party, accrued expenses and credit card payables. The carrying amount of these financial
instruments approximates fair value due either to length of maturity or interest rates that approximate prevailing market rates
unless otherwise disclosed in these financial statements. If the fair values of our assets are overstated, it would affect the
balance sheet and statement of operations as assets would be overstated and income would be overstated.





21


Table of Contents


Item 8. Financial Statements and Supplementary
Data



Index to Financial Statements Required by Article
8 of Regulation S-X:



|Audited Financial Statements:
|-----------------------------
|F-1                          
|F-2                          
|F-3                          
|F-4                          
|F-5                          
|F-6                          

22


Table of Contents




Silberstein Ungar, PLLC CPAs and Business Advisors

Phone (248) 203-0080

Fax (248) 281-0940

30600 Telegraph Road, Suite 2175

Bingham Farms, MI 48025-4586

www.sucpas.com





REPORT OF INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM



To the Board of Directors

XZERES Corp.

Portland, Oregon



We have audited the accompanying consolidated
balance sheets of XZERES Corp. as of February 28, 2011 and 2010, and the related consolidated statements of operations, stockholders’
equity (deficit), and consolidated cash flows for the years then ended. These financial statements are the responsibility of the
Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.



We conducted our audits in accordance with
the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform
the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company
has determined that it is not required to have, nor were we engaged to perform, an audit of its internal control over financial
reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures
that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s
internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe
that our audits provide a reasonable basis for our opinion.



In our opinion, the financial statements referred
to above present fairly, in all material respects, the financial position of XZERES Corp. as of February 28, 2011 and 2010 and
the results of its operations and cash flows for the years then ended, in conformity with accounting principles generally accepted
in the United States.



The accompanying financial statements have
been prepared assuming that XZERES Corp. will continue as a going concern. As discussed in Note 16 to the financial statements,
the Company has incurred losses from operations, has negative working capital, and is in need of additional capital to grow its
operations so that it can become profitable. These factors raise substantial doubt about the Company’s ability to continue
as a going concern. Management’s plans with regard to these matters are described in Note 16. The accompanying financial
statements do not include any adjustments that might result from the outcome of this uncertainty.



/s/ Silberstein Ungar, PLLC

Silberstein Ungar, PLLC



Bingham Farms, Michigan

May 26, 2011

F-1


Table of Contents




XZERES CORP.

(FORMERLY XZERES WIND CORP.)

CONSOLIDATED BALANCE SHEETS

AS OF FEBRUARY 28, 2011 AND 2010



|ASSETS                                                                                                                | 2011 |            | 2010
|--------------------------------------------------------------------------------------------------------------------- | ---- | ---------- | ----
|Current Assets                                                                                                        |      |            |     
|Cash and cash equivalents                                                                                             | $    | 364,068    |     
|Accounts receivable                                                                                                   |      | 633,669    |     
|Inventories                                                                                                           |      | 502,548    |     
|Inventory deposit                                                                                                     |      | 40,066     |     
|Prepaid expenses                                                                                                      |      | 110,281    |     
|Total Current Assets                                                                                                  |      | 1,650,632  |     
|                                                                                                                      |      |            |     
|Property and Equipment, net                                                                                           |      | 375,115    |     
|                                                                                                                      |      |            |     
|Other Assets                                                                                                          |      |            |     
|Intellectual property                                                                                                 |      | 1,320,226  |     
|Website development costs, net                                                                                        |      | 18,234     |     
|Deposits                                                                                                              |      | 18,198     |     
|Total Other Assets                                                                                                    |      | 1,356,658  |     
|                                                                                                                      |      |            |     
|TOTAL ASSETS                                                                                                          | $    | 3,382,405  |     
|                                                                                                                      |      |            |     
|LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)                                                                        |      |            |     
|LIABILITIES                                                                                                           |      |            |     
|Current Liabilities                                                                                                   |      |            |     
|Accounts payable                                                                                                      | $    | 600,451    |     
|Accrued expenses                                                                                                      |      | 107,277    |     
|Customer deposits                                                                                                     |      | 48,228     |     
|Warranty reserve                                                                                                      |      | 16,601     |     
|Notes payable – related party                                                                                         |      | 97,500     |     
|Notes payable                                                                                                         |      | 100,000    |     
|Total Liabilities                                                                                                     |      | 970,057    |     
|                                                                                                                      |      |            |     
|STOCKHOLDERS’ EQUITY (DEFICIT)                                                                                        |      |            |     
|Preferred stock, par $0.01, 5,000,000 shares authorized, no shares issued and outstanding                             |      | 0          |     
|Common stock, par $0.001, 100,000,000 shares authorized, 15,382,816 shares issued and outstanding  (4,682,602 – 2010) |      | 15,383     |     
|Stock warrants                                                                                                        |      | 1,565,054  |     
|Additional paid in capital                                                                                            |      | 6,207,203  |     
|Accumulated deficit                                                                                                   |      | (5,375,292 | )   
|Total Stockholders’ Equity (Deficit)                                                                                  |      | 2,412,348  |     
|                                                                                                                      |      |            |     
|TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)                                                                  | $    | 3,382,405  |     



The accompanying notes are an integral part
of the financial statements.

F-2


Table of Contents




XZERES CORP.

(FORMERLY XZERES WIND CORP.)

CONSOLIDATED STATEMENTS OF OPERATIONS

FOR THE YEARS ENDED FEBRUARY 28, 2011 AND
2010



|                                                               | 2011 |            | 2010
|-------------------------------------------------------------- | ---- | ---------- | ----
|                                                               |      |            |     
|GROSS REVENUES                                                 | $    | 1,489,061  |     
|                                                               |      |            |     
|COST OF GOODS SOLD                                             |      | 1,099,456  |     
|                                                               |      |            |     
|GROSS PROFIT                                                   |      | 389,605    |     
|                                                               |      |            |     
|OPERATING EXPENSES                                             |      |            |     
|General and administrative expenses                            |      | 3,157,018  |     
|Marketing                                                      |      | 172,158    |     
|Sales expense                                                  |      | 629,580    |     
|Engineering/R&D expense                                        |      | 1,480,585  |     
|TOTAL OPERATING EXPENSES                                       |      | 5,439,341  |     
|                                                               |      |            |     
|LOSS FROM OPERATIONS                                           |      | (5,049,736 | )   
|                                                               |      |            |     
|OTHER INCOME (EXPENSE)                                         |      |            |     
|Interest expense                                               |      | (51,236    | )   
|Other income                                                   |      | 3,332      |     
|TOTAL OTHER INCOME (EXPENSE)                                   |      | (47,904    | )   
|                                                               |      |            |     
|LOSS BEFORE PROVISION FOR INCOME TAXES – Continuing Operations |      | (5,097,640 | )   
|                                                               |      |            |     
|INCOME FROM DISCONTINUED OPERATIONS NET OF INCOME TAXES        |      | —          |     
|                                                               |      |            |     
|PROVISION FOR INCOME TAXES                                     |      | —          |     
|                                                               |      |            |     
|NET LOSS                                                       | $    | (5,097,640 | )   
|                                                               |      |            |     
|WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING                  |      | 12,447,305 |     
|                                                               |      |            |     
|NET LOSS PER SHARE:                                            |      |            |     
|BASIC AND DILUTED                                              | $    | (0.41      | )   



The accompanying notes are an integral part
of the financial statements.

F-3


Table of Contents






XZERES CORP.

(FORMERLY XZERES WIND CORP.)

CONSOLIDATED STATEMENT OF STOCKHOLDERS’
EQUITY (DEFICIT)

AS OF FEBRUARY 28, 2011



|                                                                                 | Common Stock |            | Stock  |  | Additional Paid in |        | Accumulated |  |        
|-------------------------------------------------------------------------------- | ------------ | ---------- | ------ |  | ------------------ | ------ | ----------- |  | -------
|                                                                                 | Shares       |            | Amount |  | Warrants           |        | Capital     |  | Deficit
|                                                                                 |              |            |        |  |                    |        |             |  |        
|Balance, October 3, 2008, Inception of Development Stage                         |              | 150,079    |        |  | $                  | 150    |             |  | $      
|                                                                                 |              |            |        |  |                    |        |             |  |        
|Common stock issued for cash at $.01 per share                                   |              | 4,501,899  |        |  |                    | 4,502  |             |  |        
|                                                                                 |              |            |        |  |                    |        |             |  |        
|Reduction in paid in capital for excess liabilities from discontinued operations |              | —          |        |  |                    | —      |             |  |        
|                                                                                 |              |            |        |  |                    |        |             |  |        
|Net loss for the year ended February 28,2009                                     |              | —          |        |  |                    | —      |             |  |        
|                                                                                 |              |            |        |  |                    |        |             |  |        
|Balance, February 28, 2009                                                       |              | 4,651,978  |        |  |                    | 4,652  |             |  |        
|                                                                                 |              |            |        |  |                    |        |             |  |        
|Correction of shares outstanding                                                 |              | 79         |        |  |                    | —      |             |  |        
|                                                                                 |              |            |        |  |                    |        |             |  |        
|Issuance of stock for cash                                                       |              | 30,545     |        |  |                    | 31     |             |  |        
|                                                                                 |              |            |        |  |                    |        |             |  |        
|Net loss for the year ended February 28, 2010                                    |              | —          |        |  |                    | —      |             |  |        
|                                                                                 |              |            |        |  |                    |        |             |  |        
|Balance, February 28, 2010                                                       |              | 4,682,602  |        |  |                    | 4,683  |             |  |        
|                                                                                 |              |            |        |  |                    |        |             |  |        
|Correction of shares outstanding                                                 |              | 3          |        |  |                    | —      |             |  |        
|                                                                                 |              |            |        |  |                    |        |             |  |        
|Shares issued for consulting services                                            |              | 688,375    |        |  |                    | 689    |             |  |        
|                                                                                 |              |            |        |  |                    |        |             |  |        
|Shares issued in payment of an accrued expense                                   |              | 320,000    |        |  |                    | 320    |             |  |        
|                                                                                 |              |            |        |  |                    |        |             |  |        
|Shareholder loans converted to shares                                            |              | 226,850    |        |  |                    | 227    |             |  |        
|                                                                                 |              |            |        |  |                    |        |             |  |        
|Shares issued to acquire assets                                                  |              | 3,192,150  |        |  |                    | 3,192  |             |  |        
|                                                                                 |              |            |        |  |                    |        |             |  |        
|Shares issued in connection with private placements                              |              | 6,272,836  |        |  |                    | 6,272  |             |  |        
|                                                                                 |              |            |        |  |                    |        |             |  |        
|Equity issuance costs                                                            |              |            |        |  |                    | —      |             |  |        
|                                                                                 |              |            |        |  |                    |        |             |  |        
|Stock options issued to employees                                                |              | —          |        |  |                    | —      |             |  |        
|                                                                                 |              |            |        |  |                    |        |             |  |        
|Net loss for the year ended February 28, 2011                                    |              | —          |        |  |                    | —      |             |  |        
|                                                                                 |              |            |        |  |                    |        |             |  |        
|Balance, February 28, 2011                                                       |              | 15,382,816 |        |  | $                  | 15,383 |             |  | $      



The accompanying notes are an integral part
of the financial statements.

F-4


Table of Contents




XZERES CORP.

(FORMERLY XZERES WIND CORP.)

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE YEARS ENDED FEBRUARY 28, 2011 AND
2010



|                                                                                          | 2011 |            | 2010
|----------------------------------------------------------------------------------------- | ---- | ---------- | ----
|Cash Flows from Operating Activities:                                                     |      |            |     
|Net loss for the period                                                                   | $    | (5,097,640 | )   
|Adjustments to Reconcile Net Loss to Net Cash Provided by (Used in) Operating Activities: |      |            |     
|Depreciation expense                                                                      |      | 42,735     |     
|Amortization expense                                                                      |      | 2,941      |     
|Share-based compensation                                                                  |      | 463,251    |     
|Issuance of common shares for services                                                    |      | 453,988    |     
|Loss on disposal of equipment                                                             |      | 400        |     
|Changes in Assets and Liabilities                                                         |      |            |     
|Accounts receivable                                                                       |      | (633,669   | )   
|Inventories                                                                               |      | (502,548   | )   
|Inventory deposits                                                                        |      | (40,066    | )   
|Prepaid expenses                                                                          |      | (110,281   | )   
|Accounts payable                                                                          |      | 600,451    |     
|Accrued expenses                                                                          |      | (147,920   | )   
|Customer deposits                                                                         |      | 48,228     |     
|Warranty reserve                                                                          |      | (83,399    | )   
|Net Cash Provided by (Used in) Operating Activities                                       |      | (5,003,529 | )   
|                                                                                          |      |            |     
|Cash Flows from Investing Activities:                                                     |      |            |     
|Purchase of property and equipment                                                        |      | (361,615   | )   
|Payment of website development costs                                                      |      | (21,175    | )   
|Deposit paid                                                                              |      | (18,198    | )   
|Net Cash Used in Investing Activities                                                     |      | (400,988   | )   
|                                                                                          |      |            |     
|Cash Flows from Financing Activities:                                                     |      |            |     
|Proceeds from note payable                                                                |      | 100,000    |     
|Proceeds from notes payable – related parties                                             |      | 172,500    |     
|Repayment of notes payable – related parties                                              |      | (75,000    | )   
|Loans from shareholder                                                                    |      | —          |     
|Proceeds from issuance of common shares                                                   |      | 5,964,653  |     
|Equity issuance costs                                                                     |      | (589,558   | )   
|Net Cash Provided by Financing Activities                                                 |      | 5,572,595  |     
|                                                                                          |      |            |     
|Cash Flows Provided by Discontinued Operations                                            |      | —          |     
|                                                                                          |      |            |     
|Net Increase in Cash and Cash Equivalents                                                 |      | 168,078    |     
|Cash and Cash Equivalents – Beginning                                                     |      | 195,990    |     
|Cash and Cash Equivalents – Ending                                                        | $    | 364,068    |     
|                                                                                          |      |            |     
|Supplemental Cash Flow Information:                                                       |      |            |     
|Cash paid for interest                                                                    | $    | —          |     
|Cash paid for income taxes                                                                | $    | —          |     
|                                                                                          |      |            |     
|Supplemental Non-Cash Investing and Financing Activities:                                 |      |            |     
|Shares issued to acquire assets                                                           | $    | 1,276,861  |     
|Shares issued in payment of accrued expense                                               | $    | 82,381     |     
|Loans from shareholder converted to common shares                                         | $    | 90,740     |     
|Warrants issued in connection with private placements                                     | $    | 1, 565,054 |     



The accompanying notes are an integral part
of the financial statements.

F-5


Table of Contents




XZERES CORP.

(FORMERLY XZERES WIND CORP.)

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FEBRUARY 28, 2011



NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES



Nature of Business



XZERES Corp. (“XZERES”
and the “Company”) is located in Portland, Oregon and was originally incorporated in the state of New Mexico in January
of 1984.  The Company was engaged in the natural gas and asphalt businesses until 2007, at which time it liquidated its
assets and operations and distributed the net proceeds to its shareholders after paying its debts.  On October 2, 2008,
the Company re-domiciled from New Mexico to Nevada in anticipation of pursuing the wind turbine business. The Company commenced
operations in the wind turbine business in the fiscal quarter ended May 31, 2010.



The Company formed two subsidiaries during
the year ended February 28, 2011. XZERES Energy Services Corp. was incorporated in Nevada in January, 2011 and XZERES Wind Europe
Limited was formed in Ireland in October, 2010.



The Company is in the business of designing,
developing, and marketing small wind turbine systems and related equipment for electrical power generation, specifically for use
in residential, small business, rural electric utility systems, other rural locations, and other infrastructure applications.  The
Company employs proprietary technology, including power electronics, alternator design, and blade design to increase performance,
reliability, and sound suppression.  The Company also works with manufacturers of inverters, lightning protection equipment
and towers to integrate their equipment into the Company’s products.



Development Stage in Prior Periods

XZERES Corp. was in the development stage from
October 3, 2008 to May 31, 2010. The fiscal year ending February 28, 2011 is the first fiscal year during which the Company is
considered an operating company and is no longer in the development stage.



Principles of Consolidation

The financial statements reflect the consolidated
results of XZERES Corp. and its wholly-owned subsidiaries XZERES Energy Services Corp. (a Nevada corporation) and XZERES Wind Europe
Limited (formed in Ireland). All material inter-company transactions have been eliminated in the consolidation.



Basis of Presentation

The financial statements of the Company have
been prepared in accordance with generally accepted accounting principles in the United States of America and are presented in
US dollars.



Accounting Basis

The Company uses the accrual basis of accounting
and accounting principles generally accepted in the United States of America (“GAAP” accounting).  The Company
has adopted a February 28 fiscal year end.



Use of Estimates

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



Concentration of Credit Risks

The Company maintains its cash in institutions
insured by the Federal Deposit Insurance Corporation (FDIC). All deposit accounts at FDIC-insured institutions are insured up to
at least $250,000 per depositor. At certain times the Company’s balances exceed the insured amount.

F-6


Table of Contents




XZERES CORP.

(FORMERLY XZERES WIND CORP.)

NOTES TO THECONSOLIDATED FINANCIAL STATEMENTS

FEBRUARY 28, 2011



NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (CONTINUED)



Recent Accounting Pronouncements

The Company does not expect the adoption of
recently issued accounting pronouncements to have a significant impact on the Company’s results of operation, financial position
or cash flows.



Revenue Recognition

The Company recognizes revenue when products
are shipped from the factory and collection is reasonably assured.



XZERES sells wind turbines to dealers and end
users directly. Dealers are required to sign an agreement with XZERES that requires the dealer to sell one unit the first year
and three units per year, thereafter. Dealers receive dealer pricing, a discount to the suggested retail price of the product.
Products sold directly to end users are sold at the retail price. To date, the Company has not offered any other price concessions
to its dealers, and has no post shipment obligations other than the warranty it provides.



Cash and Cash Equivalents

XZERES considers all highly liquid investments
with maturities of three months or less to be cash equivalents. The Company had cash of $364,068 and $195,990 at February 28, 2011
and February 28, 2010, respectively.



Advertising Costs

The Company’s policy regarding advertising
is to expense advertising when incurred. XZERES incurred advertising expense of $70,849 during the fiscal year ended February 28,
2011.



Stock-Based Compensation

Stock-based compensation is accounted for at
fair value in accordance with SFAS No. 123 and 123 (R) (ASC 718). The Company adopted its stock option plan in 2010. The
Company issued 1,700,000 stock options to its employees during the year ended February 28, 2011. The Company recorded stock-based
compensation expense of $463,251 during the year ended February 28, 2011. There was no stock-based compensation issued prior to
the current fiscal year.



Fair Value of Financial Instruments

The Company’s financial instruments consist
of cash and cash equivalents, accounts receivable, note receivable, inventories, prepaid expenses, property and equipment, intellectual
property, deposit, accounts payable, accrued expenses, customer deposits, and warranty reserve. The carrying amount of these financial
instruments approximates fair value due either to length of maturity or interest rates that approximate prevailing market rates
unless otherwise disclosed in these financial statements.



Dividends

The Company has not adopted any policy regarding
payment of dividends. No dividends have been paid during any of the periods shown.



Income Taxes

Income taxes are accounted for under the assets
and liability method. Deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable
to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases
and operating loss and tax credit carry forwards. Deferred tax assets and liabilities are measured using enacted tax rates in effect
for the year in which those temporary differences are expected to be recovered or settled.



It is the Company’s policy to classify
interest and penalties on income taxes as interest expense or penalties expense. As of February 28, 2011, there have been no interest
or penalties incurred on income taxes.

F-7


Table of Contents




XZERES CORP.

(FORMERLY XZERES WIND CORP.)

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FEBRUARY 28, 2011



NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (CONTINUED)



Basic Income (Loss) Per Share

Basic income (loss)
per share is calculated by dividing the Company’s net loss applicable to common shareholders by the weighted average number
of common shares during the period. Diluted earnings per share is calculated by dividing the Company’s net income available
to common shareholders by the diluted weighted average number of shares outstanding during the year. The diluted weighted average
number of shares outstanding is the basic weighted number of shares adjusted for any potentially dilutive debt or equity.Common
share equivalents totaling 4,284,318 at February 28, 2011 representing outstanding warrants and options were not included
in the computation of diluted earnings per share for the fiscal year ended February 28, 2011, as their effect would have been anti-dilutive.



NOTE 2 - SIGNIFICANT EVENTS – RELATED
PARTY TRANSACTION



On March 25, 2010, the Company acquired certain
assets formerly owned by Abundant Renewable Energy, LLC, a privately held Oregon limited liability company (“ARE”),
from ARE’s secured creditors (“Sellers”) in exchange for 3,192,152 shares of our common stock, par value $0.001
per share. Neither Core Fund nor the Company had any relationships or common ownership with Abundant Renewal Energy. The shares
were valued at $.40 at the time of issuance based on a recent unrelated third party private placement. The assets acquired included
intellectual property and other rights related to wind turbine systems formerly manufactured and sold by ARE. The Sellers had been
secured creditors of ARE and obtained the assets via a Collateral Surrender Agreement dated February 8, 2010. One of the Sellers
was Core Fund, L.P., which received 2,750,614 of the shares issued in connection with the Asset Purchase, 569,232 of which Core
Fund, L.P. subsequently delivered to a non-affiliate third party. The Company’s CFO, Steve Shum is the Managing Principal
of Core Fund Management, L.P. and the Fund Manager of Core Fund, L.P. David Baker, our majority shareholder and the other member
of our board of directors effective as of March 26, 2010, is also a non-managing member of Core Fund Management, L.P. David Baker
received 227,693 of the Shares issued in connection with the Asset Purchase.



The purchase price was allocated as follows:



|Description            | Amount
|---------------------- | ------
|Equipment and vehicles | $     
|Office supplies        |       
|Intellectual property  |       
|Warranty reserve       |       
|Total                  | $     









The transaction was accounted for as an asset
acquisition. The assets were transferred from Core Fund at book value, which equals the fair value of the stock issued, since the
transaction was between entities (XZERES and Core Fund) under common control.



Intellectual property consists of product designs
that management presently believes have an infinite life.



In order to maintain some existing dealer/distributor
relationships, the Company determined it may make business sense to honor some warranties on previous installations and elected
to set up an initial warranty reserve that estimated the total cost of honoring the warranties, even though it was under no obligation
to do so.

F-8


Table of Contents




XZERES CORP.

(FORMERLY XZERES WIND CORP.)

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FEBRUARY 28, 2011



NOTE 3 – PREPAID EXPENSES



Prepaid expenses consisted of the following
as of February 28:



|                       | 2011 |         | 2010
|---------------------- | ---- | ------- | ----
|Software licenses      | $    | 59,219  |     
|Interest               |      | 11,687  |     
|Consulting             |      | 39,375  |     
|Total prepaid expenses | $    | 110,281 |     



NOTE 4 – INVENTORIES



Inventories consist of parts and supplies used
in the development, manufacture and installation of wind turbines as well as finished goods. Inventories are stated at the lower
of cost, computed using the first-in first-out method, or market.



Inventories consisted of the following at February
28:



|                   | 2011 |         | 2010
|------------------ | ---- | ------- | ----
|Finished goods     | $    | 434,959 |     
|Parts and supplies |      | 67,589  |     
|Total Inventories  | $    | 502,548 |     



NOTE 5 – PROPERTY AND EQUIPMENT



Property and equipment are being depreciated
over their estimated useful lives using the straight-line method of depreciation for book purposes.



|                                      | February 28, 2011 |         | February 28, 2010
|------------------------------------- | ----------------- | ------- | -----------------
|Furniture                             | $                 | 38,907  |                  
|Computer equipment                    |                   | 123,922 |                  
|Shop machinery, tooling and equipment |                   | 224,748 |                  
|Vehicles                              |                   | 30,273  |                  
|Subtotal                              |                   | 417,850 |                  
|Less: accumulated depreciation        |                   | (42,735 | )                
|Property and equipment, net           | $                 | 375,115 |                  





Depreciation expense totaled $42,735 for the year ended February
28, 2011.



NOTE 6 – INTELLECTUAL PROPERTY



Intellectual property consists of product designs
with an infinite life.



The Company annually, or more frequently if
events or changes indicate that the asset might be impaired, evaluates the fair value of the intellectual property to determine
whether events and circumstances warrant a revision to the fair value of these assets.

F-9


Table of Contents




XZERES CORP.

(FORMERLY XZERES WIND CORP.)

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FEBRUARY 28, 2011



NOTE 7 – WEBSITE DEVELOPMENT COSTS



The Company has capitalized certain costs incurred
in developing their website, which consisted of the following at February 28:



|                               | 2011 |        | 2010
|------------------------------ | ---- | ------ | ----
|Website development costs      | $    | 21,175 |     
|Less: Accumulated amortization |      | (2,941 | )   
|Website development costs, net | $    | 18,234 |     



The Company began amortizing the website costs,
using the straight-line method over the estimated useful life of 3 years, once it was put into service in September 2010. Ongoing
updates to the website are expensed as incurred.



Amortization expense was $2,941 and $0 for the years ended February
28, 2011 and 2010, respectively.



NOTE 8 –
ACCRUED EXPENSES



Accrued expenses consisted of the following
at February 28:



|                        | 2011 |         | 2010
|----------------------- | ---- | ------- | ----
|Wages                   | $    | 107,277 |     
|Taxes due former owners |      | 0       |     
|Professional fees       |      | 0       |     
|Other                   |      | 0       |     
|Total Accrued Expenses  | $    | 107,277 |     



NOTE 9 – CUSTOMER DEPOSITS



A customer deposit of up to 50% of the selling
price is sometimes made at the time a wind turbine is ordered. Deposits are reclassified to revenue once the unit is completed
and delivered. Customer deposits were $48,228 at February 28, 2011, for open orders taken in the fiscal year ended February 28,
2011.



NOTE 10 – LOANS FROM SHAREHOLDER



On October 14, 2008, the Company received a
loan from a shareholder for $5,140. The loan is non-interest bearing and due on demand.



During the year ended February 28, 2010 the
Company received additional loans from a shareholder in the amount of $85,600. These loans bear 8% interest and are due on demand.



The loan balance was converted to 226,850 common
shares during the fiscal year ended February 28, 2011.

F-10


Table of Contents




XZERES CORP.

(FORMERLY XZERES WIND CORP.)

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FEBRUARY 28, 2011



NOTE 11 – WARRANTY RESERVE



The Company accrues for estimated future warranty
costs associated with products sold. The Company provides a ten year limited warranty for defects in materials and workmanship.
In order to maintain some existing dealer/distributor relationships, the Company elected to set up an initial reserve to estimate
its future costs of honoring warranties on previous installations. An initial reserve was created based on 100 installed units
with estimated warranty costs of $1,000 per unit, creating an initial reserve of $100,000. The reserve was also increased $26,758
for new units sold during the fiscal year ended February 28, 2011. The reserve is increased by the addition of two percent of all
system and tower sales.



Warranty reserve activity for the year ended
February 28, 2011 was as follows:



|                                   | 2011
|---------------------------------- | ----
|Reserve balance, February 28, 2010 | $   
|Added to reserve                   |     
|Charges against reserve            |     
|Reserve balance, February 28, 2011 | $   



NOTE 12 – INCOME TAXES



For the period ended February 28, 2011, XZERES
has incurred net losses from continuing operations and, therefore, has no tax liability. The net deferred tax asset generated by
the loss carry-forward has been fully reserved. The cumulative net operating loss carry-forward is approximately $5,376,000 at
February 28, 2011, and will expire beginning in the year 2029. The cumulative tax effect at the expected rate of 34% of significant
items comprising our net deferred tax amount is as follows:



The provision for Federal income tax consists of the following at
February 28:



|                                       | 2011 |            | 2010
|-------------------------------------- | ---- | ---------- | ----
|Federal income tax attributable to:    |      |            |     
|Current operations                     | $    | 1,733,000  |     
|Less: valuation allowance              |      | (1,733,000 | )   
|Net provision for Federal income taxes | $    | 0          |     



The cumulative tax effect at the expected rate
of 34% of significant items comprising our net deferred tax amount is as follows at February 28:



|                                    | 2011 |            | 2010
|----------------------------------- | ---- | ---------- | ----
|Deferred tax asset attributable to: |      |            |     
|Net operating loss carryover        | $    | 1,828,000  |     
|Less: valuation allowance           |      | (1,828,000 | )   
|Net deferred tax asset              | $    | 0          |     



Due to the change in ownership provisions of
the Tax Reform Act of 1986, net operating loss carry forwards of $5,376,000 for Federal income tax reporting purposes are subject
to annual limitations. Should a change in ownership occur net operating loss carry forwards may be limited as to use in future
years.

F-11


Table of Contents


XZERES CORP.

(FORMERLY XZERES WIND CORP.)

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FEBRUARY 28, 2011



NOTE 12 – STOCKHOLDERS’ EQUITY



In October, 2008, the Company amended its Articles
of Incorporation to increase the authorized common stock from 10,000,000 to 100,000,000 shares, and changed the par value of the
common stock from no par to $0.001 par value.   The Company also reverse split the outstanding shares of common
stock at a ratio of 7.7 to 1, leaving a total of 150,079 shares of common stock issued and outstanding following the split.



During the period ended February 28, 2009,
the Company issued 4,501,899 shares of our common stock at a price of $0.01 per share. The Company conducted the offering as a
private placement, exempt from the registration requirements of the Securities Act of 1933 under Section 4(2) and/or Rule 506 of
Regulation D there under.



During the year ended February 28, 2010 an
additional 30,545 shares of common stock were issued for cash totaling $305. There was also a correction to the shares outstanding
of 79 additional shares, and an additional correction of 3 additional shares during the twelve months ended February 28, 2011.



During the fiscal year ending February 28,
2011, the following equity-related transactions occurred:



- 200,000 common shares were issued for consulting
services. The shares were valued at $.01 per share, which in the opinion of management, approximates the value of the services
rendered.



- 320,000 common shares were issued to an
unrelated third party in payment of an accrued expense. The shares were valued at $82,381, representing the fair value of the accrued
expense.



- 226,850 common shares were issued in exchange
for $90,740 of shareholder loans. The shares were issued at $.40 per share.



- 3,192,150 common shares were issued to acquire
assets with a total cost of $1,276,864. The shares were issued at $.40 per share.



- 648,150 common shares were sold to unrelated
third parties in a private placement at $.40 per share for total proceeds of $259,260.



- 4,010,500 common shares were sold in a private
placement at $1.00 per share for net proceeds of $3,611,949.



- 488,375 common shares were issued for consulting
services to multiple providers. The shares were valued at various market prices ranging between $0.75 and $1.50 per share. The
combined value of the shares totaled $451,988. Of the total value, $358,296 was expensed during the fiscal year end February 28,
2011.



- 1,614,186 common shares were sold to unrelated
third parties in an ongoing private placement at $1.05 per share for net proceeds of $1,503,887.



Total common shares issued and outstanding
at February 28, 2011 are 15,382,816.

F-12


Table of Contents


XZERES CORP.

(FORMERLY XZERES WIND CORP.)

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FEBRUARY 28, 2011



NOTE 13 – STOCK WARRANTS AND OPTIONS



The Company granted 2,584,318 stock warrants
in connection with private placements in fiscal year 2011. The Company has accounted for these warrants as equity instruments in
accordance with EITF 00-19 (ASC 815-40), Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in,
a Company’s Own Stock, and as such, were classified in stockholders’ equity. The Company has estimated the fair value
of the warrants issued in connection with the private placements at $1,565,054 as of the grant date using the Black-Scholes option
pricing model.



The Company also granted 1,700,000 stock options
to employees. The Company has estimated the fair value of the options as of the grant dates at $1,558,527 using the Black-Scholes
option pricing model. Compensation expense is being recognized over the vesting periods of the options which range from immediate
vesting to vesting over four years. Fifteen percent of total issued and outstanding common shares are available for stock options.



Key assumptions used by the Company are summarized
as follows:



|                         | Private Placement Warrants |               | Employee Stock Options
|------------------------ | -------------------------- | ------------- | ----------------------
|Stock Price              |                            | $1.00 – $1.05 |                       
|Exercise Price           |                            | $1.25-$1.50   |                       
|Expected volatility      |                            | 97.24%        |                       
|Expected dividend yield  |                            | 0.00%         |                       
|Risk-free rate           |                            | 1.28-1.32%    |                       
|Vesting period           |                            | —             |                       
|Expected term (in years) |                            | 3             |                       



A Stock Price of $1.00 and $1.05 was used in
valuing the warrants and a range of $1.00-$2.01 for valuing the options. The stock price was based on the per share issuance prices
from a recent unrelated third party private placements. Volatility was computed based on the average volatility of similar companies
in the wind turbine business. The risk-free interest rate is the Treasury Constant Maturity Rate on the date of grant for a period
equivalent to the expected term of the instrument. The expected term is the same as the contractual term for the above valuations.



The warrants issued in connection with the
private placement were valued at $1,565,054 and have been accounted for as an equity transaction. Options issued to employees were
classified as compensation expense for the fiscal year ended February 28, 2011. Stock option expense recognized in net earnings
amounted to $463,251 for the fiscal year ended February 28, 2011. As of February 28, 2011, there was $1,095,276 of unrecognized
compensation expense related to non-vested share awards that we expect to recognize over a weighted average period of 3.25 years.



The weighted average exercise price of the
options issued is $1.05. There were no options issued prior to the fiscal year ended February 28, 2011.

F-13


Table of Contents




XZERES CORP.

(FORMERLY XZERES WIND CORP.)

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FEBRUARY 28, 2011



NOTE 15 – COMMITMENTS



Operating Leases

The Company leases its office and manufacturing
facilities under a lease which expires in July, 2013. The lease provides for the payment of taxes and operating costs, such as
insurance and maintenance in addition to the base rental payments. The lease is renewable for an additional three year term.



Aggregate minimum annual rental payments under
the non-cancelable operating lease are as follows:



|Year ended February 28, 2012 |  | $ | 120,420 | 
|---------------------------- |  | - | ------- | 
|2013                         |  |   | 110,220 | 
|2014                         |  |   | 37,152  | 
|Total                        |  | $ | 267,792 | 



Rent expense totaled $102,269 for the year
ended February 28, 2011.



NOTE 16 – GOING CONCERN



The accompanying financial statements have
been prepared assuming that the Company will continue as a going concern. The Company has sustained substantial losses since inception.



In view of this matter, the ability of the
Company to continue as a going concern is dependent upon growth of revenues and the ability of the Company to raise additional
capital. Management believes that its successful ability to raise capital and increases in revenues will provide the opportunity
for the Company to continue as a going concern.



NOTE 17 – SUBSEQUENT EVENTS



The following material events have occurred
subsequent to the fiscal year ending February 28, 2011.



·On March 21, 2011, we closed on a round of our ongoing private placement of common stock and
warrants by consummating the sale of 4,334,005 shares of common stock and warrants to purchase additional shares in an amount equal
to 50% of the number of shares purchased, exercisable at $1.50 per share at any time for a period of five years from the issue
date. Each share and one-half warrant sold for $1.05, for total gross proceeds in this closing of $4,550,705. In connection with
this closing, we paid our placement agents commissions in the amount of $405,127.44. The shares of common stock were issued pursuant
to the exemption from registration provided by Section 4(2) of the Securities Act of 1933, as amended and Rule 506 of Regulation
D. The shares and warrants were sold to accredited investors as defined in Regulation D under the Securities Act. No general solicitation
or advertising was used in connection with the offering. All securities sold are “restricted securities” within the
meaning of Regulation D.

F-14


Table of Contents




XZERES CORP.

(FORMERLY XZERES WIND CORP.)

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FEBRUARY 28, 2011



NOTE 17 – SUBSEQUENT EVENTS (CONTINUED)



·On March 29, 2011, we closed a second and final round of our ongoing private placement of
common stock and warrants by consummating the sale of 557,810 shares of common stock and warrants to purchase additional shares
in an amount equal to 50% of the number of shares purchased, exercisable at $1.50 per share at any time for a period of five years
from the issue date. Each share and one-half warrant sold for $1.05, for total gross proceeds in this closing of $585,700. Combined
with our first closing, announced on March 21, 2011, we raised total gross proceeds in the amount of $5,136,405. In connection
with this second and final closing, we paid our placement agents commissions in the amount of $53,780. The shares of common stock
were issued pursuant to the exemption from registration provided by Section 4(2) of the Securities Act of 1933, as amended and
Rule 506 of Regulation D. The shares and warrants were sold to accredited investors as defined in Regulation D under the Securities
Act. No general solicitation or advertising was used in connection with the offering. All securities sold are “restricted
securities” within the meaning of Regulation D.



·On April 25, 2011, XZERES Corp. (the “Company”) entered into an Asset Purchase
Agreement (the “Acquisition”) to acquire substantially all of the assets of Rochester Power Saver Inc., consisting
primarily of intellectual property and product designs for surge suppression and power conditioning devices. Under the terms of
the Acquisition, the Company paid 304,721 shares of its restricted common stock, $50,000 in cash and will pay a 5% royalty on gross
profits to the founders up to a maximum of $150,000 over the next 24 months. In additional to the Acquisition, the Company entered
into a three year Consulting Agreement with Rochester Power Saver, Inc. and its principal, Mike Dana, to assist the Company in
the manufacture, sale and continued development of the products the Company acquired from Rochester Power Saver, Inc. As compensation,
the Company has agreed to pay $105,000 per year as a fee, in bi-weekly installments, plus sales commissions.





F-15


Table of Contents


Item 9. Changes In and Disagreements with
Accountants on Accounting and Financial Disclosure



No events occurred that require disclosure
under Item 307 and 308 of Regulation S-K during the fiscal year ending February 28, 2011.



Item 9A. Controls and Procedures



Evaluation of Disclosure Controls and Procedures



As required by Rule 13a-15(b) under the Securities
Exchange Act of 1934 (the “1934 Act”), as of February 28, 2011, we carried out an evaluation of the effectiveness of
the design and operation of our disclosure controls and (as defined in Rule 13a-15(e) or Rule 15d-15(e) under the Exchange Act).
This evaluation was carried out under the supervision and with the participation of our Chief Executive Officer (our principal
executive officer) and our Chief Financial Officer (our principal financial officer), who concluded, that as of February 28, 2011,
our disclosure controls and procedures are effective.



Disclosure controls and procedures are controls
and other procedures that are designed to ensure that information required to be disclosed in our reports filed or submitted under
the Securities Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities
and Exchange Commission’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures
designed to ensure that information required to be disclosed in our reports filed under the Exchange Act is accumulated and communicated
to our management, including our principal executive officer and our principal financial officer, as appropriate, to allow timely
decisions regarding required disclosure.



Management’s Report on Internal Control
over Financial Reporting



Management is responsible for establishing
and maintaining adequate internal control over financial reporting as defined in Rule 13a-15(f) under the Exchange Act. This rule
defines internal control over financial reporting as a process designed by, or under the supervision of, the Company’s Chief
Executive Officer and Chief Financial Officer, to provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance with U.S. GAAP. Our internal control over financial
reporting includes those policies and procedures that:



§Pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect
the transactions and dispositions of the assets of the Company;

§Provide reasonable assurance that transactions are recorded as necessary to permit preparation
of financial statements in accordance with U.S. GAAP, and that receipts and expenditures of the Company are being made only in
accordance with authorizations of management and directors of the Company; and

§Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition,
use or disposition of the Company’s assets that could have a material effect on the financial statements.

23


Table of Contents


Limitations on the Effectiveness of Internal
Controls



Our management does not expect that our disclosure
controls and procedures or our internal control over financial reporting will necessarily prevent all fraud and material error.
Our disclosure controls and procedures are designed to provide reasonable assurance of achieving our objectives and our Chief Executive
Officer and Chief Financial Officer concluded that our disclosure controls and procedures are effective at that reasonable assurance
level.  Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits
of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation
of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been
detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns
can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons,
by collusion of two or more people, or by management override of the internal control. The design of any system of controls also
is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design
will succeed in achieving its stated goals under all potential future conditions. Over time, control may become inadequate because
of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate.



Item 9B. Other Information



On May 25, 2011, we updated our existing stock
option plan to provide for both qualified and non-qualified stock options equal to a maximum of fifteen percent (15%) of our total
issued and outstanding shares of common stock as of May 20, 2011, which is equal to 2,823,199 total shares available to be optioned.
Previously, the options available under our Plan were calculated as fifteen percent (15%) of our shares issued and outstanding
as of July 1, 2010.



Also on May 25, 2011, we granted additional
options to our Chairman, David N. Baker, and to our CEO and President, Frank P. Greco. Mr. Baker received options to purchase a
total of 500,000 shares of our common stock at an exercise price of $1.25 per share, 277,777 of which vested upon grant and the
remaining 222,223 of which will vest on May 26, 2012. Mr. Greco received options to purchase a total of 125,000 shares of our common
stock at an exercise price of $1.25 per share, all of which vested immediately. The options granted to Mr. Baker and to Mr. Greco
will expire if not exercised on or before five years from the date of grant.

24


Table of Contents


PART III



Item 10. Directors, Executive Officers and
Corporate Governance



The following information sets forth the names,
ages, and positions of our current directors and executive officers as of May 25, 2011.



|Name            | Age | Position(s) and Office(s) Held              
|--------------- | --- | --------------------------------------------
|Frank Greco     | 57  | Chief Executive Officer, President, Director
|S. Clayton Wood | 52  | Executive Vice President of Operations      
|Steve Shum      | 40  | Chief Financial Officer and Director        
|David Baker     | 43  | Director                                    



Set forth below is a brief description of the
background and business experience of each of our current executive officers and directors.



Frank Greco joined us as our Chief Executive
Officer and a member of our Board of Directors on August 25, 2010. Effective May 3, 2011, Mr. Frank Greco also assumed the office
of president. Mr. Greco will be responsible for all aspects of XZERES Corp.’s business and his initial focus will be on domestic
and global sales growth, product portfolio expansion and optimization of products and channels. We first hired Mr. Greco July 1,
2010, to serve as our executive vice president of business development. Previously, from April 2004 to March 2010, Mr. Greco was
Chief Executive Officer and a Director of Southwest Windpower Inc., a manufacturer of small wind turbines competitive with our
smaller product, 2.5kW wind turbine system. As CEO of Southwest Windpower, Mr. Greco oversaw all aspects of the business, including
operations, material planning, marketing and sales, plant engineering and human resources. It is Mr. Greco’s general industry
experience and his experience while serving as CEO of Southwest Windpower, Inc., including his participation its launch of two
new product platforms, its establishment of European operations and a joint venture in China, and its establishment of domestic
and international patents and trademarks, that led us to conclude that Mr. Greco should be our CEO and a director. Mr. Greco holds
bachelor’s degrees in Business Administration & Behavioral Science, awarded by the University of Illinois in 1984, and
in Plant Engineering, awarded by St. Joseph’s College in 1988.



S. Clayton Wood was our President and
Chief Operating Officer from April 12, 2010 thru May 2, 2011 and, effective May 3, 2011, has assumed the role of Executive Vice
President of Operations. He is responsible for certain operational aspects of our business including supply chain, manufacturing,
service and support and establishment and maintenance of the Company’s test site. Previously, from February 2006 through
October 2007, Mr. Wood was the Executive Director for WebJunction.org an online learning community and unit of OCLC, where he was
responsible for executive leadership and execution of the business plan migrating from grant funding to product revenue self-sustaining
operation. From February 2005 through October 2006, Mr. Wood was Vice-President, Operations and Chief Operating Officer for Naverus,
Inc. a venture-backed startup providing navigation information products to the commercial aviation industry where he was responsible
for leading all operations of the business including design engineering, performance engineering, flight operations, marketing,
sales, systems, and information technology. Mr. Wood holds a license as a Professional Engineer (inactive) from the New Mexico
Board of Professional Engineers and Land Surveyors, first issued in 1985. Mr. Wood earned a Bachelor of Science degree in Mechanical
Engineering from Texas A&M University, awarded in 1980, a Master of Science degree in Mechanical Engineering from Texas A&M
University, awarded in 1982, and a Master of Business Administration degree from the University of Washington, awarded in 1998.



25


Table of Contents


David N. Baker joined our Board of Directors
as its Chairman on March 26, 2010 and is responsible for working with our Board and management on various strategic initiatives.
Mr. Baker has extensive experience in financing start-up companies. He has led, as an investment principal, originating, structuring
and investing in reverse merger, self registration and other non-traditional or alternative public transactions for companies in
the asset recovery, consumer products, solar integration and technology, gaming, broadcast media, e-commerce, information services,
video content, mobile hardware, video game, Internet media, information technology, automotive and biotechnology sectors. In addition,
his career has included positions as principal and owner in two hedge funds, other investment management capacities, technology
and healthcare merchant banking, proprietary trading and securities brokerage.



Since 2007, Mr. Baker has also been employed
as the Managing Member of Cascade Summit, LLC, a private advisory firm focused upon advising small and micro-capitalization public
and private companies regarding capital strategy, business strategy and restructurings, with an emphasis on alternative going public
transactions. Mr. Baker is also the CEO of Coin Mercantile, Inc., a private company engaged in the retail and wholesale global
trade of precious metal modern world coins, which he co-founded in 2009. Mr. Baker is also a non-managing principal of Core Fund
Management, L.P., which is the general partner of Core Fund, L.P. a special situations, non-correlated, hedge fund that focuses
on making investments in early stage, micro and small capitalization companies, across all sectors. Mr. Baker founded Core Fund,
L.P. and Core Fund Management, L.P. in 2003 and was active in its management until 2007, when he stepped aside in favor of Mr.
Steven Shum. Mr. Baker earned a B.A. in 1989 from the University of Colorado and received a J.D. in 1992 from Golden Gate University,
with a focus on securities.



There was no particular or specific experience,
qualification, attribute or skill that led us to the conclusion that Mr. Baker should serve as a member of our board of directors.



Steven Shum is our CFO, corporate secretary
and a member of our Board of Directors. Mr. Shum first joined us October 21, 2008, and has agreed to continue to serve as our CFO
on an interim basis until such time as we can locate a more permanent CFO. From October 2008 through March 26, 2010, Mr. Shum was
our sole director, at which time Mr. David Baker joined our board. From October 21, 2008, through April 12, 2010, Mr. Shum was
our sole officer, at which time he resigned as our president in favor of Mr. S. Clayton Wood.



Since 2004 Mr. Shum has been a Managing Principal
of Core Fund Management, L.P. and the Fund Manager of Core Fund, L.P. Mr. Shum's tenure includes 15 years in the financial services
industry where he has an extensive background in equity research, macroeconomics, and management. Prior to joining Core Fund, he
spent four years as founder and Executive Vice President of Revere Data, which created a patented equity research application.
In addition to Revere Data, from 1999 to 2003, Mr. Shum was the senior investment analyst and co-portfolio manager with DNB Capital
Management. Mr. Shum earned a BS in both Finance and General Management from Portland State University, awarded in 1992.



There was no particular or specific experience,
qualification, attribute or skill that led us to the conclusion that Mr. Shum should serve as a member of our board of directors.



Directors



Our bylaws authorize no less than one (1) director.
We currently have three Directors.



Family Relationships



There are no family relationships between or
among the directors, executive officers or persons nominated or chosen by the Company to become directors or executive officers.

26


Table of Contents


Involvement in Certain Legal Proceedings



To the best of our knowledge, during the past
10 years, none of the following occurred with respect to our present or former director, executive officer, or employee: (1) any
bankruptcy petition filed by or against any business of which such person was a general partner or executive officer either at
the time of the bankruptcy or within two years prior to that time; (2) any conviction in a criminal proceeding or being subject
to a pending criminal proceeding (excluding traffic violations and other minor offenses); (3) being subject to any order, judgment
or decree, not subsequently reversed, suspended or vacated, of any court of competent jurisdiction, permanently or temporarily
enjoining, barring, suspending or otherwise limiting his or her involvement in any type of business, securities or banking activities;
and (4) being found by a court of competent jurisdiction (in a civil action), the SEC or the Commodities Futures Trading Commission
to have violated a federal or state securities or commodities law, and the judgment has not been reversed, suspended or vacated.



Term of Office



Our Directors are appointed for a one year
term to hold office until the next annual general meeting of our shareholders or until removed from office in accordance with our
bylaws. Our officers are appointed by our board of directors and hold office until removed by the board.



Committees of the Board



Audit Committee



We do not have a separately-designated standing
audit committee. The entire Board of Directors performs the functions of an audit committee, but no written charter governs the
actions of the Board when performing the functions of what would generally be performed by an audit committee. The Board approves
the selection of our independent accountants and meets and interacts with the independent accountants to discuss issues related
to financial reporting. In addition, the Board reviews the scope and results of the audit with the independent accountants, reviews
with management and the independent accountants our annual operating results, considers the adequacy of our internal accounting
procedures and considers other auditing and accounting matters including fees to be paid to the independent auditor and the performance
of the independent auditor.



Compensation Committee



We do not have a separately-designated standing
compensation committee. The entire Board of Directors performs the functions of a compensation committee. During the fiscal year
ended February 28, 2011, all our directors during that period participated in all deliberations concerning executive officer compensation.
Mr. Baker joined our board on March 26, 2010, and has participated in all deliberations concerning executive officer compensation
since that date. Mr. Greco joined our board on August 25, 2010, and has participated in all deliberations concerning executive
officer compensation since that date.



Code of Ethics



As of February 28, 2011, we had not adopted
a Code of Ethics for Financial Executives, which would include our principal executive officer, principal financial officer, principal
accounting officer or controller, or persons performing similar functions.

27


Table of Contents


Item 11. Executive Compensation



On August 25, 2010, Frank Greco became our
Chief Executive Officer pursuant to a written employment agreement dated August 25, 2010. As our President and Chief Executive
Officer, Mr. Greco is responsible for all aspects of XZERES Corp.’s business and his initial focus will be on domestic and
global sales growth, product portfolio expansion and optimization of products and channels.



Our written employment agreement with Frank
Greco provides for an initial term of approximately four years and further provides for a compensation package that includes a
base salary at an initial annual rate of Two Hundred Thousand Dollars ($200,000), payable bi-weekly, plus increases and performance
bonuses to be awarded in the event the Company hits certain milestones as stated in the written agreement. We have also granted
Mr. Greco a qualified option to purchase a total of 320,000 shares of our common stock at a strike price of $1.25. This option
vests at a rate of 25% per year, starting on the first anniversary of the grant. We have also granted Mr. Greco a non-qualified
option to purchase an additional 655,000 shares of our common stock at a strike price of $1.25 per share. The non-qualified option
as to 55,000 shares vests at a rate of 25% per year, starting on the first anniversary of the grant. The non-qualified option as
to the remaining 600,000 shares vests at a rate of 150,000 per year at the end of each of the next four fiscal years, starting
with February 29, 2012, but only in the event the Company achieves certain performance milestones as stated in the written Stock
Option Agreement. Also on August 25, 2010, we granted Mr. Greco a second qualified option to purchase 20,000 shares of our common
stock at a strike price of $1.25 per share, which option vests immediately. On May 25, 2011, we granted Mr. Greco options to purchase
a total of 125,000 shares of our common stock at an exercise price of $1.25 per share, all of which vested immediately, and which
will expire if not exercised on or before five years from the date of grant.



Mr. Greco is also entitled to other ancillary
employment benefits such as vacation time and health insurance as stated in his written employment agreement. We have also agreed
to make a one-time contribution to Mr. Greco’s relocation, personal living and personal travel expenses in the amount of
Ten Thousand ($10,000) Dollars payable in six (6) equal monthly installments over a six (6) month period commencing on October
1, 2010.



S. Clayton Wood served as our Chief Operating
Officer and President from April 12, 2010 through May 2, 2011. Effective May 3, 2011, S. Clayton Wood stepped down as our President
and Chief Operating Officer and was appointed to Executive Vice President of Operations. Mr. Wood’s primary focus will be
to oversee certain operations of the Company to include: supply chain, manufacturing, service and support facilities and establishment
and maintenance of the Company’s test site. Mr. Wood’s compensation package includes a base salary of One Hundred Twenty
Five Thousand Dollars ($125,000), payable bi-weekly, plus a one-time bonus of Twenty Five Thousand Dollars ($25,000) upon profitability
of the Company. His prior grant of 460,000 restricted shares of our common stock, of which 100,000 has vested, remains in full
force and effect.



28


Table of Contents


Summary Compensation Table



The table below summarizes all compensation awarded to, earned by,
or paid to each named executive officer for our last two completed fiscal years for all services rendered to us.





|SUMMARY COMPENSATION TABLE            
|--------------------------------------
|Name and principal position           
|Frank Greco,                          
|CEO and Director 1                    
|S. Clayton Wood                       
|Executive Vice President of Operations
|Steven Shum,                          
|CFO and Director                      
|David Baker,                          
|Chairman 2                            











|(1) | Mr. Greco joined our Board of Directors on August 25, 2010.                                                                                                                                                                                                                                                                                                                       
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(2) | Mr. Baker joined our Board of Directors as its Chairman on March 26, 2010.                                                                                                                                                                                                                                                                                                        
|(3) | The Company has estimated the fair value of the options as of the grant dates using the Black-Scholes option pricing model. Compensation expense is being recognized over the vesting periods of the options which range from immediate vesting to vesting over four years.  The calculations and underlying assumptions are found at note 13 to our audited financial statements.



Narrative Disclosure to the Summary Compensation Table



We did not pay any amounts in compensation
to our officers and directors in the prior fiscal year ended February 28, 2010.



Although we have not paid any cash bonuses,
our employees, including officers, may receive such bonuses and salary increases as the Board of Directors, in its sole discretion,
may award from time to time.





29


Table of Contents


Outstanding Equity Awards At Fiscal Year-end
Table



The table below summarizes all unexercised
options, stock that has not vested, and equity incentive plan awards for each named executive officer outstanding as of the end
of our last completed fiscal year.





|OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-END
|--------------------------------------------
|OPTION AWARDS                               
|Name                                        
|Frank Greco                                 
|S. Clayton Wood                             
|David Baker                                 
|Steven Shum                                 





Stock Option Grants



On March, 25, 2010, we granted Steven Shum,
our current CFO, corporate secretary and member of our Board of Directors, options that will allow him to purchase up to 200,000
shares of our common stock at an exercise price of $0.85 per share.  The options are fully vested.



On March 22, 2010, we executed an employment
agreement with S. Clayton Wood which includes options to purchase up to 460,000 shares of our common stock at $0.85 per share.  Mr.
Wood’s options will vest pro-rata over each of the four calendar years following the grant date of March 25, 2010.



On July 15, 2010, we entered into a written
employment agreement with David N. Baker, chairman of our board of directors, which includes options to purchase up to 200,000
shares of our common stock.  The option to purchase 100,000 shares is fully vested and is exercisable at $1.10 per share.  The
option to purchase the remaining 100,000 shares vests one-third per year over each of the next three years and is exercisable at
$1.00 per share.  All of the options granted to Mr. Baker will expire if not exercised within five years. On May 25,
2011, we granted Mr. Baker options to purchase a total of 500,000 shares of our common stock at an exercise price of $1.25 per
share, 277,777 of which vested upon grant and the remaining 222,223 of which will vest on May 26, 2012, which options will expire
if not exercised on or before five years from the date of grant.

30


Table of Contents


On August 25, 2010, we executed written a written
stock option agreement that granted Mr. Greco a qualified option to purchase a total of 320,000 shares of our common stock at a
strike price of $1.25.  This option vests at a rate of 25% per year, starting on the first anniversary of the grant.  We
have also granted Mr. Greco a non-qualified option to purchase an additional 655,000 shares of our common stock at a strike price
of $1.25 per share.  The non-qualified option as to 55,000 shares vests at a rate of 25% per year, starting on the first
anniversary of the grant.  The non-qualified option as to the remaining 600,000 shares vests at a rate of 150,000 per
year at the end of each of the next four fiscal years, starting with February 29, 2012, but only in the event the Company achieves
certain performance milestones as stated in the written Stock Option Agreement.  Also on August 25, 2010, we granted
Mr. Greco a second qualified option to purchase 20,000 shares of our common stock at a strike price of $1.25 per share, which option
vests immediately. On May 25, 2011, we granted Mr. Greco options to purchase a total of 125,000 shares of our common stock at an
exercise price of $1.25 per share, all of which vested immediately, and which will expire if not exercised on or before five years
from the date of grant.



Director Compensation



The table below summarizes all compensation
of our directors as of the fiscal year ended February 28, 2011.



|DIRECTOR COMPENSATION
|---------------------
|Name                 
|Frank Greco          
|Steven Shum          
|David Baker          



Narrative Disclosure to the Director Compensation
Table



Our directors do not currently receive any
compensation from the Company for their service as members of the Board of Directors of the Company.



On July 15, 2010, we entered into a written
employment agreement with David N. Baker.  Mr. Baker is the chairman of our board of directors. We paid Mr. Baker the
sum of $12,000 per month from April 2010 through December 2011 pursuant to that written agreement, which payment increased to $15,000
per month effective January 1, 2011.  Mr. Baker is also eligible for any performance bonus that our board may, in its
discretion, determine to award him.  We also granted Mr. Baker options to purchase up to 200,000 shares of our common
stock.  The option to purchase 100,000 shares is fully vested and is exercisable at $1.10 per share.  The option
to purchase the remaining 100,000 shares vests one-third per year over each of the next three years and is exercisable at $1.00
per share.  All of the options granted to Mr. Baker will expire if not exercised within five years. On May 25, 2011,
we granted Mr. Baker options to purchase a total of 500,000 shares of our common stock at an exercise price of $1.25 per share,
277,777 of which vested upon grant and the remaining 222,223 of which will vest on May 26, 2012, which options will expire if not
exercised on or before five years from the date of grant.

31


Table of Contents


On March, 25, 2010, we granted Steven Shum,
our current CFO, corporate secretary and member of our Board of Directors, options that will allow him to purchase up to 200,000
shares of our common stock at an exercise price of $0.85 per share.  The options are fully vested.



Mr. Shum continues to serve as our interim
CFO until such time we find a permanent CFO, which we expect to complete in the current fiscal year. We do not have a written employment
or consulting agreement with Mr. Shum, but he has agreed to remain our interim CFO until the permanent replacement is hired. In
late 2010, we agreed to partially compensate Mr. Shum in cash of not more than $12,000 per month for his continued service as our
interim CFO, which we expect to continue until the replacement is hired.



Item 12. Security Ownership of Certain Beneficial
Owners and Management and Related Stockholder Matters



The following table sets forth, as of May 25,
2011, the beneficial ownership of our common stock by each executive officer and director, by each person known by us to beneficially
own more than 5% of the our common stock and by the executive officers and directors as a group. Except as otherwise indicated,
all shares are owned directly and the percentage shown is based on 18,821,327 shares of common stock issued and outstanding on
May 20, 2011:



|Name
    and address of beneficial owner 1                            | Title of Class |        | Amount of beneficial ownership |  | Percent of class
|--------------------------------------------------------------------- | -------------- | ------ | ------------------------------ |  | ----------------
|Executive Officers & Directors:                                      
|David Baker 4PO Box 16282201 Sioux
    Falls, SD 57186                |                | Common |                                |  |                 
|Steven Shum 2, 39025 SW Hillman,
    Suite 3126 Wilsonville, OR 97070 |                | Common |                                |  |                 
|S. Clayton Wood 9025 SW Hillman, Suite 3126 Wilsonville, OR 97070     |                | Common |                                |  |                 
|Frank Greco 59025 SW Hillman, Suite
    3126 Wilsonville, OR 97070    |                | Common |                                |  |                 
|Total of All Directors and Executive Officers:                        |                | Common |                                |  |                 
|                                                                      |                |        |                                |  |                 
|More Than 5% Beneficial Owners:                                       |                |        |                                |  |                 
|Core Fund, L.P. 1500 SW 1st Ave. Suite 910 Portland, OR 97201         |                | Common |                                |  |                 



32


Table of Contents




| | 1. | As used in this table, "beneficial ownership" means the sole or shared power to vote, or to direct the voting of, a security, or the sole or shared investment power with respect to a security (i.e., the power to dispose of, or to direct the disposition of, a security). In addition, for purposes of this table, a person is deemed, as of any date, to have "beneficial ownership" of any security that such person has the right to acquire within 60 days after such date.
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 2. | Includes the 2,691,382 shares held by Core Fund, L.P.  Mr. Steven Shum is the manager of Core Fund, L.P. and, in that capacity, is the sole beneficial owner of the shares.  Mr. David Baker is a passive non-managing member and principal of Core Fund Management, L.P., the general partner and Fund Manager to Core Fund, L.P.
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 3. | On March 25, 2010, as compensation for services rendered, we awarded Mr. Shum fully vested options to purchase up to 200,000 shares of our common stock, all of which are fully vested and, therefore, may be exercised over a period of 60 days.
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 4. | On July 15, 2010, we entered into a written employment agreement with David N. Baker, chairman of our board of directors, which includes options to purchase up to 200,000 shares of our common stock.  The option to purchase 100,000 shares is fully vested and, therefore, may be exercised immediately.   On May 25, 2011, we granted Mr. Baker options to purchase a total of 500,000 shares of our common stock at an exercise price of $1.25 per share, 277,777 of which are fully vested and, therefore, may be exercised immediately.
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 5. | On August 25, 2010, we entered into agreements with Frank Greco, CEO and member of our board of directors, which include options to purchase up to 995,000 shares of our common stock, 20,000 of which may be exercised over a period of 60 days.  On May 25, 2011, we granted Mr. Greco options to purchase a total of 125,000 shares of our common stock, all of which are fully vested and, therefore, may be exercised immediately.
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Item 13. Certain Relationships and Related
Transactions, and Director Independence



Except as disclosed herein, none of our directors
or executive officers, nor any proposed nominee for election as a director, nor any person who beneficially owns, directly or indirectly,
shares carrying more than 5% of the voting rights attached to all of our outstanding shares, nor any members of the immediate family
(including spouse, parents, children, siblings, and in-laws) of any of the foregoing persons has any material interest, direct
or indirect, in any transaction since our incorporation or in any presently proposed transaction which, in either case, has or
will materially affect us.



We and certain members of senior management
have entered into employment agreements and option agreements. The terms and conditions of these agreements are more fully described
in the section of this annual report titled “Executive Compensation” above.



On March 25, 2010, we acquired certain assets
formerly owned by Abundant Renewable Energy, LLC, a privately held Oregon limited liability company (“ARE”), from ARE’s
secured creditors (“Sellers”) in exchange for 3,192,152 shares of our common stock, par value $0.001 per share. The
assets acquired included intellectual property and other rights related to wind turbine systems formerly manufactured and sold
by ARE. The Sellers had been secured creditors of ARE and obtained the assets via a Collateral Surrender Agreement dated February
8, 2010. One of the Sellers was Core Fund, L.P., which received 2,750,614 of the Shares issued in connection with the Asset Purchase,
569,232 of which Core Fund, L.P. subsequently delivered to a non-affiliate third party. Mr. Shum is the Managing Principal of Core
Fund Management, L.P. and the Fund Manager of Core Fund, L.P. David Baker, our majority shareholder and the other member of our
board of directors effective as of March 26, 2010, is also a non-managing member of Core Fund Management, L.P. David Baker received
227,693 of the Shares issued in connection with the Asset Purchase.

33


Table of Contents


On March 23, 2010, we sold 875,000 shares of
our restricted common stock in a private placement to Core Fund, L.P. and to our former CEO, William Hagler, at $0.40 per share
for a total purchase price of $350,000. The total purchase price consisted of new investment of $165,000 and the conversion of
prior cash advances in the amount of $85,000, plus accrued interest, from Core Fund, L.P. and new investment of $100,000 from Mr.
Hagler.



On February 25, 2010, we sold 7,700 shares
of our restricted common stock in a private placement to our then sole officer and director, Steven Shum, at $0.01 per share for
a total purchase price of $77.00 and 22,845 shares to our then majority shareholder, David Baker, at $0.01 per share for a total
purchase price of $228.45.



Item 14. Principal Accounting Fees and Services



Below is the table of Audit Fees (amounts in
US$) billed by our auditor in connection with the audit of the Company’s annual financial statements for the years ended:





|Financial Statements for the Year Ended February 28, |  | Audit Services |        | Audit Related Fees |  | Tax Fees |   | Other Fees
|---------------------------------------------------- |  | -------------- | ------ | ------------------ |  | -------- | - | ----------
|2011                                                 |  | $              | 24,800 |                    |  |          | — |           
|2010                                                 |  | $              | 8,250  |                    |  |          | — |           





34


Table of Contents


PART IV



Item 15. Exhibits, Financial Statements Schedules



|(a) | Financial Statements and Schedules
|--- | ----------------------------------



The following financial statements and schedules
listed below are included in this Form 10-K.



Financial Statements (See Item 8)



|Exhibit Numbers | Description                                                                                                                                                               
|--------------- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|3.1             | Articles of Incorporation, as amended (7)                                                                                                                                 
|3.2             | Amended and Restated By-laws(5)                                                                                                                                           
|3.3             | Certificate of Amendment filed April 6, 2010 (5)                                                                                                                          
|3.4             | Certificate of Amendment filed May 7, 2010 (5)                                                                                                                            
|3.5             | Certificate of Amendment filed May 3, 2011(5)                                                                                                                             
|10.1            | Asset Purchase Agreement(1)                                                                                                                                               
|10.2            | Stock Option Plan(1)                                                                                                                                                      
|10.3            | First Amended Employment Agreement-S. Clayton Wood(9)                                                                                                                     
|10.4            | Stock Option Grant- S. Clayton Wood(1)                                                                                                                                    
|10.5            | Stock Option Grant- Steve Shum(1)                                                                                                                                         
|10.6            | Lease Agreement(2)                                                                                                                                                        
|10.7            | Third Amended and Restated Stock Option Plan(3)                                                                                                                           
|10.8            | Fourth Amended and Restated Stock Option Plan                                                                                                                             
|10.9            | Employment Agreement – David Baker (5)                                                                                                                                    
|10.10           | Sample Dealer Agreement (6)                                                                                                                                               
|10.11           | Employment Agreement – Frank Greco(4)                                                                                                                                     
|10.12           | Stock Option Agreement – Frank Greco(4)                                                                                                                                   
|10.13           | Incentive Stock Option Agreement – Frank Greco(4)                                                                                                                         
|23.1            | Consent of Silberstein Ungar, PLLC                                                                                                                                        
|31.1            | Certification of Chief Executive Officer pursuant to Securities Exchange Act Rule 13a-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002         
|31.2            | Certification of Chief Financial Officer pursuant to Securities Exchange Act Rule 13a-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002         
|32.1            | Certificate of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of th Sarbanes-Oxley Act of 2002



(1) Incorporated by reference to Annual Report on Form 10K filed
on March 26, 2010

(2) Incorporated by reference to Current Report on Form 8K filed
on May 3, 2010

(3) Incorporated by reference to Current Report on Form 8K filed
on July 12, 2010

(4) Incorporated by reference to Current Report on Form 8K filed
August 30, 2010

(5) Incorporated by reference to Registration Statement on Form
S-1 filed July 19, 2010

(6) Incorporated by reference to Registration Statement on Form
S-1/A filed September 7, 2010

(7) Incorporated by reference to Current Report on Form 8K filed
on May 10, 2011

(8) Incorporated by reference to Current Report on Form 10K/A filed
on February 18, 2011

(9) Incorporated by reference to Current Report on Form 8K filed
on May 6, 2011



35


Table of Contents


SIGNATURES



In accordance with Section 13 or 15(d) of the
Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.



XZERES Corp.



|By: /s/Frank Greco                                                                 
|-----------------------------------------------------------------------------------
|                                                                                   
|Title: President, Chief Executive Officer, Principal Executive Officer and Director
|Date:   May 27, 2011                                                               



|By: /s/Steven Shum                                                                                    
|------------------------------------------------------------------------------------------------------
|                                                                                                      
|Title: Chief Financial Officer, Principal Financial Officer, Principal Accounting Officer and Director
|Date: May 27, 2011                                                                                    



|By: /s/David Baker
|------------------
|                  
|Title: Director   
|Date: May 27, 2011





36