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UNITED STATES
SECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549

FORM 10-K

ý

Annual Report Under Section 13 or 15(d) of the Securities Exchange Act of 1934For the fiscal year ended April 30, 2011o

Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934For the transition period
from                                  to


Commission file number 001-33261

AEROVIRONMENT, INC.(Exact name of registrant as specified in its charter)

Delaware(State or other jurisdiction of incorporation or organization)

95-2705790(I.R.S. Employer Identification No.)181 W. Huntington Drive, Suite 202
Monrovia, CA(Address of Principal Executive Offices)

91016(Zip Code)Registrant's telephone number, including area code:(626) 357-9983


Securities registered pursuant to Section 12(b) of the Act:

Title of Class

Name of each exchange on which registeredCommon Stock, par value $0.0001 per share

The NASDAQ Stock Market LLC


Securities registered pursuant to Section 12(g) of the Act:

None

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

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

Indicate by check mark 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 ý    No o

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 o    No o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K 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. ý

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

Large accelerated filer o

Accelerated filer ý

Non-accelerated filer o (Do not check if a smaller reporting company)

Smaller reporting company o


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

The aggregate market value of the voting stock held by non-affiliates of the registrant, based on the closing price on the NASDAQ Global Select Market
on October 30, 2010 was approximately $413.3 million.

As
of June 10, 2011, the issuer had 22,057,784 shares of common stock, par value $0.0001 per share, issued and outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrant's definitive proxy statement to be filed with the Securities and Exchange Commission pursuant to Regulation 14A not later than
120 days after the conclusion of the registrant's fiscal year ended April 30, 2011, are incorporated by reference into Part III of this Form 10-K.



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AEROVIRONMENT, INC.  INDEX TO FORM 10-K



PagePART IItem 1.

Business

2Item 1A.

Risk Factors

27Item 1B.

Unresolved Staff Comments

49Item 2.

Properties

49Item 3.

Legal Proceedings

49Item 4.

(Removed and Reserved)

49PART IIItem 5.

Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

50Item 6.

Selected Consolidated Financial Data

52Item 7.

Management's Discussion and Analysis of Financial Condition and Results of Operations

52Item 7A.

Quantitative and Qualitative Disclosures About Market Risk

62Item 8.

Financial Statements and Supplementary Data

63Item 9.

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

90Item 9A.

Controls and Procedures

90Item 9B.

Other Information

91PART IIIItem 10.

Directors, Executive Officers and Corporate Governance

93Item 11.

Executive Compensation

93Item 12.

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

93Item 13.

Certain Relationships and Related Transactions, and Director Independence

93Item 14.

Principal Accounting Fees and Services

93PART IVItem 15.

Exhibits, Financial Statement Schedules

94


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PART I

Forward-Looking Statements

This Annual Report on Form 10-K, or Annual Report, contains forward-looking statements, which reflect our current
views about future events and financial results. We have made these statements in reliance on the safe harbor created by the Private Securities Litigation Reform Act of 1995 (set forth in
Section 27A of the Securities Act of 1933, as amended, or the Securities Act, and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act). Forward-looking
statements include our views on future financial results, financing sources, product development, capital requirements, market growth and the like, and are generally identified by terms such as "may,"
"will," "should," "could," "targets," "projects," "predicts," "contemplates," "anticipates," "believes," "estimates," "expects," "intends," "plans" and similar words. Forward-looking statements are
merely predictions and therefore inherently subject to uncertainties and other factors which could cause the actual results to differ materially from the forward-looking
statement. These uncertainties and other factors include, among other things:



Set
forth below in Item 1A, "Risk Factors" are additional significant uncertainties and other factors affecting forward-looking statements. The reader should understand that the
uncertainties and other factors identified in this Annual Report are not a comprehensive list of all the uncertainties and other factors that may affect forward-looking statements. We do not undertake
any obligation to update or revise any forward-looking statements or the list of uncertainties and other factors that could affect those statements.

Item 1.    Business.



We design, develop, produce and support a technologically-advanced portfolio of products and services. We supply unmanned aircraft
systems, or UAS, and related services primarily to organizations within the U.S. Department of Defense, or DoD. We also supply charging systems and services for electric vehicles, or EVs and power
cycling and test systems to commercial, consumer and government customers. We derive the majority of our revenue from these business areas and we believe that the markets for these solutions have
significant growth potential. Additionally, we believe that some of the innovative potential products in our research and development pipeline will emerge as new growth platforms in the future,
creating additional market opportunities.

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The
success we have achieved with our current products stems from our investment in research and development and our ability to invent and deliver advanced solutions, utilizing our
proprietary technologies, to help our government, commercial and consumer customers operate more effectively and efficiently. Our core technological capabilities, developed through 40 years of
innovation, include lightweight aerostructures, power electronics, electric propulsion systems, efficient electric power
generation and storage systems, high-density energy packaging, miniaturization, controls integration and systems engineering optimization.

Our
UAS business segment focuses primarily on the design, development, production and support of innovative UAS that provide situational awareness and other mission effects to increase
the security and effectiveness of our customers' operations. Our Efficient Energy Systems, or EES, business segment focuses primarily on the design, development, production and support of innovative
efficient electric energy systems that address the growing demand for electric transportation solutions.



As a technology solutions provider, our strategy is to develop innovative new solutions that enable us to create new markets or market
segments, gain market share and grow as market adoption increases. We believe that by introducing new solutions that provide customers with compelling value we are able to create new markets or market
segments and then grow our positions within those markets or market segments profitably, instead of competing in existing markets against large, incumbent competitors.

We
intend to grow our business by maintaining market leadership for UAS, electric vehicle charging systems and power cycling and test systems, and by creating new solutions that enable
us to enter and lead new markets. Key components of this strategy include the following:

Expand our current solutions to existing and new customers.Our small UAS,
electric vehicle charging systems and power cycling and test
systems are leading solutions in their respective markets. We intend to increase the penetration of our small UAS products and services within the U.S. military, the military forces of allied nations
and non-military customers. We believe that the continued adoption of our small UAS by the U.S. military will continue to spur demand by allied countries, and that our efforts to pursue
new applications will help to create opportunities beyond the military market we currently serve. We similarly intend to increase the penetration of our electric vehicle charging systems and services,
and our power cycling and test systems, into existing and new customer segments in North America and globally.

Deliver innovative new solutions.Innovation is the primary driver of our growth.
We plan to continue research and development efforts
to develop better, more capable products, services and business models, both in response to and in anticipation of emerging customer needs. In some cases these innovations result in upgrades to
existing offerings, expanding their value among existing customers and
markets. In other cases these innovations become entirely new solutions that position us to address new markets, customers and business opportunities. We believe that by continuing to invest in
research and development we will continue to deliver innovative new products and services that address market needs within and outside of our current target markets, enabling us to create new
opportunities for growth.

Foster our entrepreneurial culture and continue to attract, develop and retain highly-skilled personnel.We have created a company
culture that encourages innovation and an entrepreneurial spirit, which helps to attract and retain highly-skilled professionals. We intend to maintain this culture to encourage the development of the
innovative, highly technical system solutions and business models that give us our competitive advantage. A core component of our culture is the demonstration of trust

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and
integrity in all of our interactions, contributing to a positive work environment and engendering loyalty among our employees and customers.

Preserve our agility and flexibility.We are able to respond rapidly to evolving
markets, solve complicated customer problems, and
deliver new products and system capabilities quickly, efficiently and affordably. We believe this ability helps us to strengthen our relationships with customers and partners. We intend to maintain
our agility and flexibility, which we believe to be important sources of differentiation when we compete against organizations with more extensive resources.

Effectively manage our growth portfolio.Our production and development programs
and services provide us with numerous investment
opportunities that we believe will support our long-term growth. Each opportunity is evaluated independently and within the context of all other investment opportunities to determine its
relative priority. This process ensures that we allocate resources based on relative risks and returns to maximize long-term return on investment, which is a key element of our growth
strategy.



We develop innovative solutions that target potentially large, emerging market opportunities related to two growing, global trends: the
increasing economic and security value of network-centric, intelligence, surveillance, reconnaissance and communications solutions; and the increasing economic, environmental and energy security value
of electric transportation solutions. We believe that our focus on these trends constitutes important work that will benefit our company, stockholders, employees and community. The following table
provides a summary of the market opportunities we pursue, the market requirements we satisfy and solutions we develop:

Market Opportunity

Primary Market Requirements

Our SolutionsUAS ProductsMan-portable airborne intelligence, surveillance and reconnaissance, or ISR, tools for the rapid acquisition of tactical situational awareness within 20 kilometers

Minimum size, weight and volume for rucksack or vehicle
carriage High reliability and robust performance in various operating
environmentsDay and night video sensorsQuiet operationOperation via hand-held controller

Puma, Raven® and Wasp small UAS systems: Battery-powered with an electric motor, each aircraft produces
minimal audio signature and is designed for ruggednessOnboard
sensors stream live color or infrared video wirelessly to a monitor integrated into a hand-held ground control unitOperated from a common and interoperable ground control systemSupported by spare parts, repair and training servicesOffered as hardware or through turnkey flight services


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Market Opportunity

Primary Market Requirements

Our SolutionsRapidly deployable mesh network for tactical video, voice, data and text communications

Signal encryption Multiple available communications channelsLightweight, small, low power consumption

Digital Data Link, or DDL: Small, lightweight, low power, wireless video linkBi-directional, digital; enables enhanced command and control of
small UASInternet protocol-based for maximum flexibility and
interoperability between small airborne and ground systemsEfficient use of bandwidth maximizes the number of systems that can reliably operate within an areaEES ProductsCharging infrastructure for plug-in electric vehicles entering the global automotive market

Designed for safety and reliability Standards-based solutions for home and public chargingData and communications networking to integrate with smart grid and
various business models

Passenger and Fleet Electric Vehicle Charging Systems: 240-volt "Level 2" charging systems and a variety of
three-phase, 480-volt "Level 3," DC, or fast charging systems for fleet and public charging that range from 10 kilowatts to 250 kilowattsGeographically broad, qualified network of licensed electrical contractors for installation and support servicesInfrastructure tools for web-based integration with partners and service providersCharging infrastructure for plug-in electric industrial materials handling vehicles

Designed for safety and reliability Support multiple vehicle and battery typesEconomically scalable based on vehicle usage

PosiCharge Industrial Electric Vehicle Charging Systems: Broad range of solutions for different vehicle duty cyclesStandard connector interface to support multiple vehicles and
battery typesData and communications network for reporting and
trouble-shooting


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Market Opportunity

Primary Market Requirements

Our SolutionsFast, opportunity and conventional charging rates for
multiple user types and operational requirementsTest systems for electric vehicle developers, battery manufacturers, and electric energy research and development activities

Programmable, robust Multiple DC power levels for multiple test regimesDesigned for safety and reliability

Power Cycling and Test Systems: Programmable simulation of duty cycles for lifecycle testing
electric vehicles, battery packs and componentsSource and sink
for electrical loadsReturns electricity delivered by test items
to the gridUAS Development ProgramsOrganic, high-precision non-line-of-sight strike capability for dismounted forces

Man-portable, rapidly deployable Precise, lower probability for collateral damage

Switchblade: Backpack-able, tube-launched, loitering munitionUnfolds tandem wings upon ejection from launch tube and transmits
streaming video from an onboard sensorOperator identifies and
designates target using ground control unit monitorAircraft
autonomously guides itself to the target, with high precision and lower probability for collateral damageCan be launched from a variety of air and ground platformsAffordable, high altitude long endurance platforms for wide area ISR and communications

Seamless remote sensing and communications platform Less costly than satellites and existing manned and unmanned
aircraft systemsNo latitude restrictionsRapid turnaroundDeployable from outside combat areas

Global Observer: Hydrogen-powered, hybrid-electric propulsion system provides
more energy per unit of weight than conventional fuels to maximize enduranceComposite airframe reduces weight while maintaining structural strength


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Market Opportunity

Primary Market Requirements

Our SolutionsCapacity sufficient for existing payloads

Up to one week flight duration at up to 65,000 feet
in altitudeA system, consisting of at least two aircraft trading
positions over a designated geographic area, to provide continuous coveragean unblinking eyeat a significantly lower cost than available alternatives




We sell the majority of our UAS products and services to organizations within the DoD, including the U.S. Army, Marine Corps, Special
Operations Command and Air Force. Our EES business segment generates revenue from commercial, consumer and, to a lesser extent, government customers.

During
our fiscal year ended April 30, 2011, approximately 48% of our sales were made to the U.S. Army pursuant to orders made under contract by the U.S. Army on behalf of itself
as well as several other organizations within the DoD. Other U.S. government agencies and government subcontractors accounted for 35% of our sales revenue, while purchases by foreign, commercial
customers and consumers accounted for the remaining 17% of sales revenue during our fiscal year ended April 30, 2011.



The innovations developed by our company and our founder include, among others: the world's first effective human-powered and manned solar-powered airplanes; the
first modern passenger electric car, the EV1 prototype for General Motors; the world's highest flying airplane in level flight, Helios, a solar-powered UAS that reached over 96,000 feet in
2001; and, more recently, Global Observer, the world's first liquid hydrogen-fuelled UAS. The Smithsonian Institution has selected seven vehicles developed by us or our founder for its permanent
collection. Our history of innovation excellence is the result of our creative and skilled employees whom we encourage to invent and develop new technologies.

Our
company was founded by the late Dr. Paul B. MacCready, the former Chairman of our board of directors and an internationally renowned innovator who was instrumental in
establishing our entrepreneurial and creative culture. This culture has enabled us to consistently attract and retain highly-motivated, talented employees and has established our reputation as an
innovative leader in the industries in which we compete.

A
critical component of our ongoing innovation is a screening process that helps our business managers identify early market needs, which assists us in making timely investment into
critical technologies necessary to develop solutions to address these needs. Similarly, we manage new product and business concepts through a commercialization process that balances spending,
resources, time and intellectual property considerations against market requirements and potential returns on investment. Strongly linking our technology and business development activities to
customer needs in attractive growth markets is an important element of this process. Throughout the process we revalidate our

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customer
requirement assumptions to help ensure that the products and services we ultimately deliver are of high value.

As
a result of our commitment to research and development, we possess an extensive portfolio of intellectual property in the form of patents, trade secrets, copyrights and trademarks
across a broad range of UAS and advanced energy technologies. As of April 30, 2011, we had 65 U.S. patents issued; 74 U.S. patent applications pending; 31 active Patent Cooperation Treaty
applications; and numerous foreign patents and applications. In many cases, when appropriate and to preserve confidentiality, we opt to protect our intellectual property through trade secrets as
opposed to filing for patent protection.

The
U.S. government has licenses to some of our intellectual property that is specifically developed in performance of government contracts, and may use or authorize others to use this
intellectual property. In some cases we internally fund the development of certain intellectual property to maximize its value and limit potential competitors from utilizing it. While we consider the
development and protection of our intellectual property to be integral to the future success of our business, at this time we do not believe that a loss or limitation of rights to any particular piece
of our intellectual property would have a material adverse effect on our overall business.



A core component of our business strategy is the development and commercialization of innovative solutions that we believe can become new products and enable us
to enter large new markets or accelerate the growth of our current products. We invest in an active pipeline of these commercialization projects that range in maturity from technology validation to
early market adoption. We cannot predict when, if ever, these projects will be successfully commercialized, or the exact level of capital expenditures they could require, which could be substantial.
In our fiscal year 2011, we began to transition elements of our passenger and fleet electric vehicle charging systems offering from the development stage to the production stage as passenger electric
vehicles became available to consumers.

For
the fiscal years ended April 30, 2011, 2010 and 2009, our internal research and development spending amounted to 12%, 10% and 9%, respectively, of our revenue, and
customer-funded research and development spending amounted to an additional 12%, 32% and 27%, respectively, of our revenue.



Our marketing strategy is to increase awareness of our brand among key target market segments and to be associated with innovation,
flexibility, agility and the ability to deliver reliable new technology solutions that improve customer operational effectiveness and efficiency within these segments. Our reputation for innovation is
a key component of our brand and has been acknowledged through a variety of awards and recognized in numerous articles in domestic and international publications. We have registered the trademarks for
AeroVironment, PosiCharge, Global Observer and Raven and have submitted several other applications for trademark registration, including those for the AeroVironment logo, EV Solutions,
GO and Switchblade.



We are increasing our sales efforts abroad and have contracted with international sales representatives for our business segments in a number of foreign markets.
Our international sales accounted for approximately 7% of our revenue for the fiscal years ended April 30, 2011, 2010 and 2009.

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We believe that the principal competitive factors in the markets for our products and services include product performance, features,
acquisition cost, lifetime operating cost, including maintenance and support, ease of use, integration with existing equipment, quality, reliability, customer support, brand and reputation.



We pursue a lean and efficient manufacturing system strategy across our business segments, focusing on rapid prototyping, supply chain
management, final assembly, integration, quality and final acceptance testing. Using concurrent engineering techniques within an integrated product team structure, we rapidly prototype design concepts
and products while optimizing our designs for manufacturing requirements, mission capabilities and customer specifications. Within this framework we develop our products with feedback and input from
manufacturing, quality, supply chain management, key suppliers, logistics personnel and customers. We rapidly incorporate this input into product designs to ensure maximum efficiency and quality in
our products. As a result, we believe that we can significantly reduce the time required to move a product from its design phase to full-rate production deliveries with high reliability,
quality and yields.

We
outsource certain production activities, such as the fabrication of structures, the manufacture of subassemblies and payloads and the production of certain of our EV charging
products, to qualified suppliers, many of whom we have long-term relationships with. This outsourcing enables us to focus on final assembly system integration, and test processes for our
products, ensuring high levels of quality and reliability. We believe that our efficient supply chain is a significant strength of our manufacturing strategy. We have forged strong relationships with
key suppliers based on their ability to grow with our manufacturing needs and support our growth plans. We continue to expand upon our suppliers' expertise to improve our existing products and develop
new solutions. We rely on both single and multiple suppliers for certain components and subassemblies. See "Risk FactorsIf critical components of our products that we currently purchase
from a small number of suppliers or raw materials used to manufacture our products become scarce or unavailable, then we may incur delays in manufacturing and delivery of our products, which could
damage our business" for more information. All of our production system operations incorporate internal and external quality programs and processes to increase acceptance rates, reduce lead times and
lower cost.



We actively pursue internally and externally funded projects that help us to strengthen our technological capabilities. Our UAS
business segment submits bids to large research customers such as the Defense Advanced Research Projects Agency, the U.S. Air Force, the U.S. Army and the U.S. Special Operations Command for projects
that we believe have future commercial application. Contract engineering services conducted through our EES business segment represent a strategic source of innovation for us, and a portion of our
business involves providing advanced battery module and pack testing services to automotive manufacturers in support of their electric and hybrid electric vehicle development programs. Providing these
services contributes to the development and enhancement of our technical competencies. In an effort to manage the ability of our key technical personnel to support multiple, high-value
research and development initiatives, we attempt to limit the volume of contract engineering projects that we accept. This process enables us to focus these personnel on projects we believe offer the
greatest current and future value to our business.

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The table below shows our revenue for the periods indicated by contract type, including both government and commercial sales:

Fiscal Year Ended
April 30,2011

2010

2009Fixed-price contracts


69
%

59
%

59
%Cost reimbursable contracts


30
%

40
%

40
%Time-and-materials contracts


1
%

1
%

1
%




As of April 30, 2011, we had 768 full-time employees, of whom 281 were in research and development and engineering,
71 were in sales and marketing, 278 were in operations and 138 were general and administrative personnel. We believe that we have a good relationship with our employees.



We define funded backlog as unfilled firm orders for products and services for which funding currently is appropriated to us under the
contract by the customer. As of April 30, 2011 and April 30, 2010, our funded backlog was approximately $82.9 million and $72.3 million, respectively. We expect that 94% of
our funded backlog will be filled during our fiscal year ending April 30, 2012.

In
addition to our funded backlog, we had unfunded backlog of $230.8 million and $269.4 million as of April 30, 2011 and April 30, 2010, respectively. We
define unfunded backlog as the total remaining
potential order amounts under cost reimbursable and fixed price contracts with multiple one-year options, and indefinite delivery, indefinite quantity, or IDIQ contracts. Unfunded backlog
does not obligate the U.S. government to purchase goods or services. There can be no assurance that unfunded backlog will result in any orders in any particular period, if at all. Management believes
that unfunded backlog does not provide a reliable measure of future estimated revenue under our contracts.

Because
of possible future changes in delivery schedules and/or cancellations of orders, backlog at any particular date is not necessarily representative of actual sales to be expected
for any succeeding period, and actual sales for the year may not meet or exceed the backlog represented. Our backlog is typically subject to large variations from quarter to quarter as existing
contracts expire, or are renewed, or new contracts are awarded. A majority of our contracts, specifically our IDIQ contracts, do not currently obligate the U.S. government to purchase any goods or
services. Additionally, all U.S. government contracts included in backlog, whether or not they are funded, may be terminated at the convenience of the U.S. government.



AeroVironment, Inc. was originally incorporated in the State of California in July 1971 and reincorporated in Delaware in 2006.
In January 2007, we completed an initial public offering which resulted in the issuance of 5,252,285 shares of our common stock at a price of $17.00 per share, resulting in net proceeds to us
of approximately $80.5 million, after deducting payment of underwriters' discounts and commissions and offering expenses.

Our
principal executive offices are located at 181 W. Huntington Dr., Suite 202, Monrovia, California 91016. Our telephone number is
(626) 357-9983. Our website home page on the Internet ishttp://www.avinc.com. We make our website content available for information
purposes only. It should not be relied upon for investment purposes, nor is it incorporated by reference into this Form 10-K.

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We
make our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and proxy statement for our
annual stockholders' meeting, as well as any amendments to those reports, available free of charge through our website as soon as reasonably practical after we electronically file that material with,
or furnish it to, the Securities and Exchange Commission, or SEC. You can learn more about us by
reviewing our SEC filings. Our SEC reports can be accessed through the investor relations page of our web site athttp://investor.avinc.com. These
reports may also be obtained at the SEC's public reference room at 100 F. Street, N.E., Washington, DC 20549. The SEC also maintains a web site at www.sec.gov that contains reports,
proxy statements and other information regarding the Company.



Our UAS business segment addresses the increasing economic and security value of network-centric intelligence, surveillance,
reconnaissance, or ISR, and communications with innovative UAS solutions.



The market for small UAS has grown significantly over the last several years, initially due to the U.S. military's post-Cold War transformation, and
now more directly by the demands associated with the current global threat environment. Following the end of the Cold War, the U.S. military began its transformation into a smaller, more agile force
that operates via a network of observation, communication and precision targeting technologies. This transformation accelerated following the terrorist attacks of September 11, 2001, as the
U.S. military required improved, distributed observation and targeting of enemy combatants who operate in small groups, often embedded in dense population centers or dispersed in remote locations. We
believe that UAS, which range from large systems, such as Northrop Grumman'sGlobal Hawkand General Atomics' Predator,Sky
Warrior,Reaperand Grey Eagle, to small systems, such as our Raven, Wasp and Puma, serve as integral components of this
transforming military force. These systems provide
critical observation and communications capabilities serving the increasing demand for actionable intelligence, while reducing risk to individual "warfighters." Small UAS can provide
real-time observation and communication capabilities to the small units who control them. As we explore opportunities to develop new markets for our small UAS, such as border surveillance,
law enforcement, first response and infrastructure monitoring, we expect further growth through the introduction of UAS technology to non-military applications once rules are established
for their safe and effective operation in each country's national airspace.



We believe a market opportunity exists for UAS that can fly for multiple days to perform continuous remote sensing and communications relay missions in an
affordable manner. The emergence of distributed military threats in geographic areas with limited communications infrastructure has prompted U.S. military forces to deploy solutions to manage the
increasing volume of data generated by their operations in those areas. Existing solutions such as communications satellites and manned and unmanned aircraft address some of this emerging demand for
bandwidth, but do so at relatively high financial and resource costs. Given the nature of asymmetrical warfare, with embedded military adversaries operating in population centers, rural areas and
remote locations, the ability to observe areas of interest on a continuous basis with high resolution sensors remains a critical and largely unmet need. Geosynchronous satellites provide fixed,
continuous communications relay capabilities to much of the globe, but they operate nearly 25,000 miles from the surface of the earth, therefore limiting the bandwidth they can provide and
requiring relatively larger, higher power ground stations. Remote sensing satellites typically operate at lower altitudes, but are unable to maintain geosynchronous

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positions,
meaning they are moving with respect to the surface of the earth, resulting in a limited presence over specific areas of interest, and significant periods of time during which they are not
present over those areas. UAS that are capable of operating for extended periods of time over an area of interest without gaps in availability while carrying a communications relay or observation
payload in an affordable manner could help to satisfy this need.



The pursuit of weapons capable of rapid deployment and of striking their targets with high precision while minimizing the risk to surrounding civilians, property
and the user accelerated in recent years due to advances in enabling technologies. Weapons such as laser-guided missiles, "smart" bombs and GPS-guided artillery shells have dramatically
improved the accuracy of strikes against hostile targets. Most of these weapons systems typically are operated by elements of the armed forces that are geographically removed from the target area,
requiring advanced planning and coordination to enable their use. When ground forces find themselves engaged in a firefight or near a target, their ability to deploy and use a precision weapon system
quickly and easily can mean the difference between mission success and failure. Embedding a lethal payload into a man-portable unmanned aircraft system could provide warfighters with a
valuable alternative to existing airborne and land-based munitions systems.



Our small UAS, including Raven, Wasp and Puma, are designed to provide valuable ISR, including real-time tactical reconnaissance, tracking, combat
assessment and geographic data,
directly to the small tactical unit or individual warfighter, thereby increasing flexibility in mission planning and execution. Our small UAS wirelessly transmit critical live video and other
information generated by their payload of electro-optical or infrared sensors directly to a hand-held ground control unit, enabling the operator to view and capture images, during the day
or at night, on the control unit. Our ground control systems allow the operator to control the aircraft by programming it for GPS-based autonomous navigation using operator-designated
way-points and also provide for manual flight operation. The ground control systems are designed for durability and ease of use in harsh environments and incorporate a
user-friendly, intuitive, graphical user interface. All of our small UAS currently in production operate from our common ground control system.

All
of our small UAS are designed to be man-portable, assembled without tools in less than five minutes and launched and operated by one person, with limited training
required. The efficient and reliable electric motors used in all of our small UAS are powered by replaceable modular battery packs that can be swapped out in seconds, enabling rapid return to flight.
All of our small UAS, other than Switchblade, which we consider a loitering munition, are designed to be reusable and can be recovered through an autonomous landing feature that enables a controlled
descent to a designated location.

In
military applications, our small systems enable tactical commanders to observe around the next corner, to the next intersection or past the ridgeline in real-time. This
information facilitates faster, safer movement through urban, rural and mountainous environments and can enable troops to be proactive based on field intelligence rather than reactive. Moreover, by
providing this information, our systems reduce the risk to warfighters and to the surrounding population by providing the ability to tailor the military response to the threat. U.S. military personnel
regularly use our small UAS, such as Raven, for missions such as force protection, combat observation and damage assessment. These reusable systems are easy to transport, assemble and operate and are
relatively quiet when flying at typical operational altitudes of 200 to 300 feet above ground level, the result of our efficient electric propulsion systems. Furthermore, their small size makes
them difficult to see from the ground. In addition, the low cost of our small UAS systems relative to larger systems and alternatives makes it practical for customers to deploy these assets directly
to warfighters.

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Our
small UAS also include spare equipment, alternative payload modules, batteries, chargers, repair services and customer support. We provide training by our highly-skilled instructors,
who typically have extensive military experience, and continuous refurbishment and repair services for our products. By maintaining close contact with our customers and users in the field, we gather
critical feedback on our products and incorporate that information into ongoing product development and research and development efforts. This approach enables us to improve our solutions in response
to, and in anticipation of, evolving customer needs.

Each
system in our small UAS portfolio typically includes multiple aircraft, our common and interoperable hand-held ground control system and an array of spare parts and
accessories. Our current small UAS portfolio consists of the following aircraft:

Small
UAS
Product

Wingspan
(ft.)

Weight
(lbs.)

Recovery

Standard
Sensors

Range
(mi.)(1)

Flight Time
(min.)(1)Puma


9.2


13.0

Vertical autonomous landing capable (ground or water)

Mechanical pan, tilt, zoom and digital zoom electro-optical and infrared


9.0


120Raven


4.5


4.2

Vertical autonomous landing capable

Digital zoom electro-optical or infrared


6.0


90Wasp


2.4


1.0

Horizontal autonomous landing capable

Digital zoom electro-optical and infrared


3.0


45


(1)Represents
minimum customer-mandated specifications for all operating conditions. In optimal conditions, the performance of our products may significantly
exceed these specifications.


The
ground control system is the primary interface between the operator and the aircraft, and allows the operator to control the direction, speed and altitude of the aircraft as well as
view the visual information generated by the aircraft through real-time, streaming video. Our ground control system interfaces with each of our air vehicles, providing a common user
interface with each of our air vehicles. In addition to the thousands of air vehicles delivered to our customers, thousands of ground control systems are also in our customers' hands.

During
fiscal 2011 we began production of new digital Puma systems incorporating our DDL. This transition followed the successful initiation of our digital Raven system and retrofit kit
production in fiscal 2010. The result of a successful development program, DDL enhances the capabilities, and ultimately, the utility of our small UAS by enabling more efficient radio spectrum
utilization and communications security. Small UAS incorporating our DDL offer many more channels as compared to our analog link, increasing the number of air vehicles that can be operated in a given
area. Additionally, our DDL enables each air vehicle to operate as an Internet-Protocol addressable hub capable of routing and relaying video, voice and data to and from multiple other nodes on this ad hocnetwork. This capability will enable beyond line-of-sight operation of our small UAS, further enhancing their value
proposition to our customers.



In support of our small UAS we offer a suite of services that help to ensure the successful operation of our products by our customers. These services generate
incremental revenue for the company and provide us with continuous feedback to understand the utility of our systems, anticipate our customers' needs and develop additional customer insights. We
believe that this ongoing feedback loop enables us to continue to provide our customers with innovative solutions that help them succeed.

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We
provide spare parts as well as repair, refurbishment and replacement services through our services operation. We designed our services operation to minimize supply chain delays and provide our
customers with spare parts, replacement aircraft and support whenever and wherever they need them. We developed an Internet-accessible logistics system to provide our customers with the status of
their returned products and their inventory that we help manage. This secure system also provides recent parts and repairs history and tracks usage data to enable inventory optimization forecasting.
One of our facilities also serves as the primary depot for repairs and spare parts.

We
provide complete training services to support all of our small UAS. Our highly-skilled instructors typically have extensive military experience. We deploy training teams throughout
the continental United States and abroad to support our customers' wide variety of training needs on both production and development-stage systems.

Customers
who require the information generated by our small UAS but who may not wish to purchase and operate the equipment themselves can contract with us for turnkey flight operation
services. We can deploy our own operators to locations around the world to provide small UAS-generated reconnaissance video and information to support numerous types of missions.

We
provide contract engineering services in support of customer-funded research and development projects, delivering new value-added technology solutions to our customers. These types of
projects typically involve developing new system solutions and technology or new capabilities to existing solutions that we introduce as retrofits or upgrades. We recognize customer-funded research
and development projects as revenue.

We
supply our UAS products and services to multiple customers in the United States and beyond. During fiscal 2011, the U.S. Army, our largest customer, increased its projected total
demand for our Raven small UAS by 8%, from 2,182 to 2,358 new systems. We had delivered approximately 70% against the new acquisition objective as of April 30, 2011. During fiscal 2011, strong
initial adoption of our digital Puma system complemented continued demand for digital Raven systems and UAS services, increasing the diversity of our UAS portfolio. For the fiscal years ended
April 30, 2011, 2010, and 2009, our UAS segment products and services accounted for 85%, 90% and 85%, respectively, of our revenue.



Our primary areas of technological competence represent the sum of numerous technical skills and capabilities that help to differentiate our approach and product
offerings. The following list highlights a number of our key UAS technological capabilities:



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Three
of our UAS development programs are described below:



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We organize our U.S. small UAS business development team members by customer and product and have team members located where they are in close proximity to the
customers they support. Our program managers are organized by product and focus on designing optimal solutions and contract fulfillment, as well as internalizing feedback from customers and users. By
maintaining assigned points of contact with our customers, we believe that we are able to enhance our relationships, service existing contracts effectively and gain vital feedback to improve our
responsiveness and product offerings.



We have successfully developed the manufacturing infrastructure to produce small UAS products at high rates, support initial low rate production for new small UAS
development programs and execute
initial low-rate production of our stratospheric persistent UAS, Global Observer. Continued investment in infrastructure has established our manufacturing capability to meet demand with
scalable capacity. By drawing upon experienced personnel across various manufacturing industries, aerospace, automotive, volume commodity, we have progressed in establishing our lean production system
and leveraging our International Organization for Standardization, or ISO, certification, integrated supply chain strategy, document control systems, and process control methodologies for a high
volume, efficient production system. Presently, our small UAS manufacturing is performed at our 85,000 square foot manufacturing facility established in 2005. This ISO 9001:2000 certified
manufacturing facility is designed to accommodate demand of up to 1,000 aircraft per month. ISO 9001:2000 refers to a set of voluntary standards for quality management systems. These standards
are established by the ISO to govern quality management systems used worldwide. Companies that receive ISO certification have passed audits performed by a Registrar Accreditation Board-certified
auditing company. These audits evaluate the effectiveness of companies' quality management systems and their compliance with ISO standards. Some companies and government agencies view ISO
certification as a positive factor in supplier assessments. Our 105,000 square foot facility housing the Global Observer program is equipped with specialized testing and production capabilities to
enable low rate production of this unique system.



The market for small UAS is evolving rapidly and subject to changing technologies, shifting customer needs and expectations and the potential introduction of new
products. We believe that a number of established domestic and international defense contractors have developed or are developing

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small
UAS that will continue to compete directly with our products. Some of these contractors have significantly more financial and other resources than we possess. Our current principal small UAS
competitors include Elbit Systems Ltd., L-3 Communications Holdings, Inc. and Lockheed Martin Corporation. We do not view large UAS such as Northrop Grumman Corporation's Global Hawk, General
Atomics, Inc.'sPredatorand its derivatives, The Boeing Company'sScanEagleand Textron Inc.'sShadowas direct competitors to our small UAS because they perform
different missions, do not typically deliver their information directly to front-line ground forces and are not hand launched and controlled, although we cannot be certain that these
platforms will not become direct competitors in the future.

The
market for high altitude long endurance UAS is in its early stages of development. As a result, this category is not well defined and is characterized by multiple potential
solutions. Existing contractors that claim to provide long endurance UAS include Northrop Grumman Corporation with its Global Hawk. Several aerospace and defense contractors are pursuing this market
opportunity with proposed very long duration UAS, including The Boeing Company, Qinetiq Group PLC, Aurora Flight Sciences Corporation, Lockheed Martin Corporation and Northrop Grumman
Corporation. Companies pursuing airships as a solution for this market include Lockheed Martin Corporation and Northrop Grumman Corporation. Companies pursuing satellites as a solution for this market
include The Boeing Company, Lockheed Martin Corporation, General Dynamics Corporation, EADS N.V., Ball Corporation and Orbital Sciences Corporation.

An
established market for man-portable, high-precision loitering miniature airborne munitions systems does not currently exist. The successful introduction of our
Switchblade system could establish this market, and if so, would likely attract potential competitors that could range from large aerospace and defense prime contractors to smaller, more innovative
technology developers. Early potential competitors in this market include Textron Inc. and Raytheon Company.

We
believe that the principal competitive factors in the markets for our products and services include product performance, features, acquisition cost, lifetime operating cost, including
maintenance and support, ease of use, integration with existing equipment, quality, reliability, customer support, brand and reputation.



Due to the fact that we contract with the DoD and other agencies of the U.S. government, we are subject to extensive federal regulations, including the Federal
Acquisition Regulations, Defense Federal Acquisitions Regulations, Truth in Negotiations Act, Foreign Corrupt Practices Act, False Claims Act and the regulations promulgated under the DoD Industrial
Security Manual, which establishes the security guidelines for classified programs and facilities as well as individual security clearances. The federal government audits and reviews our performance
on contracts, pricing practices, cost structure, and compliance with applicable laws, regulations and standards. Like most government contractors, our contracts are audited and reviewed on a continual
basis by federal agencies, including the Defense Contract Management Agency, or DCMA and the Defense Contract Audit Agency, or DCAA.

Certain
of these regulations carry substantial penalty provisions, including suspension or debarment from government contracting or subcontracting for a period of time if we are found to
be in violation. We carefully monitor all of our contracts and contractual efforts to minimize the possibility of any violation of these regulations.

In
addition, we are subject to industry-specific regulations due to the nature of the products and services we provide.

For
example, we are subject to further U.S. government regulation, including by the Federal Aviation Administration, or FAA, which regulates airspace for all air vehicles, by the
National

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Telecommunications
and Information Administration and Federal Communications Commission, which regulate the wireless communications upon which our UAS depend, and under the International Traffic
in Arms Regulations, which regulate the export of controlled technical data, defense articles and defense services. In 2006, the FAA issued a clarification of its existing policies stating that, in
order to engage in public use of small UAS in the U.S. National Airspace System, a public (government) operator must obtain a Certificate of Authorization, or COA, from the FAA or fly in restricted
airspace. The FAA's COA approval process requires that the public operator certify the airworthiness of the aircraft for its intended purpose, that a collision with another aircraft or other airspace
user is extremely improbable, that the small UAS complies with appropriate cloud and terrain clearances and that the operator or spotter of the small UAS is generally within one half-mile
laterally and 400 feet vertically of the small UAS while in operation. Furthermore, the FAA's clarification of existing policy states that the rules for radio-controlled hobby aircraft do not
apply to public or commercial use of small UAS. The FAA is in the process of drafting updated regulations specifically for small UAS operations. We have engaged in discussions with the FAA to help
ensure that these new regulations allow for the maximum safe utilization of our small UAS.

Furthermore,
our non-U.S. operations are subject to the laws and regulations of foreign jurisdictions, which may include regulations that are more stringent than those
imposed by the U.S. government on our U.S. operations.



We sell the significant majority of our small UAS products and services as the prime contractor under contracts with the U.S. government. Certain important
aspects of our government contracts are described below.



We are awarded government contracts either on a sole-source basis or through a competitive bidding process. Most of our current government contracts
were awarded through a competitive bidding process. The U.S. government awards competitive-bid contracts based on proposal evaluation criteria established by the procuring agency.
Competitive-bid contracts are awarded after a formal bid and proposal competition among providers. Interested contractors prepare a bid and proposal in response to the agency's request for
proposal or request for information. A bid and proposal is usually prepared in a short time period in response to a deadline and requires the extensive involvement of numerous technical and
administrative personnel. Following award, competitive-bid contracts may be challenged by unsuccessful bidders.



The funding of U.S. government programs is subject to congressional appropriations. Although multi-year contracts may be authorized in connection with
major procurements, Congress generally appropriates funds on a fiscal year basis, even though a program may continue for many years. Consequently, programs are often only partially funded initially,
and additional funds are committed only as Congress makes further appropriations.

The
contracts for our full-rate production UAS are funded either through operational needs statements or as programs of record. Operational needs statements represent
allocations of discretionary spending or reallocations of funding from other government programs. Funding for our production of initial Raven deliveries was provided through operational needs
statements. We define a program of record as a program which, after undergoing extensive DoD review and product testing, is included in the five-year government budget cycle, meaning that
funding will be allocated for purchases under these contracts during the five-year cycle, absent affirmative action by the customer or Congress

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to
change the budgeted amount. Funding for these programs is subject to annual approval. We are currently the sole provider and prime contractor under all of the programs of record established by the
DoD for small UAS.



All contracts with the U.S. government contain provisions, and are subject to laws and regulations, that give the government rights and remedies not typically
found in commercial contracts, including rights that allow the government to:



Generally,
government contracts are subject to oversight audits by government representatives. Provisions in these contracts permit termination, in whole or in part, without prior
notice, at the government's convenience or upon contractor default under the contract. Compensation in the event of a termination, if any, is limited to work completed at the time of termination. In
the event of termination for convenience, the contractor may receive a certain allowance for profit on the work performed.



We have three types of government contracts, each of which involves a different payment methodology and level of risk related to the cost of performance. These
basic types of contracts are typically referred to as fixed-price contracts, cost reimbursable contracts, including cost-plus-fixed fee, cost-plus-award
fee, and cost-plus-incentive fee, and time-and-materials contracts.

In
some cases, depending on the urgency of the project and the complexity of the contract negotiation, we will enter into a Letter Contract prior to finalizing the terms of a definitive
fixed-price, cost reimbursable or time-and-materials definitive contract. A Letter Contract is a written preliminary contractual instrument that provides limited initial
funding and authorizes us to
begin immediately manufacturing supplies or performing services while negotiating the definitive terms of the procurement.



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The U.S. government frequently uses IDIQ contracts and IDIQ-type contract forms, such as cost reimbursable and fixed price contracts with multiple
one-year options, to obtain fixed-price, cost reimbursable and time-and-materials contractual commitments to provide products or services over a period of time
pursuant to established general terms and conditions. At the time of the award of an IDIQ contract or IDIQ-type contract, the U.S. Government generally commits to purchase only a minimal
amount of products or services from the contractor to whom such contract is awarded.

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After
award of an IDIQ contract the U.S. Government may issue task orders for specific services or products it needs. The competitive process to obtain task orders under an award
contract is limited to the pre-selected contractors. If such contract has a single prime contractor, then the
award of task orders is limited to that contractor. If the contract has multiple prime contractors, then the award of the task order is competitively determined among only those prime contractors.

IDIQ
and IDIQ-type contracts typically have multi-year terms and unfunded ceiling amounts which enable, but do not commit, the U.S. government to purchase
substantial amounts of products and services from one or more contractors.

Efficient Energy Systems

Our EES business segment addresses the increasing economic, environmental and energy security value of electric transportation solutions.



Electric and advanced hybrid electric vehicles require on-board battery packs to provide the electricity that powers their operation. These battery
packs range in size, weight and energy storage capacity. As drivers operate electric vehicles, their battery packs discharge electricity similar to the way an internal combustion vehicle's engine
consumes gasoline as it is driven. Upon fully discharging the battery pack, the driver of an electric vehicle must either replace it with a fully charged pack or recharge the pack while it remains in
the vehicle. Because of the differences in battery size and composition, as well as the design of each vehicle, a variety of charging systems exist to support these vehicles. These charging systems
range from relatively slow charging devices that require many hours to completely recharge a battery pack to extremely fast chargers that can do so in a very short amount of time.



Numerous factors contribute to a growing interest among consumers, governments and automakers for vehicles that do not rely on fossil fuels. These factors
include:



In
response to these factors numerous automotive manufacturers around the world are developing and introducing modern EVs for everyday consumer and fleet transportation. Vehicles in this
class will incorporate battery electric drive systems either in a dedicated format in which an onboard battery pack supplies electricity to an electric motor, or in an advanced hybrid design, in which
an onboard battery pack provides electricity to an electric motor, and a small onboard internal combustion engine recharges the battery as needed. An EV, requires that its battery pack be recharged
from an external power source or be replaced with a fully charged battery pack. An advanced hybrid EV does not require recharging from an external power source because it has an onboard gasoline
powered internal

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combustion
engine to recharge the battery pack, but doing so can minimize gasoline consumption and vehicle carbon emissions.

Most
EVs will likely be recharged using external systems installed at home, work and at public places such as shopping centers, supermarkets and locations similar to gasoline stations.
With the first new consumer electric vehicle models now entering the market and additional models scheduled to follow
there exists a need for the implementation of charging infrastructure to enable their safe, reliable and practical recharging.

The
rate at which a passenger electric vehicle battery pack can be recharged depends on its size, the capacity of the vehicle's onboard controller to invert electricity, its ability to
receive high current charging and the amount of power available. Electric vehicle charging systems are segmented into three general categories.

Level

Infrastructure Requirement

Recharge TimeLevel 1

Power cord that plugs into a dedicated 120-volt AC outlet

Capable of slow recharge that could require up to 24 hours or more for certain batteriesLevel 2, known as Electric Vehicle Supply Equipment

Requires professional installation of a dedicated 240-volt AC circuit

Capable of fully recharging most battery packs in six to eight hoursLevel 3, DC or fast charge

Typically requires installation into a three-phase, 480-volt AC circuit

Capable of fully recharging battery packs designed to accept such a charge in minutes


We
believe that broad adoption of passenger electric vehicles will require a mix of these types of charging systems, distributed so as to make them accessible to drivers when and where
they need them. The adoption of passenger electric vehicles will also necessitate supporting services, such as: experienced electrical assessment and installation capability, the integration into
smart grids, and the ability to monitor and manage the use of electricity and provide for various payment methods and plans such as subscription and credit card point-of-sale.



While
the broad availability of passenger electric vehicles is fairly recent, industrial electric vehicles have been in use for decades. In industrial environments such as factories,
distribution centers and airports, fast charge technology, which charges a battery with a high electrical current while the battery remains in the vehicle, eliminates the need for frequent battery
changing and a dedicated battery room. This approach increases productivity, reduces operating costs and improves facility safety. The earliest adopters of fast charge technology include the
automotive and air transportation industries. Large food and retail industry customers are now also utilizing fast charge technology.

Electric
industrial vehicles are powered by large onboard batteries that can consume up to 17 cubic feet and weigh up to 3,500 pounds. In multi-shift fleet operations traditional slow
charging systems require users to exchange vehicle batteries throughout the day because these batteries discharge their energy through vehicle usage and there is insufficient vehicle downtime to
recharge them during a shift. As a result, drivers must leave their work area when the battery reaches a low state of charge and drive to a dedicated battery changing room, which often occupies
valuable floor space and is frequently located far from a driver's work area. The driver, or in some cases a dedicated battery attendant, must then remove the battery from the vehicle, place it on a
storage rack, connect it to a conventional battery charger, identify a fully-charged battery, move it into the vehicle's battery compartment and reconnect the battery to the motor before the driver
may return to the work area. These battery changes take place every day in facilities around the world, resulting in reduced material movement and

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increased
operating costs. Furthermore, depending on the type of battery, conventional battery chargers can require up to eight hours to recharge the battery, which then must cool for up to an
additional eight hours before it is ready to be used again. Consequently, depending on vehicle usage and the number of shifts in an operation, a fleet may require more than one battery per vehicle,
which necessitates additional storage space, chargers and maintenance time. Moreover, the high levels of heat generated by conventional battery chargers during their normal use can cause excessive
evaporation of the water contained in the battery and damage to the battery's components. Over time, this evaporation of fluid and damage to components result in battery degradation and adversely
affect the battery's life.



Developers and manufacturers of electric and hybrid electric vehicles typically conduct a variety of tests on the electric propulsion and energy storage systems
that form the core of their vehicles. These tests include simulating the consumption, conversion and storage of electricity through a range of operating scenarios, and include long-term
testing to simulate the rigors of real-world driving. Developers of battery packs, electric motors and fuel cells also test their devices to validate design hypotheses and identify
potential operating issues. Global interest in electric transportation solutions, including electric and hybrid electric vehicles, has increased and has served as a driver of increased demand for
electric vehicle and component test systems. This demand spans commercial, government, military and university research and development labs as well as commercial manufacturing facilities as more
funding and attention are focused on clean transportation.



Our EES business segment produces electric transportation and industrial productivity solutions for commercial, consumer and government customers, develops new
potential electric transportation solutions and performs contract engineering services. These solutions consist of: electric vehicle charging systems for passenger and fleet vehicles,
PosiCharge® industrial electric vehicle charging systems for electric material handling vehicles and airport ground support equipment, and power cycling and test systems for developers and
manufacturers of EVs as well as battery packs, electric motors and fuel cells. For the fiscal years ended April 30, 2011, 2010 and 2009, EES sales accounted for 15%, 10% and 15%, respectively,
of our revenue. We believe that the markets for our electric vehicle charging systems and power cycling and test systems continue to develop and that continued diversification of our customer base
will support increased penetration into target markets.



In response to automakers' plans to introduce EVs and broader trends favoring electric transportation, we have developed solutions to support the adoption and use
of EVs from nearly every major automaker and many startups worldwide. Our initial EV charging technology emerged from our development of the GM Impact, the first modern EV. Over two decades we
improved the technology, deployed it to industrial markets, and adapted it for the next generation of EVs. We believe that most EV drivers will charge their vehicles overnight at their homes. For
those without a charging location at home or who make trips beyond the range of their vehicle's battery pack, public charging infrastructure will be required. Our strategy is to offer a full solution
of charging infrastructure, including overnight home chargers, public chargers, public fast chargers, installation services, data collection systems and communications through multiple wired and
wireless data communications options. We offer an integrated solution designed to enable the broad adoption and the practical use of electric and hybrid electric vehicles. From home charging to "pay
at the pump" fast charging in as little as ten minutes,

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our
goal is to enable drivers to use these electric vehicles as practical alternatives to gasoline-powered automobiles.

Part
of our strategy is to develop relationships across multiple channels that leverage our strengths and provide complementary pathways to market. We have announced several such
agreements to date with leading auto manufacturers, energy companies, state and municipal governments and an electric component distributor.

We
believe these early successes represent a valuable position from which to expand our charging infrastructure footprint in the United States and globally. We continue to work in the
United States and internationally with automakers, utilities and government agencies at multiple levels as well as with private industry to explore business models and to promote our solutions.

We
have also begun the commercial rollout of our EV fast charging system, which we view as a powerful tool that can help enable the broader adoption of these vehicles in two main
categories:



Developed from our work on electric and hybrid electric vehicles and advanced battery systems in the 1990s, PosiCharge industrial electric vehicle charging
systems quickly and safely recharge industrial vehicle batteries while the batteries remain in the vehicle during regularly scheduled breaks and other times when the vehicle is not in use, thereby
maintaining a sufficient level of energy throughout the workday. By eliminating battery changing, PosiCharge systems improve supply chain productivity by returning time to the vehicle operator to
complete more work. Furthermore, because of their advanced efficient energy capabilities, PosiCharge systems can reduce the amount of electricity required to support electric industrial vehicles by
several hundred dollars per year per vehicle, as compared to less efficient conventional battery chargers. Many customers who implement our charging systems in their facilities are able to
re-purpose the battery changing room floor space for more productive activities and create a safer working environment, as drivers or battery attendants no longer need to exchange large
lead-acid batteries continually.

The
proprietary battery charging algorithms built into PosiCharge systems, which are tailored to battery type, brand and size, maximize the rate at which energy is delivered into the
battery while minimizing heat generation and its damaging effects on the battery's internal components. We developed these algorithms over years of advanced battery testing and usage. We believe our
work to develop these algorithms contributed to the major battery manufacturers offering warranties for the use of their batteries with our charging systems, which provided a critical assurance to
customers that our rapid charging systems would not harm their batteries. In combination with a weekly equalization charge that balances all the cells within the battery pack, our "intelligent"
charging process enhances the performance of batteries. We believe that competing rapid and conventional charging systems, which lack our current and voltage regulating tailored charge algorithms and
monitoring capabilities,

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may
actually contribute to lower battery performance and lifespan, ultimately resulting in higher battery costs and degraded vehicle performance.

We
project that PosiCharge system customers typically begin to realize cost savings when compared to battery changing within the first 12 months of operation. Operators of large
fleets of electric industrial vehicles who use PosiCharge systems in multiple settings, including factories, distribution centers, cold storage facilities and airport tarmacs, include Ford Motor
Company, Continental Airlines, Inc., Total Logistics Control and IKEA.

Our
PosiCharge systems and support products range from lower-power devices for smaller, less heavily-used vehicles to high-power devices for large,
heavy-duty vehicles, and are capable of charging from one to 16 vehicles concurrently, depending on the needs of the operation. Included in our product line are systems for indoor and
outdoor use, such as for airport ground support equipment. We also supply accessories to help our customers integrate PosiCharge systems into their operations. These accessories include automated
battery watering systems, charge status indicator lights, battery-mounted fans and cable management options.

Our
PosiCharge systems and support products, such as the 2500 Series of opportunity chargers, the BatteryRx comprehensive battery health management solution and the Port Splitter,
are all designed to deliver increased performance and efficiency for a broad array of material handling environments, as well as more cost-effective solutions to our value-conscious
customers.

The
PosiCharge 2500 Series offers a high degree of flexibility. The 2500 Series charger automatically identifies the battery profile of a vehicle and customizes the charge
for safe and efficient in-vehicle charging that protects the battery. The 2500 Series charger has an efficiency rating of up to 90% and we believe it offers more standard features
than any other charger in its class. The addition of the Battery Rx advanced battery monitoring module enables customers to maximize the effectiveness and life of the batteries in their system. The
Battery Rx provides critical battery management information, such as real-time battery health, maintenance scheduling, preventive care and warranty compliance tracking. The Port Splitter
is another recent innovation. This
device doubles the capacity of a charging station, lowering the cost of implementation in distributed in-vehicle charging and allowing for staggered break schedules or spare trucks in a
fleet.

Our
PosiCharge offering is focused on providing new smart, efficient products to enhance the charging process and help customers maximize the life of their industrial fleets by managing
and extending the life of their batteries, and by increasing the productivity of their drivers.



We supply a line of power cycling and test systems to research and development organizations that focus on electric propulsion systems, electric generation
systems and electricity storage systems. Customers employ these electric load and sink systems to test batteries, electric motors and fuel cell systems.

Our
line of DC test systems has the flexibility to perform a variety of electric load tests. With a full power range (+/-5kW to +/-800kW) of
bi-directional DC equipment, our power cycling and test systems can handle virtually any DC supply or load requirementfrom lead acid to the latest lithium-ion
batteries to fuel cells with integrated power electronics. In addition, these systems can emulate any drive train component, enabling the testing of individual components or partial drive trains
accurately and realistically, allowing hardware-in-the-loop testing. We also offer flexible software control options via the C language Remote Operation
System and Windows-based languages such as LabVIEW or CAN.

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We have created and are expanding a network of licensed electrical contracting firms to provide installation and repair services for our growing footprint of
passenger and fleet electric vehicle charging systems. We identify, qualify, select, train and monitor the performance of these contractors and equip them with proprietary tools and
web-based information systems to facilitate the successful installation and support of our charging systems as this market opportunity grows. We intend to expand this network nationwide to
support customers across the United States. Our 24-hour customer service center provides around-the-clock support to answer customer inquiries and promote a high
level of customer satisfaction.

Our
products and services can readily be customized to support our partners' marketing programs. This capability is designed to enable automakers, utilities, government agencies and
other businesses to deliver a branded solution to their customers that will enhance their customer relationships.



The following list highlights a number of our key EES technological capabilities:





As the market for EVs emerges, we are pursuing numerous potential sales channels for our products and services. We continue to seek to partner with auto
manufacturers, utilities, government agencies and private enterprises, both domestically and abroad, to position ourselves for the potential demand for charging solutions associated with electric and
hybrid electric vehicle adoption. We also have the capability to sell directly to consumers. We have begun the development of a nationwide network of licensed electrical contractors who we train and
certify to install and service home charging systems. To enable this installation and service network we have developed an e-commerce platform to integrate customers' orders, inventory
management, dispatching and provisioning, billing and traceability. This platform, along with our nationwide network is designed to support our growth as we pursue numerous electric vehicle charging
opportunities.



We primarily sell our PosiCharge industrial electric vehicle charging systems through a dedicated, direct sales force whose members are located in close proximity
to the customers they support. The sales team targets large entities with the potential for domestic and international enterprise adoption of our solutions. The sales team also coordinates
distribution of PosiCharge systems through battery and
lift-truck dealers. These dealers' relationships with, and proximity to, our customers' facilities enable them to sell our solutions and provide post-sale service to our
customers. We believe that these dealers are well suited to address the large number of smaller and geographically dispersed customers with industrial vehicle fleets. When evaluating a facility for
its ability to benefit from PosiCharge systems, we typically perform a detailed analysis of the customer's operations. This analysis allows us to quantify the benefit projected for a PosiCharge system
implementation, helping customers to determine for themselves if the business case is sufficiently compelling.

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We sell our power cycling and test systems through a dedicated, direct sales force and through a network of international distributors
and representatives who have access to the research and development and manufacturing organizations that procure and use these types of systems. Given the distances involved, we enable and often rely
on our international distributors to provide service in support of our customers.

EES Manufacturing and Operations

We perform assembly and testing of our power cycling and test systems at a 20,000 square foot, ISO 9001:2008 certified facility.
We designed this facility for flexibility, using a work cell model for final assembly, and have included fixtures optimized for final testing. We utilize contract manufacturing for the production of
the majority of our PosiCharge industrial electric vehicle
charging systems. We have also implemented a contract manufacturing strategy to support our passenger and fleet electric and hybrid electric vehicle charging systems business opportunity.

EES Competition

Competitors in the emerging market for passenger and fleet electric and hybrid electric vehicle charging systems include focused
charging system suppliers such as Coulomb Technologies Inc., ECOtality Inc. and ClipperCreek Inc. and large industrial electrical device suppliers such as Eaton Corporation,
General Electric Company, Leviton Manufacturing Co., Inc., and Siemens AG.

The
primary direct competitors to PosiCharge systems are other fast charge suppliers, including Aker Wade Power Technologies LLC, PowerDesigners, LLC and
ECOtality Inc. Some of the major industrial motive battery suppliers have aligned themselves with fast charge suppliers. In addition, our PosiCharge systems compete against the traditional
method of battery changing. Competitors in this area include suppliers of battery changing equipment and infrastructure, designers of battery changing rooms, battery manufacturers and dealers who may
experience reduced sales volume because PosiCharge systems reduce or eliminate the need for extra batteries.

Direct
competitors for our power cycling and test systems include Bitrode Corporation and Digatron Firing Circuits.

We
believe that the principal competitive factors in the markets for our products and services include product performance, features, acquisition cost, lifetime operating cost, including
maintenance and support, ease of use, integration with existing equipment, quality, reliability, customer support, brand and reputation.

For
additional financial information with respect to our UAS and EES segments, please see Note 13 to our consolidated financial statements, which are included in Item 8,
"Financial Statements and Supplementary Data" of this Form 10-K.

Item 1A.    Risk Factors.

We rely heavily on sales to the U.S. government, particularly to agencies of the Department of Defense.

Historically, a significant portion of our total sales and substantially all of our small UAS sales have been to the U.S. government
and its agencies. Sales to the U.S. government, either as a prime contractor or subcontractor, represented approximately 83% of our revenue for the fiscal year ended April 30, 2011. The DoD,
our principal U.S. government customer, accounted for approximately 76% of our revenue for the fiscal year ended April 30, 2011. We believe that the success and growth of our business for the
foreseeable future will continue to depend on our ability to win government contracts, in particular from the DoD. Many of our government customers are subject to budgetary constraints

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and
our continued performance under these contracts, or award of additional contracts from these agencies, could be jeopardized by spending reductions or budget cutbacks at these agencies. The funding
of U.S. government programs is uncertain and dependent on continued congressional appropriations and administrative allotment of funds based on an annual budgeting process. We cannot assure you that
current levels of congressional funding for our products and services will continue. Furthermore, all of our contracts with the U.S. government are terminable by the U.S. government at will. A
significant decline in government expenditures generally, or with respect to programs for which we provide products, could adversely affect our business and prospects. Our operating results may also
be negatively impacted by other developments that affect these government programs generally, including the following:



These
developments and other factors could cause governmental agencies to reduce their purchases under existing contracts, to exercise their rights to terminate contracts
at-will or to abstain from renewing contracts, any of which would cause our revenue to decline and could otherwise harm our business, financial condition and results of operations.

Military transformation and changes in operational levels in Afghanistan and Iraq may affect future procurement priorities and existing programs, which could limit demand
for our UAS.

Following the end of the Cold War, the U.S. military began a transformation of its operational concepts, organizational structure and
technologies in an effort to improve warfighting capabilities. The resulting shift in procurement priorities toward achieving these capabilities, together with the operational activity in Afghanistan
and Iraq, led to an increase in demand for our small UAS. We cannot predict whether current or future changes in priorities due to defense transformation or continuation of the current nature and
magnitude of operations in Afghanistan and Iraq will afford new opportunities for our small UAS business in terms of existing, additional or replacement programs. Furthermore, we cannot predict
whether or to what extent this defense transformation or current operational levels in Afghanistan or Iraq will continue. If defense transformation or operations in Afghanistan and Iraq cease or slow
down, then our business, financial condition and results of operations could be impacted.

We operate in evolving markets, which makes it difficult to evaluate our business and future prospects.

Our UAS, electric vehicle charging systems and other energy technologies are sold in new and rapidly evolving markets. Accordingly, our
business and future prospects are difficult to evaluate. We cannot accurately predict the extent to which demand for our products will
increase, if at all. The challenges, risks and uncertainties frequently encountered by companies in rapidly evolving markets could impact our ability to do the following:



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If
we fail to address these and other challenges, risks and uncertainties successfully, our business, results of operations and financial condition would be materially harmed.

We face competition from other firms, many of which have substantially greater resources.

The defense industry is highly competitive and generally characterized by intense competition to win contracts. Our current principal
small UAS competitors include Elbit Systems Ltd., L-3 Communications Holdings Inc. and Lockheed Martin Corporation. We do not view large UAS such as Northrop Grumman
Corporation'sGlobal Hawk,General Atomics, Inc.'sPredator,The Boeing Company's ScanEagleand
Textron Inc.'sShadowas direct competitors because they perform different
missions, do not typically deliver their information directly to front-line ground forces, and are not hand launched and controlled, although we cannot be certain that these platforms will
not become direct competitors in the future. Some of these firms have substantially greater financial, management, research and marketing resources than we have. Our UAS services business also faces
competition from smaller businesses that can provide training and logistics services for multiple UAS platforms, including our small UAS.

The
primary direct competitors to our PosiCharge industrial electric vehicle charging system business are other fast charge suppliers, including Aker Wade Power Technologies LLC,
PowerDesigners, LLC and ECOtality Inc., as well as industrial battery manufacturers who distribute fast charging systems from these suppliers. The primary direct competitors to our power
cycling and test system business are other test system suppliers, including Bitrode Corporation and Digatron Firing Circuits. Our primary competitors in the emerging market for passenger and fleet
electric vehicle charging systems include charging system suppliers such as Coulomb Technologies Inc., ECOtality Inc. and ClipperCreek Inc. As the passenger and fleet electric and
hybrid electric vehicle charging systems market grows we expect that certain charging products may begin to be viewed as commodities, and we therefore anticipate increasing competition from various
charging system suppliers and large industrial electrical device suppliers such as Eaton Corporation, General Electric Company, Panasonic Corporation, Leviton Manufacturing Co., Inc.,
and Siemens AG. Our electric vehicle charging system installation and support services business faces competition from local licensed electricians as well as larger electrical service providers.

Our
competitors may be able to provide customers with different or greater capabilities or benefits than we can provide in areas such as technical qualifications, past contract
performance, geographic presence, price and the availability of key professional personnel, including those with security clearances. Furthermore, many of our competitors may be able to utilize their
substantially greater resources and economies of scale to develop competing products and technologies, manufacture in high volumes more efficiently, divert sales away from us by winning broader
contracts or hire away our employees by offering more lucrative compensation packages. Small business competitors in our services businesses may be able to offer more cost competitive services, due to
their lower overhead costs, and take advantage of small business incentive and set-aside programs for which we are ineligible. In the event that the market for small UAS or electric
vehicle charging systems and services

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expands,
we expect that competition will intensify as additional competitors enter the market and current competitors expand their product lines. In order to secure contracts successfully when
competing with larger, well-financed companies, we may be forced to agree to contractual terms that provide for lower aggregate payments to us over the life of the contract, which could
adversely affect our margins. In addition, larger diversified competitors serving as prime contractors may be able to supply underlying products and services from affiliated entities, which would
prevent us from competing for subcontracting opportunities on these contracts. Our failure to compete effectively with respect to any of these or other factors could have a material adverse effect on
our business, prospects, financial condition or operating results.

If the UAS, electric vehicle charging and power cycling and test systems markets do not experience significant growth, if we cannot expand our customer base or if our
products do not achieve broad acceptance, then we may not be able to achieve our anticipated level of growth.

For the fiscal year ended April 30, 2011, our UAS and EES businesses accounted for 85% and 15% of our total revenue,
respectively. We cannot accurately predict the future growth rates or sizes of these markets. Demand for our products may not increase, or may decrease, either generally or in specific markets, for
particular types of products or during particular time periods. We believe the market for electric vehicle charging is nascent. Moreover, there are only a limited number of major programs under which
the U.S. military, our primary customer, is currently funding the development or purchase of our UAS. Although we are seeking to expand our customer base to include foreign governments, domestic
non-military agencies and commercial customers, we cannot assure you that our efforts will be successful. The expansion of the UAS, electric vehicle charging and power cycling and test
systems markets in general, and the market for our products in particular, depends on a number of factors, including the following:



Even
if UAS and electrical vehicle charging and power cycling and test systems gain wide market acceptance, our products may not adequately address market requirements and may not
continue to gain market acceptance. If these types of systems generally, or our products specifically, do not gain wide market acceptance, then we may not be able to achieve our anticipated level of
growth and our revenue and results of operations would suffer.

If critical components of our products that we currently purchase from a small number of suppliers or raw materials used to manufacture our products become scarce or
unavailable, then we may incur delays in manufacturing and delivery of our products, which could damage our business.

We obtain hardware components and various subsystems from a limited group of suppliers. We do not have long-term agreements
with any of these suppliers that obligate them to continue to sell components or products to us. Our reliance on these suppliers involves significant risks and

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uncertainties,
including whether our suppliers will provide an adequate supply of required components of sufficient quality, will increase prices for the components and will perform their obligations
on a timely basis.

In
addition, certain raw materials and components used in the manufacture of our products are periodically subject to supply shortages, and our business is subject to the risk of price
increases and periodic delays in delivery. Similarly, the market for electronic components is subject to cyclical reductions in supply. If we are unable to obtain components from third- party
suppliers in the quantities and of the quality that we require, on a timely basis and at acceptable prices, then we may not be able to deliver our products on a timely or cost-effective
basis to our customers, which could cause customers to terminate their contracts with us, increase our costs and seriously harm our business, results of operations and financial condition. Moreover,
if any of our suppliers become financially unstable, then we may have to find new suppliers. It may take several months to locate alternative suppliers, if required, or to redesign our products to
accommodate components from different suppliers. We may experience significant delays in manufacturing and shipping our products to customers and incur additional development, manufacturing and other
costs to establish alternative sources of supply if we lose any of these sources or are required to redesign our products. We cannot predict if we will be able to obtain replacement components within
the time frames that we require at an affordable cost, if at all.

Any efforts to expand our offerings beyond our current markets may not succeed, which could negatively impact our operating results.

We have focused on selling our small UAS to the U.S. military, our industrial electric vehicle fast charging and test systems to large
industrial electric vehicle fleet operators primarily in North America, our power cycling and test systems primarily to research and development facilities in North America, and our electric vehicle
charging systems to domestic commercial customers, distributors and consumers. We plan, however, to seek to expand our UAS sales into other government and commercial markets, and our industrial
electric vehicle charging and power cycling and test systems and electric vehicle charging systems sales into international markets. Efforts to expand our product offerings beyond the markets that we
currently serve may divert management
resources from existing operations and require us to commit significant financial resources to unproven businesses that may not generate additional sales, either of which could significantly impair
our operating results.

Our failure to obtain necessary regulatory approvals from the FAA or other appropriate governmental agency may prevent us from expanding the sales of our small UAS to
non-military customers in the United States and require us to incur additional costs in the testing of our products.

In 2006, the FAA issued a clarification of its existing policies stating that, in order to engage in public use of small UAS in the
U.S. National Airspace System, a public (government) operator must obtain a COA, from the FAA or fly in restricted airspace. The FAA's COA approval process requires that the public operator certify
the airworthiness of the aircraft for its intended purpose, that a collision with another aircraft or other airspace user is extremely improbable, that the small UAS complies with appropriate cloud
and terrain clearances and that the operator or spotter of the small UAS is generally within one half-mile laterally and 400 feet vertically of the small UAS while in operation.
Furthermore, the FAA's clarification of existing policy states that the rules for radio-controlled hobby aircraft do not apply to public or commercial use of small UAS. The FAA is in the process of
drafting updated regulations specifically for small UAS operations, but we cannot assure you that these regulations will allow the use of our small UAS by potential non-military government
and commercial customers. If the FAA does not modify its regulations, we may not be able to expand our sales of UAS beyond our military customers, which could harm our business prospects. In addition,
if our DoD customers are unable to obtain COAs, we may not be able to perform our flight tests without incurring the additional

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costs
of transporting our small UAS products to military installations, when restricted airspace is available for testing, which could impair our operating results.

The markets in which we compete are characterized by rapid technological change, which requires us to develop new products and product enhancements, and could render our
existing products obsolete.

Continuing technological changes in the market for our products could make our products less competitive or obsolete, either generally
or for particular applications. Our future success will depend upon our ability to develop and introduce a variety of new capabilities and enhancements to our existing product offerings, as well as
introduce a variety of new product offerings, to address the changing needs of the markets in which we offer our products. Delays in introducing new products and enhancements, the failure to choose
correctly among technical alternatives or the failure to offer innovative products or enhancements at competitive prices may cause existing and potential customers to purchase our competitors'
products.

If
we are unable to devote adequate resources to develop new products or cannot otherwise successfully develop new products or enhancements that meet customer requirements on a timely
basis, our products could lose market share, our revenue and profits could decline, and we could experience operating losses.

The
electric vehicle charging industry is especially dynamic. For example, a single fast charge connector communication protocol standard for the U.S. market has not yet been
established, although other standards are emerging throughout the world. If we are unable to accurately anticipate fast charge standards that are adopted in our potential markets or develop products
that meet such standards quickly enough to meet customer requirements, our electric vehicle charging systems could lose market share, our revenue and profits could decline, and we could experience
operating losses.

We expect to incur substantial research and development costs and devote significant resources to identifying and commercializing new products, which could significantly
reduce our profitability and may never result in revenue to us.

Our future growth depends on penetrating new markets, adapting existing products to new applications, and introducing new products that
achieve market acceptance. We plan to incur substantial research and development costs as part of our efforts to design, develop and commercialize new products and enhance existing products. We spent
$35.8 million, or 12% of our revenue, in our fiscal year ended April 30, 2011 on research and development activities and expect to continue to spend significant funds on research and
development in the future. Because we account for research and development as an operating expense, these expenditures will adversely affect our earnings in the future. Further, our research and
development programs may not produce successful results, and our new products may not achieve market acceptance, create additional revenue or become profitable, which could materially harm our
business, prospects, financial results and liquidity.

If we are unable to manage our growth, our business could be adversely affected.

Our headcount and operations have grown rapidly over the last several years. This rapid growth has placed, and will continue to place,
a significant strain on our management and our administrative, operational and financial infrastructure. We anticipate further growth of headcount and facilities will be required to address increases
in our product offerings and the geographic scope of our customer base. Our success will depend in part upon the ability of our senior management to manage this growth effectively. To do so, we must
continue to hire, train, manage and integrate a significant number of qualified managers and engineers. If our new employees perform poorly, or if we are unsuccessful in hiring, training, managing and
integrating these new employees, or retaining these or our existing employees, then our business may suffer.

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For
us to continue our growth, we must continue to improve our operational, financial and management information systems. If we are unable to manage our growth while maintaining our
quality of service, or if new systems that we implement to assist in managing our growth do not produce the expected benefits, then our business, prospects, financial condition or operating results
could be adversely affected.

Our earnings and profit margins may decrease based on the mix of our contracts and programs and other factors related to our contracts.

In general, we perform our production work under fixed-price contracts and our repair and customer-funded research and development work
under cost-plus-fee contracts. Under fixed-price contracts, we perform services under a contract at a stipulated price. Under cost-plus-fee contracts,
which are subject to a contract ceiling amount, we are reimbursed for allowable costs and paid a fee, which may be fixed or performance based. We typically experience lower profit margins under
cost-plus-fee contracts than under fixed-price contracts, though fixed-price contracts have higher risks. In general, if the volume of services we perform under
cost-plus-fee contracts increases relative to the volume of services we perform under fixed- price contracts, we expect that our operating margin will suffer. In addition, our
earnings and margins may decrease depending on the costs we incur in contract performance, our achievement of other contract performance objectives and the stage of our performance at which our right
to receive fees, particularly under incentive and award fee contracts, is finally determined.

Our senior management and key employees are important to our customer relationships and overall business.

We believe that our success depends in part on the continued contributions of our senior management and key employees. We rely on our
executive officers, senior management and key employees to generate business and execute programs successfully. In addition, the relationships and reputation that members of our management team and
key employees have established and maintain with government defense personnel contribute to our ability to maintain good customer relations and to identify new business opportunities. We do not have
employment agreements with any of our executive officers or key employees, and these individuals could terminate their employment with us at any time. The loss of any of our executive officers,
members of our senior management team or key employees could significantly delay or prevent the achievement of our
business objectives and could materially harm our business and customer relationships and impair our ability to identify and secure new contracts and otherwise manage our business.

We must recruit and retain highly-skilled employees to succeed in our competitive business.

We depend on our ability to recruit and retain employees who have advanced engineering and technical services skills and who work well
with our customers. These employees are in great demand and are likely to remain a limited resource in the foreseeable future. If we are unable to recruit and retain a sufficient number of these
employees, then our ability to maintain our competitiveness and grow our business could be negatively affected. In addition, because of the highly technical nature of our products, the loss of any
significant number of our existing engineering personnel could have a material adverse effect on our business and operating results. Moreover, some of our U.S. government contracts contain provisions
requiring us to staff a program with certain personnel the customer considers key to our successful performance under the contract. In the event we are unable to provide these key personnel or
acceptable substitutes, the customer may terminate the contract.

Our business may be dependent upon our employees obtaining and maintaining required security clearances.

Certain of our U.S. government contracts require our employees to maintain various levels of security clearances, and we are required
to maintain certain facility security clearances complying with

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DoD
requirements. The DoD has strict security clearance requirements for personnel who work on classified programs. Obtaining and maintaining security clearances for employees involves a lengthy
process, and it is difficult to identify, recruit and retain employees who already hold security clearances. If our employees are unable to obtain security clearances in a timely manner, or at all, or
if our employees who hold security clearances are unable to maintain the clearances or terminate employment with us, then a customer requiring classified work could terminate the contract or decide
not to renew it upon its expiration. In addition, we expect that many of the contracts on which we will bid will require us to demonstrate our ability to obtain facility security clearances and employ
personnel with specified types of security clearances. To the extent we are not able to obtain facility security clearances or engage employees with the required security clearances for a particular
contract, we may not be able to bid on or win new contracts, or effectively rebid on expiring contracts.

Cost overruns on our contracts could subject us to losses, decrease our operating margins and adversely affect our future business.

Fixed-price contracts (including both government and commercial contracts) represented approximately 69% of our revenue for the fiscal
year ended April 30, 2011. If we fail to anticipate technical problems, estimate costs accurately or control costs during our performance of fixed-price contracts, then we may incur losses on
these contracts because we absorb any costs in excess of the fixed price. Under cost-plus-fee contracts, if costs exceed the contract ceiling or are not allowable under the
provisions of the contract or applicable regulations, then we may not be able to obtain reimbursement for all such costs. Under time and materials contracts, we are paid for labor at negotiated hourly
billing rates and for certain expenses. Under each type of contract, if we are unable to control the costs we incur in performing under the contract, then our financial condition and results of
operations could be materially adversely affected. Cost overruns also may adversely affect our ability to sustain existing programs and obtain future contract awards.

Our products are complex and could have unknown defects or errors, which may give rise to claims against us, diminish our brand or divert our resources from other purposes.

Our UAS rely on complex avionics, sensors, user-friendly interfaces and tightly-integrated, electromechanical designs to
accomplish their missions, and our electric vehicle charging and power cycling and test systems often rely upon the application of intellectual property for which there may have been little or no
prior commercial application. Despite testing, our products have contained defects and errors and may in the future contain defects, errors or performance problems when first introduced, when new
versions or enhancements are released, or even after these products have been used by our customers for a period of time. These problems could result in expensive and time-consuming design
modifications or warranty charges, delays in the introduction of new products or enhancements, significant increases in our service and maintenance costs, exposure to liability for damages, damaged
customer relationships and harm to our reputation, any of which could materially harm our results of operations and ability to achieve market acceptance. In addition, increased development and
warranty costs could be substantial and could reduce our operating margins.

The
existence of any defects, errors, or failures in our products or the misuse of our products could also lead to product liability claims or lawsuits against us. A defect, error or
failure in one of our UAS could result in injury, death or property damage and significantly damage our reputation and support for our UAS in general. While our PosiCharge industrial electric vehicle
charging systems include certain safety mechanisms, these systems can deliver up to 600 amps of current in their application, and the failure, malfunction or misuse of these systems could result in
injury or death. Our passenger and fleet electric and hybrid electric vehicle charging systems also have the potential to cause injury, death or property damage in the event that they are misused,
malfunction or fail to operate properly due to unknown defects or errors. Although we maintain insurance policies, we cannot assure

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you
that this insurance will be adequate to protect us from all material judgments and expenses related to potential future claims or that these levels of insurance will be available in the future at
economical prices or at all. A successful product liability claim could result in substantial cost to us. Even if we are fully insured as it relates to a claim, the claim could nevertheless diminish
our brand and divert management's attention and resources, which could have a negative impact on our business, financial condition and results of operations.

Our future profitability is dependent upon achieving cost reductions and projected economies of scale from increasing manufacturing quantities of our electric vehicle
charging systems. Failing to achieve such reductions in manufacturing costs and projected economies of scale could materially adversely affect our business.

We have limited experience manufacturing our electric vehicle charging systems in high volume. We do not know whether or when we will
be able to develop efficient, low-cost manufacturing capabilities and processes that will enable us to manufacture these products in commercial quantities while meeting the volume, speed,
quality, price, engineering, design and production standards required to successfully market our products. Our failure to develop such manufacturing processes and capabilities in locations that can
efficiently service our markets would have a material adverse effect on our business, financial condition, results of operations and prospects. We are beginning volume production of electric vehicle
charging systems in Taiwan, Italy and the United States. Historically, we have produced PosiCharge industrial electric vehicle charging systems and power cycling and test systems only in limited
production quantities. Our future profitability is, in part, dependent upon achieving increased savings from volume purchases of raw materials and component parts, achieving acceptable manufacturing
yield and capitalizing on machinery efficiencies. We expect the suppliers within our supply chain will experience a sharp increase in demand for their products. As a result, we may not have reliable
access to supplies that we require or be able to purchase such materials or components at cost effective prices. There is no assurance that we will ever be in a position to realize any material, labor
and machinery cost reductions associated with higher purchasing power and higher production levels. Failure to achieve these cost reductions could adversely impact our business and financial results.

We face significant risks in overseeing our outsourcing of manufacturing processes as well as in the management of our inventory, and failure to properly oversee our
manufacturing processes or to effectively manage our inventory levels may result in product recalls or supply imbalances that could harm our business.

We have contracted for the manufacture of certain electric vehicle charging systems with contract manufacturers. We sell these units
directly and through distributors, as well as through our own online sales channels. We face significant risks if our contract manufacturers do not perform as expected. If we fail to effectively
oversee the manufacturing process, including the work performed by our contract manufacturers, we could suffer from product recalls, poorly performing products and higher than anticipated warranty
costs.

In
connection with our manufacturing operations, we maintain a finished goods inventory of electric vehicle charging units in various locations, including with third party logistics
providers. Due to the long-lead time of our manufacturing cycles, we need to make forecasts of demand and commit significant resources towards manufacturing our electric vehicle charging
units. As such, we are subject to significant risks in managing the inventory needs of our business during the year, including estimates of the appropriate demand across our models. Should actual
market conditions differ from our estimates, our future results of operations could be materially adversely affected. In the future, we may be required to record write-downs of finished products and
materials on-hand and/or additional charges for excess purchase commitments as a result of future changes in our sales forecasts.

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Due to the volatile and flammable nature of certain components of our products and equipment, fires or explosions may disrupt our business or cause significant injuries,
which could adversely affect our financial results

The development and manufacture of certain of our products involves the handling of a variety of explosive and flammable materials as
well as high power equipment. From time to time, these activities may result in incidents that could cause us to temporarily shut down or otherwise disrupt some manufacturing processes, causing
production delays and resulting in liability for workplace injuries and/or fatalities. We have safety and loss prevention programs that require detailed reviews of process changes and new operations,
along with routine safety audits of operations involving explosive materials, to mitigate such incidents, as well as a variety of insurance policies. However, we cannot ensure that we will not
experience such incidents in the future or that any such incidents will not result in production delays or otherwise have a material adverse effect on our business and financial condition.

The operation of UAS in urban environments may be subject to risks, such as accidental collisions and transmission interference, which may limit demand for our UAS in such
environments and harm our business and operating results.

Urban environments may present certain challenges to the operators of UAS. UAS may accidentally collide with other aircraft, persons or
property, which could result in injury, death or property damage and significantly damage the reputation of and support for UAS in general. While we are aware of only one instance of an accidental
collision involving one of our UAS to date, as the usage of UAS has increased, particularly by military customers in urban areas of Afghanistan and Iraq, the danger of such collisions has increased.
Furthermore, the incorporation of our DDL technology into our UAS has increased the number of vehicles which can operate simultaneously in a given area and with this increase has come an increase in
the risk of accidental collision. In addition, obstructions to effective transmissions in urban environments, such as large buildings, may limit the ability of the operator to utilize the aircraft for
its intended purpose. The risks or limitations of operating UAS in urban environments may limit their value in such environments, which may limit demand for our UAS and consequently materially harm
our business and operating results.

As a manufacturer of electrical vehicle charging products and provider of electrical installation services to consumers, we are subject to various government regulations and
may be subject to additional regulations in the future, violation of which could subject us to sanctions or otherwise harm our business. In addition, we could be the subject of future product
liability suits or product recalls, which could harm our business.

As a manufacturer of consumer products, we are subject to significant government regulations, including, in the United States, under
The Consumer Products Safety Act, as well as under product safety and consumer protection statutes in our international markets. In addition, certain of our electrical contracting services are subject
to regulation by various government authorities. While we take all the steps we believe are necessary to comply with these regulations, there can be no assurance that we will be in compliance in the
future. Failure to comply could result in sanctions that could have a negative impact on our business, financial condition and results of operations. We may also be subject to involuntary product
recalls or may voluntarily conduct a product recall. The costs associated with any future product recalls, individually and in the aggregate in any given fiscal year, could be significant. In
addition, any product recall, regardless of direct costs of the recall, may harm consumer perceptions of our products and have a negative impact on our future revenues and results of operations.

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Governments and regulatory agencies in the markets where we manufacture and sell products may enact additional regulations relating to product safety and consumer
protection in the future, and may also increase the penalties for failure to comply with product safety and consumer protection regulations. In addition, one or more of our customers might require
changes in our products, such as the non-use of certain materials, in the future. Complying with any such additional regulations or requirements could impose increased costs on our
business. Similarly, increased penalties for non-compliance could subject us to greater expense in the event any of our products were found to not comply with such regulations. Such
increased costs or penalties could harm our business.

In
addition to government regulation, products that have been or may be developed by us may expose us to potential liability from personal injury or property damage claims by the users
of such products. There can be no assurance that a claim will not be brought against us in the future. Any successful claim could significantly harm our business, financial condition and results of
operations.

Our quarterly operating results may vary widely.

Our quarterly revenue, cash flow and operating results have and may continue to fluctuate significantly in the future due to a number
of factors, including the following:



Changes
in the volume of products and services provided under existing contracts and the number of contracts commenced, completed or terminated during any quarter may cause significant
variations in our cash flow from operations because a relatively large amount of our expenses are fixed. We incur significant operating expenses during the start-up and early stages of
large contracts and typically do not receive corresponding payments in that same quarter. We may also incur significant or unanticipated expenses when contracts expire or are terminated or are not
renewed. In addition, payments due to us from government agencies may be delayed due to billing cycles or as a result of failures of governmental budgets to gain congressional and presidential
administration approval in a timely manner.

Shortfalls in available external research and development funding could adversely affect us.

We depend on our research and development activities to develop the core technologies used in our UAS and EES products and for the
development of our future products. A portion of our research and development activities depends on funding by commercial companies and the U.S. government. U.S. government and commercial spending
levels can be impacted by a number of variables, including

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general
economic conditions, specific companies' financial performance and competition for U.S. government funding with other U.S. government-sponsored programs in the budget formulation and
appropriation processes. Moreover, the U.S., state and local governments provide energy rebates and incentives to commercial companies, which directly impact the amount of research and development
that companies appropriate for energy systems. To the extent that these energy rebates and incentives are reduced or eliminated, company funding for research and development could be reduced. Any
reductions in available research and development funding could harm our business, financial condition and operating results.

Volatility and cyclicality in the market for electric industrial vehicles could adversely affect us.

Our PosiCharge industrial electric vehicle charging system products are purchased primarily by operators of fleets of electric
industrial vehicles, such as forklift trucks and airport ground support equipment. Consequently, our ability to remain profitable depends in part on the varying conditions in the market for electric
industrial vehicles. This market is subject to volatility as it moves in response to cycles in the overall business environment and it is also particularly sensitive to the industrial, food and
beverage, retail and air travel sectors, which generate a significant portion of the demand for such vehicles. Sales of electric industrial vehicles have historically been cyclical, with demand
affected by such economic factors as industrial production, construction levels, demand for consumer and durable goods, interest rates and fuel costs. A significant decline in demand for electric
industrial vehicles could adversely affect our revenue and prospects, which would harm our business, financial condition and operating results.

Our success in the emerging market for passenger and fleet electric and hybrid electric vehicle charging systems will depend on numerous factors which are out of our
control.

The passenger and fleet electric and hybrid electric vehicle charging systems market is expected to grow rapidly, along with
innovations in fast charging technologies. As a result, we expect to face increasing competition from various charging system suppliers and large industrial electrical device suppliers such as Eaton
Corporation, General Electric Company, Panasonic and Siemens AG. While we believe that we currently have superior charging technology and service infrastructure, we cannot assure you that competitors
will not develop and bring to market substantially equivalent or superior technology. In addition, because the passenger electric and fleet charging systems market is relatively new, there is no
guarantee that there will be strong consumer demand for charging systems. Demand for such systems could also be directly impacted by fuel costs; if fuel costs were to significantly decrease, the
demand for electric vehicles and charging systems could decline. If there is little consumer demand for our passenger electric and fleet charging systems, our revenue and prospects could be adversely
affected, which would harm our business, financial and operating results.

Our industrial electric vehicle charging systems business is dependent upon our relationships with third parties with whom we do not have exclusive arrangements.

To remain competitive in the market for industrial electric vehicle charging systems, we must maintain our access to potential
customers and ensure that the service needs of our customers are met adequately. In many cases, we rely on battery and industrial vehicle dealers for access to potential industrial electric vehicle
charging system customers. Currently, several of our industrial electric vehicle charging system competitors are working with battery manufacturers to sell fast charging systems and batteries
together. Cooperative agreements between our competitors and battery manufacturers could restrict our access to battery dealers and potential industrial electric vehicle charging systems customers,
adversely affecting our revenue and prospects. Additionally, we rely on outside service providers to perform post-sale services for our PosiCharge industrial electric vehicle charging
system customers. If these service providers fail to perform these services as required or discontinue their

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business
with us, then we could lose customers to competitors, which would harm our business, financial condition and operating results.

Our electric and hybrid electric vehicle charging system business is dependent upon our development of relationships with automakers, utilities and other participants in the
electric and hybrid electric vehicle and electricity delivery markets.

In January 2010, we were selected by a major automaker to support the rollout of a new model electric vehicle across the U.S.
Accordingly, we depend upon that relationship and the success of the home charging rollout to those new model electric vehicle owners to expand our charging system footprint in the United States and
worldwide. If our partnership with that major automaker terminates prematurely, and we cannot establish similar relationships with other entities with direct access to electric vehicle owners and
drivers, we may not be able to develop a sustainable market for our home charging system, which may delay the commercialization of our charging systems or jeopardize the long-term success
of this product line. We believe that the success and growth of our passenger and fleet electric vehicle charging system business for the foreseeable future will also depend on our ability to develop
similar working relationships with other automakers in the U.S. and internationally. While we have been working with other automakers and utilities to explore business models and to promote our
solutions, there is no guarantee that we will be successful in doing so.

Our work for the U.S. Department of Defense and international governments may expose us to security risks.

We work in international locations where there are high security risks, which could result in harm to our employees and contractors or
substantial costs. Some of our services are performed in or adjacent to high-risk locations, such as Iraq and Kuwait, where the country or location is suffering from political, social or
economic issues, or war or civil unrest. In those locations where we have employees or operations, we may incur substantial costs to maintain the safety of our personnel. Despite these precautions,
the safety of our personnel in these locations may continue to be at risk, and we may in the future suffer the loss of employees and contractors, which could harm our business and operating results.
In addition, our position as a supplier of UAS to military forces may increase our security risk.

We may not be able to obtain capital when desired on favorable terms, if at all, or without dilution to our stockholders.

We operate in emerging and rapidly evolving markets, which makes our prospects difficult to evaluate. It is possible that we may not
generate sufficient cash flow from operations or otherwise have the capital resources to meet our future capital needs. If this occurs, then we may need additional financing to pursue our business
strategies, including to:



If
we raise additional funds through the issuance of equity or convertible debt securities, the percentage ownership of our stockholders could be significantly diluted, and these
newly-issued securities may have rights, preferences or privileges senior to those of existing stockholders. We cannot assure you that additional financing will be available on terms favorable to us,
or at all. Our former line of credit contained, and future debt financing may contain, covenants or other provisions that limit

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our
operational or financial flexibility. In addition, certain of our customers require that we obtain letters of credit to support our obligations under some of our contracts.

Our investment portfolio includes investments in auction rate securities. Failures in the auctions for these securities affect our liquidity, while deterioration in credit
ratings of issuers of such securities and/or third parties insuring such investments may require us to adjust the carrying value of our investment through an impairment of earnings.

As of April 30, 2011, our $6.3 million of long-term investments, recorded at fair value, consisted entirely
of auction rate municipal bonds with maturities that range from approximately 8 to 23 years. These investments have characteristics similar to short-term investments, because at
pre-determined intervals, generally ranging from 30 to 35 days, there is a new auction process at which the interest rates for these securities are reset to current interest rates.
At the end of such period, we choose to roll-over our holdings or redeem the investments for cash. A market maker facilitates the redemption of the securities and the underlying issuers
are not required to redeem the investment within 365 days.

In
2009, 2010 and 2011, we experienced failed auctions of our auction rate securities and there is no assurance that auctions on the remaining auction rate securities in our investment
portfolio will succeed in the future. As a result, our ability to liquidate our investments in the near term may be limited, and our ability to recover the carrying value of our investments may be
limited. An auction failure means that the parties wishing to sell securities were not able to do so. As of June 10, 2011, including the securities involved in failed auctions, we held
approximately $6.3 million of these auction rate securities, all of which carry investment grade ratings. These investments are subject to general credit, liquidity,
market and interest rate risks, which may be exacerbated by continued problems in the global credit markets, including but not limited to, U.S. subprime mortgage defaults, writedowns by major
financial institutions due to deteriorating values of their assets portfolios, including leveraged loans, collateralized debt obligations, credit default swaps, and other credit-linked products. These
and other related factors have affected various sectors of the financial markets and caused credit and liquidity issues. If the issuers of these securities are unable to successfully close future
auctions or their credit ratings deteriorate, we may in the future be required to record an impairment charge on these investments. We currently believe these securities are not permanently impaired,
primarily due to the government backing of the underlying securities. However, it could take until the final maturity of the underlying notes (up to 23 years) to realize our investments'
purchase price of $7.6 million. Based on our ability to access our cash and cash equivalents, expected operating cash flows, and our other sources of cash, we do not anticipate that the current
lack of liquidity on these investments will affect our ability to continue to operate our business in the ordinary course, however we can provide no assurance as to when these investments will again
become liquid or as to whether we may ultimately have to recognize an impairment charge with respect to these investments.

We face risks related to the current challenging economic environment.

Our business, financial condition and results of operation could be negatively affected by economic conditions generally, both in the
United States and elsewhere around the world. Continuing concerns over inflation, energy costs, geopolitical issues, the availability and cost of credit, the U.S. mortgage market and a difficult
residential real estate market in the United States have contributed to increased volatility and diminished expectations for the economy and the markets going forward. These factors, combined with
volatile oil prices, declining business and consumer confidence and continued unemployment concerns, have resulted in heightened volatility and turmoil in domestic and international equity markets.
These events and the continuing market upheavals could adversely affect our business in a number of ways, including:

Potential Deferment of Purchases and Orders by Customers:Uncertainty about current and future global economic conditions may cause
governments,
including the U.S. government, which is our largest

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customer,
consumers and businesses to modify, defer or cancel purchases in response to tighter credit, decreased cash availability and declining consumer confidence. Accordingly, future demand for our
products could differ materially from our current expectations. Additionally, if customers are not successful in generating sufficient revenue or are precluded from securing financing, they may not be
able to pay, or may delay payment of, accounts receivable that are owed to us. Any inability of current and/or potential customers to pay us for our products may adversely affect our earnings and cash
flow.

Negative Impact from Increased Financial Pressures on Key Suppliers:Our ability to meet customers' demands depends, in part, on our
ability to
obtain timely and adequate delivery of quality materials, parts and components from our suppliers. Certain of our hardware components and various subsystems are available only from a limited group of
suppliers. If certain key suppliers were to become capacity constrained or insolvent as a result of a continuing market downturn, then we may have to find new suppliers. We may experience significant
delays in manufacturing and shipping our products to customers and incur additional development, manufacturing and other costs to establish alternative sources of supply if we lose any of these
sources or are required to redesign our products. We cannot predict if we will be able to obtain replacement components within the time frames that we require at an affordable cost, if at all. In
addition, credit constraints of key suppliers could result in accelerated payment of accounts payable by us, impacting our cash flow.

Customers' Inability to Obtain Financing to Make Purchases from Us and/or Maintain Their Business:Some of our customers may require
substantial
financing in order to fund their operations and make purchases from us. The inability of these customers to obtain sufficient credit to finance purchases of our products, or otherwise meet their
payment obligations to us could adversely impact our financial condition and results of operations. In addition, if a continuing market downturn results in insolvencies for our customers, it could
adversely impact our financial condition and results of operations.

Our international business poses potentially greater risks than our domestic business.

We derived approximately 7% of our revenue from international sales during the fiscal year ended April 30, 2011. We expect to
derive an increasing portion of our revenue from international sales. Our international revenue and operations are subject to a number of material risks, including the
following:



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Negative
developments in any of these areas in one or more countries could result in a reduction in demand for our products, the cancellation or delay of orders already placed, threats
to our intellectual property, difficulty in collecting receivables and a higher cost of doing business, any of which could negatively impact our business, financial condition or results of operations.
Moreover, our sales, including sales to customers outside the United States, are denominated in dollars, and downward fluctuations in the value of foreign currencies relative to the U.S. dollar may
make our products more expensive than other products, which could harm our business.

Potential future acquisitions could be difficult to integrate, divert the attention of key personnel, disrupt our business, dilute stockholder value and impair our financial
results.

We intend to consider strategic acquisitions that would add to our customer base, technological capabilities or system offerings.
Acquisitions involve numerous risks, any of which could harm our business, including the following:



Acquisitions
also frequently result in the recording of goodwill and other intangible assets which are subject to potential impairments in the future that could harm our financial
results. In addition, if we finance acquisitions by issuing equity, or securities convertible into equity, then our existing stockholders may be diluted, which could lower the market price of our
common stock. If we finance acquisitions through debt, then such future debt financing may contain covenants or other provisions that limit our operational or financial flexibility. As a result, if we
fail to properly evaluate acquisitions or investments, then we may not achieve the anticipated benefits of any such acquisitions, and we may incur costs in excess of what we anticipate. The failure to
successfully evaluate and execute acquisitions or investments or otherwise adequately address these risks could materially harm our business and financial results.

Environmental laws and regulations and unforeseen costs could impact our future earnings.

The manufacture and sale of our products in certain states and countries may subject us to environmental and other regulations. For
example, we obtain a significant number of our electronics components from companies located in East Asia, where environmental rules may be less stringent than

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in
the United States. Over time, the countries where these companies are located may adopt more stringent environmental regulations, resulting in an increase in our manufacturing costs. Furthermore,
certain environmental laws, including the U.S. Comprehensive, Environmental Response, Compensation and Liability Act of 1980, impose strict, joint and several liability on current and previous owners
or operators of real property for the cost of removal or remediation of hazardous substances and impose liability for damages to natural resources. These laws often impose liability even if the owner
or operator did not know of, or was not responsible for, the release of such hazardous substances. These environmental laws also assess liability on persons who arrange for hazardous substances to be
sent to disposal or treatment facilities when such facilities are found to be contaminated. Such persons can be responsible for cleanup costs even if they never owned or operated the contaminated
facility. Although we have not yet been named a responsible party at a contaminated site, we could be named a potentially responsible party in the future. We cannot assure you that such existing laws
or future laws will not have a material adverse effect on our future earnings or results of operations.

Our passenger and fleet electric vehicle charging system business is subject to federal, state and international laws regarding data protection and privacy, and a privacy
breach could damage our reputation, expose us to litigation risk and adversely affect our business.

In connection with our emerging passenger and fleet electric vehicle charging system business, we collect, process and retain certain
sensitive and confidential customer information. As a result, we are subject to increasingly rigorous federal, state and international laws regarding privacy and data protection. Compliance with these
constantly evolving laws may cause us to incur significant costs or require changes to our business practices, which could reduce our revenue. If we fail to comply with these laws, proceedings may be
brought against us by governmental entities or others or penalties may be imposed on us, either of which could have a material adverse effect on our business, results of operations and financial
condition. While we rely, in part, on security services and software provided by outside vendors to protect sensitive and confidential customer information, there is no guarantee that the protections
that we or our outside vendors have implemented will prevent security breaches. Any actual, threatened or perceived security breach that could result in misappropriation, loss or other unauthorized
disclosure of sensitive or confidential customer information could harm our reputation and relationship with customers, expose us to litigation risk and liability and adversely affect our business.

Our business and operations are subject to the risks of earthquakes and other natural catastrophic events.

Our corporate headquarters, research and development and manufacturing operations are located in Southern California, a region known
for seismic activity and wild fires. A significant natural disaster, such as an earthquake, fire or other catastrophic event, could severely affect our ability to conduct normal business operations,
and as a result, our future operating results could be materially and adversely affected.

Risks Related to Our U.S. Government Contracts

We are subject to extensive government regulation, and our failure to comply with applicable regulations could subject us to penalties that may restrict our ability to
conduct our business.

As a contractor to the U.S. government, we are subject to and must comply with various government regulations that impact our revenue,
operating costs, profit margins and the internal

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organization
and operation of our business. The most significant regulations and regulatory authorities affecting our business include the following:



Also,
we need special security clearances and regulatory approvals to continue working on certain of our projects with the U.S. government. Classified programs generally will require
that we comply with various executive orders, federal laws and regulations and customer security requirements that may include restrictions on how we develop, store, protect and share information, and
may require our employees to obtain government security clearances. Our failure to comply with applicable regulations, rules and approvals or misconduct by any of our employees could result in the
imposition of fines and penalties, the loss of security clearances, the loss of our government contracts or our suspension or
debarment from contracting with the U.S. government generally, any of which would harm our business, financial condition and results of operations. We are also subject to certain regulations of
comparable government agencies in other countries, and our failure to comply with these non-U.S. regulations could also harm our business, financial condition or results of operations.

Our business could be adversely affected by a negative audit or investigation by the U.S. government.

U.S. government agencies, primarily the DCAA and the DCMA, routinely audit and investigate government contractors. These agencies
review a contractor's performance under its contracts, cost structure and compliance with applicable laws, regulations and standards. These agencies also may review the adequacy of, and a contractor's
compliance with, its internal control systems and policies, including the contractor's purchasing, property, estimating, compensation and management information systems.

Like
most government contractors, our contracts are audited and reviewed on a continual basis by the DCMA and the DCAA. Audits for costs incurred on work performed after fiscal year 2005
have

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not
yet been completed. In addition, non-audit reviews or investigations by the government may still be conducted on all of our government contracts. Any costs found to be improperly
allocated to a specific contract will not be reimbursed, while such costs already reimbursed must be refunded. If an audit or investigation of our business were to uncover improper or illegal
activities, then we could be subject to civil and criminal penalties and administrative sanctions, including termination of contracts, forfeiture of profits, suspension of payments, fines and
suspension or prohibition from doing business with the U.S. government. We could suffer serious harm to our reputation if allegations of impropriety or illegal acts were made against us, even if the
allegations were inaccurate. In addition, responding to governmental audits or investigations may involve significant expense and divert management attention. If any of the foregoing were to occur,
our financial condition and operating results could be materially adversely affected.

Moreover,
if any of our administrative processes and systems are found not to comply with the applicable requirements, we may be subjected to increased government scrutiny or required to
obtain additional governmental approvals that could delay or otherwise adversely affect our ability to compete for or perform contracts. An unfavorable outcome to such an audit or investigation by the
DCAA, DOJ or other government agency, could materially adversely affect our competitive position, affect our ability to obtain the maximum price for our products and services, and result in a
substantial reduction of our revenues.

If
we were suspended or debarred from contracting with the federal government generally, or any specific agency, if our reputation or relationship with government agencies were impaired,
or if the government otherwise ceased doing business with us or significantly decreased the amount of business it does with us, our revenue and operating results would be materially harmed.

In
February 2010, we were notified by the U.S. Department of Justice, or DOJ, that it had initiated a civil investigation into our billing practices with respect to our government
contracts. The investigation is focused on three matters:



We
are currently cooperating with this investigation, which we believe may be the result of prior DCAA audit activity. Based on our current understanding of the matters identified, we
believe that the outcome of the investigation will not have a material impact on our business. We are voluntarily cooperating with a request for information received in connection with this
investigation. No claim has been filed against us to date.

Some of our contracts with the U.S. government allow it to use inventions developed under the contracts and to disclose technical data to third parties, which could harm our
ability to compete.

Some of our contracts allow the U.S. government to use, royalty-free, or have others use, inventions developed under those
contracts on behalf of the government. Some of the contracts allow the federal government to disclose technical data without constraining the recipient on how those data are used. The ability of third
parties to use patents and technical data for government purposes creates the possibility that the government could attempt to establish alternative suppliers or to negotiate with us to reduce our
prices. The potential that the government may release some of the technical data without constraint creates the possibility that third parties may be able to use this data to compete with us, which
could have a material adverse effect on our business, results of operations or financial condition.

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U.S. government contracts are generally not fully funded at inception and contain certain provisions that may be unfavorable to us, which could prevent us from realizing our
contract backlog and materially harm our business and results of operations.

U.S. Government contracts typically involve long lead times for design and development, and are subject to significant changes in
contract scheduling. Congress generally appropriates funds on a fiscal year basis even though a program may continue for several years. Consequently, programs are often only partially funded
initially, and additional funds are committed only as Congress makes further appropriations. The termination or reduction of funding for a government program would result in a loss of anticipated
future revenue attributable to that program.

The
actual receipt of revenue on awards included in backlog may never occur or may change because a program schedule could change or the program could be canceled, or a contract could be
reduced, modified or terminated early.

In
addition, U.S. government contracts generally contain provisions permitting termination, in whole or in part, at the government's convenience or for contractor default. Since a
substantial majority of our revenue is dependent on the procurement, performance and payment under our U.S. government contracts, the termination of one or more critical government contracts could
have a negative impact on our results of operations and financial condition. Termination arising out of our default could expose us to liability and have a material adverse effect on our ability to
re-compete for future contracts and orders. Moreover, several of our contracts with the U.S. government do not contain a limitation of liability provision, creating a risk of
responsibility for indirect, incidental
damages and consequential damages. These provisions could cause substantial liability for us, especially given the use to which our products may be put.

U.S. government contracts are subject to a competitive bidding process that can consume significant resources without generating any revenue.

U.S. government contracts are frequently awarded only after formal, protracted competitive bidding processes and, in many cases,
unsuccessful bidders for U.S. government contracts are provided the opportunity to protest contract awards through various agency, administrative and judicial channels. We derive significant revenue
from U.S. government contracts that were awarded through a competitive bidding process. Much of the UAS business that we expect to seek in the foreseeable future likely will be awarded through
competitive bidding. Competitive bidding presents a number of risks, including the following:



We
may not be provided the opportunity to bid on contracts that are held by other companies and are scheduled to expire if the government extends the existing contract. If we are unable
to win particular contracts that are awarded through a competitive bidding process, then we may not be able

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to
operate in the market for goods and services that are provided under those contracts for a number of years. If we are unable to win new contract awards over any extended period consistently, then
our business and prospects will be adversely affected.

Risks Related to Our Intellectual Property

If we fail to protect, or incur significant costs in defending, our intellectual property and other proprietary rights, our business, financial condition, and results of
operations could be materially harmed.

Our success depends, in large part, on our ability to protect our intellectual property and other proprietary rights. We rely primarily
on patents, trademarks, copyrights, trade secrets and unfair competition laws, as well as license agreements and other contractual provisions, to protect our intellectual property and other
proprietary rights. However, a significant portion of our technology is not patented, and we may be unable or may not seek to obtain patent protection for this technology. Moreover, existing U.S.
legal standards relating to the validity, enforceability and scope of protection of intellectual property rights offer only limited protection, may not provide us with any competitive advantages, and
may be challenged by third parties. The laws of countries other than the United States may be even less protective of intellectual property rights. Accordingly, despite our efforts, we may be unable
to prevent third parties from infringing upon or misappropriating our intellectual property or otherwise gaining access to our technology. Unauthorized third parties may try to copy or reverse
engineer our products or portions of our products or otherwise obtain and use our intellectual property. Moreover, many of our employees have access to our trade secrets and other intellectual
property. If one or more of these employees leave us to work for one of our competitors, then they may disseminate this proprietary information, which may as a result damage our competitive position.
If we fail to protect our intellectual property and other proprietary rights, then our business, results of operations or financial condition could be materially harmed.

In
addition, affirmatively defending our intellectual property rights and investigating whether we are pursuing a product or service development that may violate the rights of others may
entail significant expense. Any of our intellectual property rights may be challenged by others or invalidated through
administrative processes or litigation. If we resort to legal proceedings to enforce our intellectual property rights or to determine the validity and scope of the intellectual property or other
proprietary rights of others, then the proceedings could result in significant expense to us and divert the attention and efforts of our management and technical employees, even if we prevail.

We may be sued by third parties for alleged infringement of their proprietary rights, which could be costly, time-consuming and limit our ability to use certain
technologies in the future.

We may become subject to claims that our technologies infringe upon the intellectual property or other proprietary rights of third
parties. Any claims, with or without merit, could be time-consuming and expensive, and could divert our management's attention away from the execution of our business plan. Moreover, any
settlement or adverse judgment resulting from these claims could require us to pay substantial amounts or obtain a license to continue to use the disputed technology, or otherwise restrict or prohibit
our use of the technology. We cannot assure you that we would be able to obtain a license from the third party asserting the claim on commercially reasonable terms, if at all, that we would be able to
develop alternative technology on a timely basis, if at all, or that we would be able to obtain a license to use a suitable alternative technology to permit us to continue offering, and our customers
to continue using, our affected product. An adverse determination also could prevent us from offering our products to others. Infringement claims asserted against us may have a material adverse effect
on our business, results of operations or financial condition.

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Risks Relating to Securities Markets and Investment in Our Stock

The price of our common stock may fluctuate significantly.

The market prices for securities of emerging technology companies have historically been highly volatile, and the market has from time
to time experienced significant price and volume fluctuations that are unrelated to the operating performance of particular companies. The
market price of our common stock may fluctuate significantly in response to a number of factors, most of which we cannot control, including the following:



In
addition, the equity markets in general, and NASDAQ in particular, have experienced extreme price and volume fluctuations that have often been unrelated or disproportionate to the operating
performance of those companies. Further, the market prices of securities of emerging technology companies have been particularly volatile. These broad market and industry factors may affect the market
price of our common stock adversely, regardless of our operating performance. In the past, following periods of volatility in the market price of a company's securities, securities class action
litigation often has been instituted against that company. This type of litigation, if instituted against us, could result in substantial costs and a diversion of management's attention and resources.

Our management, whose interests may not be aligned with yours, is able to exert significant influence over all matters requiring stockholder approval.

As of June 10, 2011, our directors, executive officers and their affiliates collectively beneficially owned 4,862,459 shares, or
approximately 22%, of our total outstanding shares of common stock. Accordingly, our directors and executive officers as a group may be able to exert significant influence over matters requiring
stockholder approval, including the election of directors. The interests of our directors and executive officers may not be fully aligned with yours. Although there is no agreement

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among
our directors and executive officers with respect to the voting of their shares, this concentration of ownership may delay, defer or even prevent a change in control of our company, and make
transactions more difficult or impossible without the support of all or some of our directors and executive officers. These transactions might include proxy contests, tender offers, mergers or other
purchases of common stock that could give you the opportunity to realize a premium over the then-prevailing market price for shares of our common stock.

Item 1B.    Unresolved Staff Comments.

None.

Item 2.    Properties.

All of our facilities are leased. Our corporate headquarters are located in Monrovia, California where we lease approximately 13,000
square feet under an agreement expiring in September 2015. We have several other leased facilities in California and Alabama that are used for administration, research and development,
logistics and manufacturing and have a total of approximately 345,000 square feet. Such leases expire between the end of 2012 and 2016.

Item 3.    Legal Proceedings.

We are not currently a party to any material legal proceedings. We are, however, subject to lawsuits from time to time in the ordinary
course of business.

Item 4.    (Removed and Reserved)

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PART II

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

Common Stock

The following table sets forth, for the periods indicated, the high and low sales prices for our common stock from May 1, 2009
through April 30, 2011. The following quotations reflect inter-dealer prices, without retail mark-up, mark-down or commission, and may not represent actual transactions.

Fiscal Year Ended April 30,2011

2010High

Low

High

LowFirst Quarter

$
28.17

$
20.70

$
32.90

$
23.15Second Quarter

$
24.47

$
21.25

$
31.25

$
26.28Third Quarter

$
29.91

$
22.25

$
35.38

$
25.64Fourth Quarter

$
35.96

$
27.20

$
34.11

$
21.64


On
June 10, 2011, the closing sales price of our common stock as reported on the NASDAQ Global Select Market was $28.97 per share. As of June 10, 2011, there were 77
holders of record of our common stock.

Dividends

We currently intend to retain all future earnings, if any, for use in the operation and expansion of our business and do not anticipate
paying any cash dividends in the foreseeable future. Any future determination related to dividend policy will be made at the discretion of our board of directors and will depend upon, among other
factors, our results of operations, financial condition, capital requirements, contractual restrictions and such other factors as our board of directors deems relevant.

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Stock Price Performance Graph

The following graph shows a comparison of cumulative returns on our common stock, based on the market price of the common stock, with
the cumulative total returns of companies in the Russell 2000 Index and the SPADES Index.

Cumulative Total Return

GRAPHIC

The
following table shows the value of $100 invested on April 30, 2007 in AeroVironment, Inc., the Russell 2000 Index and the SPADES Index.

Performance Graph Table ($)April 30, 2007

April 30, 2008

April 30, 2009

April 30, 2010

April 30, 2011AeroVironment Stock


100


112


111


122


134Russell 2000 Index


100


88


60


88


106SPADES Index


100


104


66


94


102


The
stock price performance shown on the graph above is not necessarily indicative of future price performance. Factual material was obtained from sources believed to be reliable, but we
are not responsible for any errors or omissions contained therein. No portions of this graph shall be deemed incorporated by reference into any filing under the Securities Act, or the Exchange Act
through any general statement incorporating by reference in its entirety the report in which this graph appears, except to the extent that we specifically incorporate this graph or a portion of it by
reference. In addition, this graph shall not be deemed filed under either the Securities Act or the Exchange Act.

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Item 6.    Selected Consolidated Financial Data.

The following selected financial data should be read in conjunction with our consolidated financial statements. The information set
forth below is not necessarily indicative of results of future operations, and should be read in conjunction with Item 7, "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and the consolidated financial statements and notes thereto included in Item 8, "Financial Statements and Supplementary Data" of this Form 10-K in
order to understand fully factors that may affect the comparability of the financial data presented below.

Year Ended April 30,2011

2010

2009

2008

2007(In thousands, except per share data)Consolidated Income Statement Data:Revenue

$
292,503

$
249,518

$
247,662

$
215,746

$
173,721Net income

$
25,909

$
20,716

$
24,245

$
21,386

$
20,718Earnings per common share:Basic

$
1.20

$
0.97

$
1.15

$
1.08

$
1.39Diluted

$
1.17

$
0.94

$
1.11

$
1.00

$
1.22Weighted average common shares outstanding (basic):


21,591


21,392


21,024


19,767


14,947Weighted average common shares outstanding (diluted):


22,081


21,977


21,776


21,372


16,992Balance Sheet DataTotal assets

$
331,747

$
281,971

$
253,181

$
205,211

$
168,177Long-term obligations

$
6,175

$
4,438

$
7,117

$
5,460

$
541


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

Introduction

The following discussion of our financial condition and results of operations should be read in conjunction with our "Selected
Consolidated Financial Data" and our consolidated financial statements and notes thereto included herein as Item 8. This discussion contains forward-looking statements. Refer to
"Forward-Looking Statements" on page 2 and "Risk Factors" beginning on page 27, for a discussion of the uncertainties, risks and assumptions associated with these statements.

Overview

We design, develop, produce and support a technologically-advanced portfolio of products. We supply unmanned aircraft systems, or UAS,
and services primarily to organizations within the U.S. Department of Defense, or DoD. We also supply charging systems and services for electric vehicles and power cycling and test systems to
commercial, consumer and government customers. We derive the majority of our revenue from these business areas and we believe that the markets for these solutions have significant growth potential.
Additionally, we believe that some of the innovative potential products in our research and development pipeline will emerge as new growth platforms in the future, creating additional market
opportunities.

The
success we have achieved with our current products stems from our investment in research and development and our ability to invent and deliver advanced solutions, utilizing our
proprietary technologies, to help our government, commercial and consumer customers operate more effectively and efficiently. Our core technological capabilities, developed through 40 years of
innovation, include lightweight aerostructures, power electronics, electric propulsion systems, efficient electric energy generation and storage systems, high-density energy packaging,
miniaturization, controls integration and systems engineering optimization.

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Our
UAS business segment focuses primarily on the design, development, production and support of innovative UAS that provide situational awareness and other mission effects to increase
the security and effectiveness of our customers' operations. Our Efficient Energy Systems, or EES, business segment focuses primarily on the design, development, production and support of innovative
efficient electric energy systems that address the growing demand for electric transportation solutions.

Revenue

We generate our revenue primarily from the sale and support of our small UAS, electric vehicle charging systems and power cycling and
test systems solutions. Support for our small UAS customers includes training, spare parts, product repair, product replacement, and the customer-contracted operation of our small UAS by our
personnel. We refer to these support activities collectively as our services operation. We derive most of our small UAS revenue from fixed-price and cost-plus-fee contracts
with the U.S. government, and most of our electric vehicle charging systems and power cycling and test systems revenue from sales and service to commercial customers.

Cost of Sales

Cost of sales consists of direct costs and allocated indirect costs. Direct costs include labor, materials, travel, subcontracts and
other costs directly related to the execution of a specific contract. Indirect costs include overhead expenses, fringe benefits and other costs that are not directly charged to a specific contract.

Gross Margin

Gross margin is equal to revenue minus cost of sales. We use gross margin as a financial metric to help us understand trends in our
direct costs and allocated indirect costs when compared to the revenue we generate.

Research and Development Expense

Research and development, or R&D, is an integral part of our business model. We conduct significant internally funded research and
development and anticipate that research and development expense will continue to increase in absolute dollars for the foreseeable future. Our research and development activities focus specifically on
creating capabilities that support our existing
product portfolio as well as new solutions. These activities are funded both externally by customers and internally.

Selling, General and Administrative

Our selling, general and administrative expenses, or SG&A, include salaries and other expenses related to selling, marketing and
proposal activities, and other administrative costs. SG&A is an important financial metric that we analyze to help us evaluate the contribution of our selling, marketing and proposal activities to
revenue generation.

Other Income and Expenses

Other income and expenses includes interest income and interest expense.

Income Tax Expense

Our effective tax rates are substantially lower than the statutory rates primarily due to research and development tax credits.

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Critical Accounting Policies and Estimates

Management's Discussion and Analysis of Financial Condition and Results of Operations discusses our consolidated financial statements,
which have been prepared in accordance
with accounting principles generally accepted in the United States. When we prepare these consolidated financial statements, we are required to make estimates and assumptions that affect the reported
amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting
period. Some of our accounting policies require that we make subjective judgments, including estimates that involve matters that are inherently uncertain. Our most critical estimates include those
related to revenue recognition, inventories and reserves for excess and obsolescence, self-insured liabilities, accounting for stock-based awards, and income taxes. We base our estimates
and judgments on historical experience and on various other factors that we believe to be reasonable under the circumstances, the results of which form the basis for our judgments about the carrying
values of assets and liabilities that are not readily apparent from other sources. Our actual results may differ from these estimates under different assumptions or conditions.

We
believe the following critical accounting estimates affect our more significant judgments and estimates used in preparing our consolidated financial statements. See Note 1 of
the Notes to Consolidated Financial Statements for our Organization and Significant Accounting Policies. There have been no material changes made to the critical accounting estimates during the
periods presented in the consolidated financial statements.



Significant management judgments and estimates must be made and used in connection with the recognition of revenue in any accounting
period. Material differences in the amount of revenue in any given period may result if these judgments or estimates prove to be incorrect or if management's estimates change on the basis of
development of the business or market conditions.

The
substantial majority of our revenue is generated pursuant to written contractual arrangements to design, develop, manufacture and/or modify complex products, and to provide related
engineering, technical and other services according to customer specifications. These contracts may be fixed price or cost-reimbursable. We consider all contracts for treatment in
accordance with authoritative guidance for contracts with multiple deliverables.

Revenue
from product sales not under contractual arrangement is recognized at the time title and the risk and rewards of ownership pass, which typically occurs when the products are
shipped and collection is reasonably assured.

Revenue
and profits on fixed-price contracts are recognized using percentage-of-completion methods of accounting. Revenue and profits on fixed-price production
contracts, whose units are produced and delivered in a continuous or sequential process, are recorded as units are delivered based on their selling prices, or the
units-of-delivery method. Revenue and profits on other fixed-price contracts with significant engineering as well as production requirements are recorded based on the ratio of
total actual incurred costs to date to the total estimated costs for each contract, or the cost-to-cost method. Under percentage-of-completion methods
of accounting, a single estimated total profit margin is used to recognize profit for each contract over its entire period of performance, which can exceed one year. Accounting for revenue and profits
on a fixed-price contract requires the preparation of estimates of (1) the total contract revenue, (2) the total costs at completion, which is equal to the sum of the actual incurred
costs to date on the contract and the estimated costs to complete the contract's statement of work and (3) the measurement of progress towards completion. The estimated profit or loss at
completion on a contract is equal to the difference between the total estimated contract revenue and the total estimated cost at completion. Under the units-of-delivery

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method,
sales on a fixed-price type contract are recorded as the units are delivered during the period based on their contractual selling prices. Under the cost-to-cost method,
sales on a fixed-price type contract are recorded at amounts equal to the ratio of actual cumulative costs incurred divided by total estimated costs at completion, multiplied by (A) the total
estimated contract revenue, less (B) the cumulative sales recognized in prior periods. The profit recorded on a contract in any period using either the units-of-delivery
method or cost-to-cost method is equal to (X) the current estimated total profit margin multiplied by the cumulative sales recognized, less (Y) the amount of
cumulative profit previously recorded for the contract. In the case of a contract for which the total estimated costs exceed the total estimated revenue, a loss arises, and a provision for the entire
loss is recorded in the period that it becomes evident. The unrecoverable costs on a loss contract that are expected to be incurred in future periods are recorded in the program cost.

Revenue
and profits on cost-reimbursable type contracts are recognized as costs are incurred on the contract, at an amount equal to the costs plus the estimated profit on
those costs. The estimated profit on a cost-reimbursable contract is generally fixed or variable based on the contractual fee arrangement.

We
review cost performance and estimates to complete at least quarterly and in many cases more frequently. Adjustments to original estimates for a contract's revenue, estimated costs at
completion and estimated profit or loss are often required as work progresses under a contract, as experience is gained and as more information is obtained, even though the scope of work required
under the contract may not change, or if contract modifications occur. The impact of revisions in profit estimates for all types of contracts are recognized on a cumulative catch-up basis
in the period in which the revisions are made. Amounts representing contract change orders or claims are included in revenue only when they can be reliably estimated and their realization is probable.
Incentives or penalties and awards applicable to performance on contracts are considered in estimating revenue and
profit rates, and are recorded when there is sufficient information to assess anticipated contract performance.



Our policy for valuation of inventory, including the determination of obsolete or excess inventory, requires us to perform a detailed
assessment of inventory at each balance sheet date, which includes a review of, among other factors, an estimate of future demand for products within specific time horizons, valuation of existing
inventory, as well as product lifecycle and product development plans. Inventory reserves are also provided to cover risks arising from slow-moving items. We write down our inventory for
estimated obsolescence or unmarketable inventory equal to the difference between the cost of inventory and the estimated market value based on assumptions about future demand and market conditions. We
may be required to record additional inventory write-downs if actual market conditions are less favorable than those projected by our management.



We are self-insured for employee medical claims, subject to individual and aggregate stop-loss policies. We
estimate a liability for claims filed and incurred but not reported based upon recent claims experience and an analysis of the average period of time between the occurrence of a claim and the time it
is reported to and paid by us. We perform an annual evaluation of this policy and have determined that for all prior years during which this policy has been in effect there have been cost advantages
to this policy, as compared to obtaining commercially available employee medical insurance. However, actual results may differ materially from those estimated and could have a material impact on our
consolidated financial statements.

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We review the recoverability of long-lived assets whenever events or changes in circumstances indicate that the carrying
amount of such assets may not be recoverable. The estimated future cash flows are based upon, among other things, assumptions about expected future operating performance, and may differ from actual
cash flows. If the sum of the projected undiscounted cash flows (excluding interest) is less than the carrying value of the assets, the assets will be written down to the estimated fair value in the
period in which the determination is made.



We grant long-term incentive awards and we establish a target payout at the beginning of each performance period. The
actual payout at the end of the performance period is calculated based upon our achievement of revenue and operating profit growth. Payouts are made in cash and restricted stock units. Upon vesting of
the restricted stock units, we have the discretion to settle the restricted stock units in cash or stock.

The
cash component of the award is accounted for as a liability. The equity component is accounted for as a stock-based liability as the restricted stock units may be settled in cash or
stock. At each reporting period, we reassess the probability of achieving the performance targets. The estimation of whether the performance targets will be achieved requires judgment, and to the
extent actual results or updated estimates differ from our current estimates, the cumulative effect on current and prior periods of those changes will be recorded in the period estimates are revised.
Upon settlement of these awards, the total compensation expense recorded over the vesting period of the awards will equal the settlement amount, which is based on our stock price on the vesting date.



We are required to estimate our income taxes, which includes estimating our current income taxes as well as measuring the temporary
differences resulting from different treatment of items for tax and accounting purposes. We currently have significant deferred assets, which are subject to periodic recoverability assessments.
Realizing our deferred tax assets principally depends on our achieving projected future taxable income. We may change our judgments regarding future profitability due to future market conditions and
other factors, which may result in recording a valuation allowance against those deferred tax assets.

Fiscal Periods

Our fiscal year ends on April 30. Due to our fixed year end date of April 30, our first and fourth quarters each consist
of approximately 13 weeks. The second and third quarters each consist of 13 weeks. Our first three quarters end on a Saturday.

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Results of Operations

The following table sets forth certain historical consolidated income statement data expressed in dollars (in thousands) and as a
percentage of revenue for the periods indicated. Certain amounts may not sum due to rounding.

Fiscal Year Ended April 30,2011

2010

2009Revenue

$
292,503


100
%
$
249,518


100
%
$
247,662


100
%Cost of sales


175,352


60
%

152,692


61
%

159,065


64
%Gross margin


117,151


40
%

96,826


39
%

88,597


36
%Selling, general and administrative


47,431


16
%

42,429


17
%

34,246


14
%Research and development


35,769


12
%

24,510


10
%

21,798


9
%Income from operations


33,951


12
%

29,887


12
%

32,553


13
%Interest income


277


0
%

195


0
%

1,244


1
%Income before income taxes


34,228


12
%

30,082


12
%

33,797


14
%Income tax expense


8,319


3
%

9,366


4
%

9,552


4
%Net income

$
25,909


9
%
$
20,716


8
%
$
24,245


10
%


The
following table sets forth our revenue and gross margin generated by each operating segment for the periods indicated:

Fiscal Year Ended April 30,2011

2010

2009(In thousands)Revenue:UAS

$
249,769

$
224,179

$
211,364EES


42,734


25,339


36,298Total

$
292,503

$
249,518

$
247,662Gross margin:UAS

$
99,513

$
85,157

$
70,968EES


17,638


11,669


17,629Total

$
117,151

$
96,826

$
88,597


Fiscal Year Ended April 30, 2011 Compared to Fiscal Year Ended April 30, 2010

Revenue.Revenue for the fiscal year ended April 30, 2011 was $292.5 million, as compared to $249.5 million for
the fiscal year
ended April 30, 2010, representing an increase of $43.0 million, or 17%. UAS revenue increased $25.6 million, or 11%, to $249.8 million for the fiscal year ended
April 30, 2011, primarily due to an increase in service revenue of $48.4 million and higher product deliveries of $21.9 million, partially offset by decreased customer-funded R&D
work of $45.0 million. The increase in UAS service revenue was primarily due to an increase in support services revenue for the digital Puma AE systems. The increase in product deliveries was
primarily due to the deliveries of our new digital Puma AE systems. The decrease in customer-funded R&D was primarily due to decreased activity on the Global Observer program. EES revenue increased
$17.4 million, or 69%, to $42.7 million for the fiscal year ended April 30, 2011, due primarily to increased product deliveries of our electric vehicle charging systems and power
cycling and test systems.

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Cost of Sales.Cost of sales for the fiscal year ended April 30, 2011 was $175.4 million, as compared to
$152.7 million for the
fiscal year ended April 30, 2010, representing an increase of $22.7 million, or 15%, including an impairment charge of $2.0 million on certain long-lived assets related to the
Global Observer contract. For additional information regarding the impairment charge, please see Note 5 to our consolidated financial statements, which are included in Item 8, "Financial
Statements and Supplementary Data" of this Form 10-K. The increase in cost of sales was caused by higher UAS cost of sales of $11.2 million and EES cost of sales of $11.4 million.

Gross Margin.Gross margin for the fiscal year ended April 30, 2011 was $117.2 million, as compared to
$96.8 million for the
fiscal year ended April 30, 2010, representing an increase of $20.4 million, or 21%. As a percentage of revenue, gross margin increased from 39% to 40%. UAS gross margin increased
$14.4 million, or 17%, to $99.5 million for the fiscal year ended April 30, 2011, primarily due to increased sales volume. As a percentage of revenue, gross margin for UAS
increased from 38% to 40%, primarily due to a higher amount of fixed-price contract revenue compared to cost-reimbursable contract revenue. EES gross margin increased $6.0 million,
or 51%, to $17.6 million for the fiscal year
ended April 30, 2011, primarily due to increased sales volume. As a percentage of revenue, EES gross margin decreased from 46% to 41%, primarily due to higher manufacturing and engineering
support overhead costs.

Selling, General and Administrative.SG&A expense for the fiscal year ended April 30, 2011 was $47.4 million, or
16% of revenue,
compared to SG&A expense of $42.4 million, or 17% of revenue, for the fiscal year ended April 30, 2010. SG&A expense increased primarily due to higher bid and proposal costs, selling and
marketing expenses and administrative costs.

Research and Development.R&D expense for the fiscal year ended April 30, 2011 was $35.8 million, or 12% of
revenue, compared to R&D
expense of $24.5 million, or 10% of revenue, for the fiscal year ended April 30, 2010. R&D expense increased primarily due to increased investment in various UAS and EES technology
development initiatives.

Interest Income.Interest income for the fiscal year ended April 30, 2011 was $0.3 million, as compared to interest
income of
$0.2 million for the fiscal year ended April 30, 2010, representing an increase of $0.1 million. Interest income increased primarily due to higher average cash and
short-term investment balances.

Income Tax Expense.Our effective income tax rate was 24.3% for the fiscal year ended April 30, 2011, as compared to 31.1%
for the fiscal year
ended April 30, 2010. The decrease was caused primarily by higher federal R&D tax credits in the fiscal year ended April 30, 2011.

Fiscal Year Ended April 30, 2010 Compared to Fiscal Year Ended April 30, 2009

Revenue.Revenue for the fiscal year ended April 30, 2010 was $249.5 million, as compared to
$247.7 million for the fiscal year ended April 30, 2009, representing an increase of $1.8 million, or 1%. UAS revenue increased $12.8 million, or 6%, to
$224.2 million for the fiscal year ended April 30, 2010, primarily due to higher service revenue of $20.9 million and increased customer-funded R&D work of $12.0 million,
partially offset by lower product deliveries of $20.1 million. The increase in UAS service revenue was primarily due to the retrofitting of Raven B systems with our DDL technology. The increase
in customer-funded R&D work was primarily due to increased activity on the Global Observer program. The decrease in product deliveries was primarily due to the reduction in our analog Raven B
production as we migrated into the production and retrofit of Raven B systems with our DDL technology. EES revenue decreased $11.0 million, or 30%, to $25.3 million for the fiscal year
ended April 30, 2010, primarily due to decreased product deliveries of our industrial electric vehicle charging systems and power cycling and test systems.

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Cost of Sales.Cost of sales for the fiscal year ended April 30, 2010 was $152.7 million, as compared to
$159.1 million for the
fiscal year ended April 30, 2009, representing a decrease of $6.4 million, or 4%. The decrease in cost of sales was caused by lower EES cost of sales of $5.0 million and UAS cost
of sales of $1.4 million.

Gross Margin.Gross margin for the fiscal year ended April 30, 2010 was $96.8 million, as compared to
$88.6 million for the
fiscal year ended April 30, 2009, representing an increase of $8.2 million, or 9%. As a percentage of revenue, gross margin increased from 36% to 39%. UAS gross margin increased
$14.2 million, or 20%, to $85.2 million for the fiscal year ended April 30, 2010, primarily due to increased sales volume. As a percentage of revenue, gross margin for UAS
increased from 34% to 38%, primarily due to a higher amount of fixed-price contract revenue compared to cost-reimbursable contract revenue. EES gross margin decreased $6.0 million,
or 34%, to $11.7 million for the fiscal year ended April 30, 2010, primarily due to decreased sales volume. As a percentage of revenue, EES gross margin decreased from 49% to 46%,
primarily due to a lower level of product deliveries compared to service related revenue.

Selling, General and Administrative.SG&A expense for the fiscal year ended April 30, 2010 was $42.4 million, or
17% of revenue,
compared to SG&A expense of $34.2 million, or 14% of revenue, for the fiscal year ended April 30, 2009. SG&A expense increased primarily due to higher bid and proposal activity, selling
and marketing expenses, and administrative costs.

Research and Development.R&D expense for the fiscal year ended April 30, 2010 was $24.5 million, or 10% of
revenue, compared to R&D
expense of $21.8 million, or 9% of revenue, for the fiscal year ended April 30, 2009. R&D expense increased primarily due to increased investment in development initiatives for
industrial electrical vehicle charging systems infrastructure.

Interest Income.Interest income for the fiscal year ended April 30, 2010 was $0.2 million, as compared to interest
income of
$1.2 million for the fiscal year ended April 30, 2009, representing a decrease of $1.0 million. Interest income decreased primarily due to lower yields on investment grade
securities.

Income Tax Expense.Our effective income tax rate was 31.1% for the fiscal year ended April 30, 2010, as compared to 28.3%
for the fiscal year
ended April 30, 2009. The increase was caused primarily by lower R&D tax credits in the fiscal year ended April 30, 2010.

Liquidity and Capital Resources

We currently have no material cash commitments, except for normal recurring trade payables, accrued expenses and ongoing research and
development costs, all of which we anticipate funding through our existing working capital and funds provided by operating activities. The majority of our purchase obligations are pursuant to funded
contractual arrangements with our customers. In addition, we do not currently anticipate significant investment in property, plant and equipment, and we believe that our existing cash, cash
equivalents, cash provided by operating activities and other financing sources will be sufficient to meet our anticipated working capital, capital expenditure and debt service requirements, if any,
during the next twelve months. There can be no assurance, however, that our business will continue to generate cash flow at current levels. If we are unable to generate sufficient cash flow from
operations, then we may be required to sell assets, reduce capital expenditures or obtain additional financing. The current challenging economic environment continues to create volatility and
disruption in the capital markets, diminished liquidity and credit availability, and increased counterparty risk. Nevertheless, we anticipate that existing sources of liquidity and cash flows from
operations will be sufficient to satisfy our cash needs for the foreseeable future.

Our
primary liquidity needs are for financing working capital, investing in capital expenditures, supporting product development efforts, introducing new products and enhancing existing
products, and

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marketing
acceptance and adoption of our products and services. Our future capital requirements, to a certain extent, are also subject to general conditions in or affecting the defense and electric
vehicle industries and are subject to general economic, political, financial, competitive, legislative and regulatory factors that are beyond our control. Moreover, to the extent that existing cash,
cash equivalents, cash from operations, and cash from short-term borrowing are insufficient to fund our future activities, we may need to raise additional funds through public or private
equity or debt financing. Although we are currently not a party to any agreement or letter of intent with respect to potential investment in, or acquisitions of, businesses, services or technologies,
we may enter into these types of arrangements in the future, which could also require us to seek additional equity or debt financing.

Our
working capital requirements vary by contract type. On cost-plus-fee programs, we typically bill our incurred costs and fees monthly as work progresses, and
therefore working capital investment is minimal. On fixed-price contracts, we typically are paid as we deliver products, and working capital is needed to fund labor and expenses incurred during the
lead time from contract award until contract deliveries begin.

Cash Flows

The following table provides our cash flow data as of:

Fiscal Year Ended April 30,2011

2010

2009(In thousands)Net cash provided by operating activities

$
33,486

$
35,984

$
39,770Net cash used in investing activities

$
(933
)
$
(124,764
)
$
(29,480
)Net cash provided by financing activities

$
823

$
944

$
1,147


Cash Provided by Operating Activities.Net cash provided by operating activities for the fiscal year ended April 30, 2011
decreased by
$2.5 million to $33.5 million, compared to net cash provided by operating activities of $36.0 million for the fiscal year ended April 30, 2010. This decrease in net cash
provided by operating activities was primarily due to higher working capital needs of $8.3 million and lower tax benefits from stock option exercises of $2.0 million, partially offset by
higher income of $5.2 million, higher depreciation of $1.6 million, and an impairment charge of $2.0 million.

Net
cash provided by operating activities for the fiscal year ended April 30, 2010 decreased by $3.8 million to $36.0 million, compared to net cash provided by
operating activities of $39.8 million for the fiscal year ended April 30, 2009. This decrease in net cash provided by operating activities was primarily due to higher working capital
needs of $3.6 million and lower tax benefits on exercises of stock options of $9.0 million, partially offset by higher deferred income taxes of $4.1 million and higher
depreciation of $3.6 million.

Cash Used in Investing Activities.Net cash used in investing activities decreased by $123.8 million to $0.9 million
for the fiscal
year ended April 30, 2011, compared to net cash used by investing activities of $124.8 million for the fiscal year ended April 30, 2010. The decrease in net cash used in investing
activities was primarily due to net redemptions of U.S. Treasury bills and municipal bonds of $123.2 million and lower capital expenditures of $0.6 million. During the fiscal years ended
April 30, 2011 and April 30, 2010, we used cash to purchase property and equipment totaling $10.2 million and $10.8 million, respectively.

Net
cash used in investing activities increased by $95.3 million to $124.8 million for the fiscal year ended April 30, 2010, compared to net cash used by investing
activities of $29.5 million for the fiscal year ended April 30, 2009. The increase in net cash used in investing activities was primarily due to higher net purchases of U.S. Treasury
bills and municipal bonds of $97.8 million, partially offset by

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lower
capital expenditures of $2.5 million. During the fiscal years ended April 30, 2010 and April 30, 2009, we used cash to purchase property and equipment totaling
$10.8 million and $13.3 million, respectively.

Cash Provided by Financing Activities.Net cash provided by financing activities decreased by $0.1 million to
$0.8 million for the
fiscal year ended April 30, 2011, compared to $0.9 million for the fiscal year ended April 30, 2010. The decrease was due to lower exercises of stock options.

Net
cash provided by financing activities decreased by $0.2 million to $0.9 million for the fiscal year ended April 30, 2010, compared to $1.1 million for the
fiscal year ended April 30, 2009. The decrease was due to lower exercises of stock options.

Contractual Obligations

The following table describes our commitments to settle contractual obligations as of April 30, 2011:

Payments Due By PeriodTotal

Less Than
1 Year

1 to 3 Years

3 to 5 Years

More Than
5 Years(In thousands)Operating lease obligations

$
12,912

$
3,844

$
6,220

$
2,804

$
44Purchase obligations(1)


25,909

$
25,909








Total

$
38,821

$
29,753

$
6,220

$
2,804

$
44


---

Off-Balance Sheet Arrangements

As of April 30, 2011, we had no off-balance sheet arrangements as defined in Item 303(a)(4) of the SEC's
Regulation S-K.

Inflation

Our operations have not been, and we do not expect them to be, materially affected by inflation. Historically, we have been successful
in adjusting prices to our customers to reflect changes in our material and labor costs.

New Accounting Standards

In January 2010, the Financial Accounting Standards Board, or FASB, issued fair value guidance requiring new disclosures and
clarification of existing disclosures for assets and liabilities that are measured at fair value on either a recurring or non-recurring basis. The guidance requires disclosure of transfer
activity into and out of Level 1 and Level 2 fair value measurements and also requires more detailed disclosure about the activity within Level 3 fair value measurements. The
majority of the requirements in this guidance are effective for interim and annual periods beginning after December 15, 2009. Requirements related to Level 3 disclosures are effective
for interim and annual periods beginning after December 15, 2010. We do not expect that the adoption of the guidance will have a material impact on our consolidated financial statements.

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Item 7A.    Quantitative and Qualitative Disclosures About Market Risk.

Interest Rate Risk

It is our policy not to enter into interest rate derivative financial instruments. We do not currently have any significant interest
rate exposure.

Foreign Currency Exchange Rate Risk

Since a significant part of our sales and expenses are denominated in U.S. dollars, we have not experienced significant foreign
exchange gains or losses to date, and do not expect to incur significant foreign exchange gains or losses in the future. We occasionally engage in forward contracts in foreign currencies to limit our
exposure on non-U.S. dollar transactions.

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Item 8.    Financial Statements and Supplementary Data.

AeroVironment, Inc.    Audited Consolidated Financial Statements    Index to Consolidated Financial Statements and Supplementary Data



PageReport of Independent Registered Public Accounting Firm

64Consolidated Balance Sheets at April 30, 2011 and 2010

65Consolidated Statements of Income for the Years Ended April 30, 2011, 2010 and
2009

66Consolidated Statements of Stockholders' Equity for the Years Ended April 30, 2011, 2010 and
2009

67Consolidated Statements of Cash Flows for the Years Ended April 30, 2011, 2010 and
2009

68Notes to Consolidated Financial Statements

69Quarterly Results of Operations (Unaudited)

88Supplementary DataFinancial Statement Schedule: Schedule IIValuation and Qualifying Accounts

89


All other schedules are omitted because they are not applicable, not required or the information required is included in the Consolidated Financial Statements, including the
notes thereto.

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The
Board of Directors and Stockholders of
AeroVironment, Inc. and Subsidiaries

We
have audited the accompanying consolidated balance sheets of AeroVironment, Inc. and subsidiaries as of April 30, 2011 and 2010, and the related consolidated statements
of income, stockholders' equity and cash flows for each of the three years in the period ended April 30, 2011. Our audits also included the financial statement schedule listed in the Index at
Item 15(a). These consolidated financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements
and schedule 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 audit to
obtain reasonable assurance about whether the financial statements are free of material misstatement. 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 consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of AeroVironment, Inc. and
subsidiaries at April 30, 2011 and 2010, and the consolidated results of their operations and their cash flows for each of the three years in the period ended April 30, 2011, in
conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a
whole, presents fairly in all material respects the information set forth therein.

We
have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Aerovironment, Inc.'s internal controls over financial
reporting as of April 30, 2011, based upon criteria established in Internal ControlIntegrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission and our report dated June 21, 2011 expressed an unqualified opinion thereon.

/s/ Ernst & Young LLP


Los
Angeles, California
June 21, 2011

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AEROVIRONMENT, INC.        CONSOLIDATED BALANCE SHEETS        (In thousands except share data)

April 30,2011

2010AssetsCurrent assets:Cash and cash equivalents

$
62,041

$
28,665Short-term investments


126,839


135,770Accounts receivable, net of allowance for doubtful accounts of $639 at April 30, 2011 and $745 at April 30, 2010


44,376


38,645Unbilled receivables and retentions


21,966


18,710Inventories, net


38,137


20,928Deferred income taxes


2,300


956Prepaid expenses and other current assets


2,372


1,921Total current assets


298,031


245,595Long-term investments


6,275


6,515Property and equipment, net


17,498


20,025Deferred income taxes


9,762


9,747Other assets


181


89Total assets

$
331,747

$
281,971Liabilities and stockholders' equityCurrent liabilities:Accounts payable

$
31,134

$
20,205Wages and related accruals


15,458


10,336Income taxes payable


7,404


6,507Other current liabilities


7,384


4,473Liability for uncertain tax positions


724


2,592Total current liabilities


62,104


44,113Wages and related accruals


762


Deferred rent


1,275


1,268Liability for uncertain tax positions


4,138


3,170Commitments and contingenciesStockholders' equity:Preferred stock, $0.0001 par value:Authorized shares10,000,000; none issued or outstanding





Common stock, $0.0001 par value:Authorized shares100,000,000Issued and outstanding shares21,949,884 shares at April 30, 2011 and 21,732,413 at April 30, 2010


2


2Additional paid-in capital


119,765


115,602Accumulated other comprehensive loss


(784
)

(760
)Retained earnings


144,485


118,576Total stockholders' equity


263,468


233,420Total liabilities and stockholders' equity

$
331,747

$
281,971


See
accompanying notes to consolidated financial statements.

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AEROVIRONMENT, INC.        CONSOLIDATED STATEMENTS OF INCOME        (In thousands except share and per share data)

Year Ended April 30,2011

2010

2009Revenue:Product sales

$
137,724

$
103,268

$
136,173Contract services


154,779


146,250


111,489292,503


249,518


247,662Cost of sales:Product sales


74,843


59,266


82,427Contract services


100,509


93,426


76,638175,352


152,692


159,065Gross margin


117,151


96,826


88,597Selling, general and administrative


47,431


42,429


34,246Research and development


35,769


24,510


21,798Income from operations


33,951


29,887


32,553Other income:Interest income


277


195


1,244Income before income taxes


34,228


30,082


33,797Provision for income taxes


8,319


9,366


9,552Net income

$
25,909

$
20,716

$
24,245Earnings per share data:Basic

$
1.20

$
0.97

$
1.15Diluted

$
1.17

$
0.94

$
1.11Weighted average shares outstanding:Basic


21,591,333


21,391,795


21,023,590Diluted


22,081,266


21,977,364


21,775,727


See
accompanying notes to consolidated financial statements.

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AEROVIRONMENT, INC.        CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY        (In thousands except share data)

Common Stock





Accumulated
Other
Comprehensive
LossAdditional
Paid-In
Capital

Retained
EarningsShares

Amount

TotalBalance at April 30, 2008


20,614,044

$
2

$
96,123

$
73,615

$


$
169,740Net income











24,245





24,245Other comprehensive loss:Unrealized loss on investments














(537
)

(537
)Comprehensive income

















23,708Stock options exercised


690,437





1,049








1,049Restricted stock awards


166,000














Tax benefit from exercise of stock options








12,004








12,004Stock-based compensation








926








926Balance at April 30, 2009


21,470,481


2


110,102


97,860


(537
)

207,427Net income











20,716





20,716Other comprehensive loss:Unrealized loss on investments














(223
)

(223
)Comprehensive income

















20,493Stock options exercised


205,132





836








836Restricted stock awards


63,000














Restricted stock awards forfeited


(6,200
)













Tax benefit from stock-based compensation








3,010








3,010Stock-based compensation








1,654








1,654Balance at April 30, 2010


21,732,413


2


115,602


118,576


(760
)

233,420Net income











25,909





25,909Other comprehensive loss:Unrealized loss on investments














(24
)

(24
)Comprehensive income

















25,885Stock options exercised


120,561





619








619Restricted stock awards


98,910














Restricted stock awards forfeited


(2,000
)













Tax benefit from stock-based compensation








1,238








1,238Stock-based compensation








2,306








2,306Balance at April 30, 2011


21,949,884

$
2

$
119,765

$
144,485

$
(784
)
$
263,468


See
accompanying notes to consolidated financial statements.

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AEROVIRONMENT, INC.        CONSOLIDATED STATEMENTS OF CASH FLOWS        (In thousands)

Year ended April 30,2011

2010

2009Operating activitiesNet income

$
25,909

$
20,716

$
24,245Adjustments to reconcile net income to cash provided by operating activities:Depreciation and amortization


10,599


8,982


5,355Impairment of long-lived assets


2,043





Provision for doubtful accounts


(105
)

454


71Deferred income taxes


(1,343
)

(253
)

(4,355
)Stock-based compensation


2,306


1,654


926Tax benefit from exercise of stock options


1,034


2,902


11,906Excess tax benefit from stock-based compensation


(204
)

(108
)

(98
)(Gain) loss on disposition of property and equipment


(51
)

3


17Changes in operating assets and liabilities:Accounts receivable


(5,626
)

3,452


(12,834
)Unbilled receivables and retentions


(3,256
)

1,360


520Inventories


(17,209
)

(9,326
)

4,321Income tax receivable





3,415


(983
)Prepaid expenses and other assets


(543
)

(172
)

298Accounts payable


10,929


(3,785
)

9,910Other liabilities


9,003


6,690


471Net cash provided by operating activities


33,486


35,984


39,770Investing activitiesAcquisition of property and equipment


(10,173
)

(10,792
)

(13,302
)Net sales (purchases) of held-to-maturity investments


8,931


(114,247
)

(21,523
)Net sales of available-for-sale investments


200


275


5,325Proceeds from sale of property and equipment


109





20Net cash used in investing activities


(933
)

(124,764
)

(29,480
)Financing activitiesExcess tax benefit from stock-based compensation


204


108


98Exercise of stock options


619


836


1,049Net cash provided by financing activities


823


944


1,147Net increase (decrease) in cash and cash equivalents


33,376


(87,836
)

11,437Cash and cash equivalents at beginning of year


28,665


116,501


105,064Cash and cash equivalents at end of year

$
62,041

$
28,665

$
116,501Supplemental disclosures of cash flow informationCash paid during the year for:Income taxes

$
9,873

$
104

$
2,781Non-cash investing activitiesUnrealized losses on long-term investments recorded in other comprehensive income, net of deferred tax benefit of $16, $143 and $357,
respectively

$
24

$
223

$
537


See accompanying notes to consolidated financial statements.

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AEROVIRONMENT, INC.        NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

1.     Organization and Significant Accounting Policies

Organization

AeroVironment, Inc., a Delaware corporation, is engaged in the design, development, production and support of unmanned aircraft
systems and efficient energy systems for various industries and governmental agencies.

Significant Accounting Policies



The accompanying consolidated financial statements include the accounts of AeroVironment, Inc. and its wholly-owned
subsidiaries: AV S.r.l., Skytower, LLC, AV GmbH, Skytower Inc., AILC, Inc. and Regenerative Fuel Cell Systems, LLC (collectively referred to herein as the
"Company"). All intercompany balances and transactions have been eliminated in consolidation.



The Company's products are sold and divided among two reportable segments to reflect the Company's strategic goals. Operating segments
are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the Chief Operating Decision Maker ("CODM") in deciding how to
allocate resources and in assessing performance. The Company's CODM is the Chief Executive Officer, who reviews the revenue and gross margin results for each of these segments in order to make
resource allocation decisions, including the focus of research and development, or R&D, activities, and assessing performance. The Company's reportable segments are business units that offer different
products and services and are managed separately.



The preparation of consolidated financial statements in conformity with generally accepted accounting principles in the United States
requires management to make estimates and assumptions. These estimates and assumptions 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 revenue and expenses during the reporting period. Significant estimates made by management include, but are not limited to, valuation of:
inventory, deferred tax assets and liabilities, useful lives of property, plant and equipment, medical and dental liabilities, and estimates of anticipated contract costs and revenue utilized in the
revenue recognition process. Actual results could differ from those estimates.



The Company considers all highly liquid investments with an original maturity of three months or less at the time of purchase to be
cash equivalents. The Company's cash equivalents are comprised of money market funds, certificates of deposit of major financial institutions, and U.S. Treasury bills.



The Company's investments are accounted for as held-to-maturity and available-for-sale
and reported at amortized cost and fair value, respectively.

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AEROVIRONMENT, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Unrealized
gains and losses are excluded from earnings and reported as a separate component of stockholders' equity, net of deferred income taxes for
available-for-sale investments.

Gains
and losses realized on the disposition of investment securities are determined on the specific identification basis and credited or charged to income. Premium and discount on
investments are amortized and accreted using the interest method and charged or credited to investment income.

Management
determines the appropriate classification of securities at the time of purchase and re-evaluates such designation as of each balance sheet date.

Investments
are considered to be impaired when a decline in fair value is judged to be other-than-temporary. On a quarterly basis, the Company considers available
quantitative and qualitative evidence in evaluating potential impairment of our investments. If the cost of an investment exceeds its fair value, the Company evaluates, among other factors, general
market conditions, the duration and extent to which the fair value is less than cost, and our intent and ability to hold the investment to maturity. The Company also considers potential adverse
conditions related to the financial health of the issuer based on rating agency actions. Once a decline in fair value is determined to be other-than-temporary, an impairment
charge is recorded in earnings and a new cost basis in the investment is established.



Fair values of cash and cash equivalents, accounts receivable, unbilled receivables, retentions and accounts payable approximate cost
due to the short period of time to maturity.



Financial instruments that potentially subject the Company to concentration of credit risk consist primarily of cash, cash equivalents,
U.S. Treasury bills and accounts receivable. The Company currently invests the majority of its cash in U.S. Treasury bills. The Company's revenue and accounts receivable are with a limited number of
corporations and governmental entities. In the aggregate, 83%, 80% and 78% of the Company's revenue came from agencies of the U.S. government for the years ended April 30, 2011, 2010 and 2009,
respectively. These agencies accounted for 59% and 58% of the accounts receivable balances at April 30, 2011 and 2010, respectively. One such agency, the U.S. Army, accounted for 48%, 44% and
43% of the Company's consolidated revenue for the years ended April 30, 2011, 2010 and 2009, respectively. The U.S. Army accounted for approximately 56%, 48% and 51% of UAS reportable segment
sales for the years ended April 30, 2011, 2010 and 2009, respectively. The Company performs ongoing credit evaluations of its commercial customers and maintains an allowance for potential
losses.



Accounts receivable represents primarily U.S. government, and to a lesser extent commercial receivables, net of allowances for doubtful
accounts. Unbilled receivables represent costs in excess of billings on incomplete contracts and, where applicable, accrued profit related to government long-term contracts on which
revenue has been recognized, but for which the customer has not yet been billed.

Retentions
represent amounts withheld by customers until contract completion. The Company determines the allowance for doubtful accounts based on historical customer experience and other
currently available evidence. When a specific account is deemed uncollectible, the account is written off against the allowance. The allowance for doubtful accounts reflects the Company's best
estimate of

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AEROVIRONMENT, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)

probable
losses inherent in the accounts receivable balance; such losses have historically been within management's expectations. An account is deemed past due based on contractual terms rather than
on how recently payments have been received.



Inventories are stated at the lower of cost (using the weighted average costing method) or market value. Inventory
write-offs and write-down provisions are provided to cover risks arising from slow-moving items or technological obsolescence and for market prices lower than cost.
The Company periodically evaluates the quantities on hand relative to current and historical selling prices and historical and projected sales volume. Based on this evaluation, provisions are made to
write inventory down to its market value.



Property and equipment are carried at cost. Depreciation of property and equipment, including amortization of leasehold improvements,
are provided using the straight-line method over the following estimated useful lives:

Machinery and equipment

2 to 7 yearsComputer equipment and software

2 to 5 yearsFurniture and fixtures

3 to 7 yearsLeasehold improvements

Lesser of useful life or term of lease


Maintenance,
repairs and minor renewals are charged directly to expense as incurred. Additions and betterments to property and equipment are capitalized at cost. When the Company
disposes of assets, the applicable costs and accumulated depreciation and amortization thereon are removed from the accounts and any resulting gain or loss is included in selling, general and
administrative expense in the period incurred.

The
Company reviews the recoverability of its long-lived assets whenever events or changes in circumstances indicate that the carrying amount of such assets may not be
recoverable. The estimated future cash flows are based upon, among other things, assumptions about expected future operating performance, and may differ from actual cash flows. If the sum of the
projected undiscounted cash flows (excluding interest) is less than the carrying value of the assets, the assets will be written down to the estimated fair value in the period in which the
determination is made. At April 30, 2011, there were indicators of impairment identified and an impairment charge of $2,043,000 was recorded. See Note 5, "Property and Equipment, net"
for further details. At April 30, 2010, no indicators of impairment were identified and no impairment charge was recorded.



The Company accrues an estimate of its exposure to warranty claims based upon both current and historical product sales data and
warranty costs incurred. Product warranty reserves are recorded in other current liabilities.



The Company is self-insured for employee medical claims, subject to individual and aggregate stop-loss
policies. The Company estimates a liability for claims filed and incurred but not reported based upon recent claims experience and an analysis of the average period of time between the

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AEROVIRONMENT, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)

occurrence
of a claim and the time it is reported to and paid by the Company. As of April 30, 2011 and 2010, the Company estimated and recorded a self insurance liability in wages and related
accruals of approximately $898,000 and $1,014,000, respectively.



Deferred income tax assets and liabilities are computed annually for differences between the financial statement and income tax bases
of assets and liabilities that will result in taxable or deductible amounts in the future. The provision for income taxes reflects the taxes to be paid for the period and the change during the period
in the deferred income tax assets and liabilities. The Company records a valuation allowance to reduce the deferred tax assets to the amount of future tax benefit that is more likely than not to be
realized. For uncertain tax positions, the Company determines whether it is "more likely than not" that a tax position will be sustained upon examination by the appropriate taxing authorities before
any part of the benefit can be recorded in the financial statements. For those tax positions where it is "not more likely than not" that a tax benefit will be sustained, no tax benefit is recognized.
Where applicable, associated interest and penalties are also recorded.



The Company receives advances, performance-based payments and progress payments from customers that may exceed costs incurred on
certain contracts, including contracts with agencies of the U.S. government. These advances are classified as advances from customers and will be offset against billings.



The substantial majority of the Company's revenue is generated pursuant to written contractual arrangements to design, develop,
manufacture and/or modify complex products, and to provide related engineering, technical and other services according to the specifications of the buyers (customers). These contracts may be fixed
price or cost-reimbursable. The Company considers all contracts for treatment in accordance with authoritative guidance for contracts with multiple deliverables.

Revenue
arrangements with multiple deliverables should be divided into separate units of accounting if the deliverables have value to the customer on a stand-alone basis; there is
objective and reliable evidence of the fair value of the undelivered item(s); and, if the arrangement includes a general right of return, delivery or performance of the undelivered item(s) is
considered probable and substantially in the control of the vendor. The Company occasionally enters into arrangements that consist of installation and repair contracts associated with hardware sold by
the Company. Such arrangements consist of separate contractual arrangements and are divided into separate units of accounting where the delivered item has value to the customer on a stand- alone basis
and there is objective and reasonable evidence of the fair value of the installation contract. Consideration is allocated among the separate units of accounting based on their relative fair values.

Product
sales revenue is composed of revenue recognized on contracts for the delivery of production hardware and related activities. Contract services revenue is composed of revenue
recognized on contracts for the provision of services, including repairs, training, engineering design, development and prototyping activities.

Revenue
from cost-plus-fee contracts are recognized on the basis of costs incurred during the period plus the fee earned. Revenue from fixed-price contracts are
recognized on the percentage-of-completion method. Contract costs include all direct material and labor costs and those

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AEROVIRONMENT, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)

indirect
costs related to contract performance. Unbilled receivables represent costs incurred and related profit on contracts not yet billed to customers, and are invoiced in subsequent periods.

Product
sales revenue is recognized on the percentage-of-completion method or upon transfer of title to the customer, which is generally upon shipment. Shipping
and handling costs incurred are included in cost of sales.

Revenue
and profits on fixed-price production contracts, where units are produced and delivered in a continuous or sequential process, are recorded as units are delivered based on their
selling prices (the "units-of-delivery method"). Revenue and profits on other fixed-price contracts with significant engineering as well as production requirements are recorded
based on the ratio of total actual incurred costs to date to the total estimated costs for each contract (the "cost-to-cost method"). Accounting for revenue and profits on a
fixed-price contract requires the preparation of estimates of (1) the total contract revenue, (2) the total costs at completion, which is equal to the sum of the actual incurred costs to
date on the contract and the estimated costs to complete the contract's statement of work and (3) the measurement of progress towards completion. The estimated profit or loss at completion on a
contract is equal to the difference between the total estimated contract revenue and the total estimated cost at completion. Under the units-of-delivery method, sales on a
fixed-price type contract are recorded as the units are delivered during the period based on their contractual selling prices. Under the cost-to-cost method, sales on a
fixed-price type contract are recorded at amounts equal to the ratio of actual cumulative costs incurred divided by total estimated costs at completion, multiplied by (i) the total estimated
contract revenue, less (ii) the cumulative sales recognized in prior periods. The profit recorded on a contract in any period using either the units-of-delivery method
or cost-to-cost method is equal to (i) the current estimated total profit margin multiplied by the cumulative sales recognized, less (ii) the amount of cumulative
profit previously recorded for the contract. In the case of a contract for which the total estimated costs exceed the total estimated revenue, a loss arises, and a provision for the entire loss is
recorded in the period that it becomes evident. The unrecoverable costs on a loss contract that are expected to be incurred in future periods are recorded in the program cost.

Significant
management judgments and estimates must be made and used in connection with the recognition of revenue in any accounting period. Material differences in the amount of revenue
in any given period may result if these judgments or estimates prove to be incorrect or if management's estimates change on the basis of development of the business, market conditions or other
factors. Management judgments and estimates have been applied consistently and have been reliable historically.



Stock-based compensation is measured at the grant date based on the fair value of the award and is recognized as expense over the
requisite service period, which is generally the vesting period of the respective award. No compensation cost is ultimately recognized for awards for which employees do not render the requisite
service and are forfeited.



For long-term incentive awards, a target payout is established at the beginning of each performance period. The actual
payout at the end of the performance period is calculated based upon the Company's achievement of revenue and operating profit growth. Payouts are made in cash and restricted stock units. Upon vesting
of the restricted stock units, the Company has the discretion to settle the restricted stock units in cash or stock.

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AEROVIRONMENT, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)

The
cash component of the award is accounted for as a liability. The equity component is accounted for as a stock-based liability, as the restricted stock units may be settled in cash or
stock. At each reporting period, the Company reassesses the probability of achieving the performance targets. The estimation of whether the performance targets will be achieved requires judgment, and,
to the extent actual results or updated estimates differ from the Company's current estimates, the cumulative effect on current and prior periods of those changes will be recorded in the period
estimates are revised. Upon settlement of these awards, the total compensation expense recorded over the vesting period of the awards will equal the settlement amount, which is based on the Company's
stock price on the vesting date.



Internally funded research and development costs, or IRAD, sponsored by the Company relate to both U.S. government products and
services and those for commercial and foreign customers. IRAD costs for the Company are recoverable and allocable under government contracts in accordance with U.S. government procurement regulations.

Customer-funded
research and development costs are incurred pursuant to contracts (revenue arrangements) to perform research and development activities according to customer
specifications. These costs are direct contract costs and are expensed to cost of sales when the corresponding revenue is recognized, which is generally as the research and development services are
performed. Revenue from customer-funded research and development was approximately $33,952,000, $80,552,000 and $66,321,000 for the years ended April 30, 2011, 2010 and 2009, respectively. The
related costs of sales for customer-funded research and development totaled approximately $33,003,000, $56,532,000 and $46,493,000 for the years ended April 30, 2011, 2010 and 2009,
respectively.



The Company accounts for its leases and subsequent amendments as operating leases or capital leases for financial reporting purposes.
Certain operating leases contain rent escalation clauses, which are recorded on a straight-line basis over the initial term of the lease with the difference between the rent paid and the
straight-line rent recorded as a deferred rent liability. Lease incentives received from landlords are recorded as deferred rent liabilities and are amortized on a
straight-line basis over the lease term as a reduction to rent expense. Deferred rent liabilities were approximately $1,275,000 and $1,268,000 as of April 30, 2011 and 2010,
respectively.



Advertising costs consist of tradeshows and other marketing activities, and are expensed as incurred. Advertising expenses included in
selling, general and administrative expenses were approximately $979,000, $994,000 and $549,000 for the years ended April 30, 2011, 2010 and 2009, respectively.



Basic earnings per share are computed using the weighted-average number of common shares outstanding and excludes any
anti-dilutive effects of options and restricted stock. The dilutive effect of potential common shares outstanding is included in diluted earnings per share.

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AEROVIRONMENT, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)

The
reconciliation of diluted to basic shares is as follows:

Year Ended April 30,2011

2010

2009Numerator for basic earnings per share:Net income

$
25,909,000

$
20,716,000

$
24,245,000Denominator for basic earnings per share:Weighted average common shares


21,591,333


21,391,795


21,023,590Dilutive effect of employee stock options and restricted stock


489,933


585,569


752,137Denominator for diluted earnings per share


22,081,266


21,977,364


21,775,727


During
the years ended April 30, 2011, 2010 and 2009, certain options and shares of restricted stock were not included in the computation of diluted earnings per share because
their inclusion would have been anti-dilutive. The number of options and restricted stock which met this anti-dilutive criterion was approximately 36,000, 70,000 and 104,000
for the years ended April 30, 2011, 2010 and 2009, respectively.

Recently Issued Accounting Standards

In January 2010, the Financial Accounting Standards Board ("FASB") issued fair value guidance requiring new disclosures and
clarification of existing disclosures for assets and liabilities that are measured at fair value on either a recurring or non-recurring basis. The guidance requires disclosure of transfer
activity into and out of Level 1 and Level 2 fair value measurements and also requires more detailed disclosure about the activity within Level 3 fair value measurements. The
majority of the requirements in this guidance are effective for interim and annual periods beginning after December 15, 2009. Requirements related to Level 3 disclosures are effective
for interim and annual periods beginning after December 15, 2010. The Company does not expect that the adoption of the guidance will have a material impact on the Company's consolidated
financial statements.

2.     Investments

Investments consist of the following:

April 30,2011

2010(In thousands)Short-term investments:Held-to-maturity securities:U.S. Treasury bills

$
126,839

$
135,770Total short-term investments

$
126,839

$
135,770Long-term investments:Available-for-sale securities:Auction rate securities

$
6,275

$
6,515Total long-term investments

$
6,275

$
6,515


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AEROVIRONMENT, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)



As of April 30, 2011 and 2010, the balance of held-to-maturity securities consisted of U.S. Treasury
bills. Interest earned from these investments is recorded in interest income.

The
amortized cost, gross unrealized losses, and estimated fair value of the held-to-maturity investments as of April 30, is as follows (in thousands):

2011

2010Amortized
Cost

Gross
Unrealized
Gains

Gross
Unrealized
Losses

Fair
Value

Amortized
Cost

Gross
Unrealized
Gains

Gross
Unrealized
Losses

Fair
ValueU.S. Treasury bills

$
126,839

$
38

$
(3
)
$
126,874

$
135,770

$
5

$
(3
)
$
135,772Total held-to-maturity investments

$
126,839

$
38

$
(3
)
$
126,874

$
135,770

$
5

$
(3
)
$
135,772


The
amortized cost and fair value of the Company's held-to-maturity securities by contractual maturity at April 30, 2011, are as follows:

Cost

Fair ValueDue within one year

$
126,839

$
126,874Total

$
126,839

$
126,874




As of April 30, 2011 and 2010, the entire balance of available-for-sale securities consisted of four
investment grade auction rate municipal bonds with maturities ranging from 8 to 23 years. These investments have characteristics similar to short-term investments, because at
pre-determined intervals, generally ranging from 30 to 35 days, there is a new auction process at which the interest rates for these securities are reset to current interest rates.
At the end of such period, the Company chooses to roll-over its holdings or redeem the investments for cash. A market maker facilitates the redemption of the securities and the underlying
issuers are not required to redeem the investment within 365 days. Interest earned from these investments is recorded in interest income.

During
the fourth quarter of the fiscal year ended April 30, 2008, the Company began experiencing failed auctions on some of its auction rate securities. A failed auction occurs
when a buyer for the securities cannot be obtained and the market maker does not buy the security for its own account. The Company continues to earn interest on the investments that failed to settle
at auction, at the maximum contractual rate until the next auction occurs. In the event the Company needs to access funds invested in these auction rate securities, the Company may not be able to
liquidate these securities at the fair value recorded on April 30, 2011 until a future auction of these securities is successful or a buyer is found outside of the auction process.

As
a result of the failed auctions, the fair values of these securities are estimated utilizing a discounted cash flow analysis as of April 30, 2011 and 2010. The analysis
considers, among other items, the collateralization underlying the security investments, the creditworthiness of the counterparty, the
timing of expected future cash flows, and the expectation of the next time the security is expected to have a successful auction.

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AEROVIRONMENT, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Based
on the Company's ability to access its cash and cash equivalents, expected operating cash flows, and other sources of cash, the Company does not anticipate the current lack of
liquidity on these investments will affect its ability to operate the business in the ordinary course. The Company believes the current lack of liquidity of these investments is temporary and expects
that the securities will be redeemed or refinanced at some point in the future. The Company will continue to monitor the value of its auction rate securities at each reporting period for a possible
impairment if a further decline in fair value occurs. The auction rate securities have been in an unrealized loss position for more than 12 months. The Company has the ability and the intent to
hold these investments until a recovery of fair value, which may be maturity and as of April 30, 2011, it did not consider these investments to be other-than-temporarily
impaired.

The
amortized cost, gross unrealized losses, and estimated fair value of the available-for-sale investments is as follows (in thousands):

April 30,2011

2010Auction rate securitiesAmortized cost

$
7,575

$
7,775Gross unrealized gains





Gross unrealized losses


(1,300
)

(1,260
)Fair value

$
6,275

$
6,515


The
amortized cost and fair value of the Company's auction rate securities by contractual maturity at April 30, 2011 are as follows (in thousands):

Cost

Fair ValueDue after five through 10 years

$
1,975

$
1,792Due after 10 years


5,600


4,483Total

$
7,575

$
6,275


3.     Fair Value Measurements

Fair value is the price that would be received to sell an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for
the asset or liability in an orderly transaction between market participants on the measurement date. The fair value hierarchy contains three levels as follows:



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AEROVIRONMENT, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)

The
Company's financial assets measured at fair value on a recurring basis at April 30, 2011, were as follows (in thousands):

Fair Value Measurement UsingDescription

Quoted prices in
active markets for
identical assets
(Level 1)

Significant
other
observable
inputs
(Level 2)

Significant
unobservable
inputs
(Level 3)

TotalAuction rate securities

$


$


$
6,275

$
6,275Total

$


$


$
6,275

$
6,275


The
following table provides a reconciliation between the beginning and ending balances of items measured at fair value on a recurring basis in the table above that used significant
unobservable inputs (Level 3) (in thousands):

Fair Value
Measurements Using
Significant
Unobservable Inputs
(Level 3)Description

Auction Rate SecuritiesBalance at May 1, 2010

$
6,515Transfers to Level 3


Total losses (realized or unrealized)Included in earnings


Included in other comprehensive income


(40
)Purchases, issuances and settlements, net


(200
)Balance at April 30, 2011

$
6,275The amount of total gains or (losses) for the period included in earnings (or change in net assets) attributable to the change in unrealized gains or
losses relating to assets still held at April 30, 2011

$



The
auction rate securities are valued using a discounted cash flow model. The analysis considers, among other items, the collateralization underlying the security investments, the
creditworthiness of the counterparty, the timing of expected future cash flows, and the expectation of the next time the security is expected to have a successful auction.

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AEROVIRONMENT, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)

4.     Inventories, net

Inventories consist of the following:

April 30,2011

2010(In thousands)Raw materials

$
13,737

$
6,629Work in process


7,994


6,336Finished goods


17,647


9,154Inventories, gross


39,378


22,119Reserve for inventory obsolescence


(1,241
)

(1,191
)Inventories, net

$
38,137

$
20,928


5.     Property and Equipment, net

Property and equipment consist of the following:

April 30,2011

2010(In thousands)Leasehold improvements

$
8,207

$
7,804Machinery and equipment


27,370


25,512Furniture and fixtures


2,370


2,164Computer equipment and software


11,758


7,197Construction in process


3,111


2,347Property and equipment, gross


52,816


45,024Less accumulated depreciation and amortization


(35,318
)

(24,999
)Property and equipment, net

$
17,498

$
20,025


At
April 30, 2011, an analysis of the Company's long-lived assets related to the Global Observer customer-funded R&D contract indicated impairment. On April 14,
2011, the Company received a stop-work order for the Global Observer Joint Capabilities Technology Demonstration contract due to the contract essentially reaching its funding limit. As a
result of the stop-work order, the carrying value of this asset group, primarily consisting of tooling, test and manufacturing support equipment, may not be recoverable over the remaining
useful life of such assets. Accordingly, the Company completed an impairment test in accordance with the accounting policy for this asset group, which resulted in an impairment charge of $2,043,000
that was recorded in cost of sales for contract services. To determine the amount of the impairment charge, the Company was required to make estimates of the fair value of the assets in this group,
and these estimates were based on the use of the income approach to determine the fair value of the equipment. The Company considers these assets "held and used."

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Table of Contents

AEROVIRONMENT, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)

6.     Warranty Reserves

Warranty reserve activity is summarized as follows:

April 30,2011

2010(In thousands)Beginning balance

$
804

$
523Warranty expense


1,449


1,512Warranty costs incurred


(1,126
)

(1,231
)Ending balance

$
1,127

$
804


7.     Employee Savings Plan

The Company has an employee 401(k) savings plan covering all eligible employees. The Company expensed approximately $2,401,000, $1,995,000 and $1,790,000 in
contributions to the plan for the years ended April 30, 2011, 2010 and 2009, respectively.

8.     Stock-Based Compensation

For the years ended April 30, 2011, 2010 and 2009, the Company recorded stock-based compensation expense of approximately $2,306,000, $1,654,000 and
$926,000, respectively.

On
January 14, 2007, the stockholders of the Company approved the 2006 Equity Incentive Plan, or 2006 Plan, effective January 21, 2007, for officers, directors, key
employees and consultants. Under the
2006 Plan, incentive stock options, nonqualified stock options, restricted stock awards, stock appreciation right awards, performance share awards, performance stock unit awards, dividend equivalents
awards, stock payment awards, deferred stock awards, restricted stock unit awards, other stock-based awards, performance bonus awards or performance-based awards may be granted at the discretion of a
committee, which consists of outside directors. A maximum of 3,684,157 shares of stock may be issued pursuant to awards under the 2006 Plan. The maximum number of shares of common stock with respect
to one or more awards that may be granted to any one participant during any twelve month period is 950,000. A maximum of $9,500,000 may be paid in cash as a performance-based award during any twelve
month period. The exercise price for any incentive stock option shall not be less than 100% of the fair market value on the date of grant. Vesting of awards is established at the time of grant.

The
Company had an equity incentive plan, or 2002 Plan, for officers, directors and key employees. Under the 2002 Plan, incentive stock options or nonqualified stock options were
granted, as determined by the administrator at the time of grant. Stock purchase rights were also granted under the 2002 Plan. Options under the 2002 Plan were granted at their fair market value (as
determined by the board of directors). The options become exercisable at various times over a five-year period from the grant date. The 2002 Plan was terminated on the effective date of
the 2006 Plan. Awards outstanding under the 2002 Plan remain outstanding and exercisable; no additional awards may be made under the 2002 Plan.

The
Company had a 1992 nonqualified stock option plan, or 1992 Plan, for certain officers and key employees. Options under the 1992 Plan were granted at their fair market value (as
determined by the board of directors) at the date of grant and became exercisable at various times over a five-year period from the grant date. The 1992 Plan expired in August 2002.

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AEROVIRONMENT, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)

The
fair value of stock options granted was estimated at the grant date using the Black-Scholes option pricing model with the following weighted average assumptions for the years ended
April 30, 2011, 2010 and 2009:

Year Ended April 30,2011

2010

2009Expected term (in years)


5.00


5.00


5.84Expected volatility


24.72
%

24.16
%

20.83
%Risk-free interest rate


2.08
%

2.43
%

2.33
%Expected dividend








Weighted average fair value at grant date

$
6.48

$
6.44

$
6.66


The
expected term of stock options represents the weighted average period the Company expects the stock options to remain outstanding, based on the Company's historical exercise and
post-vesting cancellation experience and the remaining contractual life of its outstanding options.

The
expected volatility is based on peer group volatility in the absence of historical market data for the Company's stock. The peer group volatility was derived based on historical
volatility of a comparable peer group index consisting of companies operating in a similar industry.

The
risk free interest rate is based on the implied yield on a U.S. Treasury zero-coupon bond with a remaining term that approximates the expected term of the option.

The
expected dividend yield of zero reflects that the Company has not paid any cash dividends since inception and does not anticipate paying cash dividends in the foreseeable future.

Information
related to the stock option plans at April 30, 2011, 2010 and 2009, and for the years then ended is as follows:

2006 Plan

2002 Plan

1992 PlanShares

Weighted
Average
Exercise
Price

Shares

Weighted
Average
Exercise
Price

Shares

Weighted
Average
Exercise
PriceOutstanding at April 30, 2008


379,310

$
21.86


1,077,477

$
2.20


626,895

$
0.49Options granted


160,000


25.34











Options exercised


(20,100
)

21.35


(445,606
)

1.13


(224,731
)

0.51Options canceled


(22,000
)

22.27


(48,563
)

2.66





Outstanding at April 30, 2009


497,210


22.98


583,308


2.97


402,164


0.48Options granted


75,000


24.68











Options exercised


(18,800
)

20.76


(171,169
)

2.55


(15,164
)

0.59Options canceled


(60,200
)

22.71


(7,038
)

5.99





Outstanding at April 30, 2010


493,210


23.36


405,101


3.10


387,000


0.48Options granted


72,500


24.91











Options exercised


(17,500
)

22.27


(35,634
)

5.67


(67,427
)

0.41Options canceled


(12,800
)

27.25


(1,408
)

11.79





Outstanding at April 30, 2011


535,410


23.51


368,059


2.81


319,573


0.49Options exercisable at April 30, 2011


220,536

$
22.94


350,814

$
2.37


319,573

$
0.49


81

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Table of Contents

AEROVIRONMENT, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)

The
total intrinsic value of all options exercised during the years ended April 30, 2011, 2010 and 2009 was approximately $2,904,000, $5,581,000, and $21,177,000, respectively.
The intrinsic value of all options outstanding at April 30, 2011 and 2010 was $21,445,000 and $21,046,000, respectively. The intrinsic value of all exercisable options at April 30, 2011
and 2010, was $19,544,000 and $17,971,000, respectively.

A
summary of the status of the Company's non-vested stock options as of April 30, 2011 and the year then ended is as follows:

Non-vested Options

Shares

Weighted
Average
Grant Date
Fair ValueNon-vested at April 30, 2010


440,786

$
6.78Granted


72,500


6.48Expired


(1,408
)

4.12Canceled


(4,800
)

7.91Vested


(174,959
)

6.63Non-vested at April 30, 2011


332,119

$
6.76


As
of April 30, 2011, there was approximately $6,275,000 of total unrecognized compensation cost related to non-vested share-based compensation awards granted under
the equity plans. That cost is expected to be recognized over an approximately five-year period or a weighted average period of approximately four years.

The
weighted average fair value of options issued for the years ended April 30, 2011, 2010 and 2009 was $6.48, $6.44 and $6.66, respectively. The total fair value of shares
vesting during the years ended April 30, 2011, 2010 and 2009 was $1,111,000, $780,000 and $637,000, respectively.

Proceeds
from all option exercises under all stock option plans for the years ended April 30, 2011, 2010 and 2009 were approximately $619,000, $836,000 and $1,049,000,
respectively. The tax benefit realized from stock-based compensation during the years ended April 30, 2011, 2010 and 2009 was approximately $1,238,000, $3,010,000, and $12,004,000,
respectively.

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Table of Contents

AEROVIRONMENT, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)

The
following tabulation summarizes certain information concerning outstanding and exercisable options at April 30, 2011:

Options OutstandingWeighted
Average
Remaining
Contractual
Life In
Years



Options ExercisableRange of Exercise Prices

As of
April 30,
2011

Weighted
Average
Exercise
Price

As of
April 30,
2011

Weighted
Average
Exercise
Price$            0.37


142,406


2.97

$
0.37


142,406

$
0.370.59


177,167


8.50


0.59


177,167


0.590.64-0.78


199,638


2.12


0.72


199,638


0.722.13-19.76


178,421


4.86


6.10


157,176


5.1319.90-22.15


159,000


6.79


20.95


78,200


20.9722.38-23.25


192,510


7.23


22.70


94,936


22.6423.42-32.19


173,900


7.96


26.96


41,400


27.79$  0.37-32.19


1,223,042


5.79

$
11.27


890,923

$
6.79


The
remaining weighted average contractual life of exercisable options at April 30, 2011 was 5.12 years.

Information
related to the Company's restricted stock awards at April 30, 2011 and for the year then ended is as follows:

2006 PlanShares

Weighted
Average
Grant Date
Fair ValueUnvested stock at April 30, 2010


190,600

$
24.36Stock granted


98,910


25.34Stock vested


(46,000
)

24.25Stock canceled


(2,000
)

31.76Unvested stock at April 30, 2011


241,510

$
24.72


9.     Long-Term Incentive Awards

During the year ended April 30, 2011, the Company granted two performance awards under the 2006 Plan to key employees, a two-year and
three-year performance award. The performance periods for the two-year and three-year awards are the two-year and three-year periods ending
April 30, 2012 and 2013, respectively. A target payout was established at the beginning of each performance period. The actual payout at the end of each performance period will be calculated
based upon the Company's achievement of revenue and operating profit growth. Payouts will be made in cash and restricted stock units. Upon vesting of the restricted stock units, the Company has the
discretion to settle the restricted stock units in cash or stock.

The
cash component of the award is accounted for as a liability. The equity component is accounted for as a stock-based liability, as the restricted stock units may be settled in cash or
stock. At each reporting period, the Company reassesses the probability of achieving the performance targets.

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AEROVIRONMENT, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)

The
estimation of whether the performance targets will be achieved requires judgment, and, to the extent actual results or updated estimates differ from the Company's current estimates, the cumulative
effect on current and prior periods of those changes will be recorded in the period estimates are revised. Upon settlement of these awards, the total compensation expense recorded over the vesting
period of the awards will equal the settlement amount, which is based on the Company's stock price on the vesting date.

During
the year ended April 30, 2011, the Company recorded compensation expense of $762,000 and $0 related to the two-year and three-year awards,
respectively. As there were no performance awards granted in prior years, there was no compensation expense for the years ended April 30, 2010 and 2009. At April 30, 2011, the Company
accrued $762,000 and $0 for the two-year and three-year performance awards, respectively. The maximum compensation expense that may be recorded for the two-year and
three-year awards is $5,436,000 and $5,617,000, respectively.

10.   Income Taxes

A reconciliation of income tax expense computed using the U.S. federal statutory rates to actual income tax expense is as follows:

Year Ended April 30,2011

2010

2009U.S. federal statutory income tax rate


35.0
%

35.0
%

35.0
%State and local income taxes, net of federal benefit


1.1


1.9


2.2R&D credits


(11.3
)

(2.3
)

(7.6
)Other


(0.5
)

(3.5
)

(1.3
)Effective income tax rate


24.3
%

31.1
%

28.3
%


The
components of the provision for income taxes are as follows (in thousands):

Year ended April 30,2011

2010

2009Current:Federal

$
8,660

$
8,663

$
13,793State


641


1,229


4719,301


9,892


14,264Deferred:Federal


859


492


(2,105
)State


(1,836
)

(900
)

(2,600
)Foreign





(105
)

(977
)

(513
)

(4,705
)Change in valuation allowance


(5
)

(13
)

(7
)Total income tax expense

$
8,319

$
9,366

$
9,552


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AEROVIRONMENT, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Significant
components of the Company's deferred income tax assets are as follows (in thousands):

April 30,2011

2010Deferred income tax assets:Book over tax depreciation

$
449

$
567Accrued expenses


7,743


4,991Allowances, reserves, and other


322


1,330Capital loss and credit carry-forwards


3,076


3,357Unrealized loss on securities


530


521Total deferred income tax assets, gross


12,120


10,766Less: valuation allowance


(58
)

(63
)Total deferred income tax assets, net

$
12,062

$
10,703


At
April 30, 2011 and 2010, the Company had approximately $4,655,000 and $5,052,000, respectively, of unrecognized tax benefits all of which would impact the Company's effective
tax rate if recognized. The
Company estimates that $588,000 of its unrecognized tax benefits will decrease in the next twelve months due to statute of limitation expiration.

The
following table summarizes the activity related to our gross unrecognized tax benefits for the years ended April 30, 2011 and 2010 (in thousands):

April 30,2011

2010Balance as of May 1

$
5,052

$
5,663Increases related to prior year tax positions


371


123Decreases related to prior year tax positions


(145
)

(406
)Increases related to current year tax positions


1,208


927Decreases related to lapsing of statute of limitations


(1,831
)

(1,255
)Balance as of April 30

$
4,655

$
5,052


The
Company records interest and penalties on uncertain tax positions to income tax expense. As of April 30, 2011 and April 30, 2010, the Company had accrued approximately
$207,000 and $710,000, respectively, of interest and penalties related to uncertain tax positions. The Company is currently under audit by various state jurisdictions but does not anticipate any
material adjustments from these examinations. The tax years 2009 and 2010 remain open to examination by the IRS for federal income taxes. The tax years 2005 to 2010 remain open for major state taxing
jurisdictions.

11.   Related Party Transactions

Pursuant to a consulting agreement, the Company paid a board member approximately $210,000, $222,000 and $216,000 during the years ended April 30, 2011,
2010 and 2009, respectively, for consulting services independent of his board service. The agreement stipulates the payment of $17,500 plus expenses per month, in exchange for consulting services.

During
the year ended April 30, 2011, the Company purchased materials in the amount of $1,674,000 from a vendor with a common board member. As of April 30, 2011, the
Company had a

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AEROVIRONMENT, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)

trade
payable of $654,000 to this vendor. There were no significant transactions with this vendor during the years ended April 30, 2010 and 2009.

During
the year ended April 30, 2010, the Company made an equipment sale in the amount of $1,705,000 to a customer with a common board member. There were no sales to this customer
during the years ended April 30, 2011 and 2009. As of April 30, 2010, there was no trade receivable due from this customer.

12.   Commitments and Contingencies



The Company's operations are conducted in leased facilities. Following is a summary of non-cancelable operating lease
commitments:

Year ending
April 30(In thousands)2012

$
3,8442013


3,1332014


3,0872015


1,8442016


960Thereafter


44$
12,912


Rental
expense under operating leases was approximately $3,812,000, $3,660,000 and $3,348,000 for the years ended April 30, 2011, 2010 and 2009, respectively.



The Company is subject to legal proceedings and claims which arise out of the ordinary course of its business. Although adverse
decisions or settlements may occur, the Company, in consultation with legal counsel, believes that the final disposition of such matters will not have a material adverse effect on the consolidated
financial position, results of operations or cash flows of the Company.



Payments to the Company on government cost reimbursable contracts are based on provisional, or estimated indirect rates, which are
subject to an annual audit by the Defense Contract Audit Agency, or DCAA. The cost audits result in the negotiation and determination of the final indirect cost rates that the Company may use for the
period(s) audited. The final rates, if different from the provisional rates, may create an additional receivable or liability for the Company.

For
example, during the course of its audits, the DCAA may question the Company's incurred costs, and if the DCAA believes the Company has accounted for such costs in a manner
inconsistent with the requirements under Federal Acquisition Regulations, or FAR, the DCAA auditor may recommend to the Company's administrative contracting officer to disallow such costs.
Historically, the Company has not experienced material disallowed costs as a result of government audits. However, the Company can provide no assurance that the DCAA or other government audits will
not result in material disallowances for incurred costs in the future.

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AEROVIRONMENT, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)

The
Company's revenue recognition policy calls for revenue recognized on all cost reimbursable government contracts to be recorded at actual rates unless collectability is not reasonably
assured.

13.   Segment Data

The Company's product segments are as follows:



The
accounting policies of the segments are the same as those described in Note 1, "Organization and Significant Accounting Policies." The operating segments do not make sales to
each other. Depreciation and amortization related to the manufacturing of goods is included in gross margin for the segments. The Company does not discretely allocate assets to its operating segments,
nor does the CODM evaluate operating segments using discrete asset information. Consequently, the Company operates its financial systems as a single segment for accounting and control purposes,
maintains a single indirect rate structure across all segments, has no inter-segment sales or corporate elimination transactions, and maintains only limited financial statement information by segment.

The
segment results are as follows (in thousands):

Year Ended April 30,2011

2010

2009Revenue:UAS

$
249,769

$
224,179

$
211,364EES


42,734


25,339


36,298Total


292,503


249,518


247,662Gross margin:UAS


99,513


85,157


70,968EES


17,638


11,669


17,629Total


117,151


96,826


88,597Selling, general and administrative


47,431


42,429


34,246Research and development


35,769


24,510


21,798Income from operations


33,951


29,887


32,553Interest income


277


195


1,244Income before income taxes

$
34,228

$
30,082

$
33,797




Sales to non-U.S. customers accounted for 7.0% of revenue for each of the fiscal years ended April 30, 2011, 2010
and 2009.

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AEROVIRONMENT, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)

14.  Quarterly Results of Operations (Unaudited)

The following tables present selected unaudited consolidated financial data for each of the eight quarters in the two-year period ended
April 30, 2011. In the Company's opinion, this unaudited information has been prepared on the same basis as the audited information and includes all adjustments (consisting of only normal
recurring adjustments) necessary for a fair statement of the financial information for the period presented. The Company's fiscal year ends on April 30. Due to the fixed year end date of
April 30, the first and fourth quarters each consist of approximately 13 weeks. The second and third quarters each consist of 13 weeks. The first three quarters end on a Saturday.

Three Months EndedJuly 31,
2010

October 30,
2010

January 29,
2011

April 30,
2011(In thousands except per share data)Year ended April 30, 2011Revenue

$
38,228

$
63,781

$
84,434

$
106,060Gross margin

$
12,036

$
21,775

$
34,129

$
49,211Net (loss) income

$
(3,443
)
$
262

$
11,454

$
17,636Net (loss) income per sharebasic(1)

$
(0.16
)
$
0.01

$
0.53

$
0.81Net (loss) income per sharediluted(1)

$
(0.16
)
$
0.01

$
0.52

$
0.79




Three Months EndedAugust 1,
2009

October 31,
2009

January 30,
2010

April 30,
2010(In thousands except per share data)Year ended April 30, 2010Revenue

$
37,940

$
51,367

$
60,861

$
99,350Gross margin

$
10,715

$
19,649

$
23,481

$
42,981Net (loss) income

$
(3,587
)
$
2,216

$
6,515

$
15,572Net (loss) income per sharebasic(1)

$
(0.17
)
$
0.10

$
0.30

$
0.72Net (loss) income per sharediluted

$
(0.17
)
$
0.10

$
0.30

$
0.71


(1)Earnings
per share is computed independently for each of the quarters presented. The sums of the quarterly earnings per share do not equal the total
earnings per share computed for the year due to rounding.


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SUPPLEMENTARY DATA  SCHEDULE IIVALUATION AND QUALIFYING ACCOUNTS

AdditionsDescription

Balance at
Beginning
of Period

Charged to
Costs and
Expenses

Charged to
Other
Accounts

Deductions

Balance at
End of
Period(In thousands)Allowance for doubtful accounts for the year ended April 30:2009

$
220

$
183

$


$
(112
)
$
2912010

$
291

$
601

$


$
(147
)
$
7452011

$
745

$
492

$


$
(598
)
$
639Warranty reserve for the year ended April 30:2009

$
344

$
1,182

$


$
(1,003
)
$
5232010

$
523

$
1,512

$


$
(1,231
)
$
8042011

$
804

$
1,449

$


$
(1,126
)
$
1,127Reserve for inventory excess and obsolescence for the year ended April 30:2009

$
1,541

$
491

$


$
(643
)
$
1,3892010

$
1,389

$
434

$


$
(632
)
$
1,1912011

$
1,191

$
579

$


$
(529
)
$
1,241Reserve for self-insured medical claims for the year ended April 30:2009

$
399

$
3,758

$


$
(3,477
)
$
6802010

$
680

$
5,170

$


$
(4,836
)
$
1,0142011

$
1,014

$
7,322

$


$
(7,438
)
$
898


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Table of Contents

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

Not applicable.

Item 9A.    Controls and Procedures.

Evaluation of Disclosure Controls and Procedures

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our Exchange
Act reports is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms, and that such information is accumulated and communicated to our management,
including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow for timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and
procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can only provide reasonable assurance of achieving the desired control objectives, and
management is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. As required by Rule 13a-15(b) under the
Exchange Act, we have carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and our Chief Financial Officer, of the
effectiveness of the design and operation of our disclosure controls and procedures. Based on the foregoing, our Chief Executive Officer and Chief Financial Officer concluded that, as of the end of
the period covered by this report, our disclosure controls and procedures were effective and were operating at a reasonable level.

Management's Report on Internal Control Over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control
over financial reporting is defined in Rules 13a-15(f) and 15d-15(f) promulgated under the Exchange Act as a process designed by, or under the supervision of, our
principal executive and principal financial officers and effected by our board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles and includes those policies and procedures
that:



Because
of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Under
the supervision and with the participation of management, including our principal executive and financial officers, we assessed our internal control over financial reporting as of
April 30, 2011, based on criteria for effective internal control over financial reporting established inInternal ControlIntegrated
Framework, issued by the Committee of Sponsoring Organizations of the Treadway

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Commission
(COSO). Based on this assessment, management concluded that the Company maintained effective internal control over financial reporting as of April 30, 2011 based on the specified
criteria.

The
effectiveness of our internal control over financial reporting as of April 30, 2011 has been audited by Ernst & Young LLP, an independent registered public
accounting firm, as stated in their report which is included herein.

Item 9B.    Other Information.

None.

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Table of Contents

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The
Board of Directors and Stockholders of AeroVironment, Inc. and Subsidiaries

We
have audited AeroVironment Inc.'s internal control over financial reporting as of April 30, 2011, based on criteria established in Internal
ControlIntegrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). AeroVironment Inc.'s management is responsible for
maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management's
Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the company's internal control over financial reporting based on our audit.

We
conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control
over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and
performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A
company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures
that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide
reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and
expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) 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.

Because
of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In
our opinion, AeroVironment, Inc. maintained, in all material respects, effective internal control over financial reporting as of April 30, 2011, based on the COSO
criteria.

We
also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of AeroVironment, Inc. and
subsidiaries as of April 30, 2011 and 2010, and the related consolidated statements of income, stockholders' equity, and cash flows for each of the three years in the period ended
April 30, 2011 of AeroVironment, Inc. and subsidiaries and our report dated June 21, 2011 expressed an unqualified opinion thereon.



Los
Angeles, California
June 21, 2011

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PART III

Item 10.    Directors, Executive Officers, and Corporate Governance.

Certain information required by Item 401 and Item 405 of Regulation S-K will be included in the Proxy
Statement for our 2011 Annual Meeting of Stockholders, and that information is incorporated by reference herein.

Codes of Ethics

We have adopted a Code of Business Conduct and Ethics, or Code of Conduct. The Code of Conduct is posted on our website,
http://investor.avinc.com. We intend to disclose on our website any amendments to, or waivers of, the Code of Conduct covering our Chief Executive Officer, Chief Financial Officer and/or Controller
promptly following the date of such amendments or waivers. A copy of the Code of Conduct may be obtained upon request, without charge, by contacting our Secretary at (626) 357-9983
or by writing to us at AeroVironment, Inc., Attn: Secretary, 181 W. Huntington Dr., Suite 202, Monrovia, CA 91016. The information contained or
connected to our website is not incorporated by reference into this annual report on Form 10-K and should not be considered part of this or any reported filed with the SEC.

No
family relationships exist among any of our executive officers or directors.

There
have been no material changes to the procedures by which security holders may recommend nominees to our board of directors.

The
information required by Item 407(d)(4) and (5) of Regulation S-K will be included in the Proxy Statement for our 2011 Annual Meeting of Stockholders,
and that information is incorporated by reference herein.

Item 11.    Executive Compensation.

The information required by Item 402 and Item 407(e)(4) and (5) of Regulation S-K will be
included in the Proxy Statement for our 2011 Annual Meeting of Stockholders, and that information is incorporated by reference herein.

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

The information required by Item 201(d) and Item 403 of Regulation S-K will be included in the Proxy
Statement for our 2011 Annual Meeting of Stockholders, and that information is incorporated by reference herein.

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

The information required by Item 404 and Item 407(a) of Regulation S-K will be included in the Proxy
Statement for our 2011 Annual Meeting of Stockholders, and that information is incorporated by reference herein.

Item 14.    Principal Accounting Fees and Services.

The information required by Item 14 will be included in the Proxy Statement for our 2011 Annual Meeting of Stockholders, and
that information is incorporated by reference herein.

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PART IV

Item 15.    Exhibits, Financial Statement Schedules.



The following consolidated financial statements are included in Item 8:



The following Schedule is included in Item 8:



All
other schedules have been omitted since the required information is not present, or not present in amounts sufficient to require submission of the schedule, or because the
information required is included in the consolidated financial statements or the Notes thereto.

ExhibitsSee
Item 15(b) of this report below.

Exhibit
Number

Exhibit3.1(1)

Amended and Restated Certificate of Incorporation of AeroVironment, Inc.3.3(2)

Second Amended and Restated Bylaws of AeroVironment, Inc.4.1(3)

Form of AeroVironment, Inc.'s Common Stock Certificate10.1#(3)

Form of Director and Executive Officer Indemnification Agreement10.2#(3)

AeroVironment, Inc. Nonqualified Stock Option Plan10.3#(3)

Form of Nonqualified Stock Option Agreement pursuant to the AeroVironment, Inc. Nonqualified Stock Option Plan10.4#(3)

AeroVironment, Inc. Directors' Nonqualified Stock Option Plan10.5#(3)

Form of Directors' Nonqualified Stock Option Agreement pursuant to the AeroVironment, Inc. Directors' Nonqualified Stock Option Plan10.6#(3)

AeroVironment, Inc. 2002 Equity Incentive Plan10.7#(3)

Form of AeroVironment, Inc. 2002 Equity Incentive Plan Stock Option Agreement10.8#(3)

AeroVironment, Inc. 2006 Equity Incentive Plan10.9#(3)

Form of Stock Option Agreement pursuant to the AeroVironment, Inc. 2006 Equity Incentive Plan10.10#(3)

Form of Performance Based Bonus Award pursuant to the AeroVironment, Inc. 2006 Equity Incentive Plan10.11#(4)

Form of Long-Term Compensation Award Grant Notice and Long-Term Compensation Award Agreement pursuant to the AeroVironment, Inc. 2006 Equity Incentive Plan10.12(5)

Standard Industrial/Commercial Single-Tenant Lease, dated February 12, 2007, between AeroVironment, Inc. and OMP Industrial Moreland, LLC, for the property located at 85 Moreland Road, Simi Valley,
California, including the addendum thereto


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Table of Contents

Exhibit
Number

Exhibit10.13(6)

Standard Industrial/Commercial Single-Tenant Lease, dated March 3, 2008, between AeroVironment, Inc. and Hillside Associates III, LLC, for the property located at 900 Enchanted Way, Simi Valley, California,
including the addendum thereto10.14(6)

Standard Industrial/Commercial Single-Tenant Lease, dated April 21, 2008, between AeroVironment, Inc. and Hillside Associates II, LLC, for the property located at 994 Flower Glen Street, Simi Valley,
California, including the addendum thereto10.15(3)

AV Direct Project Request, dated July 7, 2005, between AeroVironment, Inc. and Marine Corps System Command10.16(3)

Award Contract, dated December 22, 2005, between AeroVironment, Inc. and Marine Corps System Command10.17(7)

Award Contract, dated August 15, 2005, between AeroVironment, Inc. and U.S. Army Aviation & Missile Command10.18(3)

Award Contract, dated September 21, 2004, between AeroVironment, Inc. and Natick Contracting Division10.19(3)

Award Contract, dated January 2, 2004, between AeroVironment, Inc. and U.S. Army Aviation & Missile Command10.20(8)

Award Contract, dated September 24, 2007, between AeroVironment, Inc. and United States Special Operations Command, as amended10.21(9)

Award Contract, dated December 22, 2006, between AeroVironment, Inc. and the United States Air Force/Air Force Research Laboratory, Aeronautical Systems Center, as amended10.22#(2)

Standard Consulting Agreement, dated November 1, 2008, between AeroVironment, Inc. and Charles R. Holland10.23(10)

Amendment No. 2 to Standard Consulting Agreement, dated December 17, 2009, between AeroVironment, Inc. and Charles R. Holland10.24(10)

Task Order #FY-10-001, dated December 17, 2009, between AeroVironment, Inc. and Charles R. Holland10.25#(3)

Retiree Medical Plan10.26(11)

Award Contract, dated June 30, 2008, between AeroVironment, Inc. and United States Special Operations Command, as amended10.27

Award Contract, dated March 1, 2011, between AeroVironment, Inc. and United States Army Contracting Command21.1

Subsidiaries of AeroVironment, Inc.23.1

Consent of Ernst & Young LLP, independent registered public accounting firm24.1

Power of Attorney (incorporated by reference to the signature page of this report on Form 10-K)31.1

Certification Pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 193431.2

Certification Pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 193432.1

Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002


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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this
report to be signed on its behalf by the undersigned, thereunto duly authorized.

AEROVIRONMENT, INC.Date: June 21, 2011



/s/ TIMOTHY E. CONVERBy:

Timothy E. ConverIts:

Chairman, Chief Executive Officer and President
(Principal Executive Officer)


KNOW
ALL PERSONS BY THESE PRESENTS, that each of the persons whose signature appears below hereby constitutes and appoints Timothy E. Conver and Jikun Kim, each of them acting
individually, as his attorney-in-fact, each with full power of substitution, for him in any and all capacities, to sign any and all amendments to this Annual Report on
Form 10-K, and to file the same, with all exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said
attorneys-in-fact, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises as
fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming our signatures as they may be signed by our said attorney-in-fact and any
and all amendments to this Annual Report on Form 10-K.

Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on
the dates indicated.

Name

Title

Date/s/ TIMOTHY E. CONVER Timothy E. Conver

Chairman, President and Chief
Executive Officer and Director
(Principal Executive Officer)

June 21, 2011/s/ JIKUN KIM Jikun Kim

Chief Financial Officer (Principal
Financial and Accounting Officer)

June 21, 2011/s/ JOSEPH F. ALIBRANDI Joseph F. Alibrandi

Director

June 21, 2011/s/ KENNETH R. BAKER Kenneth R. Baker

Director

June 21, 2011/s/ ARNOLD L. FISHMAN Arnold L. Fishman

Director

June 21, 2011/s/ MURRAY GELL-MANN Murray Gell-Mann

Director

June 21, 2011/s/ CHARLES R. HOLLAND Charles R. Holland

Director

June 21, 2011


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